<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD COMMISSION FILE NUMBER:
ENDED JUNE 30, 1999 0-22832
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1081052
(State or Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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 of 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 August 11, 1999 there were 62,247,536 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 June 30, 1999 and
December 31, 1998.................................. 1
Consolidated Statement of Operations -- For the
Three and Six Months Ended June 30, 1999 and
1998............................................... 2
Consolidated Statement of Changes in Net
Assets -- For the Six Months Ended June 30, 1999
and 1998........................................... 3
Consolidated Statement of Cash Flows -- For the
Six Months Ended June 30, 1999 and 1998............ 4
Consolidated Statement of Investments as of June
30, 1999 and December 31, 1998..................... 5
Notes to Consolidated Financial Statements........ 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 26
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................. 43
Item 2. Changes in Securities and Use of Proceeds...... 43
Item 3. Defaults Upon Senior Securities................ 43
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 43
Item 5. Other Information.............................. 43
Item 6. Exhibits and Reports on Form 8-K............... 43
Signatures............................................. 46
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Mezzanine loans and debt securities (cost:
1999-$431,289; 1998-$354,870)........................ $ 413,109 $339,163
Commercial mortgage-backed securities (cost:
1999-$269,993; 1998-$115,174)........................ 268,493 113,674
Commercial mortgage loans (cost: 1999-$199,725;
1998-$232,745)....................................... 200,107 233,186
Small Business Administration 7(a) loans (cost:
1999-$65,316; 1998-$57,651).......................... 64,959 56,285
Equity interests in portfolio companies (cost:
1999-$29,971; 1998-$27,618).......................... 52,782 49,391
Other portfolio assets (cost: 1999-$7,475;
1998-$8,331)......................................... 7,476 8,575
---------- --------
Total portfolio at value.......................... 1,006,926 800,274
---------- --------
Cash and cash equivalents................................... 25,495 25,075
Other assets................................................ 44,639 30,730
---------- --------
Total assets...................................... $1,077,060 $856,079
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures and notes payable.......................... $ 388,012 $239,350
Revolving lines of credit............................. 120,000 95,000
Accounts payable and other liabilities................ 20,257 27,912
Dividends and distributions payable................... -- 1,700
---------- --------
Total liabilities................................. 528,269 363,962
---------- --------
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; 59,938,272 and 56,729,502 issued and
outstanding at June 30, 1999 and December 31, 1998
respectively......................................... 6 6
Additional paid-in capital............................ 583,867 526,824
Common stock held in deferred compensation trust
(496,412 shares and 810,456 shares at June 30, 1999
and December 31, 1998, respectively)................. (13,561) (19,431)
Notes receivable from sale of common stock............ (23,534) (23,735)
Net unrealized appreciation on portfolio.............. 1,073 2,380
Distributions in excess of earnings................... (6,060) (927)
---------- --------
Total shareholders' equity........................ 541,791 485,117
---------- --------
Total liabilities and shareholders' equity........ $1,077,060 $856,079
========== ========
</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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and related portfolio income:
Interest..................................... $28,158 $18,744 $52,842 $38,245
Net premiums from loan dispositions.......... 2,431 712 4,332 2,048
Net gain on securitization of commercial
mortgage loans............................. -- -- -- 14,812
Investment advisory fees and other income.... 2,597 1,865 3,690 3,113
------- ------- ------- -------
Total interest and related portfolio
income................................. 33,186 21,321 60,864 58,218
------- ------- ------- -------
Expenses:
Interest on indebtedness..................... 8,042 4,232 14,407 8,830
Salaries and employee benefits............... 3,750 2,667 7,111 5,517
General and administrative................... 2,926 3,120 5,276 5,877
------- ------- ------- -------
Total operating expenses................. 14,718 10,019 26,794 20,224
Formula and cut-off awards................... 1,849 2,154 3,621 3,926
------- ------- ------- -------
Portfolio income before net realized and unrealized
gains............................................ 16,619 9,148 30,449 34,068
------- ------- ------- -------
Net realized and unrealized gains:
Net realized gains........................... 11,096 7,373 11,562 13,794
Net unrealized losses........................ (5,594) (2,045) (1,310) (1,321)
------- ------- ------- -------
Total net realized and unrealized
gains.................................. 5,502 5,328 10,252 12,473
------- ------- ------- -------
Net increase in net assets resulting from
operations....................................... $22,121 $14,476 $40,701 $46,541
======= ======= ======= =======
Basic earnings per common share.................... $ 0.38 $ 0.28 $ 0.70 $ 0.90
======= ======= ======= =======
Diluted earnings per common share.................. $ 0.38 $ 0.28 $ 0.70 $ 0.89
======= ======= ======= =======
Weighted average common shares
outstanding -- basic............................. 58,736 51,329 57,758 51,570
======= ======= ======= =======
Weighted average common shares
outstanding -- diluted........................... 58,833 51,866 57,831 51,988
======= ======= ======= =======
</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 SIX MONTHS
ENDED JUNE 30,
-------------------
1999 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
(UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................. $ 30,449 $ 34,068
Net realized gains..................................... 11,562 13,794
Net unrealized losses.................................. (1,310) (1,321)
-------- --------
Net increase in net assets resulting from
operations....................................... 40,701 46,541
-------- --------
Shareholder distributions:
Portfolio income....................................... (47,030) (36,468)
Preferred stock dividend............................... (110) (110)
-------- --------
Net decrease in net assets resulting from
shareholder distributions........................ (47,140) (36,578)
-------- --------
Capital share transactions:
Sale of common stock................................... 54,729 --
Net decrease in notes receivable from sale of common
stock................................................. 201 4,209
Issuance of common stock upon the exercise of stock
options............................................... 15 173
Issuance of common stock in lieu of cash
distributions......................................... 2,379 2,758
Purchase of common stock by deferred compensation
trust................................................. -- (19,375)
Distribution of common stock by deferred compensation
trust................................................. 5,869 --
Other.................................................. (80) 477
-------- --------
Net increase (decrease) in net assets resulting
from capital share transactions.................. 63,113 (11,758)
-------- --------
Total increase (decrease) in net assets..................... $ 56,674 $ (1,795)
-------- --------
Net assets at beginning of period........................... $485,117 $420,060
-------- --------
Net assets at end of period................................. $541,791 $418,265
======== ========
Net asset value per common share............................ $ 9.11 $ 8.14
======== ========
Common shares outstanding at end of period.................. 59,442 51,360
======== ========
</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 SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
(IN THOUSANDS) -------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $ 40,701 $ 46,541
Adjustments
Net unrealized losses.................................. 1,310 1,321
Net gain on securitization of commercial mortgage
loans................................................. -- (14,812)
Depreciation and amortization.......................... 2,999 391
Amortization of loan discounts and fees................ (4,434) (1,689)
Changes in other assets and liabilities................ (14,137) (13,975)
-------- ---------
Net cash provided by operating activities............ 26,439 17,777
-------- ---------
Cash flows from investing activities:
Investments in small business concerns.................... (342,485) (248,799)
Collections of investment principal....................... 71,910 58,161
Proceeds from loan sales.................................. 68,018 21,539
Proceeds from securitization of commercial mortgage
loans.................................................. -- 223,401
Net redemption of U.S. government securities.............. -- 11,091
Collections of notes receivable from sale of common
stock.................................................. 201 4,209
Other investing activities................................ (5,526) --
-------- ---------
Net cash (used in) provided by investing
activities.......................................... (207,882) 69,602
-------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 54,729 172
Purchase of common stock by deferred compensation trust... -- (19,375)
Common dividends and distributions paid................... (46,418) (34,296)
Special undistributed earnings distribution paid.......... -- (8,261)
Preferred stock dividends................................. (110) (330)
Net borrowings under (payments on) debentures and notes
payable................................................ 148,662 (48,821)
Net borrowings under (payments on) revolving lines of
credit................................................. 25,000 (842)
Other financing activities................................ -- (5,290)
-------- ---------
Net cash provided by (used in) financing
activities.......................................... 181,863 (117,043)
-------- ---------
Net increase (decrease) in cash and cash equivalents........ $ 420 $ (29,664)
Cash and cash equivalents at beginning of period............ $ 25,075 $ 70,437
-------- ---------
Cash and cash equivalents at end of period.................. $ 25,495 $ 40,773
======== =========
</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 JUNE 30, 1999
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,163 $ 13,163
- -----------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,438 6,438
Partnership Interest 1,456 2,100
- -----------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 4,951 4,951
Warrants -- --
- -----------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
- -----------------------------------------------------------------------------------------------------
AMF Bowling, Inc. (1) High Yield Debt 5,385 5,385
- -----------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -----------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,578 11,578
Warrants 1,180 1,180
- -----------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc. (1) Common Stock (342,938 shares) 330 --
- -----------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,445 2,445
Warrants 220 220
- -----------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
- -----------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 324 324
Warrants 12 12
- -----------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,610 850
Common Stock (220 shares) 1 --
- -----------------------------------------------------------------------------------------------------
COHR, Inc. Debt Securities 20,228 20,228
Common Stock (277,778 shares) 245 3,245
- -----------------------------------------------------------------------------------------------------
Convenience Corporation of Debt Securities 8,391 2,774
America Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,455 3,455
Warrants -- 1,138
- -----------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 5,915 5,915
- -----------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 2,952 2,952
Resources, LLC Options -- --
- -----------------------------------------------------------------------------------------------------
Coverall North America Loan 8,919 8,919
- -----------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
- -----------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 --
- -----------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 85
- -----------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- --
- -----------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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 JUNE 30, 1999
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Drilltec Patents & Technologies Loan $ 10,642 $ 8,930
Company, Inc.
- -----------------------------------------------------------------------------------------------------
ECM Enterprises Loan 28 4
- -----------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 14 14
Debt Securities 1,875 540
Common Stock (100 shares) 250 --
- -----------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
- -----------------------------------------------------------------------------------------------------
Enterprise Software, Inc. (1) Debt Securities 14,895 14,895
Common Stock (147,975 shares) 1,176 1,124
Warrants -- 425
- -----------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
- -----------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
- -----------------------------------------------------------------------------------------------------
Everything Yogurt Loan 17 17
- -----------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 497 497
Common Stock (2,500 shares) 3 3
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,727 5,727
Company Warrants 280 3,628
- -----------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loans 200 200
- -----------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 11,848 11,848
Warrants 970 970
- -----------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,721 30,721
Communications, LLC Warrants -- --
- -----------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Loan 242 242
Corporation
- -----------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,406 15,406
Warrants 525 1,000
- -----------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
- -----------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 1,390
Archery, LLC Convertible Debentures 2,248 2,242
- -----------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 7,338
- -----------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,165 9,165
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Han Hie Loan 507 507
- -----------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (1,000,000 shares) 1,000 1,000
- -----------------------------------------------------------------------------------------------------
Jack Henry & Associates, Inc. (1) Common Stock (90,498 shares) 26 3,331
- -----------------------------------------------------------------------------------------------------
Jeff & Chris Mufflers, Inc. Loan 73 73
- -----------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,125 2,125
Warrants 74 74
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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 JUNE 30, 1999
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Julius Koch USA, Inc. Debt Securities $ 4,222 $ 4,222
Warrants 324 2,700
- -----------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,500
Equity Interest 4 5
- -----------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,300 6,300
Warrants 96 1,500
- -----------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,629 7,629
Warrants 348 348
- -----------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,420 3,420
Common Stock (64,535 shares) 142 142
- -----------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 207 207
- -----------------------------------------------------------------------------------------------------
Liqui-Dri Foods, Inc. Loans 10,595 10,595
- -----------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High Yield Debt 15,150 15,150
- -----------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 359 213
- -----------------------------------------------------------------------------------------------------
May Investments Loan 47 --
- -----------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,928 2,928
- -----------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, LLC Loan 10,768 10,768
- -----------------------------------------------------------------------------------------------------
Midview Associates, L.P. Options -- --
- -----------------------------------------------------------------------------------------------------
Mihadas Loan 285 285
- -----------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- -----------------------------------------------------------------------------------------------------
Monarch Machine Tool Company(1) Loan 1,328 1,328
Common Stock (41,644 shares) 143 143
- -----------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 17 17
Debt Securities 1,823 219
Common Stock (33,333 shares) -- --
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 82
- -----------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,600 14,600
Warrants -- --
- -----------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 36 36
- -----------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,454 9,454
Inc. (1) Series D Convertible Preferred Stock 2,000 2,000
(265,957 shares)
Warrants 575 575
- -----------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, Debt Securities 398 398
L.P.
- -----------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,883 10,883
Warrants 900 900
- -----------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 589 140
Warrants 77 --
- -----------------------------------------------------------------------------------------------------
Opinion Research Corporation(1) Debt Securities 13,822 13,822
Warrants 1,030 1,030
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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 JUNE 30, 1999
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
PAL Liberty, Inc. Loan $ 216 $ 216
- -----------------------------------------------------------------------------------------------------
Panera Bread Company (1) Warrants 227 --
- -----------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loan 31 31
Preferred Stock (276 shares) 160 222
Common Stock (24 shares) -- --
- -----------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Debt Securities 4,591 2,591
Common Stock (208,000 shares) 59 27
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Progressive International Debt Securities 3,935 3,935
Corporation Common Stock (197 shares) 13 13
Preferred Stock (500 shares) 500 500
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Quality Software Products Common Stock (94,479 shares) 901 764
Holdings, PLC (1)
- -----------------------------------------------------------------------------------------------------
R.L. Singletary Loan 92 92
- -----------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,790 9,790
Warrants 395 395
- -----------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred Stock (1,000 shares) 993 271
- -----------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,103 8,103
Common Stock (2,000 shares) 200 200
Preferred Stock (300 shares) 300 300
Warrants 446 446
- -----------------------------------------------------------------------------------------------------
Southwest PCS, LP Debt Securities 7,355 7,355
Options -- --
- -----------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 403 310
Common Stock (6,208 shares) 24 --
- -----------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Loans 6,130 4,641
Inc.
Debt Securities 2,445 676
- -----------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,659 11,659
Options 266 266
- -----------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 15,000 15,000
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,545 149
Common Stock (910 shares) 57 --
- -----------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,880 3,880
Warrants 54 54
Common Units (2,325 units) 500 500
- -----------------------------------------------------------------------------------------------------
Unitel, Inc. Debt Securities 3,637 3,637
Warrants 360 360
- -----------------------------------------------------------------------------------------------------
Vianova Resins GmbH Debt Securities 1,652 1,652
Warrants -- --
- -----------------------------------------------------------------------------------------------------
Vidon, Inc. Loan 257 257
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally
non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 11
<TABLE>
<CAPTION>
PORTFOLIO COMPANY JUNE 30, 1999
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C>
William R. Dye Loan $ 263 $ 263
- -----------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
- -----------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,390 12,390
- -----------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Debt Securities 15,103 15,103
Corporation Common Stock (99 shares) 100 100
Preferred Stock (100 shares) 3,700 3,700
- -----------------------------------------------------------------------------------------------------
Total mezzanine loans and debt securities and equity
interests in portfolio companies (96 investments) $461,260 $465,891
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
INTEREST NUMBER OF -----------------------
RATE RANGES INVESTMENTS COST VALUE
---------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES
Subordinated CMBS 5 $ 184,694 $ 184,694
- --------------------------------------------------------------------------------------------------
Residual CMBS 1 75,475 75,475
- --------------------------------------------------------------------------------------------------
Residual securitization spread 1 9,824 8,324
- --------------------------------------------------------------------------------------------------
Total commercial mortgage-backed securities 7 $ 269,993 $ 268,493
- --------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 4 $ 1,353 $ 1,353
7.00%- 8.99% 25 83,386 83,386
9.00%-10.99% 59 64,043 64,425
11.00%-12.99% 17 38,447 38,447
13.00%-14.99% 3 12,370 12,370
15.00% and above 1 126 126
- --------------------------------------------------------------------------------------------------
Total commercial mortgage loans 109 $ 199,725 $ 200,107
- --------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(a) LOANS
Up to 6.99% 2 $ 70 $ 70
7.00%- 8.99% 7 120 43
9.00%-10.99% 381 63,261 63,602
11.00%-12.99% 28 1,603 1,065
13.00%-14.99% 3 262 179
15.00% and above -- -- --
- --------------------------------------------------------------------------------------------------
Total Small Business Administration 421 $ 65,316 $ 64,959
7(a) loans
- --------------------------------------------------------------------------------------------------
Other portfolio assets 8 $ 7,475 $ 7,476
- --------------------------------------------------------------------------------------------------
Total portfolio at value 641 $1,003,769 $1,006,926
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
<S> <C> <C> <C>
Acme Paging, L.P. Debt Securities $ 6,273 $ 6,273
Partnership Interest 1,456 2,600
- -------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Loans 1,475 1,475
Inc.
Debt Securities 2,084 2,084
Warrants 125 125
- -------------------------------------------------------------------------------------------------------
AMF Bowling, Inc. (1) High Yield Debt 5,086 5,086
- -------------------------------------------------------------------------------------------------------
Arnold Moving Co., Inc. Loans 570 570
- -------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc. (1) Debt Securities 7,427 7,427
Warrants 227 8
- -------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,510 12,510
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc. (1) Common Stock (342,938 shares) 330 --
- -------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
- -------------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 339 339
Warrants 12 12
- -------------------------------------------------------------------------------------------------------
CeraTech Holdings Corporation Debt Securities 1,991 50
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,557 1,557
Common Stock (220 shares) 1 --
- -------------------------------------------------------------------------------------------------------
Convenience Corporation of Debt Securities 8,391 2,774
America Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Debt Securities 3,450 3,450
Inc.
Warrants -- 1,138
- -------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 5,860 5,860
- -------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 2,948 2,948
Resources, LLC Options -- --
- -------------------------------------------------------------------------------------------------------
Coverall North America Loan 8,915 8,915
- -------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 700
- -------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 250
- -------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 133
- -------------------------------------------------------------------------------------------------------
Directory Investment Common Stock (470 shares) -- 148
Corporation
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
Directory Lending Corporation Series A Common Stock (1,031 shares) $ -- $ --
Series B Common Stock (188 shares) 235 161
Series C Common Stock (292 shares) 656 449
Series A Preferred Stock (214 shares) 307 210
Series B Preferred Stock (175 shares) 931 638
Series C Preferred Stock (58 shares) 58 40
- -------------------------------------------------------------------------------------------------------
Drilltec Patents & Loan 10,020 10,020
Technologies Company, Inc.
- -------------------------------------------------------------------------------------------------------
ECM Enterprises Loan 31 4
- -------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 30 30
Debt Securities 1,875 680
Common Stock (100 shares) 250 --
- -------------------------------------------------------------------------------------------------------
El Dorado Communications, Loans 306 306
Inc.
- -------------------------------------------------------------------------------------------------------
Enterprise Software, Inc. (1) Debt Securities 14,880 14,880
Common Stock (147,975 shares) 1,176 683
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
- -------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. Warrants 6 --
(1)
- -------------------------------------------------------------------------------------------------------
Everything Yogurt Loan 34 34
- -------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Series A Preferred Stock (500 shares) 497 497
Inc.
Common Stock (2,500 shares) 3 3
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,702 5,702
Company Warrants 280 3,629
- -------------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loans 200 200
- -------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,703 30,703
Communications, LLC Warrants -- --
- -------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,080 15,080
Warrants 525 1,000
- -------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 1,390
Archery, LLC Convertible Debentures 2,248 2,242
- -------------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 3,600
- -------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,154 9,154
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Han Hie Loan 510 510
- -------------------------------------------------------------------------------------------------------
H.B.N. Communications, Inc. Loan 233 233
- -------------------------------------------------------------------------------------------------------
Hotelevision, Inc. 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 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, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
Jack Henry & Associates, Inc. Common Stock (90,438 shares) $ 26 $ 4,193
(1)
- -------------------------------------------------------------------------------------------------------
Jeff & Chris Mufflers, Inc. Loan 93 93
- -------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,111 2,111
Warrants 74 74
- -------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 4,692 4,692
Warrants 324 2,100
- -------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Loans 3,739 3,739
Debt Securities 2,609 2,609
Warrants 348 3,500
Equity Interest 3 3
- -------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,283 6,283
Warrants 96 2,850
- -------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,601 7,601
Warrants 348 348
- -------------------------------------------------------------------------------------------------------
KZSF Broadcasting, Inc. Loans 884 884
- -------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Debt Securities 3,403 3,403
Inc.
Common Stock (64,535 shares) 142 142
- -------------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 207 207
- -------------------------------------------------------------------------------------------------------
Liqui-Dri Foods, Inc. Loans 10,291 10,291
- -------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High Yield Debt 15,002 15,002
- -------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 359 213
- -------------------------------------------------------------------------------------------------------
May Investments Loan 47 --
- -------------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,918 2,918
- -------------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, Loan 10,434 10,434
LLC
- -------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Debt Securities 197 197
Options -- --
- -------------------------------------------------------------------------------------------------------
Mihadas Loan 287 287
- -------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- -------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 17 17
Debt Securities 1,823 219
Common Stock (33,333 shares) -- --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 82
- -------------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 61 61
- -------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,419 9,419
Inc. (1) Series D Convertible Preferred Stock (265,957 2,000 2,000
shares)
Warrants 575 575
- -------------------------------------------------------------------------------------------------------
Norman's Yogurt, Inc. Loan 8 8
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
Northeast Broadcasting Group, Debt Securities $ 415 $ 415
L.P.
- -------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,841 10,841
Warrants 900 900
- -------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 589 140
Warrants 77 --
- -------------------------------------------------------------------------------------------------------
PAL Liberty, Inc. Loan 229 229
- -------------------------------------------------------------------------------------------------------
David Peters Loan 164 55
- -------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loan 31 31
Preferred Stock (276 shares) 160 222
Common Stock (24 shares) -- --
- -------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Debt Securities 4,091 4,091
Common Stock (208,000 shares) 59 33
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Precision Industries Co. Debt Securities 9,580 9,580
Common Stock (132,507 shares) 1,050 1,616
- -------------------------------------------------------------------------------------------------------
Progressive International Debt Securities 3,680 3,680
Corporation Preferred Stock (500 shares) 500 500
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Quality Software Products Common Stock (94,479 shares) 901 557
Holdings, PLC (1)
- -------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. Loans 2,000 2,000
Debt Securities 9,972 9,972
Common Stock (1,430 shares) -- 3,000
- -------------------------------------------------------------------------------------------------------
Randhawa Brothers Loan 117 117
Enterprises, Inc.
- -------------------------------------------------------------------------------------------------------
R.L. Singletary Loan 98 98
- -------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,605 9,605
Warrants 395 395
- -------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred Stock (1,000 shares) 993 993
- -------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 399 306
Common Stock (6,208 shares) 24 --
- -------------------------------------------------------------------------------------------------------
SunStates Refrigerated Loans 1,830 341
Services,
Inc. Debt Securities 2,445 676
- -------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,881 11,881
Options -- --
- -------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,562 106
Common Stock (910 shares) 57 --
- -------------------------------------------------------------------------------------------------------
Unitel, Inc. Debt Securities 3,579 3,579
Warrants 360 360
- -------------------------------------------------------------------------------------------------------
Vianova Resins GmbH Debt Securities 1,812 1,812
Warrants -- --
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally
non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C>
Vidon, Inc. Loan $ 259 $ 259
- -------------------------------------------------------------------------------------------------------
William R. Dye Loan 265 265
- -------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Warrants 24 322
Company
- -------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,000 12,000
- -------------------------------------------------------------------------------------------------------
WYCB Acquisition Corporation Loan 3,812 3,812
- -------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Debt Securities 15,094 15,094
Corporation Common Stock (99 shares) 100 100
Preferred Stock (100 shares) 3,700 3,700
- -------------------------------------------------------------------------------------------------------
Total mezzanine loans and debt securities and equity
interests in portfolio companies (94 investments) $382,488 $388,554
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
INTEREST NUMBER OF -------------------
RATE RANGES INVESTMENTS COST VALUE
---------------- ----------- -------- --------
<S> <C> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES
Subordinated CMBS 1 $ 32,221 $ 32,221
- ------------------------------------------------------------------------------------------------
Residual CMBS 1 70,771 70,771
- ------------------------------------------------------------------------------------------------
Residual securitization spread 1 12,182 10,682
- ------------------------------------------------------------------------------------------------
Total commercial mortgage-backed securities 3 $115,174 $113,674
- ------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 3 $ 1,327 $ 1,327
7.00%- 8.99% 43 104,872 104,872
9.00%-10.99% 102 69,635 70,076
11.00%-12.99% 31 44,424 44,424
13.00%-14.99% 4 12,362 12,362
15.00% and above 1 125 125
- ------------------------------------------------------------------------------------------------
Total commercial mortgage loans 184 $232,745 $233,186
- ------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(a) LOANS
Up to 6.99% 12 $ 160 $ 115
7.00%- 8.99% 12 134 57
9.00%-10.99% 364 51,925 51,343
11.00%-12.99% 53 5,148 4,592
13.00%-14.99% 5 284 178
15.00% and above -- -- --
- ------------------------------------------------------------------------------------------------
Total Small Business Administration 446 $ 57,651 $ 56,285
7(a) loans
- ------------------------------------------------------------------------------------------------
Other portfolio assets 6 $ 8,331 $ 8,575
- ------------------------------------------------------------------------------------------------
Total portfolio at value 733 $796,389 $800,274
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants 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 ("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 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 the year ended December 31, 1997 restated as if the
Predecessor Companies had merged as of the beginning of the earliest period
presented.
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"). The Company 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
wholly owned 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 Small Business Administration ("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"). The
Company 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."
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).
15
<PAGE> 18
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30, 1999 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, 1998 Annual Report. The results of operations for the
three and six months ended June 30, 1999 are not necessarily indicative of the
operating results to be expected for the full year.
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 1998 balances to conform with the 1999
financial statement presentation.
NOTE 4. PORTFOLIO
The Company's lending operations are conducted in three primary areas:
mezzanine finance, commercial real estate finance, and SBA Section 7(a)
guaranteed lending.
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.
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.
At June 30, 1999 and December 31, 1998, approximately 99 percent and 98
percent, respectively, 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 June 30, 1999 and December 31, 1998 was 13.7 percent and
14.6 percent, respectively. At June 30, 1999 and December 31, 1998, mezzanine
loans and debt securities with a cost basis of $25,034,000 and $20,977,000,
respectively, were not accruing interest.
16
<PAGE> 19
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
The geographic and industry composition of the mezzanine portfolio at June
30, 1999 and December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 25% 27%
Southeast................................................... 24 23
Mid-Atlantic................................................ 23 28
West........................................................ 16 11
International............................................... 6 7
Northeast................................................... 6 4
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Business Services........................................... 30% 11%
Consumer Products........................................... 18 25
Telecommunications.......................................... 13 14
Industrial Products......................................... 12 8
Education................................................... 7 8
Retail...................................................... 6 9
Broadcasting................................................ 4 9
Other....................................................... 10 16
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
COMMERCIAL MORTGAGE-BACKED SECURITIES
In December 1998, the Company purchased $67 million of Subordinated
Commercial Mortgage-Backed Securities ("Subordinated CMBS") for $32 million. For
the six months ended June 30, 1999, the Company purchased for a price of $155.5
million, Subordinated CMBS with a face value of $322.8 million. The bonds owned
by the Company of non-investment grade and unrated tranches are junior in
priority for payment of principal to the more senior tranches of the related
commercial securitization. Cash flow from the underlying mortgages generally is
allocated first to the senior tranches, with the most senior tranches having a
priority right to the cash flow. Then, any remaining cash flow is allocated,
generally, among the other tranches in order of their relative seniority. To the
extent there are defaults and unrecoverable losses on the underlying mortgages
resulting in reduced cash flows, the subordinate tranche will bear this loss
first.
As of June 30, 1999 and December 31, 1998, the estimated yield to maturity
on the Subordinated CMBS was approximately 14.4 percent and 15.0 percent,
respectively. The Company's estimated returns on its Subordinated CMBS are based
upon a number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples include the timing and magnitude of
credit losses on the mortgage loans underlying the Subordinated CMBS that are a
result of the general condition of the real estate market (including competition
for tenants and their related credit quality) and changes in market rental
rates. As these uncertainties and contingencies are difficult to predict and are
subject to future events which may alter these assumptions, no assurance can be
given that the anticipated yields to maturity, will be achieved.
17
<PAGE> 20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
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 three bond classes sold had an
aggregate weighted average interest rate of approximately 6.38 percent.
To effect the securitization, 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 CMBS") in the loan pool sold, and will receive interest income from
this Residual CMBS as well as 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 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 $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 (i.e., cash, Residual Securitization Spread,
Residual CMBS and a servicing asset). As of June 30, 1999, the mortgage loan
pool had an approximate weighted average stated interest rate of 9.4 percent.
The value of the Residual CMBS was determined using a discount rate equal to the
average interest rate of the underlying mortgage loans. The value of the
Residual Securitization Spread was determined based on a constant prepayment
rate of 7 percent and a discount rate of 14 percent.
The geographic composition and the property types securing the total
commercial mortgage-backed securities portfolio at June 30, 1999 and December
31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
West........................................................ 31% 17%
Southeast................................................... 23 25
Mid-Atlantic................................................ 21 32
Midwest..................................................... 21 19
Northeast................................................... 4 7
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Retail...................................................... 33% 32%
Housing..................................................... 29 13
Office...................................................... 20 21
Hospitality................................................. 10 23
Other....................................................... 8 11
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
18
<PAGE> 21
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
COMMERCIAL REAL ESTATE FINANCE
The commercial mortgage loan 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 June 30, 1999 and December 31, 1998, approximately 65 percent and 35
percent and 68 percent and 32 percent of the Company's commercial mortgage loan
portfolio was composed of fixed and adjustable interest rate loans,
respectively. The weighted average yield (at value) on the real estate portfolio
as of June 30, 1999 and December 31, 1998 equaled 10.1 percent and 10.4 percent,
respectively. As of June 30, 1999 and December 31, 1998, loans with a cost basis
of $4,310,000 and $5,443,000, respectively, were not accruing interest.
The geographic composition and the property types securing the commercial
mortgage loan portfolio at June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Mid-Atlantic................................................ 41% 37%
Southeast................................................... 25 26
West........................................................ 24 24
Midwest..................................................... 6 9
Northeast................................................... 4 4
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Hospitality................................................. 37% 47%
Office...................................................... 33 20
Retail...................................................... 11 14
Recreation.................................................. 11 7
Other....................................................... 8 12
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
SBA SECTION 7(a) GUARANTEED LENDING
The Company, through its wholly owned subsidiary, Allied SBLC, participates
in the SBA's Section 7(a) Guaranteed Loan Program ("7(a) loans").
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 or no more than 500 employees.
The Company charges interest on the 7(a) 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 June 30, 1999 and
19
<PAGE> 22
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
December 31, 1998, approximately 98 percent and 96 percent, respectively, 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 June 30, 1999 and December 31, 1998, 7(a) loans with a cost basis of
$10,568,000 and $11,227,000, respectively, were not accruing interest.
The geographic and industry composition of the SBA 7(a) portfolio at June
30, 1999 and December 31, 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 36% 34%
Mid-Atlantic................................................ 36 29
Southeast................................................... 15 16
West........................................................ 9 14
Northeast................................................... 4 7
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Retail...................................................... 42% 41%
Hospitality................................................. 28 30
Consumer Products........................................... 8 6
Consumer Services........................................... 5 6
Business Services........................................... 4 4
Broadcasting................................................ 3 4
Other....................................................... 10 9
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
20
<PAGE> 23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT
At June 30, 1999 and December 31, 1998, the Company had the following
credit facilities:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Debentures and notes payable:
Master loan and security agreement.... $250,000 $ 17,662 $250,000 $ 6,000
Unsecured long-term notes payable..... 317,000 317,000 180,000 180,000
SBA debentures........................ 74,650 47,650 74,650 47,650
OPIC loan............................. 5,700 5,700 5,700 5,700
Master repurchase agreement........... -- -- 250,000 --
Senior note payable................... -- -- -- --
-------- -------- -------- --------
Total debentures and notes
payable........................ 647,350 388,012 760,350 239,350
-------- -------- -------- --------
Revolving lines of credit.................. 340,000 120,000 200,000 95,000
-------- -------- -------- --------
Total Debt....................... $987,350 $508,012 $960,350 $334,350
======== ======== ======== ========
</TABLE>
MASTER LOAN AND SECURITY AGREEMENT
The Company, and BMI, established a facility to borrow up to $250,000,000,
of which $100,000,000 is committed, using commercial mortgage loans as
collateral under the agreement. The Company pledges commercial mortgage loans as
collateral for the facility such that the amount borrowed is approximately equal
to 80 percent to 90 percent of the value of the collateral pledged. The
agreement generally requires interest only payments with all principal due at
maturity. Principal may be repaid at any time without penalty. The agreement
bears interest at the one-month London Interbank Offer Rate ("LIBOR") plus 1.0
percent, or 6.2 percent and 6.6 percent, at June 30, 1999 and December 31, 1998,
respectively. Average debt outstanding, maximum amount borrowed, and weighted
average interest rate charged on this facility for the six months ended June 30,
1999 and for the year ended December 31, 1998 were $42,472,000 and $21,932,000;
$84,392,000 and $56,000,000; and 6.0 percent and 6.5 percent; respectively. The
agreement matures on October 7, 1999.
UNSECURED LONG-TERM NOTES PAYABLE
In June 1998 and May 1999 the Company issued five 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 $317,000,000. The weighted
average interest rate on the notes is 7.3 percent 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.
SBA DEBENTURES
At June 30, 1999 and December 31, 1998, the Company had drawn debentures
totaling $47,650,000 payable to the SBA at interest rates ranging from 6.9
percent to 9.6 percent. Scheduled maturity dates are as follows: 1999 -- $0;
2000 -- $17,300,000; 2001 -- $9,350,000; 2002 -- $0; 2003 -- $0; and $21,000,000
thereafter. 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.
21
<PAGE> 24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT, CONTINUED
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 June 30, 1999 and December
31, 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.
REVOLVING LINES OF CREDIT
In May 1999, the Company increased its unsecured revolving line of credit
to $340,000,000 from $315,000,000. The facility bears interest at LIBOR plus
1.25 percent, or 6.5 percent and 6.9 percent at June 30, 1999 and December 31,
1998, respectively, and requires a commitment fee equal to 0.25 percent of the
committed amount. The new line expires in March 2001. The line of credit
requires monthly payments of interest and all principal is due upon its
expiration.
The average debt outstanding on the revolving lines were $69,354,000 and
$51,904,000 for the six months ended June 30, 1999 and for the year ended
December 31, 1998, respectively. The maximum amount borrowed under these
facilities and the weighted average interest rate for the six months ended June
30, 1999 and for the year ended December 31, 1998 were $174,000,000 and
$105,000,000, and 6.4 percent and 6.8 percent, respectively.
NOTE 6. SHAREHOLDERS' EQUITY
For the six months ended June 30, 1999 and for the year ended December 31,
1998, the Company's compensation committee granted a total of 30,000 options and
5,189,944 options, respectively, to officers of the Company under the ACC 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 a weighted average
exercise price equal to $20.15 per share. At June 30, 1999, options for
1,438,090 shares were vested. 834 options were exercised and 141,695 options
were cancelled during the six months ended June 30, 1999. Options were exercised
for 10,408 shares, and options were canceled for 65,638 shares during the year
ended December 31, 1998.
During the six months ended June 30, 1999, the Company sold 1,963,000
shares of its common stock through underwriters for net proceeds of $34,896,000,
after costs of $1,783,000 which included a weighted average discount of 3.7
percent. In addition, the Company sold 1,136,439 shares of its common stock to
an institutional investor in two transactions. The net proceeds from the
transactions were $19,833,000, after costs of $785,000 which included a discount
of 3.0 percent.
In 1998, the Company sold 3,565,000 shares of its common stock through an
underwriter for net proceeds of $56,776,000, after costs of $3,384,000 which
included a 5.0 percent fee paid to the underwriter. In 1998, the Company also
sold 801,959 shares of its common stock to an institutional investor in two
transactions. The net proceeds from the transactions were $12,899,000, after
costs of $677,000 which included a weighted average discount of 4.0 percent.
22
<PAGE> 25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY, CONTINUED
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 six months ended
June 30, 1999 and for the year ended December 31, 1998, the Company issued
117,398 and 241,482 shares, respectively, at an average price per share of
$19.52 and $20.35, respectively.
NOTE 7. 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 JUNE 30, 1999 (UNAUDITED)
Net increase in net assets resulting from operations... $22,121
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $22,066
=======
BASIC EARNINGS PER COMMON SHARE........................ 58,736 $0.38
=====
Options outstanding to officers........................ 97
------
DILUTED EARNINGS PER COMMON SHARE...................... 58,833 $0.38
====== =====
FOR THE THREE MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Net increase in net assets resulting from operations... $14,476
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $14,421
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,329 $0.28
=====
Options outstanding to officers........................ 537
------
DILUTED EARNINGS PER COMMON SHARE...................... 51,866 $0.28
====== =====
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
Net increase in net assets resulting from operations... $40,701
Less: Preferred stock dividends (110)
-------
Income available to common shareholders................ $40,591
=======
BASIC EARNINGS PER COMMON SHARE........................ 57,758 $0.70
=====
Options outstanding to officers........................ 73
------
DILUTED EARNINGS PER COMMON SHARE...................... 57,831 $0.70
====== =====
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Net increase in net assets resulting from operations... $46,541
Less: Preferred stock dividends........................ (110)
-------
Income available to common shareholders................ $46,431
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,570 $0.90
=====
Options outstanding to officers........................ 418
------
DILUTED EARNINGS PER COMMON SHARE...................... 51,988 $0.89
====== =====
</TABLE>
23
<PAGE> 26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. EARNINGS PER COMMON SHARE, CONTINUED
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 8. FORMULA AWARD AND CUT-OFF AWARD
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 Allied Lending and the
Predecessor Companies as of the close of the market on the Merger announcement
date. 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 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust under the DC Plan (see Note 10) and was used to
purchase shares of the Company's stock (included in common stock held in
deferred compensation trust). The Formula Award vests 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. For the six
months ended June 30, 1999 and for the year ended December 31, 1998, $3,121,000
and $6,242,000, respectively was expensed as a result of the Formula Award.
Vested Formula Awards are distributable to recipients at the Company's
discretion, however, sale of the Company's stock by the recipients is
restricted. Unvested Formula Awards are forfeited upon a recipient's separation
from service and the related Company stock is retired. For the six months ended
June 30, 1999 and for the year ended December 31, 1998, $61,000 and $270,000,
respectively, of the Formula Award was forfeited.
On January 4, 1999, the Company distributed shares of the Company's common
stock with a value of $4,062,000 representing the portion of the Formula Award
that vested on December 31, 1998.
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 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 is
expensed as the Cut-off Award vests. For the six months ended June 30, 1999 and
for the year ended December 31, 1998, $500,000 and $807,000, respectively, of
the Cut-off Award vested.
24
<PAGE> 27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $0.80 per
common share dividend, or $47,033,000, for the six months ended June 30, 1999.
NOTE 10. 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.
25
<PAGE> 28
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.
OVERVIEW
The Company provides capital to small and middle-market companies in a
variety of different industries and in diverse geographic locations. Our lending
and investment activity is focused in three areas:
- Mezzanine finance
- Commercial real estate finance, including the purchase of CMBS, and
- Small business and commercial real estate loans originated for sale
under our Allied Capital Express brand name.
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gain income earned on
the Company's investment portfolio after deducting interest paid on borrowed
capital and operating expenses. Interest income results from the stated interest
rate earned 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 and loan
originations, and the Company's ability to secure financing for its investment
activities.
The total portfolio at value was $1,006.9 million at June 30, 1999 and
$800.3 million at December 31, 1998. During the six months ended June 30, 1999,
the Company originated investments totaling $342.5 million and received
repayments of $71.9 million and sold loans of
26
<PAGE> 29
$68.0 million. As a result, the total portfolio increased by 26% from December
31, 1998 to June 30, 1999. The portfolio increased approximately 15% for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
AT AT
ASSET COMPOSITION JUNE 30, 1999 DECEMBER 31, 1998
----------------- ------------- -----------------
<S> <C> <C>
Mezzanine Investments.............................. 43% 46%
Commercial Mortgage-Backed Securities*............. 25% 13%
Commercial Mortgage Loans.......................... 19% 27%
SBA 7(a) Loans..................................... 6% 7%
Cash and Other Assets.............................. 7% 7%
--- ---
100% 100%
=== ===
</TABLE>
- -------------------------
* Includes purchased Subordinated CMBS totaling 17% and 4% of total assets at
June 30, 1999 and December 31, 1998, respectively.
MEZZANINE
Mezzanine loans, debt securities and equity interests were $465.9 million
and $388.6 million at June 30, 1999 and December 31, 1998, respectively. The
effective yield on the mezzanine loans and debt securities was 13.7% and 14.6%
at June 30, 1999 and December 31, 1998, respectively. Mezzanine loan
originations and purchases were $87.9 million and $45.1 million for the three
months ended June 30, 1999 and 1998, respectively, and $127.2 million and $83.0
million for the six months ended June 30, 1999 and 1998, respectively. Mezzanine
loan originations and purchases for the six months ended June 30, 1999 had a
weighted average stated rate of 13.1% and consisted primarily of investments
structured as subordinated debt with warrants. Mezzanine loan originations and
purchases were $236.0 million for the year ended December 31, 1998. Mezzanine
repayments were $23.6 million and $6.4 million for the three months ended June
30, 1999 and 1998, respectively, and $48.3 million and $20.2 million for the six
months ended June 30, 1999 and 1998, respectively. Mezzanine repayments and
sales were $41.3 million for the year ended December 31, 1998.
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial mortgage-backed securities (CMBS) were $268.5 million and $113.7
million at June 30, 1999 and December 31, 1998, representing 25% and 13% of
total assets, respectively. The portfolio at June 30, 1999 consisted of $184.7
million of purchased subordinated CMBS ("Subordinated CMBS") and $83.8 million
of CMBS retained primarily from a $295 million asset securitization the Company
completed on January 30, 1998 ("Residual CMBS"). During the second quarter of
1999, the Company purchased Subordinated CMBS with a face value of $144.9
million for a price of $67.5 million. During the first half of 1999, the Company
purchased Subordinated CMBS with a face value of $322.8 million for a price of
$155.5 million. At June 30, 1999 and December 31, 1998, the estimated yield to
maturity on the Subordinated CMBS and the Residual CMBS was 14.4% and 9.8%, and
15.0% and 9.7%, respectively. At June 30, 1999 and December 31, 1998, the
weighted average yield on the entire CMBS portfolio was 13.0% and 11.2%,
respectively. The weighted average loan-to-value and debt service coverage of
the loans securing the total CMBS portfolio at June 30, 1999 were 69.8% and 1.3,
respectively.
The purchases of the Subordinated CMBS have had, and will continue to have,
the full scrutiny of the Company's underwriting processes. The Company
re-underwrites the majority of the loans securing the bonds, including
determining its own assessment of cash flow available for debt service and
appraisal value, and visits most of the collateral properties. The Company will
continue to bid on similar CMBS offerings as long as we can achieve significant
discounts and attractive yields on the
27
<PAGE> 30
purchase of such offerings. However, we will limit our Subordinated CMBS
purchasing activity in order to maintain a balanced portfolio.
COMMERCIAL MORTGAGE LOANS
Commercial mortgage loans were $200.1 million at June 30, 1999 and $233.2
million at December 31, 1998. The weighted average current stated interest rate
on the commercial mortgage loan portfolio at June 30, 1999 and at December 31,
1998 was 9.7%. The weighted average yield on the commercial mortgage loan
portfolio was 10.1% at June 30, 1999 and 10.4% at December 31, 1998. The
effective yield on the commercial mortgage loan portfolio is higher than the
stated interest rate due to the amortization of market discount on purchased
loans and original issue discount.
In the first quarter of 1998, the Company reduced its commercial mortgage
loan portfolio through the securitization of $295 million in commercial real
estate loans. In addition the Company slowed its origination activity in early
1998 due to pricing conditions in the market. As a result, the commercial
mortgage loan portfolio decreased by 14% and 48%, respectively, for the six
months ended June 30, 1999 and the year ended December 31, 1998.
ALLIED CAPITAL EXPRESS
During the second quarter of 1999, the Company combined its commercial real
estate loan origination activity with its SBA 7(a) lending activity in order to
increase its loans originated for sale business under the Allied Capital Express
brand name. Through Allied Capital Express, the Company provides small business
and commercial real estate loans up to $3 million. The majority of the loans
originated in this area are originated for sale, generally at premiums of up to
10% of the loan amount. A summary of Allied Capital Express loan origination and
sale activity for the three and six months ended June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Loan Originations:
SBA 7(a)..................................... $19,715 $13,700 $38,066 $ 29,500
Other........................................ 8,027 82,500 21,643 136,400
Loan Sales:
SBA 7(a)..................................... 10,561 9,700 23,608 19,400
Other........................................ 12,993 2,142 44,410 2,142
</TABLE>
On a comparative basis, SBA 7(a) loan origination activity has increased
due to the opening of new office locations and due to increased emphasis that is
being placed on the Allied Capital Express product area. Non-SBA 7(a) loan
origination activity has decreased due to the reduction of middle-market
commercial real estate lending activity that occurred in 1998 as discussed under
"Commercial Mortgage Loans." Allied Capital Express targets small commercial
real estate loans that are in many cases originated in conjunction with SBA 7(a)
loans. The 1999 and 1998 non-SBA 7(a) activity is not comparable because of the
shift from larger real estate loans originated for the portfolio to smaller
commercial real estate loans originated primarily for sale. In addition, the
Company has sold lower yielding commercial mortgage loans during 1999 and has
reinvested the proceeds into higher yielding mezzanine, CMBS and SBA 7(a)
investments. SBA 7(a) loans are originated with variable interest rates priced
at spreads ranging from 1.75% to 2.75% over the prime lending rate.
28
<PAGE> 31
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net increase in net assets resulting from operations (NIA) was $40.7
million, or $0.70 per share, and $46.5 million, or $0.89 per share, for the six
months ended June 30, 1999 and 1998, respectively. NIA results from total
interest and related portfolio income earned, less total expenses incurred in
the operations of the Company, plus net realized and unrealized gains or losses.
The NIA for the six months ended June 30, 1998 also includes a one-time gain of
$14.8 million, or $0.28 per share, resulting from a commercial mortgage loan
securitization transaction that was completed in January 1998.
Total interest and related portfolio income was $60.9 million and $58.2
million for the six months ended June 30, 1999 and 1998, respectively. Total
interest and related portfolio income is primarily a function of the level of
interest income earned and the balance of portfolio assets. In addition, total
interest and related portfolio income includes net premiums from loan
dispositions, prepayment premiums, and advisory fee and other income. 1998 total
interest and related portfolio income includes a one-time gain on sale of $14.8
million resulting from a commercial mortgage loan securitization transaction
that was completed in January 1998. Excluding the 1998 gain on sale, total
interest and related portfolio income increased in the first half of 1999 by 40%
as compared to the first half of 1998.
Interest income totaled $52.8 million and $38.2 million for the six months
ended June 30, 1999 and 1998, respectively. Interest income increased $14.6
million or 38% compared to the same period in the prior year. The increase in
interest income earned results primarily from continued growth of the Company's
investment portfolio and the Company's focus on increasing its return on assets.
The Company's investment portfolio, excluding non-interest bearing equity
interests in portfolio companies, increased by 53% to $954.1 million at June 30,
1999 from $622.5 million at June 30, 1998. The weighted average yield on the
interest bearing investments in the portfolio at June 30, 1999 was 12.4% as
compared to 11.8% at June 30, 1998.
Net premiums from loan dispositions were $4.3 million and $2.0 million for
the six months ended June 30, 1999 and 1998, respectively. Included in net
premiums from loan dispositions are premiums from loan sales and premiums
received on the early repayment of loans. Premiums from loan sales were $3.7
million and $1.4 million for the six months ended June 30, 1999 and 1998,
respectively. This premium income results primarily from the premium paid by
purchasers of the guaranteed portion of the Company's SBA 7(a) loans sold into
the secondary market and the commercial real estate loans sold to third parties,
less the origination costs associated with the loans sold.
Prepayment premiums were $0.6 million for the six months ended June 30,
1999 and 1998. While the scheduled maturity of mezzanine and commercial mortgage
loans ranges from five to ten years, it is not unusual for the Company's
borrowers to refinance or pay off their debts to the Company ahead of schedule.
Because the Company seeks to finance primarily seasoned, performing companies,
such companies at times can secure lower cost financing as their balance sheets
strengthen, or as more favorable interest rates become available. Therefore, the
Company generally structures its loans to require a prepayment premium for the
first three to five years of the loan.
Investment advisory fees and other income were $3.7 million and $3.1
million for the six months ended June 30, 1999 and 1998, respectively.
Investment advisory fees are received from the private funds managed by the
Company, primarily from a fund managed in Germany.
Total operating expenses were $26.8 million and $20.2 million for the six
months ended June 30, 1999 and 1998, respectively. Operating expenses include
interest on indebtedness, salaries and employee benefits, and general and
administrative expenses.
29
<PAGE> 32
The Company's single largest expense is interest on indebtedness, which
totaled $14.4 million and $8.8 million for the six months ended June 30, 1999
and 1998, respectively. Interest expense increased $5.6 million, or 63%,
compared to the same period in the prior year. The increase is attributable to
an increase in borrowings by the Company and its subsidiaries under various
credit facilities. The Company's total borrowings were $508.0 million and $298.0
million at June 30, 1999 and 1998, respectively. Average outstanding
indebtedness for the six months ended June 30, 1999 and 1998 was $388.3 million
and $224.4 million, respectively. The Company's weighted average interest cost
on outstanding borrowings at June 30, 1999 and 1998 was 7.5% and 7.4%,
respectively.
Salaries and employee benefits totaled $7.1 million and $5.5 million for
the six months ended June 30, 1999 and 1998, respectively. Total employees were
114 and 93 at June 30, 1999 and 1998, respectively. The increase in salaries and
employee benefits reflects the increase in total employees, combined with wage
increases and the experience level of employees hired. The Company has been an
active recruiter throughout 1998 and 1999 for experienced investment and
operational personnel, and the Company will continue to actively recruit and
hire new professionals in 1999 to support anticipated portfolio growth.
General and administrative expenses include the leases for the Company's
headquarters in Washington, DC, and its regional offices. General and
administrative expenses also include travel costs, stock record expenses,
directors' fees, legal and accounting fees and various other expenses. General
and administrative expenses totaled $5.3 million and $5.9 million for the six
months ended June 30, 1999 and 1998, respectively. The decrease in general and
administrative expenses was partially due to certain post-Merger integration
expenses incurred in the first quarter of 1998, totaling $0.2 million. The
post-Merger integration expenses included primarily the costs of legal and
accounting advice as well as the use of certain outside consultants. The
remaining decrease results from the timing of recognizing expenses in 1999 and
1998.
For the six months ended June 30, 1999 and 1998, operating expenses
excluding interest on indebtedness as a percent of total interest and related
portfolio income less interest expense plus net realized and unrealized capital
gains was 22% and 18%, respectively.
The formula award and cut-off award totaled $3.6 million and $3.9 million,
or $0.06 per share and $0.08 per share, for the six months ended June 30, 1999
and 1998, respectively.
The formula award expense totaled $3.1 million and $3.2 million for the six
months ended June 30, 1999 and 1998, respectively. The formula award was
designed as an incentive compensation program that would replace canceled stock
options that were cancelled as a result of the Company's 1997 Merger and would
balance share ownership among key officers. The formula award vests over a
three-year period, on the anniversary date of the Merger, beginning on December
31, 1998. Assuming all officers who received a formula award remain with the
Company over the remaining vesting period, the Company will expense the
remaining formula award during 1999 and 2000 in an annual amount of
approximately $6.2 million.
The cut-off award expense totaled $0.5 million and $0.7 million for the six
months ended June 30, 1999 and 1998, respectively. 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 will only be payable if the award recipient is
employed by the Company on a future vesting date. Total cut-off award that will
vest in 1999 is estimated at $0.5 million.
Net realized gains were $11.6 million and $13.8 million for the six months
ended June 30, 1999 and 1998, respectively. These gains resulted from the sale
of equity securities associated with certain mezzanine and commercial mortgage
loans and the realization of unamortized discount resulting from the early
repayment of mezzanine and commercial mortgage loans, offset by losses on
investments.
30
<PAGE> 33
Realized gains totaled $14.9 million and $13.9 million for the six months
ended June 30, 1999 and 1998, respectively. Realized gains during 1999 primarily
resulted from transactions involving two portfolio companies, Radio One, Inc.
($10.5 million) and Precision Industries Co. ($3.2 million). The Company
reversed previously recorded unrealized appreciation of $6.5 million when these
gains were realized in 1999. Realized losses totaled $3.3 million and $0.1
million for the six months ended June 30, 1999 and 1998, respectively. Realized
losses during 1999 resulted primarily from the liquidation of one portfolio
investment, CeraTech Holdings Corporation ($2.5 million). Losses realized in
1999 had been recognized in NIA over time as unrealized depreciation when the
Company determined that the respective portfolio security's value had become
impaired. Thus, the Company reversed previously recorded unrealized depreciation
totaling $2.7 million in 1999 when the related losses were realized.
The Company recorded net unrealized losses of $1.3 million for each of the
six months ended June 30, 1999 and 1998. Net unrealized losses for 1999 and 1998
consisted of valuation changes resulting from the Board of Directors' valuation
of the Company's assets and the effect of reversals of net unrealized
appreciation resulting from net realized gains. At June 30, 1999, net unrealized
appreciation in the portfolio totaled $1.1 million, and was composed of
unrealized appreciation of $29.1 million resulting primarily from appreciated
equity interests in portfolio companies, and unrealized depreciation of $28.0
million resulting primarily from underperforming loan and equity investments in
the portfolio. At June 30, 1998, net unrealized depreciation in the portfolio
totaled $20,000 and was composed of unrealized appreciation of $26.75 million
and unrealized depreciation of $26.77 million.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value. During
1998, the Company began to grade its commercial mortgage and 7(a) loan
portfolios using the same grading system used for its mezzanine loan portfolio,
so that the Company's entire portfolio would have a uniform grading system.
Prior to this, the commercial real estate portfolio used a different grading
system and the 7(a) loan portfolio was not graded.
At June 30, 1999, the Company's portfolio was graded as follows:
<TABLE>
<CAPTION>
INVESTMENTS PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1..................................................... $ 112.5 11.2%
2..................................................... 823.5 81.8
3..................................................... 42.1 4.2
4..................................................... 14.8 1.5
5..................................................... 14.0 1.3
-------- -----
$1,006.9 100.0%
======== =====
</TABLE>
Grade 5 mezzanine investments totaled $9.1 million at value at June 30,
1999, or 0.9%, of the Company's total portfolio based on the valuation of the
Board of Directors. The value of these Grade 5 mezzanine investments has been
reduced from an aggregate cost of $28.3 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 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
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<PAGE> 34
troubled portfolio company in order to recover the maximum amount of the
Company's investment, but records unrealized depreciation for the expected full
amount of the potential loss when such exposure is identified. Grade 5 mezzanine
investments at December 31, 1998 totaled $6.4 million at value, or 0.8% of the
Company's total portfolio.
At June 30, 1999, Grade 5 commercial mortgage loans totaled $0.1 million at
value. The value of these Grade 5 loans approximates cost because of the
estimated value of the underlying collateral securing the loans. Grade 5
commercial mortgage loans at December 31, 1998 totaled $0.1 million at value.
Grade 5 SBA 7(a) loans totaled $4.8 million at value at June 30, 1999. The
value of these loans has been reduced from an aggregate cost basis of $6.1
million, which includes $3.4 million at cost that is guaranteed by the SBA.
Grade 5 SBA 7(a) loans at December 31, 1998 totaled $6.3 million at value.
For the total portfolio, loans greater than 120 days delinquent were $23.5
million at value at June 30, 1999, or 2.3% of the total portfolio. Included in
this category are loans valued at $14.0 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 December 31, 1998 were $13.7 million
at value, or 1.7% of the total portfolio.
Because the Company has elected to be taxed as a regulated investment
company ("RIC") under Subchapter M of the Code, the Company is not taxed on its
investment company taxable income and realized capital gains, to the extent that
such income and gains are distributed to shareholders. The Company's dividend
policy currently is to annually distribute substantially all of its net taxable
income, including net capital gains, if any. Annual tax distributions may differ
from NIA for the fiscal year due to timing differences in the recognition of
income and expenses, returns of capital and net unrealized appreciation or
depreciation, which are not included in taxable income. The Company's current
regular quarterly dividend was determined based on estimated 1999 taxable
income.
In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest and gains from
the sale of securities; (2) meet investment diversification requirements as
defined in the Code; and (3) distribute to shareholders at least 90% of its
investment company taxable ordinary income annually. The Company intends to take
all steps necessary to continue to meet the RIC qualifications. However, there
can be no assurance that the Company will continue to elect or qualify for such
treatment in future years.
Certain of the Company's credit facilities limit the Company's ability to
declare dividends, should the Company default under certain provisions of the
respective credit agreements.
The weighted average common shares outstanding used to compute basic
earnings per share were 57.8 million and 51.6 million for the six months ended
June 30, 1999 and 1998, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 57.8 million and 52.0 million for the six months ended
June 30, 1999 and 1998, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net increase in net assets resulting from operations (NIA) was $22.1
million, or $0.38 per share, and $14.5 million, or $0.28 per share, for the
three months ended June 30, 1999 and 1998,
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<PAGE> 35
respectively. NIA results from total interest and related portfolio income
earned, less total expenses incurred in the operations of the Company, plus net
realized and unrealized gains or losses.
Total interest and related portfolio income was $33.2 million and $21.3
million for the three months ended June 30, 1999 and 1998, respectively. Total
interest and related portfolio income is primarily a function of the level of
interest income earned and the balance of portfolio assets. In addition, total
interest and related portfolio income includes net premiums from loan
dispositions, prepayment premiums, and advisory fee and other income. Total
interest and related portfolio income increased in the second quarter of 1999 as
compared to the second quarter of 1998 by 56%.
Interest income totaled $28.2 million and $18.7 million for the three
months ended June 30, 1999 and 1998, respectively. Interest income increased
$9.4 million or 50% compared to the same period in the prior year. The increase
in interest income earned results primarily from changes in the amount of
interest bearing investments outstanding, continued growth of the Company's
investment portfolio, and the Company's focus on increasing its return on
assets. The Company's investment portfolio, excluding non-interest bearing
equity interests in portfolio companies, increased by 53% to $954.1 million at
June 30, 1999 from $622.5 million at June 30, 1998. The weighted average yield
on the interest bearing investments in the portfolio at June 30, 1999 was 12.4%
as compared to 11.8% at June 30, 1998.
Net premiums from loan dispositions were $2.4 million and $0.7 million for
the three months ended June 30, 1999 and 1998, respectively. Included in net
premiums from loan dispositions are premiums from loan sales and premiums
received on the early repayment of loans. Premiums from loan sales were $1.9
million and $0.5 million for the three months ended June 30, 1999 and 1998,
respectively. This premium income results primarily from the premium paid by
purchasers of the guaranteed portion of the Company's SBA 7(a) loans sold into
the secondary market and commercial real estate loans sold to third parties,
less the origination costs associated with the loans sold.
Prepayment premiums were $0.5 million and $0.2 million for the three months
ended June 30, 1999 and 1998, respectively. While the scheduled maturity of
mezzanine and commercial mortgage loans ranges from five to ten years, it is not
unusual for the Company's borrowers to refinance or pay off their debts to the
Company ahead of schedule. Because the Company seeks to finance primarily
seasoned, performing companies, such companies at times can secure lower cost
financing as their balance sheets strengthen, or as more favorable interest
rates become available. Therefore, the Company generally structures its loans to
require a prepayment premium for the first three to five years of the loan.
Investment advisory fees and other income were $2.6 million and $1.9
million for the three months ended June 30, 1999 and 1998, respectively.
Investment advisory fees are received from the private funds managed by the
Company, primarily from a fund managed in Germany.
Total operating expenses were $14.7 million and $10.0 million for the three
months ended June 30, 1999 and 1998, respectively. Operating expenses include
interest on indebtedness, salaries and employee benefits, and general and
administrative expenses.
The Company's single largest expense is interest on indebtedness, which
totaled $8.0 million and $4.2 million for the three months ended June 30, 1999
and 1998, respectively. Interest expense increased $3.8 million, or 90%,
compared to the same period in the prior year. The increase is attributable to
an increase in borrowings by the Company and its subsidiaries under various
credit facilities. The Company's total borrowings were $508.0 million and $298.0
million at June 30, 1999 and 1998, respectively. Average outstanding
indebtedness for the quarters ended June 30, 1999 and 1998 was $422.3 million
and $227.9 million, respectively. The Company's weighted average interest cost
on outstanding borrowings at June 30, 1999 and 1998 was 7.5% and 7.4%,
respectively.
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<PAGE> 36
Salaries and employee benefits totaled $3.8 million and $2.7 million for
the three months ended June 30, 1999 and 1998, respectively. Total employees
were 114 and 93 at June 30, 1999 and 1998, respectively. The increase in
salaries and employee benefits reflects the increase in total employees,
combined with wage increases and the experience level of employees hired. The
Company has been an active recruiter throughout 1998 and in the first half of
1999 for experienced investment and operational personnel, and the Company will
continue to actively recruit and hire new professionals in 1999 to support
anticipated portfolio growth.
General and administrative expenses include the leases for the Company's
headquarters in Washington, DC, and its regional offices. General and
administrative expenses also include travel costs, stock record expenses,
directors' fees, legal and accounting fees and various other expenses. General
and administrative expenses totaled $2.9 million and $3.1 million for the three
months ended June 30, 1999 and 1998, respectively. The decrease results from the
timing of recognizing expenses in 1999 and 1998.
For the three months ended June 30, 1999 and 1998, the operating expenses
excluding interest on indebtedness as a percent of total interest and related
portfolio income less interest expense plus net realized and unrealized capital
gains was 22% and 26%, respectively.
The formula award expense totaled $1.5 million and $1.7 million for the
three months ended June 30, 1999 and 1998, respectively. The formula award was
designed as an incentive compensation program that would replace canceled stock
options that were cancelled as a result of the Company's 1997 Merger and would
balance share ownership among key officers. The formula award vests over a
three-year period, on the anniversary date of the Merger, beginning on December
31, 1998. Assuming all officers who received a formula award remain with the
Company over the remaining vesting period, the Company will expense the
remaining formula award during 1999 and 2000 in an annual amount of
approximately $6.2 million.
The cut-off award expense totaled $0.3 million and $0.5 million for the
three months ended June 30, 1999 and 1998, respectively. 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 will only be payable if the award recipient is
employed by the Company on a future vesting date. Total cut-off award that will
vest in 1999 is estimated at $0.5 million.
Net realized gains were $11.1 million and $7.4 million for the three months
ended June 30, 1999 and 1998, respectively. These gains resulted from the sale
of equity securities associated with certain mezzanine and commercial mortgage
loans and the realization of unamortized discount resulting from the early
repayment of mezzanine and commercial mortgage loans, offset by losses on
investments.
Realized gains totaled $14.1 million and $7.5 million for the three months
ended June 30, 1999 and 1998, respectively. Realized gains during the second
quarter of 1999 primarily resulted from transactions involving two portfolio
companies, Radio One, Inc. ($10.5 million) and Precision Industries Co. ($3.2
million). The Company reversed previously recorded unrealized appreciation of
$6.5 million when these gains were realized in the second quarter of 1999.
Realized losses totaled $3.0 million and $0.1 million for the three months ended
June 30, 1999 and 1998, respectively. Realized losses during the second quarter
of 1999 resulted primarily from the liquidation of one portfolio investment,
CeraTech Holdings Corporation ($2.5 million). Losses realized in the second
quarter of 1999 had been recognized in NIA over time as unrealized depreciation
when the Company determined that the respective portfolio security's value had
become impaired. Thus, the Company reversed previously recorded unrealized
depreciation totaling $2.4 million in the second quarter of 1999 when the
related losses were realized.
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<PAGE> 37
The Company recorded net unrealized losses of $5.6 million and $2.0 million
for the three months ended June 30, 1999 and 1998, respectively. Net unrealized
losses for 1999 and 1998 consisted of valuation changes resulting from the Board
of Directors' valuation of the Company's assets and the effect of reversals of
net unrealized appreciation resulting from net realized gains.
The weighted average common shares outstanding used to compute basic
earnings per share were 58.7 million and 51.3 million for the three months ended
June 30, 1999 and 1998, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 58.8 million and 51.9 million for the three months ended
June 30, 1999 and 1998, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At June 30, 1999, the Company had $25.5 million in cash and cash
equivalents. The Company 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's objective is
to manage to a low cash balance and fund new originations with its lines of
credit.
INDEBTEDNESS
The Company had outstanding indebtedness at June 30, 1999 as follows:
<TABLE>
<CAPTION>
AMOUNT ANNUAL
CLASS OUTSTANDING INTEREST RATE(1)
----- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Debentures and notes payable:
Master loan and security agreement............. $ 17,662 6.24%
Unsecured long-term notes payable.............. 317,000 7.30%
SBA debentures................................. 47,650 8.22%
OPIC loan...................................... 5,700 6.57%
--------
Total debentures and notes payable........ $388,012 7.35%
========
Revolving line of credit............................ $120,000 7.79%
========
</TABLE>
- ---------------
(1) The annual interest rate includes the cost of commitment fees and other
facility fees.
MASTER LOAN AND SECURITY AGREEMENT. The Company, in conjunction with
Business Mortgage Investors, Inc. ("BMI"), 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 matures on October 7,
1999.
UNSECURED LONG-TERM NOTES PAYABLE. During the second quarter of 1999, the
Company sold $137 million in unsecured long-term notes through a private
placement. At June 30, 1999, the Company has $317 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 a weighted average rate of 7.3%. The notes
require payment of interest only semiannually, and all principal is due upon
maturity.
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<PAGE> 38
SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
totaling $47.7 million payable to the SBA, at interest rates ranging from 6.9%
to 9.6% with scheduled maturity dates as follows: 1999 -- $0; 2000 -- $17.3
million; 2001 -- $9.4 million; 2002 -- $0; 2003 -- $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. The Company
currently has a commitment from the SBA for an additional $27.0 million of debt.
REVOLVING LINE OF CREDIT. The Company has a two-year, $340 million
unsecured revolving line of credit which expires in March, 2001. This facility
was increased by $25 million during the second quarter of 1999 to $340 million,
and may be expanded up to $400 million. At the Company's option, the credit
facility bears interest at a rate equal to (i) LIBOR plus 1.25% or (ii) the
higher of (a) the NationsBank, N.A. prime rate and (b) the Federal Funds rate
plus 0.50%. The credit facility requires monthly payments of interest, and all
principal is due upon maturity. The credit facility also requires an annual
facility fee equal to 0.25% of the committed amount, regardless of the amount
outstanding under the facility, which is payable quarterly in arrears.
EQUITY CAPITAL AND DIVIDENDS
During the first six months of 1999, the Company raised $54.7 million in
new equity primarily through the sale of shares from its shelf registration
statement. At June 30, 1999, total shareholders' equity had increased to $541.8
million.
The Company expects to distribute four regular quarterly dividends of $0.40
per share during 1999, for total dividends of at least $1.60 per share for 1999.
During the first and second quarters of 1999, the board of directors declared
and the Company paid regular quarterly dividends of $0.40 per share.
The Company's dividend policy currently is to annually distribute
substantially all of its net taxable income, including net capital gains, if
any. The Company's taxable income can differ from its financial reporting income
due to differences in the timing of revenue and expense recognition. The
Company's current regular dividend was determined based on estimated 1999
taxable income. Dividends for 1998 totaled $1.43 per share.
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 RIC, 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 plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowing under short- or long-term credit facilities, through asset sales, or
through obtaining new 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.
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<PAGE> 39
FINANCIAL OBJECTIVES
The 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, or return on equity, of 19% to
22%. 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 "Risk Factors" and also include
other factors such as changes in the economy, competitive and market conditions,
and future business decisions.
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<PAGE> 40
INVESTMENT CONSIDERATIONS
Investing in the Company involves a number of significant risks and other
factors relating to the structure and investment objective of the Company. As a
result, there can be no assurance that the Company will achieve its investment
objective.
LENDING TO PRIVATE SMALL AND MIDDLE-MARKET COMPANIES INVOLVES A HIGH DEGREE OF
RISK.
Our portfolio consists primarily of loans to private small and
middle-market companies. There is generally no publicly available information
about these companies, and we rely on the diligence of our employees and agents
to obtain information in connection with the Company's investment decisions.
Typically, small businesses depend on the management talents and efforts of one
person or a small group of persons for their success. The death, disability or
resignation of these persons could have a material adverse impact on such a
company. In addition, small businesses frequently have smaller product lines and
market shares than their competition. Small companies may be more vulnerable to
customer preferences, market conditions and economic downturns and often need
substantial additional capital to expand or compete. Small companies may also
experience substantial variations in operating results, and frequently have
highly leveraged capital structures. Such factors can severely effect the return
on, or the recovery of, our investment in such businesses. Loans to small
businesses, therefore, involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be considered
speculative.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS.
We invest in and lend to small and middle-market companies that may have
limited financial resources and that may be unable to obtain financing from
traditional sources. Our borrowers may not meet net income, cash flow and other
coverage tests typically imposed by bank lenders. Numerous factors may affect a
borrower's ability to repay its loan, including the failure to meet its business
plan, a downturn in its industry or negative economic conditions. A
deterioration in a borrower's financial condition and prospects may be
accompanied by deterioration in the collateral for the loan. We also make
unsecured, subordinated loans or invest in equity securities, which may involve
a higher degree of repayment risk.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID.
We acquire most of our loans and equity securities directly from small
companies. Our portfolio of loans and equity securities are and will be subject
to restrictions on resale or otherwise have no established trading market. The
illiquidity of most of our portfolio may adversely affect our ability to dispose
of loans and securities at times when it may be advantageous for us to liquidate
such investments.
WE INVEST IN NON-INVESTMENT GRADE CMBS.
The commercial mortgage-backed securities ("CMBS") in which we invest are
non-investment grade, which means that nationally recognized statistical rating
organizations rate them below the top four investment-grade rating categories
(e.g., "AAA" through "BBB"). Non-investment grade securities usually provide a
higher yield than do investment-grade bonds, but with the higher return comes
greater risk. Non-investment grade securities are considered speculative, and
their capacity to pay principal and interest in accordance with the terms of
their issue is not ensured. The CMBS tend to react more to changes in interest
rates than do higher-rated securities, have a higher risk of default, tend to be
less liquid, and may be more difficult to value.
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<PAGE> 41
OUR PORTFOLIO IS RECORDED AT FAIR VALUE AS DETERMINED BY THE BOARD OF DIRECTORS.
There is typically no public market for the loans and equity securities of
the companies to which we make loans. As a result, our board of directors
estimates the value of these loans and equity securities. Unlike traditional
lenders, we do not establish reserves for anticipated loan losses. Instead, we
adjust quarterly the valuation of our portfolio to reflect the board of
directors' estimate of the current realizable value of each investment in our
portfolio. Without a readily ascertainable market value, the estimated value of
our portfolio of loans and equity securities may differ significantly from the
values that would be placed on the portfolio if there existed a ready market for
the loans and equity securities. Any changes in estimated value are recorded in
the Company's statement of operations as "Net unrealized gains (losses)."
WE BORROW MONEY WHICH MAY INCREASE THE RISK OF INVESTING IN OUR COMPANY.
We borrow from, and issue senior debt securities to, banks and other
lenders. Lenders of these senior securities have fixed dollar claims on our
consolidated assets which are superior to the claims of our common shareholders.
Borrowings, also known as leverage, magnify the potential for gain and loss
on amounts invested and, therefore, increase the risks associated with investing
in our securities. If the value of our consolidated assets increases, then
leveraging would cause the net asset value attributable to the Company's common
stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments, and, if asset coverage for a
class of senior security representing indebtedness declines to less than 200%,
we may be required to sell a portion of our investments when it is
disadvantageous to do so. Leverage is generally considered a speculative
investment technique.
As of June 30, 1999, the Company's debt as a percentage of total
liabilities and shareholders' equity was 47%. Our ability to achieve our
investment objective may depend in part on our continued ability to maintain a
leveraged capital structure by borrowing from banks or other lenders on
favorable terms. There can be no assurance that we will be able to maintain such
leverage.
At June 30, 1999, the Company had $508.0 million of outstanding
indebtedness, bearing a weighted annual interest rate of 7.5%. In order for us
to cover annual interest payments on indebtedness, we must achieve annual
returns of at least 3.5% on our portfolio.
CHANGES IN INTEREST RATES MAY AFFECT OUR PROFITABILITY.
Because we borrow money to make investments, our income is materially
dependent upon the "spread" between the rate at which we borrow funds and the
rate at which we loan these funds. In periods of sharply rising interest rates,
our cost of funds would increase and could reduce or eliminate the spread. We
use a combination of long-term and short-term borrowings to finance our lending
activities. We may use interest rate risk management techniques in an effort to
limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities to the extent permitted by the 1940
Act. There can be no assurance that we can maintain a positive net interest
spread or that a significant change in market interest rates will not have a
material adverse effect on our profitability.
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<PAGE> 42
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL CAPITAL.
We will continue to need capital to fund investments. Historically, we have
borrowed from financial institutions and have issued equity securities. A
reduction in the availability of funds from financial institutions could have a
material adverse effect on the Company. We must distribute at least 90% of our
net operating income other than net realized long-term capital gains to our
stockholders to maintain our regulated investment company ("RIC") status. As a
result such earnings will not be available to fund loan originations. We expect
to continue to borrow from financial institutions and sell additional equity
securities. If we fail to obtain funds from such sources or from other sources
to fund our loans, it could have a material adverse effect on the Company's
financial condition and our results. In addition, as a BDC, we are generally
required to maintain a ratio of at least 200% of total assets to total
borrowings, which may restrict our ability to borrow in certain circumstances.
OUR PORTFOLIO MAY NOT PRODUCE CAPITAL GAINS.
Mezzanine loans are typically structured as debt securities with a
relatively high fixed rate of interest and with an equity feature such as
conversion rights, warrants or options. As a result, mezzanine loans will
generate interest income from the time they are made, and may also produce a
realized gain, from an accompanying equity feature. We cannot be sure that our
portfolio will generate a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS AND
INCOME AVAILABLE FOR DIVIDENDS.
The Company qualifies as a RIC. If we meet certain diversification and
distribution requirements, the Company qualifies for pass-through tax treatment.
The Company would cease to qualify for pass-through tax treatment if it were
unable to comply with these requirements, or if it ceased to qualify as a BDC
under the 1940 Act. We also could be subject to a 4% excise tax (and, in certain
cases, corporate level income tax) if we fail to make certain distributions. If
the Company fails to qualify as a RIC, the Company would become subject to
federal income tax as if it were an ordinary corporation, which would
substantially reduce our net assets and the amount of income available for
distribution to our shareholders.
WE OPERATE IN A COMPETITIVE MARKET.
We compete for investments with many other companies and individuals, some
of whom have greater resources than we do. Increased competition would make it
more difficult for us to purchase or originate loans at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT.
We are regulated by the Commission and the SBA. In addition, changes in the
laws or regulations that govern BDCs, RICs, real estate investment trusts
("REITs"), SBICs and SBLCs may significantly affect our business. Laws and
regulations may be changed from time to time, and the interpretations of the
relevant laws and regulations also are subject to change. Any change in the law
or regulations that govern our business could have a material impact on the
Company or its operations.
QUARTERLY RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER.
The Company's quarterly operating results could fluctuate due to a number
of factors. These factors include, among others, the completion of a
securitization transaction in a particular calendar
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<PAGE> 43
quarter, variations in the loan origination volume, variation in timing of loan
prepayments, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, you
should not rely on quarterly results to be indicative of the Company's
performance in future quarters.
POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR BUSINESS.
The Company has a Year 2000 compliance committee which is responsible for
assessing the Company's Year 2000 readiness by focusing on three main areas: the
Company's information technology ("IT") and other operating systems, service
providers, and portfolio companies. The committee reports periodically to the
board of directors and to executive management.
The Company's IT systems consist of third-party software and relatively new
hardware systems. All vendors providing critical software and hardware have
indicated that their programs and systems are Year 2000 compliant. All testing
of critical software should be completed by August 31, 1999. The Company has
tested most of its critical software applications and the test results have
indicated the software and systems are Year 2000 compliant. In addition to the
testing performed by Company personnel, the Company also contracted with its
loan accounting software vendor to perform independent validation tests, using
the Company's data, to verify that this software will be Year 2000 compliant.
The test results revealed that the Company's loan accounting software is
currently Year 2000 compliant. Implementation of tested software and IT systems
has been completed. The Company currently has service and maintenance contracts
with all its critical software vendors, therefore, no additional costs were
incurred by the Company for the upgrades needed to become compliant.
The second area of focus is the Company's service providers. The Company
continues to monitor all of its critical service providers as they work toward
Year 2000 compliance. The Company is not aware of any critical service provider
that will not be Year 2000 compliant. However, the Company cannot give any
assurance that the service providers will be Year 2000 compliant and that no
interruption of business will occur as a result of their noncompliance.
The Company has sent Year 2000 questionnaires to its portfolio companies to
assess their awareness and to evaluate their Year 2000 readiness. Based on the
responses to the Year 2000 questionnaires, the portfolio companies have
represented that they expect to be Year 2000 compliant by December 31, 1999. The
Company will continue to monitor the progress of its portfolio companies that
are working toward Year 2000 compliance. During 1998, the Company began to
evaluate each new portfolio company's Year 2000 compliance as part of the due
diligence process. No assurance can be given that certain of the Company's
portfolio companies will not suffer material adverse effects from Year 2000
issues, and if such adverse effects impact such companies' ability to repay
their loans, the Company's operating results and financial condition could be
affected.
The Company estimates its operating costs to reach Year 2000 compliance
will be approximately $100,000, and these costs are included in the Company's
1999 budget. This includes time allocated to this task by Company personnel and
costs incurred in the testing phase.
While the Company believes that it is taking the necessary steps to be Year
2000 compliant, it is difficult to fully predict the impact on the Company of
non-compliance in any of the above-mentioned areas. Significant non-compliance
could result in a material adverse effect on the Company's financial conditions
and results from operations. The Company believes that the worst case Year 2000
scenarios may include 1) incurring additional costs to maintain the Company's
books and records and to service the Company's investment portfolio, 2) the
inability of the Company to access or transfer cash needed to pay its bills or
fund new investments, 3) an increase in
41
<PAGE> 44
delinquencies and/or losses due to Year 2000 problems with the Company's
portfolio companies, or 4) disruption in the capital markets resulting in a lack
of liquidity to the Company. The degree of impact resulting from any of these
worst case scenarios cannot be determined at this time. The Company is currently
assessing its contingency plan, taking into consideration these worst-case
scenarios. This plan is currently in the process of being finalized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the quantitative and qualitative
disclosure about market risk since December 31, 1998.
42
<PAGE> 45
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 three months ended June 30, 1999 ACC issued a total of 54,419
shares 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
On May 11, 1999, the Company held its Annual Meeting of Shareholders in
Washington, DC. Shareholders voted on two matters; the substance of these
matters and the results of the voting of each such matter are described below.
There were no broker non-votes for these two matters.
1. Election of Directors: Shareholders elected four directors of the
Company, which will serve for three years, or until their successors are
elected and qualified. Votes were cast as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
John D. Firestone...................................... 49,327,723 267,989
Anthony T. Garcia...................................... 49,327,241 268,471
Lawrence I. Hebert..................................... 49,326,379 269,333
Laura W. Van Roijen.................................... 49,309,892 285,829
</TABLE>
The following directors are continuing as directors of the Company for
their respective terms -- William L. Walton, Brooks H. Browne, John I.
Leahy, Robert E. Long, Warren K. Montouri, Guy T. Steuart, T. Murray
Toomey, and George C. Williams, Jr.
2. Ratification of the selection of Arthur Andersen LLP to serve as
independent public accountants for the year ended December 31, 1999:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
49,274,505 140,469 180,731
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(ii)(2) Articles of Merger.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3(iii)(3) By-laws.
4.1(6) Specimen certificate of the Company's Common stock, par
value $0.0001 per share. See exhibits 3(i), 3(ii) and 3(iii)
for other instruments defining the rights of security
holders.
4.2(4) Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
10.1(11) Credit Agreement dated as of March 9, 1999 between the
Company, as borrower, each of the financial institutions
initially a signatory thereto, as Lenders, and Nationsbank,
N.A., as administrative agent, Nationsbanc Montgomery
Securities LLC, as sole lead arranger and sole book manager,
First Union National Bank, as syndication agent, BankBoston,
N.A., as documentation agent, Riggs Bank, N.A., as managing
agent, and Chevy Chase Bank, F.S.B. and Credit Lyonnais New
York Branch, as co-agents.
10.2.b* First Amendment to Credit Agreement dated May 7, 1999.
10.2(7) 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.
10.5* Note Agreement dated as of May 1, 1999.
10.5(8) Amended and restated Master Loan & Security Agreement dated
October 7, 1998 among the Company, BMI and Morgan Stanley
Mortgage Capital, Inc.
10.6(6) Sale and Servicing Agreement dated as of January 1, 1998
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and the Company and LaSalle National
Bank Inc. and ABN AMRO Bank N.V.
10.7(6) Indenture dated as of January 1, 1998 between Allied Capital
Commercial Mortgage Trust 1998-1 and LaSalle National Bank
Inc.
10.8(6) Amended and Restated Trust Agreement dated January 1, 1998
between Allied Capital CMT, Inc., LaSalle National Bank Inc.
and Wilmington Trust Company.
10.9(6) Guaranty dated as of January 1, 1998 by the Company.
10.10(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
10.10a(7) First Amendment to the Company's Employee Stock Ownership
Plan dated April 30, 1998.
10.11(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
10.12(9) Stock Option Plan.
10.13a(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
10.13b(6) Form of Custody Agreement with La Salle National Bank Inc.
10.18(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.
21 Direct subsidiaries of the Company and jurisdiction of
incorporation/organization:
Allied Investment Corporation Maryland
Allied Capital SBLC Corporation Maryland
Allied Capital REIT, Inc. Maryland
Allied Capital Holdings LLC Delaware
PC Acquisition Corporation Maryland
Allied Capital Beteiligungsberatung
GmbH Germany
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.
(2) Incorporated by reference from Appendix B to the Company's registration
statement on Form N-14 filed on September 26, 1997 (File No. 333-36459).
44
<PAGE> 47
(3) 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.
(4) Incorporated by reference to the exhibit of the same name filed with Allied
I's Annual Report on Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Exhibit f.7 of Allied I's Pre-Effective
Amendment No. 2 to the registration statement on Form N-2 on January 24,
1996 (File No. 33-64629). Assignment to Company is incorporated by
reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(6) Incorporated by reference to the exhibit of the same name to the Company's
registration statement on Form N-2 filed on the Company's behalf with the
Commission on May 5, 1998 (File No. 333-51899).
(7) Incorporated by reference to the exhibit of the same name filed with the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(8) Incorporated by reference to the exhibit of the same name filed with the
Company's Quarterly Report on Form 10-Q for the period ended September 30,
1998.
(9) 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).
(10) 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, 1998.
(11) Incorporated by reference to exhibit f.2 filed with the Company's
registration statement on Form N-2 on March 26, 1999 (File No. 333-75161).
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended June 30,
1999.
45
<PAGE> 48
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: August 11, 1999 /s/ PENNI F. ROLL
-------------------------------------
Principal and Chief Financial Officer
46
<PAGE> 1
EXHIBIT 10.2.6
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT") is entered
into as of May 7, 1999, by and among ALLIED CAPITAL CORPORATION, a corporation
organized under the laws of the State of Maryland ("BORROWER"), BRANCH BANKING
& TRUST CO. ("BRANCH BANK"), UNITED BANK ("UNITED BANK," and, together with
Branch Bank, the "RELEVANT LENDERS"), and NATIONSBANK, N.A., as Administrative
Agent (in such capacity, the "ADMINISTRATIVE AGENT") for the Lenders under the
Credit Agreement (hereinafter defined).
RECITALS
A. Borrower, Administrative Agent, and certain other Agents and Lenders
are parties to that certain Credit Agreement dated as of March 9, 1999, (with
the Effective Date being March 10, 1999, the "CREDIT AGREEMENT"). Unless
otherwise indicated herein, all terms used with their initial letter
capitalized are used herein with their meaning as defined in the Credit
Agreement; all Section references are to Sections in the Credit Agreement; and
all Paragraph references are to Paragraphs in this Amendment.
B. Pursuant to SECTION 2.12, Borrower has requested an increase in the
aggregate Commitments under the Agreement, by requesting: (i) Branch Banking &
Trust Co. ("BRANCH BANK") to increase its Commitment from $25,000,000 to
$30,000,000 and (ii) United Bank to become a Lender with a Commitment of
$20,000,000 (the increased and new Commitments referred to in ITEMS (i) and
(ii) preceding are herein referred to as the "SUPPLEMENTAL COMMITMENTS").
C. Subject to and upon the following terms and conditions, Branch Bank
and United Bank have agreed to the Supplemental Commitments, and Administrative
Agent has agreed to the addition of United Bank as a new Lender.
D. Accordingly, in accordance with the requirements of SECTIONS 2.12
and 12.5 and subject to and upon the following terms and conditions, Borrower,
Administrative Agent, Branch Bank, and United Bank are entering into this
Amendment (i) to increase the Commitment of Branch Bank to $30,000,000 pursuant
to SECTION 2.12 of the Credit Agreement, (ii) as a result of such increased
Commitment, to designate Branch Bank as an additional Co-Agent, (iii) to add
United Bank as a "Lender" with a Commitment of $20,000,000 as a new Lender,
pursuant to SECTION 2.12 of the Credit Agreement, and (iv) to amend Schedule 2
to the Credit Agreement to reflect the Supplemental Commitments.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, Relevant Lenders, and Administrative Agent agree, as
follows:
PARAGRAPH 1. AMENDMENTS TO CREDIT AGREEMENT.
1.1 SUPPLEMENTAL INCREASES AND CONSENT TO NEW LENDER.
(a) Pursuant to SECTION 2.12, effective on and after the
Amendment Effective Date (hereinafter defined), (i) Branch Bank agrees
that its Commitment shall be increased to the amount set forth opposite
its name on ANNEX A hereto, and (ii) United Bank agrees to be a new
Lender having the Commitment set forth opposite its name on ANNEX A
hereto. Accordingly, each Lender's Commitment Percentage shall be
recalculated to reflect the new proportionate share of the revised
total Commitments as stated on ANNEX A hereto.
FIRST AMENDMENT
<PAGE> 2
(b) Furthermore, to the extent any Revolving Loans are
outstanding on the Amendment Effective Date (excluding any Loans made
on such date), then on such date, each Relevant Lender shall pay to
Administrative Agent (for ratable distribution to the other Lenders) an
amount equal to its pro rata share of the Revolving Loans then
outstanding, which are deemed assumed and purchased from the other
Lenders. All such payments shall reduce the outstanding principal
balance of the Revolving Notes of each Lender receiving such payments
and shall represent Revolving Loans to Borrower by the appropriate
Relevant Lender. The Relevant Lenders shall be entitled to share
ratably in interest accruing in accordance with the Loan Documents.
(c) To the extent a payment contemplated in PARAGRAPH 1.1(b), if
any, occurs on a date other than the last day of any Interest Period
for any outstanding Eurodollar Loans, Borrower agrees to pay to each
Lender (upon the request of each such Lender) the amounts required by
SECTION 4.5(a) in connection therewith.
(d) On the Amendment Effective Date, United Bank shall be
entitled to the rights and benefits and subject to the duties of a
Lender under the Loan Documents.
(e) By execution hereof, Administrative Agent and Borrower
consent to the addition of United Bank as a "LENDER" under the Loan
Documents.
1.2 DEFINITIONS AND TERMS.
(a) The definition of "CO-AGENTS" in SECTION 1 of the Credit
Agreement is amended in its entirety to read, as follows:
"'CO-AGENTS' means, collectively, Chevy Chase Bank, F.S.B.,
Credit Lyonnais New York Branch, Branch Bank & Trust Co., and
their respective permitted successors and assigns as "Co-Agents"
under this Agreement."
(b) On and after the Amendment Effective Date (hereinafter
defined), (i) each reference to "Lender" or "Lenders" in the Credit
Agreement and the related Loan Documents shall include United Bank, and
(ii) each reference to SCHEDULE 2 shall be to SCHEDULE 2 as set forth
on ANNEX A, as the same may hereafter be amended or modified in
accordance with the Loan Documents.
1.3 CONFIRMATIONS AND AGREEMENTS OF UNITED BANK. United Bank
severally (a) confirms that it has received a copy of the Credit Agreement,
together with copies of the consolidated and consolidating balance sheets of
Borrower and its Consolidated Subsidiaries most recently delivered under the
Credit Agreement and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Amendment, including, without limitation, the transaction contemplated in this
PARAGRAPH 1; (b) agrees that it will, independently and without reliance upon
the Administrative Agent or any Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement; (c)
appoints and authorizes Administrative Agent to take such action as
"Administrative Agent" on its behalf and to exercise such powers and discretion
under the Credit Agreement as are delegated to Administrative Agent by the
terms thereof, together with such powers and discretion as are reasonably
incidental thereto; (d) agrees that it will perform in accordance with their
terms all of the obligations that by the terms of the Credit Agreement are
required to be performed by it as a Lender; and (e) shall deliver to
Administrative Agent any U.S. Internal Revenue Service or other forms required
under SECTION 4.6 of the Credit Agreement.
2 FIRST AMENDMENT
<PAGE> 3
1.4 NOTES. On the Amendment Effective Date (hereinafter defined),
Borrower shall execute and deliver to each Relevant Lender a Revolving Note
reflecting the respective Commitment of each such Lender, after giving effect
to the Supplemental Commitments contemplated and effected in accordance with
PARAGRAPH 1.
PARAGRAPH 2. AMENDMENT EFFECTIVE DATE. This Amendment shall be binding upon each
Relevant Lender, Administrative Agent, Borrower, and each other Lender on the
last day (the "AMENDMENT EFFECTIVE DATE") upon which (a) counterparts of this
Amendment shall have been executed and delivered to Administrative Agent by
Borrower, Administrative Agent, and each Relevant Lender, or when
Administrative Agent shall have received, telecopied, telexed, or other
evidence satisfactory to it that all such parties have executed and are
delivering to Administrative Agent counterparts thereof; (b) the Notes are
executed by Borrower and delivered in accordance with PARAGRAPH 1.4 hereof; (c)
to the extent required by PARAGRAPH 1.1(b), all assumptions and related
payments have been made by the Relevant Lenders to Administrative Agent; and
(d) Borrower shall have paid to Administrative Agent (for distribution to
Relevant Lenders) the respective upfront fees payable to each Relevant Lender
as indicated on ANNEX A (less, in the case of Branch Bank, the amount of any
upfront fees previously paid to Branch Bank pursuant to SECTION 3.8(b)).
PARAGRAPH 3. REPRESENTATIONS AND WARRANTIES. As a material inducement to each
Relevant Lender and Administrative Agent to execute and deliver this Amendment,
Borrower hereby represents and warrants to each Relevant Lender, the other
Lenders, and Administrative Agent (with the knowledge and intent that such
parties are relying upon the same in entering into this Amendment) the
following: (a) the representations and warranties in the Credit Agreement and
in all other Loan Documents are true and correct on the date hereof in all
material respects, as though made on the date hereof, except to the extent that
such representations and warranties expressly relate solely to an earlier date
(in which case such representations and warranties shall have been true and
accurate as of such earlier date); (b) no Default or Event of Default exists
under the Loan Documents or will exist after giving effect to the transactions
contemplated by this Amendment; and (c) this Amendment has been duly authorized
and approved by all necessary corporate action and requires the consent of no
other Person, and upon execution and delivery, this Amendment shall be binding
and enforceable against Borrower in accordance with its terms.
PARAGRAPH 4. MISCELLANEOUS.
4.1 EFFECT ON LOAN DOCUMENTS. The Credit Agreement and all related Loan
Documents shall remain unchanged and in full force and effect, except as
provided in this Amendment, and are hereby ratified and confirmed. On and after
the Amendment Effective Date, all references to the "Credit Agreement" or the
"Agreement" shall be to the Credit Agreement as herein amended. The execution,
delivery, and effectiveness of this Amendment shall not, except as expressly
provided herein, operate as a waiver of any rights of the Lenders under the
Credit Agreement or any Loan Documents, nor constitute a waiver under the
Credit Agreement or any other provision of the Loan Documents.
4.2 REFERENCE TO MISCELLANEOUS PROVISIONS. This Amendment and the other
documents delivered pursuant to this Amendment are part of the Loan Documents
referred to in the Credit Agreement, and the provisions relating to Loan
Documents set forth in SECTION 12 are incorporated herein by reference the same
as if set forth herein verbatim.
4.3 COSTS AND EXPENSES. Borrower agrees to pay promptly the reasonable
fees and expenses of counsel to Administrative Agent for services rendered in
connection with the preparation, negotiation, reproduction, execution, and
delivery of this Amendment.
3 FIRST AMENDMENT
<PAGE> 4
4.4 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes, and all of which constitute, collectively, one agreement; but, in
making proof of this Amendment, it shall not be necessary to produce or account
for more than one such counterpart. It is not necessary that all parties
execute the same counterpart so long as identical counterparts are executed by
Borrower, each Relevant Lender, and Administrative Agent.
4.5 ENTIRETY. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
4.6 PARTIES. This Amendment binds and inures to Borrower, Administrative
Agent, Relevant Lenders, the other Lenders, and their respective successors and
assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in
multiple counterparts as of the respective dates indicated on each signature
page hereof, but effective as of the Amendment Effective Date.
REMAINDER OF THIS PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE TO FOLLOW.
4 FIRST AMENDMENT
<PAGE> 5
Signature Page to that certain First Amendment to Credit Agreement dated
as of May 7, 1999, amending that certain Credit Agreement dated as of March 9,
1999 (with the Effective Date being March 10, 1999) among Allied Capital
Corporation, as Borrower, NationsBank, N.A., as Administrative Agent, and
certain other Agents and Lenders named therein.
ALLIED CAPITAL CORPORATION, as Borrower
By /s/ Kelly A. Anderson
---------------------------------
Name: Kelly Anderson
Title: Principal and Treasurer
FIRST AMENDMENT
<PAGE> 6
Signature Page to that certain First Amendment to Credit Agreement
dated as of May 7, 1999, amending that certain Credit Agreement dated as of
March 9, 1999 (with the Effective Date being March 10, 1999) among Allied
Capital Corporation, as Borrower, NationsBank, N.A., as Administrative Agent,
and certain other Agents and Lenders named therein.
NATIONSBANK, N.A.,
as Administrative Agent and a Lender
By /s/ Shelly K. Harper
----------------------------
Name: Shelly K. Harper
Title: Vice President
FIRST AMENDMENT
<PAGE> 7
Signature Page to that certain First Amendment to Credit Agreement
dated as of May 7, 1999, amending that certain Credit Agreement dated as of
March 9, 1999 (with the Effective Date being March 10, 1999) among Allied
Capital Corporation, as Borrower, NationsBank, N.A., as Administrative Agent,
and certain other Agents and Lenders named therein.
BRANCH BANKING & TRUST CO., as a Relevant
Lender
By /s/ Cory Boyte
-------------------------
Name: Cory Boyte
Title: Vice President
FIRST AMENDMENT
<PAGE> 8
Signature Page to that certain First Amendment to Credit Agreement
dated as of May 7, 1999, amending that certain Credit Agreement dated as of
March 9, 1999 (with the Effective Date being March 10, 1999) among Allied
Capital Corporation, as Borrower, NationsBank, N.A., as Administrative Agent,
and certain other Agents and Lenders named therein.
UNITED BANK, as a Relevant Lender
By /s/ Keith A. Harding
-------------------------
Name: Keith A. Harding
Title: Vice President
FIRST AMENDMENT
<PAGE> 9
ANNEX A
REVISED SCHEDULE 2
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
REVOLVING
FACILITY
COMMITTED COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS SUMS PERCENTAGE FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NationsBank, N.A. $ 52,500,000.00 15.441176% $131,250.00
Financial Services
901 Main Street, 66th Floor
Dallas, Texas 75202-3748
Attn: Shelly K. Harper
Tel: 214-209-0567
Fax: 214-209-0604
Email: [email protected]
- -------------------------------------------------------------------------------------------------
BankBoston, N.A. $ 50,000,000.00 14.705882% $125,000.00
100 Federal Street
Mail Stop 01-10-08
Boston, MA 02110
Attn: Deirdre Holland
Tel: 617-434-0419
Fax: 617-434-1537
Email: [email protected]
- -------------------------------------------------------------------------------------------------
First Union National Bank $ 50,000,000.00 14.705882% $125,000.00
One First Union Center, NC0610
301 South College Street
Charlotte, NC 28288
Attn: Raj Shah
Tel: 704-374-6230
Fax: 704-383-7611
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Riggs Bank N.A. $ 50,000,000.00 14.705882% $125,000.00
808 17th Street NW
10th Floor
Washington, DC 20006
Attn: David Olson
Tel: 202-835-5105
Fax: 202-835-5977
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Chevy Chase Bank, F.S.B. $ 30,000,000.00 8.823529% $60,000.00
8401 Connecticut Avenue
9th Floor
Chevy Chase, MD 20815
- -------------------------------------------------------------------------------------------------
</TABLE>
ANNEX A
<PAGE> 10
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
REVOLVING
FACILITY
COMMITTED COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS SUMS PERCENTAGE FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Attn: William Palmer
Tel: 301-986-7452
Fax: 301-986-7038
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Credit Lyonnais New York Branch $ 30,000,000.00 8.823529% $60,000.00
1301 Avenue of the Americas
12th Floor
New York, NY 10019
Attn: W. Jay Buckley
Tel: 212-261-7340
Fax: 212-261-3401
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Branch Banking & Trust Co. $ 30,000,000.00 8.823529% $60,000.00
110 S. Stratford Road
Suite 301
Winston-Salem, NC 27104
Attn: Cory Boyte
Tel: 336-733-3259
Fax: 336-733-3254
Email: [email protected]
- -------------------------------------------------------------------------------------------------
LaSalle National Bank $ 20,000,000.00 5.882353% $30,000.00
135 South LaSalle Street
Suite 362
Chicago, IL 60603
Attn: David H. Sherer
Tel: 312-904-2722
Fax: 312-904-2982
Email: [email protected]
- -------------------------------------------------------------------------------------------------
United Bank $ 20,000,000.00 5.882353% $30,000.00
2071 Chain Bridge Road
Vienna, VA 22182
Attn: Keith Harding
Tel: 703-442-7154
Fax: 703-448-7126
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Firstrust Bank $ 7,500,000.00 2.205882% $ 9,375.00
15 E. Ridge Pike
Conshohocken, PA 19428
Attn: Marissa Mignogna
Tel: 610-238-5029
- -------------------------------------------------------------------------------------------------
</TABLE>
ANNEX A
<PAGE> 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
REVOLVING
FACILITY
COMMITTED COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS SUMS PERCENTAGE FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fax: 610-238-5066
Email: [email protected]
=================================================================================================
Totals $ 340,000,000.00 100.00% $755,625.00
- -------------------------------------------------------------------------------------------------
</TABLE>
ANNEX A
<PAGE> 1
EXHIBIT 10.5
[CONFORMED COPY]
===============================================================================
ALLIED CAPITAL CORPORATION
NOTE AGREEMENT
Dated as of May 1, 1999
Re: $112,000,000 7.39% Senior Notes, Series A, due May 1, 2004,
and
$25,000,000 7.49% Senior Notes, Series B, due May 1, 2006
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not a part of the Agreement)
<TABLE>
<CAPTION>
SECTION HEADING PAGE
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SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT....................................1
Section 1.1. Description of Notes...................................................1
Section 1.2. Commitment, Closing Date...............................................1
SECTION 2. PAYMENT OF NOTES.......................................................2
Section 2.1. Required Payments......................................................2
Section 2.2. Optional Prepayment with Premium.......................................2
Section 2.3. Notice of Optional Prepayments.........................................2
Section 2.4. Application of Prepayments.............................................2
Section 2.5. Direct Payment.........................................................3
SECTION 3. REPRESENTATIONS........................................................3
Section 3.1. Representations of the Company.........................................3
Section 3.2. Representations of the Purchasers......................................3
SECTION 4. CLOSING CONDITIONS.....................................................5
Section 4.1. Conditions.............................................................5
Section 4.2. Waiver of Conditions...................................................6
SECTION 5. COVENANTS..............................................................6
Section 5.1. Corporate Existence, Etc...............................................6
Section 5.2. Insurance..............................................................6
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws............6
Section 5.4. Maintenance, Etc.......................................................7
Section 5.5. Nature of Business.....................................................7
Section 5.6. Capital Maintenance....................................................7
Section 5.7. Interest Charges Coverage Ratio........................................7
Section 5.8. Limitations on Debt; Interest Rate Swaps...............................7
Section 5.9. Limitation on Liens....................................................8
Section 5.10. Restricted Payments...................................................10
Section 5.11. Mergers, Consolidations and Sales of Assets...........................11
Section 5.12. Repurchase of Notes...................................................13
Section 5.13. Transactions with Affiliates..........................................13
Section 5.14. Termination of Pension Plans..........................................13
Section 5.15. Reports and Rights of Inspection......................................13
Section 5.16. Year 2000 Compliance..................................................16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR...............................16
Section 6.1. Events of Default.....................................................16
Section 6.2. Notice to Holders.....................................................17
Section 6.3. Acceleration of Maturities............................................18
Section 6.4. Rescission of Acceleration............................................18
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS......................................19
Section 7.1. Consent Required......................................................19
Section 7.2. Solicitation of Holders...............................................19
Section 7.3. Effect of Amendment or Waiver.........................................19
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS..............................19
Section 8.1. Definitions...........................................................19
Section 8.2. Accounting Principles.................................................29
Section 8.3. Directly or Indirectly................................................29
SECTION 9. MISCELLANEOUS.........................................................29
Section 9.1. Registered Notes......................................................29
Section 9.2. Exchange of Notes.....................................................30
Section 9.3. Loss, Theft, Etc. of Notes............................................30
Section 9.4. Expenses, Stamp Tax Indemnity.........................................30
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative.....................31
Section 9.6. Notices...............................................................31
Section 9.7. Successors and Assigns................................................31
Section 9.8. Survival of Covenants and Representations.............................31
Section 9.9. Severability..........................................................31
Section 9.10. Governing Law.........................................................32
Section 9.11. Captions..............................................................32
Signature...................................................................................33
</TABLE>
Attachments to Note Agreement:
Schedule I - Names and Addresses of Purchasers
Exhibit A-1 - Form of 7.39% Senior Note, Series A, due May 1, 2004
Exhibit A-2 - Form of 7.49% Senior Note, Series B, due May 1, 2006
Exhibit B - Representations and Warranties
Exhibit C - Form of Opinion of Special Counsel to the Purchaser
Exhibit D - Form of Opinion of Counsel to the Company
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<PAGE> 4
ALLIED CAPITAL CORPORATION
NOTE AGREEMENT
Re: $112,000,000 7.39% Senior Notes, Series A, due May 1, 2004,
and
$25,000,000 7.49% Senior Notes, Series B, due May 1, 2006
Dated as of
May 1, 1999
To the Purchasers named
on Schedule I to this Agreement
Ladies and Gentlemen:
The undersigned, ALLIED CAPITAL CORPORATION ("Company"), a Maryland
corporation, hereby agrees with the Purchasers named on Schedule I to this
Agreement (the "Purchasers") as follows:
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.
Section 1.1. Description of Notes. The Company will authorize the
issue and sale of (i) $112,000,000 7.39% Senior Notes, Series A, due May 1,
2004 (the "Series A Notes") and (ii) $25,000,000 7.49% Senior Notes, Series B,
due May 1, 2006 (the "Series B Notes" and together with the Series A Notes, the
"Notes," such term to include any such notes issued in substitution therefor
pursuant to SECTION 9 of this Agreement). The Series A Notes and the Series B
Notes shall be substantially in the form set out in Exhibits A-1 and A-2,
respectively, with such changes therefrom, if any, as may be approved by the
Purchasers and the Company. Interest on the Notes shall be computed on the
basis of a 360-day year of twelve 30-day months. The Notes are not subject to
prepayment or redemption at the option of the Company prior to their expressed
maturity dates except on the terms and conditions and in the amounts and with
the premium, if any, set forth in SECTION 2 of this Agreement.
Section 1.2. Commitment, Closing Date. Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to issue and sell to each Purchaser,
and such Purchaser agrees to purchase from the Company, Notes of the Series and
in the principal amount set forth opposite such Purchaser's name on Schedule I
hereto at a price equal to the principal amount thereof on May 5, 1999 (the
"Closing Date"); provided that the Closing Date may be postponed to such other
date (but not more than ten days after the originally scheduled Closing Date)
as shall mutually be agreed upon by the
<PAGE> 5
Allied Capital Corporation Note Agreement
Company and the Purchasers scheduled to purchase the Notes on the Closing Date.
Delivery of the Notes will be made at the offices of Chapman and Cutler, 111
West Monroe Street, Chicago, Illinois 60603. On the Closing Date, the Company
will deliver to each Purchaser the Notes of the Series to be purchased by such
Purchaser in the form of a single Note (or such greater number of Notes in
denominations of at least $500,000 as such Purchaser may request) dated the
Closing Date and registered in such Purchaser's name (or in the name of such
Purchaser's nominee), against delivery by such Purchaser to the Company or its
order of immediately available funds in the amount of the purchase price
therefor by wire transfer via Fedwire of immediately available funds for the
account of the Company to Account Number 3918973064 at Nations Bank, Bethesda,
Maryland, (ABA #052-001-633).
SECTION 2. PAYMENT OF NOTES.
Section 2.1. Required Payments. (a) The entire principal amount of
the Series A Notes shall become due and payable on May 1, 2004.
(b) The entire principal amount of the Series B Notes shall become
due and payable on May 1, 2006.
Section 2.2. Optional Prepayment with Premium. In addition to the
payments required by SECTION 2.1, upon compliance with SECTION 2.3 the Company
shall have the privilege, at any time and from time to time, of prepaying the
outstanding Notes, either in whole or in part (but if in part then in a minimum
principal amount of $1,000,000) and ratably among the Series A Notes and the
Series B Notes by payment of the principal amount of the Notes, or portion
thereof to be prepaid, and accrued interest thereon to the date of such
prepayment, together with a premium equal to the Make-Whole Amount, determined
as of two Business Days prior to the date of such prepayment pursuant to this
SECTION 2.2.
Section 2.3. Notice of Optional Prepayments. The Company will give
notice of any prepayment of the Notes pursuant to SECTION 2.2 to each holder
thereof not less than 30 days nor more than 60 days before the date fixed for
such optional prepayment specifying (i) such date, (ii) the principal amount of
the holder's Notes to be prepaid on such date, (iii) that a premium may be
payable, (iv) the date when such premium will be calculated, (v) the estimated
premium and (vi) the accrued interest applicable to the prepayment. Notice of
prepayment having been so given, the aggregate principal amount of the Notes
specified in such notice, together with accrued interest thereon and the
premium, if any, payable with respect thereto shall become due and payable on
the prepayment date specified in said notice. Not later than two Business Days
prior to the prepayment date specified in such notice, the Company shall
provide each holder of a Note written notice of the premium, if any, payable in
connection with such prepayment and, whether or not any premium is payable, a
reasonably detailed computation of the Make-Whole Amount (which calculation
shall be reasonably satisfactory to each Holder of the Notes to be prepaid).
Section 2.4. Application of Prepayments. All partial prepayments
pursuant to SECTION 2.2 shall be applied on all outstanding Notes ratably in
accordance with the unpaid principal amounts thereof.
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<PAGE> 6
Allied Capital Corporation Note Agreement
Section 2.5. Direct Payment. Notwithstanding anything to the
contrary contained in this Agreement or the Notes, in the case of any Note
owned by any Holder that is a Purchaser or any other Institutional Holder which
has given written notice to the Company requesting that the provisions of this
SECTION 2.5 shall apply, the Company will punctually pay when due the principal
thereof, interest thereon and premium, if any, due with respect to said
principal, without any presentment thereof, directly to such Holder at its
address set forth in Schedule I hereto or such other address as such Holder may
from time to time designate in writing to the Company or, if a bank account
with a United States bank is so designated for such Holder on Schedule I hereto
the Company will make such payments in immediately available funds to such bank
account, marked for attention as indicated, or in such other manner or to such
other account in any United States bank as such Holder may from time to time
direct in writing.
SECTION 3. REPRESENTATIONS.
Section 3.1. Representations of the Company. The Company represents
and warrants that all representations and warranties set forth in Exhibit B are
true and correct as of the date hereof and are incorporated herein by reference
with the same force and effect as though herein set forth in full.
Section 3.2. Representations of the Purchasers. Each Purchaser
represents, and in entering into this Agreement the Company understands, that
such Purchaser is acquiring the Notes in a private placement for the purpose of
investment and not with a view to the distribution thereof, and that such
Purchaser has no present intention of selling, negotiating or otherwise
disposing of the Notes; it being understood, however, that the disposition of
such Purchaser's property shall at all times be and remain within its control.
Each Purchaser represents that it is an institutional "accredited investor"
within the meaning of Rule 501 of Regulation D as promulgated under the
Securities Act of 1933 and at least one of the following statements is an
accurate representation as to each source of funds (a "Source") to be used by
it to pay the purchase price of the Notes to be purchased by it hereunder:
(a) the Source is an "insurance company general account"
within the meaning of Department of Labor Prohibited Transaction
Exemption ("PTE") 95-60 (issued July 12, 1995) and there is no
employee benefit plan, treating as a single plan all plans maintained
by the same employer (or affiliate thereof as defined in Section
V(a)(1) of PTE 95-60) or employee organization, with respect to which
the amount of the general account reserves and liabilities for all
contracts held by or on behalf of such plan exceeds ten percent (10%)
of the total reserves and liabilities of such general account
(exclusive of separate account liabilities) plus surplus, as set forth
in the NAIC Annual Statement filed with such Purchaser's state of
domicile; or
(b) the Source is either (i) an insurance company pooled
separate account, within the meaning of PTE 90-1 (issued January 29,
1990), or (ii) a bank collective investment fund, within the meaning
of the PTE 91-38 (issued July 12, 1991) and, except as such Purchaser
has disclosed to the Company in writing pursuant to this paragraph
(b), no employee benefit plan or group of plans maintained by the same
employer or
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<PAGE> 7
Allied Capital Corporation Note Agreement
employee organization beneficially owns more than 10% of
all assets allocated to such pooled separate account or collective
investment fund; or
(c) the Source constitutes assets of an "investment fund"
(within the meaning of Part V of the QPAM Exemption) managed by a
"qualified professional asset manager" or "QPAM" (within the meaning
of Part V of the QPAM Exemption), no employee benefit plan's assets
that are included in such investment fund, when combined with the
assets of all other employee benefit plans established or maintained
by the same employer or by an affiliate (within the meaning of Section
V(c)(1) of the QPAM Exemption) of such employer or by the same
employee organization and managed by such QPAM, exceed 20% of the
total client assets managed by such QPAM, the conditions of Part I(c)
and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a
person controlling or controlled by the QPAM (applying the definition
of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more
interest in the Company and (i) the identity of such QPAM and (ii) the
names of all employee benefit plans whose assets are included in such
investment fund have been disclosed to the Company in writing pursuant
to this paragraph (c); or
(d) the Source is a governmental plan; or
(e) the Source is one or more employee benefit plans, or
a separate account or trust fund comprised of one or more employee
benefit plans, each of which has been identified to the Company in
writing pursuant to this paragraph (e); or
(f) the Source does not include assets of any employee
benefit plan, other than a plan exempt from the coverage of ERISA.
If any Purchaser or any subsequent transferee of the Notes indicates that such
Purchaser or such transferee is relying on any representation contained in
paragraphs (b), (c) or (e) above, the Company shall deliver on the date of
Closing and on the date of any applicable transfer a certificate, which shall
either state that (i) it is neither a party in interest nor a "disqualified
person" (as defined in Section 4975(e)(2) of the Code), with respect to any
plan identified pursuant to paragraphs (b) or (e) above, or (ii) with respect
to any plan, identified pursuant to paragraph (c) above, neither it nor any
"affiliate" (as defined in Section V(c) of the QPAM Exemption) has at such
time, and during the immediately preceding one year, exercised the authority to
appoint or terminate said QPAM as manager of any plan identified in writing
pursuant to paragraph (c) above or to negotiate the terms of said QPAM's
management agreement on behalf of any such identified plan.
As used in this SECTION 3.2, the terms "employee benefit plan", "governmental
plan", "party in interest" and "separate account" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
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<PAGE> 8
Allied Capital Corporation Note Agreement
SECTION 4. CLOSING CONDITIONS.
Section 4.1. Conditions. The obligation of each Purchaser to
purchase the Notes on the Closing Date shall be subject to the performance by
the Company of its agreements hereunder which by the terms hereof are to be
performed at or prior to the time of delivery of the Notes and to the following
further conditions precedent:
(a) Closing Certificates. On the Closing Date such
Purchaser shall have received a certificate dated the Closing Date,
signed by the President or a Vice President or a Managing Director or
a Principal of the Company, the truth and accuracy of which shall be a
condition to such Purchaser's obligation to purchase the Notes
proposed to be sold to such Purchaser on the Closing Date and to the
effect that (i) the representations and warranties of the Company set
forth in Exhibit B hereto are true and correct on and with respect to
the Closing Date, (ii) the Company has performed all of its
obligations hereunder which are to be performed on or prior to the
Closing Date, and (iii) no Default or Event of Default has occurred
and is continuing.
(b) Legal Opinions. Such Purchaser shall have received
from Chapman and Cutler, who are acting as special counsel to the
Purchasers in this transaction, and from Sutherland Asbill & Brennan
LLP, counsel for the Company, their respective opinions dated the
Closing Date, in form and substance satisfactory to such Purchaser,
and covering the matters set forth in Exhibits C and D, respectively,
hereto.
(c) Purchase Permitted By Applicable Law, Etc. On the
Closing Date, each purchase of Notes shall (a) be permitted by the
laws and regulations of each jurisdiction to which such Purchaser is
subject, without recourse to provisions (such as Section 1405(a)(8) of
the New York Insurance Law) permitting limited investments by
insurance companies without restriction as to the character of the
particular investment, (b) not violate any applicable law or
regulation (including, without limitation, Regulation U, T or X of the
Board of Governors of the Federal Reserve System) and (c) not subject
any Purchaser to any tax, penalty or liability under or pursuant to
any applicable law or regulation, which law or regulation was not in
effect on the date hereof. If requested by any Purchaser, such
Purchaser shall have received an officer's certificate certifying as
to such matters of fact as such Purchaser may reasonably specify to
enable such Purchaser to determine whether such purchase is so
permitted.
(d) Sale of Other Notes. The Company shall have
consummated the sale of the entire principal amount of the Notes
scheduled to be sold on the Closing Date as specified in Schedule I.
(e) Private Placement Number. A Private Placement Number
issued by S&P's CUSIP Service Bureau (in cooperation with the
Securities Valuation Office of the National Association of Insurance
Commissioners) shall have been obtained for each Series of Notes.
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<PAGE> 9
Allied Capital Corporation Note Agreement
(f) Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and
all documents necessary to the consummation thereof, shall be
satisfactory in form and substance to such Purchaser and such
Purchaser's special counsel, and such Purchaser shall have received a
copy (executed or certified as may be appropriate) of all legal
documents or proceedings taken in connection with the consummation of
said transactions.
Section 4.2. Waiver of Conditions. If on the Closing Date the
Company fails to tender to any Purchaser the Notes to be issued to such
Purchaser on such date or if the conditions specified in SECTION 4.1 have not
been fulfilled, such Purchaser may thereupon elect to be relieved of all
further obligations under this Agreement. Without limiting the foregoing, if
the conditions specified in SECTION 4.1 have not been fulfilled, such Purchaser
may waive compliance by the Company with any such condition to such extent as
such Purchaser may in its sole discretion determine. Nothing in this SECTION
4.2 shall operate to relieve the Company of any of its obligations hereunder or
to waive any Purchaser's rights against the Company.
SECTION 5. COVENANTS.
From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:
Section 5.1. Corporate Existence, Etc. The Company will preserve
and keep in full force and effect, and will cause each Consolidated Subsidiary
to keep in full force and effect, its corporate existence and all
registrations, licenses, permits and governmental approvals necessary to the
proper conduct of its business except, in the case of a Consolidated
Subsidiary, where the failure to do so would not have a Material Adverse Effect
on the Company or its Consolidated Subsidiaries; provided, however, that the
foregoing shall not prevent any transaction permitted by SECTION 5.11.
Section 5.2. Insurance. The Company will maintain, and will cause
each Consolidated Subsidiary to maintain, insurance coverage by financially
sound and reputable insurers in such forms and amounts and against such risks
as are customary for corporations of established reputation engaged in the same
or a similar business and owning and operating similar properties.
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with
Laws. The Company will promptly pay and discharge, and will cause each
Consolidated Subsidiary to pay and discharge, all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or such Consolidated
Subsidiary, respectively, or upon or in respect of all or any part of the
property or business of the Company or such Consolidated Subsidiary, all trade
accounts payable in accordance with usual and customary business terms, and all
claims for work, labor or materials, which if unpaid might become a Lien upon
any property of the Company or such Consolidated Subsidiary; provided, however,
that the Company or such Consolidated Subsidiary shall not be required to pay
any such tax, assessment, charge, levy, account payable or claim if (i) the
validity, applicability or amount thereof is being contested in good faith by
appropriate actions or proceedings which will prevent the forfeiture or sale of
any
-6-
<PAGE> 10
Allied Capital Corporation Note Agreement
property of the Company or such Consolidated Subsidiary or any material
interference with the use thereof by the Company or such Consolidated
Subsidiary, and (ii) the Company or such Consolidated Subsidiary shall set
aside on its books, reserves deemed by it to be adequate with respect thereto.
The Company will promptly comply and will cause each Consolidated Subsidiary to
promptly comply with all laws, ordinances or governmental rules and regulations
to which it is subject including, without limitation, the Occupational Safety
and Health Act of 1970, as amended, ERISA and all laws, ordinances,
governmental rules and regulations relating to environmental protection in all
applicable jurisdictions, the violation of which could have a Material Adverse
Effect on the Company and its Consolidated Subsidiaries or would result in any
Lien not permitted under SECTION 5.9.
Section 5.4. Maintenance, Etc. The Company will maintain, preserve
and keep, and will cause each Consolidated Subsidiary to maintain, preserve and
keep, its properties which are used in the conduct of its business (whether
owned in fee or a leasehold interest) in good repair and working order,
ordinary wear and tear excepted, and from time to time will make all necessary
repairs, replacements and renewals as the Company may determine to be
appropriate to the conduct of its business.
Section 5.5. Nature of Business. Neither the Company nor any
Consolidated Subsidiary will engage in any business if, as a result, the
general nature of the business, taken on a consolidated basis, which would then
be engaged in by the Company and its Consolidated Subsidiaries would be
substantially changed from the general nature of the business engaged in by the
Company and its Consolidated Subsidiaries on the date of this Agreement as
described in the Memorandum.
Section 5.6. Capital Maintenance. The Company shall at all times
maintain Consolidated Shareholders Equity in an amount not less than (i)
$375,000,000 plus (ii) 75% of the Net Proceeds of all Equity Issuances effected
by the Company or any of its Consolidated Subsidiaries at any time after
September 30, 1998 (excluding the Net Proceeds of any Equity Issuance by a
Consolidated Subsidiary to a Consolidated Subsidiary or to the Company).
Section 5.7. Interest Charges Coverage Ratio. The Company shall
maintain the ratio of Adjusted EBIT to Interest Expense of the Company and its
Consolidated Subsidiaries, determined on a consolidated basis as of the last
day of each fiscal quarter for the period of four consecutive fiscal quarters
ending on such day, at not less than 1.8 to 1.
Section 5.8. Limitations on Debt; Interest Rate Swaps. (a) The
Company will have on the last day of each quarterly fiscal period a ratio of
Consolidated Debt to Consolidated Shareholders' Equity not exceeding 1.5 to 1.
(b) The Company will not at any time permit the aggregate principal
amount of Priority Debt to exceed 25% of Consolidated Shareholders' Equity;
provided that in the case of any determination of Priority Debt made prior to
April 30, 2001, outstanding Indebtedness secured by Real Estate Assets in an
aggregate principal amount of up to $100,000,000 shall be excluded from
Priority Debt.
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<PAGE> 11
Allied Capital Corporation Note Agreement
(c) The Company will not at any time permit the Asset Coverage
Ratio to be less than 2 to 1.
(d) The Company will not permit any Consolidated Subsidiary to
enter into any Subsidiary Bank Guaranty or Subsidiary Existing Note Guaranty,
unless the Company shall first furnish to each Holder of the Notes (i) an
unconditional Subsidiary Note Guaranty, (ii) an Intercreditor Agreement, and
(iii) an opinion of counsel to the effect that such Subsidiary Note Guaranty
has been duly authorized, executed and delivered by such Consolidated
Subsidiary and constitutes the legal, valid and binding obligation of such
Consolidated Subsidiary, enforceable against such Consolidated Subsidiary in
accordance with the terms thereof, and covering such other matters as the
Holders of 51% or more of the principal amount of the Notes at the time
outstanding may reasonably request.
(e) The Company will not and will not permit any Consolidated
Subsidiary to enter into any Interest Rate Swap except in the ordinary course
of business pursuant to transactions that are entered into for bona fide
purposes of managing the Company's interest rate risk and not for speculation.
Section 5.9. Limitation on Liens. The Company will not, and
will not permit any Consolidated Subsidiary to, create or incur, or suffer to
be incurred or to exist, any Lien on its or their property or assets, whether
now owned or hereafter acquired, or upon any income or profits therefrom, or
transfer any property for the purpose of subjecting the same to the payment of
obligations in priority to the payment of its or their general creditors, or
acquire or agree to acquire any property or assets upon conditional sales
agreements or other title retention devices, except:
(a) Liens for property taxes and assessments or
governmental charges or levies and Liens securing claims or demands of
mechanics and materialmen, provided payment thereof is not at the time
required by SECTION 5.3;
(b) Liens of or resulting from any judgment or award, the
time for the appeal or petition for rehearing of which shall not have
expired, or in respect of which the Company or a Consolidated
Subsidiary shall at any time in good faith be prosecuting an appeal or
proceeding for a review and in respect of which a stay of execution
pending such appeal or proceeding for review shall have been secured;
(c) Liens incidental to the conduct of business or the
ownership of properties and assets (including Liens in connection with
the making of loans to customers, worker's compensation, unemployment
insurance and other like laws, warehousemen's and attorneys' liens and
statutory landlords' liens) and Liens to secure the performance of
bids, tenders or trade contracts, or to secure statutory obligations,
surety or appeal bonds or other Liens of like general nature incurred
in the ordinary course of business and not in connection with (i) the
borrowing of money or (ii) obligations pursuant to ERISA, provided in
each case, the obligation secured is not overdue or, if overdue, is
being contested in good faith by appropriate actions or proceedings;
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<PAGE> 12
Allied Capital Corporation Note Agreement
(d) minor survey exceptions or minor encumbrances,
easements or reservations, or rights of others for rights-of-way,
utilities and other similar purposes, or zoning or other restrictions
as to the use of real properties, which are necessary for the conduct
of the activities of the Company and its Consolidated Subsidiaries or
which customarily exist on properties of corporations engaged in
similar activities and similarly situated and which do not in any
event materially impair their use in the operation of the business of
the Company and its Consolidated Subsidiaries;
(e) Liens securing Indebtedness of a Consolidated
Subsidiary to the Company or to another Wholly-owned Consolidated
Subsidiary;
(f) Liens existing as of March 31, 1999 and reflected on
Annex B to Exhibit B hereto;
(g) Liens incurred after the Closing Date given to secure
the payment of the purchase price or cost of construction incurred in
connection with the acquisition of, or improvements to, fixed assets
useful and intended to be used in carrying on the business of the
Company or a Consolidated Subsidiary, including Liens existing on such
assets at the time of acquisition thereof or at the time of
acquisition by the Company or a Consolidated Subsidiary of any
business entity then owning such assets, whether or not such existing
Liens were given to secure the payment of the purchase price of the
assets to which they attach so long as they were not incurred,
extended or renewed in contemplation of such acquisition, provided
that (i) the Lien shall attach solely to the assets acquired or
purchased, (ii) the Lien (other than Liens that are existing on such
assets at the time of acquisition thereof and that are permitted as
aforesaid) shall have been created or incurred within 180 days of the
date of acquisition of such fixed assets, except in the case of
construction or acquisition of improvements to real estate, the land
on which such improvements are located shall not be required to have
been acquired within such 180 period; (iii) at the time of acquisition
of such assets, the aggregate amount remaining unpaid on all
Indebtedness secured by Liens on such assets whether or not assumed by
the Company or a Consolidated Subsidiary shall not exceed an amount
equal to 80% (or 100% in the case of Capitalized Leases) of the lesser
of the total purchase price or fair market value at the time of
acquisition of such assets (as determined in good faith by the Board
of Directors of the Company), and (iv) all Indebtedness secured by
such Liens shall be permitted hereunder;
(h) Liens on Real Estate Assets securing Non-Recourse
Indebtedness; provided that such Non-Recourse Indebtedness shall be
permitted within the limitations of SECTION 5.8; and
(i) Liens securing Indebtedness under Mortgage Repurchase
Facilities or Interest Rate Swaps; provided that (i) the Lien of any
such Mortgage Repurchase Facility shall extend only to the Commercial
Mortgage Loans which are financed or refinanced under such Mortgage
Repurchase Facility and the Related Collateral, (ii) the aggregate
advances under such Mortgage Repurchase Facility shall not exceed 80%
of the aggregate unpaid principal amount of the Commercial Mortgage
Loans securing such
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Allied Capital Corporation Note Agreement
Mortgage Repurchase Facility, (iii) the Lien securing any Interest
Rate Swap shall extend only to Commercial Mortgage Loans and Related
Collateral, and (iv) all such Indebtedness shall be permitted within
the limitations of SECTION 5.8.
The Company will not, and will not permit any Consolidated Subsidiary
to, directly or indirectly, create, incur, assume or permit to exist (upon the
happening of a contingency or otherwise) any Lien on or with respect to any
property which secures Debt outstanding under the Bank Credit Agreement or the
Existing Note Agreement, unless the Company makes, or causes to be made,
effective provision whereby the Notes will be equally and ratably secured with
any and all other obligations thereby secured; provided that such security is
granted pursuant to an agreement reasonably satisfactory to the Holders of 51%
or more of the principal amount of the Notes at the time outstanding.
Section 5.10. Restricted Payments. The Company will not except as
hereinafter provided:
(a) Declare or pay any dividends, either in cash or
property, on any shares of its capital stock of any class (except
dividends or other distributions payable solely in shares of capital
stock of the Company);
(b) Directly or indirectly, or through any Subsidiary,
purchase, redeem or retire any shares of its capital stock of any
class or any warrants, rights or options to purchase or acquire any
shares of its capital stock (other than in exchange for or out of the
net cash proceeds to the Company from the substantially concurrent
issue or sale of other shares of capital stock of the Company or
warrants, rights or options to purchase or acquire any shares of its
capital stock); or
(c) Make any other payment or distribution, either
directly or indirectly or through any Subsidiary, in respect of its
capital stock;
(such declarations or payments of dividends, purchases, redemptions or
retirements of capital stock and warrants, rights or options and all such other
payments or distributions being herein collectively called "Restricted
Payments"), if after giving effect thereto (i) an Event of Default described in
paragraph (a) or (b) of SECTION 6.1 shall exist, (ii) as the result of an
occurrence of any other Event of Default described in SECTION 6.1 the Notes
shall have been accelerated under SECTION 6.3 or (iii) the Company would not be
in compliance with the limitations of SECTION 5.8.
The Company will not declare any regular quarterly dividend which
constitutes a Restricted Payment payable more than 60 days after the date of
declaration thereof; provided that any year-end extra dividend which
constitutes a Restricted Payment shall not be payable more than 120 days after
the date of declaration thereof.
For the purposes of this SECTION 5.10, the amount of any Restricted
Payment declared, paid or distributed in property shall be deemed to be the
greater of the book value or fair market value (as determined in good faith by
the Board of Directors of the Company) of such property at the time of the
making of the Restricted Payment in question.
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Allied Capital Corporation Note Agreement
Section 5.11. Mergers, Consolidations and Sales of Assets. (a) The
Company will not, and will not permit any Consolidated Subsidiary to,
consolidate with or be a party to a merger with any other Person or dispose of
all or a substantial part of the assets of the Company and its Consolidated
Subsidiaries; provided that:
(1) any Consolidated Subsidiary may merge or consolidate
with or into, sell, lease or otherwise dispose of all or a substantial
part of its assets to the Company or any Wholly-owned Subsidiary so
long as (A) (i) in any merger or consolidation involving the Company,
the Company shall be the surviving or continuing corporation and (ii)
in any merger or consolidation involving a Wholly-owned Subsidiary
(and not the Company), a Wholly-owned Subsidiary shall be the
surviving or continuing corporation, and (B) at the time of such
consolidation or merger and immediately after giving effect thereto,
no Default or Event of Default would exist;
(2) the Company may consolidate or merge with or into any
other corporation if (i) the corporation which results from such
consolidation or merger (the "surviving corporation") is organized
under the laws of any state of the United States or the District of
Columbia, (ii) the due and punctual payment of the principal of and
premium, if any, and interest on all of the Notes, according to their
tenor, and the due and punctual performance and observation of all of
the covenants in the Notes and this Agreement, to be performed or
observed by the Company are expressly assumed in writing by the
surviving corporation and the surviving corporation shall furnish to
the holders of the Notes an opinion of counsel reasonably satisfactory
to the holder or holders of 51% or more of the principal amount of the
Notes at the time outstanding to the effect that the instrument of
assumption has been duly authorized, executed and delivered and
constitutes the legal, valid and binding contract and agreement of the
surviving corporation enforceable in accordance with its terms, except
as enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles,
and (iii) at the time of such consolidation or merger and immediately
after giving effect thereto and to the incurrence of any Debt assumed
or incurred in connection therewith, (x) the aggregate amount of
outstanding Consolidated Debt and Priority Debt of the surviving
corporation would be permitted by the terms of SECTION 5.8 as of the
last day of the fiscal quarter immediately preceding the date of such
consolidation or merger, and (y) no Default or Event of Default would
exist; and
(3) the Company and any Consolidated Subsidiary may,
sell, transfer or otherwise dispose of all or any part of its
Investments in the ordinary course of business including, without
limitation, in securitization transactions.
(b) The Company will not permit any Consolidated Subsidiary to issue
any Voting Stock of such Consolidated Subsidiary except to satisfy the rights
of minority shareholders to receive issuances of stock which are non-dilutive
to the Company and/or any Consolidated Subsidiary; provided that the foregoing
restrictions do not apply to issuances to the Company or to a Wholly-owned
Subsidiary or the issuance of directors' qualifying shares.
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Allied Capital Corporation Note Agreement
(c) The Company will not sell, transfer or otherwise dispose of
stock or Debt of any Consolidated Subsidiary (except issuance of directors'
qualifying shares and sales, transfers and dispositions of all the stock of a
special purpose Consolidated Subsidiary for consideration if (x) substantially
all the assets of such Consolidated Subsidiary constitute Investments and (y)
the sale, transfer or disposition of all such Investments for substantially the
same consideration would be permitted by SECTION 5.11(a)(3)) and will not
permit any Consolidated Subsidiary to sell, transfer or otherwise dispose of
stock (otherwise than by purchase or redemption of preferred stock) of a
Consolidated Subsidiary or Debt of any other Consolidated Subsidiary (except
issuances to the Company or to a Wholly-owned Subsidiary or issuance of
directors' qualifying shares); provided that the foregoing restrictions do not
apply if the following conditions are met:
(1) all shares of stock and all Debt of such Consolidated
Subsidiary held by the Company and its Subsidiaries shall be sold
simultaneously;
(2) in the opinion of the Company's Board of Directors:
(i) such sale of stock or Debt is in the best
interests of the Company;
and
(ii) the consideration paid for such stock and
Debt is deemed adequate and satisfactory.
(3) the Consolidated Subsidiary being disposed of shall
not have any continuing investment in the Company or any Consolidated
Subsidiary that is not being disposed of simultaneously; and
(4) such sale or disposition does not involve a
substantial part of assets of the Company and its Consolidated
Subsidiaries.
As used in this SECTION 5.11, a sale of assets will be deemed a
"substantial part" of the assets of the Company and its Consolidated
Subsidiaries if (i) the Book Value of such assets sold in a given fiscal year
(except those sold in the ordinary course of business) exceeds 15% of the
Consolidated Total Assets of the Company and its Consolidated Subsidiaries
determined at the close of the immediately preceding fiscal year, or (ii) the
operations of such assets sold (except those sold in the ordinary course of
business) generated 15% or more of the consolidated operating profit of the
Company and its Consolidated Subsidiaries during the immediately preceding
fiscal year; provided, however, that for purposes of the foregoing calculation,
there shall not be included any assets if a portion of the proceeds of such
assets equal to the aggregate Book Value thereof immediately prior to such sale
was or is applied within 365 days of the date of sale of such assets to either
(A) the acquisition of Investments useful and intended to be used in the
operation of the business of the Company and its Consolidated Subsidiaries and
having a fair market value (as determined in good faith by the Board of
Directors of the Company) at least equal to the Book Value of the assets so
disposed of, or (B) the prepayment at any applicable prepayment premium, on a
pro rata basis, of Senior Funded Debt of the Company. It is understood and
agreed by the Company that any such proceeds paid and applied to the
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Allied Capital Corporation Note Agreement
prepayment of the Notes as hereinabove provided shall be prepaid as and to the
extent provided in SECTION 2.2.
Section 5.12. Repurchase of Notes. Neither the Company nor any
Consolidated Subsidiary or Affiliate, directly or indirectly, may repurchase or
make any offer to repurchase any Notes unless an offer has been made to
repurchase Notes, pro rata, from all holders of the Notes at the same time and
upon the same terms. In case the Company repurchases or otherwise acquires any
Notes, such Notes shall immediately thereafter be canceled and no Notes shall
be issued in substitution therefor. Without limiting the foregoing, upon the
repurchase or other acquisition of any Notes by the Company, any Consolidated
Subsidiary or any Affiliate, such Notes shall no longer be outstanding for
purposes of any section of this Agreement relating to the taking by the holders
of the Notes of any actions with respect hereto, including without limitation,
SECTION 6.3, SECTION 6.4 and SECTION 7.1.
Section 5.13. Transactions with Affiliates. The Company will not,
and will not permit any Consolidated Subsidiary to, enter into or be a party to
any transaction or arrangement with any Affiliate (including, without
limitation, the purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any Affiliate), except transactions in the
ordinary course of and pursuant to the reasonable requirements of the Company's
or such Consolidated Subsidiary's business and upon fair and reasonable terms
no less favorable to the Company or such Consolidated Subsidiary than would be
obtained in a comparable arm's-length transaction with a Person other than an
Affiliate.
Section 5.14. Termination of Pension Plans. The Company will not,
and will not permit any Consolidated Subsidiary to, withdraw from any
Multiemployer Plan to which it may hereafter contribute or permit any employee
benefit plan hereafter maintained by it to be terminated if such withdrawal or
termination could result in withdrawal liability (as described in Part 1 of
Subtitle E of Title IV of ERISA) or the imposition of a Lien on any property of
the Company or any Consolidated Subsidiary pursuant to Section 4068 of ERISA.
Section 5.15. Reports and Rights of Inspection. The Company will
keep, and will cause each Consolidated Subsidiary to keep, proper books of
record and account in which full and correct entries will be made of all
dealings or transactions of, or in relation to, the business and affairs of the
Company or such Consolidated Subsidiary, in accordance with GAAP consistently
applied (except for changes disclosed in the financial statements furnished to
the Holders pursuant to this SECTION 5.15 and concurred with by the independent
public accountants referred to in SECTION 5.15(b) hereof), and will furnish to
each Institutional Holder of the then outstanding Notes (in duplicate if so
specified below or otherwise requested):
(a) Quarterly Statements. As soon as available and in any
event within 45 days after the end of each quarterly fiscal period
(except the last) of each fiscal year, copies of:
(1) consolidated balance sheets of the Company and
its Consolidated Subsidiaries as of the close of such
quarterly fiscal period, setting forth in
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Allied Capital Corporation Note Agreement
comparative form the consolidated figures for the fiscal year
then most recently ended,
(2) consolidated statements of operations of the
Company and its Consolidated Subsidiaries for such quarterly
fiscal period and for the portion of the fiscal year ending
with such quarterly fiscal period, in each case setting forth
in comparative form the consolidated figures for the
corresponding periods of the preceding fiscal year, and
(3) consolidated statements of changes in net
assets and cash flows of the Company and its Consolidated
Subsidiaries for the portion of the fiscal year ending with
such quarterly fiscal period, setting forth in comparative
form the consolidated figures for the corresponding period of
the preceding fiscal year,
all in reasonable detail and certified as complete and correct by a
Senior Financial Officer of the Company;
(b) Annual Statements. As soon as available and in any
event within 90 days after the close of each fiscal year, copies of:
(1) consolidated and consolidating balance sheets
of the Company and its Consolidated Subsidiaries as of the
close of such fiscal year,
(2) consolidated and consolidating statements of
operations, changes in net assets and cash flows, and
(3) consolidated statement of investments
setting forth in comparative form the consolidated figures for the
preceding fiscal year (except in the case of such statement of
investments) and in each case all in reasonable detail and accompanied
by a report thereon of a firm of independent public accountants of
recognized national standing selected by the Company to the effect
that the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company
and its Consolidated Subsidiaries as of the end of the fiscal year
being reported on and the consolidated results of their operations,
changes in net assets and cash flows for said year in conformity with
GAAP and that the examination of such accountants in connection with
such financial statements has been conducted in accordance with
generally accepted auditing standards and included such tests of the
accounting records and such other auditing procedures as said
accountants deemed necessary in the circumstances;
(c) Audit Reports. Promptly upon receipt thereof, one
copy of each interim or special audit made by independent accountants
of the books of the Company or any Consolidated Subsidiary and any
management letter received from such accountants;
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Allied Capital Corporation Note Agreement
(d) SEC and Other Reports. Promptly upon their becoming
available, one copy of each financial statement, report, notice, press
releases or proxy statement sent by the Company to stockholders
generally and of each regular or periodic report, and any registration
statement or prospectus filed by the Company with any securities
exchange or the Securities and Exchange Commission or any successor
agency, and copies of any orders in any proceedings to which the
Company or any Consolidated Subsidiary is a party, issued by any
governmental agency, Federal or state, having jurisdiction over the
Company or any of its Consolidated Subsidiaries;
(e) ERISA Reports. Promptly upon the occurrence thereof,
written notice of (i) a Reportable Event with respect to any Plan
hereafter maintained by the Company or any ERISA Affiliate; (ii) the
institution of any steps by the Company, any ERISA Affiliate, the PBGC
or any other person to terminate any such Plan; (iii) the institution
of any steps by the Company or any ERISA Affiliate to withdraw from
any such Plan; (iv) a non-exempt "prohibited transaction" within the
meaning of Section 406 of ERISA in connection with any such Plan; (v)
any material contingent liability of the Company or any Consolidated
Subsidiary with respect to any post-retirement welfare liability
hereafter existing; or (vi) the taking of any action by, or the
threatening of the taking of any action by, the Internal Revenue
Service, the Department of Labor or the PBGC with respect to any of
the foregoing;
(f) Officer's Certificates. Within the periods provided
in paragraphs (a) and (b) above, a certificate of a Senior Financial
Officer of the Company stating that such officer has reviewed the
provisions of this Agreement and setting forth: (i) the information
and computations (in sufficient detail) required in order to establish
whether the Company was in compliance with the requirements of SECTION
5.6 through SECTION 5.11 at the end of the period covered by the
financial statements then being furnished and (ii) whether there
existed as of the date of such financial statements and whether, to
the best of such officer's knowledge, there exists on the date of the
certificate or existed at any time during the period covered by such
financial statements any Default or Event of Default and, if any such
condition or event exists on the date of the certificate, specifying
the nature and period of existence thereof and the action the Company
is taking and proposes to take with respect thereto;
(g) Accountant's Certificates. Within the period
provided in paragraph (b) above, a certificate of the accountants who
render an opinion with respect to such financial statements
acknowledging that the Company was in compliance with the financial
covenants of SECTION 5.6, SECTION 5.7 and SECTION 5.8(a), (b) and (c),
and setting forth the procedures used to make such determination; and
(h) Requested Information. With reasonable promptness,
such other data and information as any Holder or any such
Institutional Holder may reasonably request.
Without limiting the foregoing, the Company will permit each
Institutional Holder of the then outstanding Notes (or such Persons as such
Holder may designate), to visit and inspect, under the Company's guidance, any
of the properties of the Company or any Consolidated
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Allied Capital Corporation Note Agreement
Subsidiary, to examine all of their books of account, records, reports and
other papers, to make copies and extracts therefrom and to discuss their
respective affairs, finances and accounts with their respective officers,
employees, and independent public accountants (and by this provision the
Company authorizes said accountants to discuss with such Holder the finances
and affairs of the Company and its Consolidated Subsidiaries) all at such
reasonable times and as often as may be reasonably requested. Any visitation
shall be at the sole expense of such Institutional Holder, unless a Default or
Event of Default shall have occurred and be continuing or the Holder of any
Note or of any other evidence of Indebtedness of the Company or any
Consolidated Subsidiary gives any written notice or takes any other action with
respect to a claimed default, in which case, any such visitation or inspection
shall be at the sole expense of the Company.
Section 5.16. Year 2000 Compliance. The Company will promptly notify
each Institutional Holder in the event the Company discovers or determines that
any computer application (including those of its suppliers and vendors) that is
material to its or any of its Subsidiaries' business and operations will not be
Year 2000 Complaint on a timely basis, except to the extent that such failure
could not reasonably be expected to have a Material Adverse Effect.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 6.1. Events of Default. Any one or more of the following
shall constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest on any
Note when the same shall have become due and such default shall
continue for more than five Business Days; or
(b) Default shall occur in the making of any payment of
the principal of any Note or premium, if any, thereon at the expressed
or any accelerated maturity date or at any date fixed for prepayment;
or
(c) Default shall be made in the payment when due
(whether by lapse of time, by declaration, by call for redemption or
otherwise) of the principal of or interest on any Consolidated Debt
(other than the Notes) of the Company or any Consolidated Subsidiary
having an aggregate unpaid principal amount in excess of $5,000,000
and such default shall continue beyond the period of grace, if any,
allowed with respect thereto; or
(d) Default or the happening of any event shall occur
under any indenture, agreement or other instrument under which
Consolidated Debt of the Company or any Consolidated Subsidiary having
an aggregate unpaid principal amount in excess of $5,000,000 may be
issued and such default or event shall continue for a period of time
sufficient to permit the acceleration of the maturity of such
Consolidated Debt or the Company or a Consolidated Subsidiary has
become obligated to purchase such Consolidated Debt or one or more
Persons have the right to require the Company or any Consolidated
Subsidiary to purchase such Consolidated Debt; or
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<PAGE> 20
(e) Default shall occur in the observance or performance
of any covenant or agreement contained in SECTION 5.6 through SECTION
5.11 and such default shall continue for more than five Business Days;
or
(f) Default shall occur in the observance or performance
of any other provision of this Agreement which is not remedied within
30 days after the earlier of (i) the day on which a Senior Financial
Officer first obtains actual personal knowledge of such default, or
(ii) the day on which written notice thereof is given to the Company
by the Holder of any Note; or
(g) Any representation or warranty made by the Company
herein, or made by the Company in any statement or certificate
furnished by the Company in connection with the consummation of the
issuance and delivery of the Notes or furnished by the Company
pursuant hereto, is untrue in any material respect as of the date of
the issuance or making thereof; or
(h) Final judgment or final judgments for the payment of
money aggregating in excess of $5,000,000 is or are outstanding
against the Company or any Material Subsidiary or against any property
or assets of the Company or any Material Subsidiary and any such final
judgment or final judgments have remained unpaid, unvacated, unbonded
or unstayed by appeal or otherwise for a period of 60 days from the
date of its entry; or
(i) A custodian, liquidator, receiver or similar official
is appointed for the Company or any Material Subsidiary or for the
major part of its property and is not discharged within 60 days after
such appointment; or
(j) The Company or any Material Subsidiary becomes
insolvent or bankrupt, is generally not paying its debts as they
become due or makes an assignment for the benefit of creditors, or the
Company or any Material Subsidiary applies for or consents to the
appointment of a custodian, liquidator, trustee or receiver for the
Company or such Material Subsidiary or for the major part of its
property; or
(k) Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or
similar law or laws for the relief of debtors, are instituted by or
against the Company or any Material Subsidiary and, if instituted
against the Company or such Material Subsidiary, are consented to or
are not dismissed within 60 days after such institution.
Section 6.2. Notice to Holders. When any Event of Default described
in the foregoing SECTION 6.1 has occurred, or if the holder of any Note or of
any other evidence of Debt of the Company gives any notice or takes any other
action with respect to a claimed default, the Company agrees to give notice
within three Business Days of such event to all holders of the Notes then
outstanding.
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Allied Capital Corporation Note Agreement
Section 6.3. Acceleration of Maturities. When any Event of Default
described in paragraph (a) or (b) of SECTION 6.1 has happened and is
continuing, any Holder of any Note may declare the entire principal and all
interest accrued on such Holder's Notes to be and such Notes shall thereupon
become, forthwith due and payable, without any presentment, demand, protest or
other notice of any kind, all of which are hereby waived. When any Event of
Default described in paragraphs (a) through (i), inclusive, of SECTION 6.1 has
happened and is continuing, the Holder or Holders of 51% or more of the
principal amount of Notes at the time outstanding may, by notice to the
Company, declare the entire principal and all interest accrued on all Notes to
be, and all Notes shall thereupon become, forthwith due and payable, without
any presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived. When any Event of Default described in paragraph (j)
or (k) of SECTION 6.1 has occurred, then all outstanding Notes shall
immediately become due and payable without presentment, demand or notice of any
kind. Upon any Note becoming due and payable as a result of any Event of
Default as aforesaid, the Company will forthwith pay to the Holder of such Note
the entire principal and interest accrued on such Note and (to the extent
permitted by applicable law) an amount as liquidated damages for the loss of
the bargain evidenced hereby (and not as a penalty) equal to the Make-Whole
Amount, determined as of the date on which such Note shall so become due and
payable. No course of dealing on the part of the Holder or Holders of any
Notes nor any delay or failure on the part of any Holder of Notes to exercise
any right shall operate as a waiver of such right or otherwise prejudice such
Holder's rights, powers and remedies. The Company further agrees, to the
extent permitted by law, to pay to the Holder or Holders of the Notes all costs
and expenses incurred by them in the collection of any Notes upon any default
hereunder or thereon, including reasonable compensation to such Holder's or
Holders' attorneys for all services rendered in connection therewith.
Section 6.4. Rescission of Acceleration. The provisions of SECTION
6.3 are subject to the condition that if the principal of and accrued interest
on all or any outstanding Notes have been declared immediately due and payable
by reason of the occurrence of any Event of Default described in paragraphs (a)
through (i), inclusive, of SECTION 6.1, the holders of 66-2/3% in aggregate
principal amount of the Notes then outstanding may, by written instrument filed
with the Company, rescind and annul such declaration and the consequences
thereof, provided that at the time such declaration is annulled and rescinded:
(a) no judgment or decree has been entered for the
payment of any monies due pursuant to the Notes or this Agreement;
(b) all arrears of interest upon all the Notes and all
other sums payable under the Notes and under this Agreement (except
any principal, interest or premium on the Notes which has become due
and payable solely by reason of such declaration under SECTION 6.3)
shall have been duly paid; and
(c) each and every other Default and Event of Default
shall have been made good, cured or waived pursuant to SECTION 7.1;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right
consequent thereto.
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Allied Capital Corporation Note Agreement
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.
Section 7.1. Consent Required. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the Company has
obtained the consent in writing of the Holders of at least 66-2/3% in aggregate
principal amount of outstanding Notes; provided that without the written
consent of the Holders of all of the Notes then outstanding, no such amendment
or waiver shall be effective (i) which will change the time of payment of the
principal of or the interest on any Note or change the principal amount thereof
or change the rate of interest thereon or the method of computation of the
Make-Whole Amount, or (ii) which will change any of the provisions with respect
to optional prepayments or (iii) which will change the percentage of holders of
the Notes required to consent to any such amendment or waiver of any of the
provisions of this SECTION 7 or SECTION 6.
Section 7.2. Solicitation of Holders. So long as there are any
Notes outstanding, the Company will not solicit, request or negotiate for or
with respect to any proposed waiver or amendment of any of the provisions of
this Agreement or the Notes unless each Holder of Notes (irrespective of the
amount of Notes then owned by it) shall be informed thereof by the Company and
shall be afforded the opportunity of considering the same and shall be supplied
by the Company with sufficient information to enable it to make an informed
decision with respect thereto. The Company will not, directly or indirectly,
pay or cause to be paid any remuneration, whether by way of supplemental or
additional interest, fee or otherwise, to any Holder of Notes as consideration
for or as an inducement to entering into by any holder of Notes of any waiver
or amendment of any of the terms and provisions of this Agreement or the Notes
unless such remuneration is concurrently paid on the same terms, ratably to
each Holder of Notes then outstanding even if such Holder did not consent to
such waiver or amendment.
Section 7.3. Effect of Amendment or Waiver. Any such amendment or
waiver shall apply equally to all of the Holders of the Notes and shall be
binding upon them, upon each future holder of any Note and upon the Company,
whether or not such Note shall have been marked to indicate such amendment or
waiver. No such amendment or waiver shall extend to or affect any obligation
not expressly amended or waived or impair any right consequent thereon.
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 8.1. Definitions. Unless the context otherwise requires,
the terms hereinafter set forth when used herein shall have the following
meanings and the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:
"Adjusted EBIT" means, for any period with respect to the Company and
its Consolidated Subsidiaries on a consolidated basis, income after deduction
of all expenses and other proper charges other than taxes and Interest Expense,
all as determined in accordance with GAAP.
"Affiliate" shall mean any Person (other than a Consolidated
Subsidiary) which (i) directly or indirectly, or through one or more
intermediaries controls, or is controlled by, or is
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Allied Capital Corporation Note Agreement
under common control with, the Company, (ii) which beneficially owns or holds
5% or more of any class of the Voting Stock of the Company or (iii) 5% or more
of the Voting Stock (or in the case of a Person which is not a corporation, 5%
or more of the equity interest) of which is beneficially owned by the Company
or a Subsidiary. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of Voting Stock, by
contract or otherwise, other than by investment advisory contracts entered into
in the ordinary course of business of the Company or a Subsidiary of the
Company.
"Asset Coverage Ratio" shall mean on a consolidated basis for the
Company and its Consolidated Subsidiaries the ratio which the value of total
assets, less all liabilities and indebtedness not represented by senior
securities (all as determined pursuant to the Investment Company Act and any
orders of the Securities and Exchange Commission issued to the Company
thereunder), bears to the aggregate amount of senior securities representing
indebtedness of the Company and its Consolidated Subsidiaries
"Bank Credit Agreement" means the Credit Agreement between the Banks
and the Company dated as of March 9, 1999, as amended from time to time,
pursuant to which the Banks have extended credit to the Company, and any
renewals, extensions or replacements thereof.
"Banks" means the banks or financial institutions which are party to
the Bank Credit Agreement from time to time.
"Book Value" means, with respect to any asset at any time, the value
thereof as the same would be reflected on a consolidated balance sheet of the
Company and its Consolidated Subsidiaries as at such time prepared in
accordance with GAAP.
"Business Day" shall mean (a) for the purposes of computation of the
Make-Whole Amount only, any day of the week (excluding Saturday or Sunday) on
which banks in New York, New York are not obligated by law to close, and (b)
for the purposes of any other provision of this Agreement any day of the week
(excluding Saturday or Sunday) on which banks in Washington, D.C. and New York,
New York are not obligated by law to close.
"Capitalized Lease" shall mean any lease the obligation for Rentals
with respect to which is required to be capitalized on a consolidated balance
sheet of the lessee and its subsidiaries in accordance with GAAP.
"Capitalized Rentals" of any Person shall mean as of the date of any
determination thereof the amount at which the aggregate Rentals due and to
become due under all Capitalized Leases under which such Person is a lessee
would be reflected as a liability on a consolidated balance sheet of such
Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended and
the rules and regulations promulgated thereunder.
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Allied Capital Corporation Note Agreement
"Commercial Mortgage Loan" means a loan secured by a Lien on improved
real estate used for commercial purposes.
"Consolidated Debt" shall mean as of the date of any determination
thereof, the aggregate unpaid amount of all Debt of the Company and its
Consolidated Subsidiaries determined on a consolidated basis in accordance with
GAAP.
"Consolidated Shareholders' Equity" as of the date of determination
thereof, shall mean the total shareholders' equity of the Company and its
Consolidated Subsidiaries as the same would appear on a consolidated balance
sheet of the Company and its Consolidated Subsidiaries prepared as of such date
in accordance with GAAP, including, in any case, common stock of the Company
(valued at cost) held in the Allied Capital Corporation Deferred Compensation
Trust and Permitted Preferred Stock of the Company and its Consolidated
Subsidiaries but excluding any stock, common or preferred, not both issued and
outstanding.
"Consolidated Subsidiary" shall mean any Subsidiary which is required
to be consolidated on financial statements of the Company prepared in
accordance with GAAP.
"Consolidated Total Assets" shall mean total assets of the Company and
its Consolidated Subsidiaries on a consolidated basis.
"Debt" means, with respect to any Person, without duplication,
(a) its liabilities for borrowed money;
(b) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising
in the ordinary course of business but including, without limitation,
all liabilities created or arising under any conditional sale or other
title retention agreement with respect to any such property);
(c) its Capitalized Rentals;
(d) all liabilities for borrowed money secured by any
Lien with respect to any property owned by such Person (whether or not
it has assumed or otherwise become liable for such liabilities); and
(e) any Guaranty of such Person with respect to
liabilities of a type described in any of clauses (a) through (d)
hereof.
Debt of any Person shall include all obligations of such Person of the
character described in clauses (a) through (e) to the extent such Person
remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"Default" shall mean any event or condition the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default.
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Allied Capital Corporation Note Agreement
"Equity Issuance" means 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, and any successor statute of similar import, together with
the regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA shall be construed to also refer to any
successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that
is, along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in SECTION 6.1.
"Existing Notes" means the notes issued by the Company pursuant to the
Existing Note Agreement.
"Existing Note Agreement" means the Note Agreement dated as of April
30, 1998, among the Company and the purchasers parties thereto, pursuant to
which the Company has issued its $140,000,000 7.055% Senior Notes, Series A,
due May 30, 2003, its $30,000,000 7.168% Senior Notes, Series B, due May 30,
2005, and its $10,000,000 9.530% Senior Notes, Series C, due May 30, 2005, and
any replacement or renewal thereof.
"GAAP" shall mean generally accepted accounting principles at the time
in the United States.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, all obligations incurred through an agreement, contingent
or otherwise, by such Person: (i) to purchase such Indebtedness or obligation
or any property or assets constituting security therefor, (ii) to advance or
supply funds (x) for the purchase or payment of such Indebtedness or
obligation, (y) to maintain working capital or other balance sheet condition or
otherwise to advance or make available funds for the purchase or payment of
such Indebtedness or obligation, (iii) to lease property or to purchase
Securities or other property or services primarily for the purpose of assuring
the owner of such Indebtedness or obligation of the ability of the primary
obligor to make payment of the Indebtedness or obligation, or (iv) otherwise to
assure the owner of the Indebtedness or obligation of the primary obligor
against loss in respect thereof. For the purposes of all computations made
under this Agreement, a Guaranty in respect of any Indebtedness for borrowed
money shall be deemed to be Indebtedness equal to the principal amount of such
Indebtedness for borrowed money which has been guaranteed, and a Guaranty in
respect of any other obligation or liability or any dividend
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Allied Capital Corporation Note Agreement
shall be deemed to be Indebtedness equal to the maximum aggregate amount of
such obligation, liability or dividend.
"Holder" shall mean any Person which is, at the time of reference,
the registered Holder of any Note.
"Indebtedness" with respect to any Person means, at any time, without
duplication,
(a) its liabilities for borrowed money and its redemption
obligations in respect of mandatorily redeemable preferred stock;
(b) its liabilities for the deferred purchase price of
property acquired by such Person (excluding accounts payable arising
in the ordinary course of business but including all liabilities
created or arising under any conditional sale or other title retention
agreement with respect to any such property);
(c) all liabilities appearing on its balance sheet in
accordance with GAAP in respect of Capitalized Leases;
(d) all liabilities for borrowed money secured by any
Lien with respect to any property owned by such Person (whether or not
it has assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of unreimbursed
drawings under letters of credit or instruments serving a similar
function issued or accepted for its account by banks and other
financial institutions (whether or not representing obligations for
borrowed money);
(f) Interest Rate Swaps of such Person; and
(g) any Guaranty of such Person with respect to
liabilities of a type described in any of clauses (a) through (f)
hereof.
Indebtedness of any Person shall include all obligations of such
Person of the character described in clauses (a) through (g) to the extent such
Person remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"Institutional Holder" shall mean any insurance company, bank, savings
and loan association, trust company, investment company, charitable foundation,
employee benefit plan (as defined in ERISA) or other institutional investor or
financial institution which is not principally engaged, or as one of its
important activities, in the business of making small business investments of
the type made by the Company.
"Intercreditor Agreement" means an intercreditor agreement pursuant to
which the Banks, the Holders of the Existing Notes and the Holders of the Notes
have agreed to share payments made by any Consolidated Subsidiary under a
Subsidiary Existing Note Guaranty, a Subsidiary Note Guaranty or a Subsidiary
Bank Guaranty on an equal and ratable basis.
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Allied Capital Corporation Note Agreement
"Interest Expense" means, with respect to a Person and for any period,
the total consolidated interest expense (including, without limitation,
capitalized interest expense and interest expense attributable to Capitalized
Leases) of such Person and in any event shall include all interest expense with
respect to any Debt in respect of which such Person is wholly or partially
liable.
"Interest Rate Swap" means a currency swap, an interest rate swap or
other currency or interest rate hedge entered into by the Company or a
Consolidated Subsidiary. For the purposes of this Agreement, the amount of the
obligation under any Interest Rate Swap shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such Interest Rate Swap had
terminated at the end of such fiscal quarter, and in making such determination,
if any agreement relating to such Interest Rate Swap provides for the netting
of amounts payable by and to such Person thereunder or if any such agreement
provides for the simultaneous payment of amounts by and to such Person, then in
each such case, the amount of such obligation shall be the net amount so
determined.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended, and all rules and regulations promulgated thereunder.
"Investments" shall mean all investments, in cash or by delivery of
property made, directly or indirectly in any Person, whether by acquisition of
shares of capital stock, Indebtedness or other obligations or Securities or by
loan, advance, capital contribution or otherwise.
"Lien" shall mean any interest in property securing an obligation owed
to, or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property. For the purposes of this
Agreement, the Company or any Consolidated Subsidiary shall be deemed to be the
owner of any property which it has acquired or holds subject to a conditional
sale agreement, Capitalized Lease or other arrangement pursuant to which title
to the property has been retained by or vested in some other Person for
security purposes and such retention or vesting shall constitute a Lien.
"Make-Whole Amount" means, with respect to a Note of any series, an
amount equal to the excess, if any, of the Discounted Value of the Remaining
Scheduled Payments with respect to the Called Principal of the Note of such
series over the amount of such Called Principal, provided that the Make-Whole
Amount may in no event be less than zero. For the purposes of determining the
Make-Whole Amount, the following terms have the following meanings:
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Allied Capital Corporation Note Agreement
"Called Principal" means, with respect to a Note of any
Series, the principal of such Note that is to be prepaid pursuant to
SECTION 2.2 or has become or is declared to be immediately due and
payable pursuant to SECTION 6.3, as the context requires.
"Discounted Value" means, with respect to the Called Principal
of a Note of any Series, the amount obtained by discounting all
Remaining Scheduled Payments with respect to such Called Principal
from their respective scheduled due dates to the Settlement Date with
respect to such Called Principal, in accordance with accepted
financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable)
equal to the Reinvestment Yield with respect to such Called Principal.
"Reinvestment Yield" means, with respect to the Called
Principal of a Note of any Series, 0.50% over the yield to maturity
implied by (i) the yields reported, as of 10:00 A.M. (New York City
time) on the second Business Day preceding the Settlement Date with
respect to such Called Principal, on the display designated as "PX-1"
of the Bloomberg Financial Markets Services Screen (or such other
display as may replace PX-1 of the Bloomberg Financial Markets
Services Screen) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal
as of such Settlement Date, or (ii) if such yields are not reported as
of such time or the yields reported as of such time are not
ascertainable (including by way of interpolation), the Treasury
Constant Maturity Series Yields reported, for the latest day for which
such yields have been so reported as of the second Business Day
preceding the Settlement Date with respect to such Called Principal,
in Federal Reserve Statistical Release H.15 (519) (or any comparable
successor publication) for actively traded U.S. Treasury securities
having a constant maturity equal to the Remaining Average Life of such
Called Principal as of such Settlement Date. Such implied yield will
be determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted
financial practice and (b) interpolating linearly between (1) the
actively traded U.S. Treasury security with the maturity closest to
and greater than the Remaining Average Life and (2) the actively
traded U.S. Treasury security with the maturity closest to and less
than the Remaining Average Life.
"Remaining Average Life" means, with respect to any Called
Principal, the number of years (calculated to the nearest one-twelfth
year) obtained by dividing (i) such Called Principal into (ii) the sum
of the products obtained by multiplying (a) the principal component of
each Remaining Scheduled Payment with respect to such Called Principal
by (b) the number of years (calculated to the nearest one-twelfth
year) that will elapse between the Settlement Date with respect to
such Called Principal and the scheduled due date of such Remaining
Scheduled Payment.
"Remaining Scheduled Payments" means, with respect to the
Called Principal of a Note of any Series, all payments of such Called
Principal and interest thereon that would be due after the Settlement
Date with respect to such Called Principal if no payment of such
Called Principal were made prior to its scheduled due date, provided
that if such Settlement Date is not a date on which interest payments
are due to be made under
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Allied Capital Corporation Note Agreement
the terms of the Notes of such Series, then the amount of the next
succeeding scheduled interest payment will be reduced by the amount of
interest accrued to such Settlement Date and required to be paid on
such Settlement Date pursuant to or SECTION 2.2 or SECTION 6.3.
"Settlement Date" means, with respect to the Called Principal
of a Note of any Series, the date on which such Called Principal is to
be prepaid pursuant to SECTION 2.2 or has become or is declared to be
immediately due and payable pursuant to SECTION 6.3, as the context
requires.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, affairs, financial condition, assets or properties of the
Company and its Consolidated Subsidiaries taken as a whole, or (b) the ability
of the Company to perform its obligations under this Agreement and the Notes,
or (c) the validity or enforceability of this Agreement or the Notes.
"Material Subsidiary" shall mean any Consolidated 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.
"Memorandum" is described in paragraph 5 of Exhibit B hereto.
"Mortgage Repurchase Facility" means financing agreements providing
for (i) the pledge and assignment of Commercial Mortgage Loans owned by the
Company and its Consolidated Subsidiaries as security for loans to the Company
and its Consolidated Subsidiaries, or (ii) the sale of such Commercial Mortgage
Loans to a commercial lender pursuant to an agreement under which such loans
shall be repurchased by the Company or a Consolidated Subsidiary at a future
date.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"Net Proceeds" means, 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.
"Non-Recourse Indebtedness" means Indebtedness secured by Real Estate
Assets if recourse for the payment of such Indebtedness is limited to such Real
Estate Assets.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Preferred Stock" means (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 time to time
by a Subsidiary for the purpose of qualifying such Subsidiary as a real estate
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Allied Capital Corporation Note Agreement
investment trust under Sections 856 through 860 of the 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.
"Person" shall mean an individual, partnership, limited liability
company, corporation, trust or unincorporated organization, and a government or
agency or political subdivision thereof.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Priority Debt" means the sum of (i) all Debt of the Company and its
Consolidated Subsidiaries secured by a Lien, and (ii) all unsecured Debt of
Consolidated Subsidiaries (excluding in each case, Debt owing to the Company or
another Consolidated Subsidiary).
"Purchaser" shall have the meaning set forth in SECTION 1.1.
"QPAM Exemption" means Prohibited Transaction Class Exemption 84-14
issued by the United States Department of Labor.
"Real Estate" means fee ownership or co-ownership of, or leaseholds
of, land or improvements thereon.
"Real Estate Assets" means (i) Real Estate securing Investments made
in the ordinary course of business, (ii) Commercial Mortgage Loans and (iii)
Related Collateral.
"Related Collateral" means, in respect of any Commercial Mortgage
Loan: (i) any and all documents, instruments, agreements, records or other
collateral of any kind evidencing, securing, guaranteeing or otherwise relating
to such Commercial Mortgage Loan, including without limitation all promissory
notes or other negotiable instruments, mortgages, deeds of trust or similar
instruments, assignments of leases or rents or other collateral assignments,
financing statements, guaranties, indemnities, servicing agreements, servicing
records, files, surveys, certificates, affidavits, title abstracts, title
insurance policies and commitments, correspondence, opinions, appraisals,
closing documents, computer programs, computer storage media, data bases,
accounting records and other books and records relating thereto, (ii) any and
all mortgage guaranties and insurance (issued by governmental agencies or
otherwise) and mortgage insurance certificates or other documents evidencing
such mortgage guaranties or insurance relating to any such Commercial Mortgage
Loan and all claims and payments thereunder, (iii) any and all other insurance
policies and insurance proceeds relating to such Commercial Mortgage Loan or
the related real property, (iv) all "general intangibles" as defined in the
Uniform Commercial Code relating to or constituting any and all of the
foregoing, and (v) any and all replacements, substitutions or distributions on
or proceeds of any and all of the foregoing.
"Rentals" shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Company or any
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Allied Capital Corporation Note Agreement
Consolidated Subsidiary, as lessee or sublessee under a lease of real or
personal property, but shall be exclusive of any amounts required to be paid by
the Company or any Consolidated Subsidiary (whether or not designated as rents
or additional rents) on account of maintenance, repairs, insurance, taxes and
similar charges. Fixed rents under any so-called "percentage leases" shall be
computed solely on the basis of the minimum rents, if any, required to be paid
by the lessee regardless of sales volume or gross revenues.
"Reportable Event" shall have the same meaning as in ERISA.
"SBA" shall mean the United States Small Business Administration.
"Security" shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
"Senior Financial Officer" means the chief financial officer, chief
operating officer, principal accounting officer, treasurer or controller of the
Company.
"Senior Funded Debt" means any Debt of the Company which is classified
as long term debt in accordance with GAAP (including, without limitation, the
Bank Credit Agreement) other than Subordinated Debt.
"Subordinated Debt" means all unsecured Debt of the Company
which shall contain or have applicable thereto subordination provisions
providing for the subordination thereof to other Debt of the Company
(including, without limitation, the obligations of the Company under the
Notes).
"Subsidiary" with respect to any Person shall mean (i) any
corporation, partnership, association or other business entity at least 50% of
the outstanding shares of Voting Stock or similar interests of which are owned,
directly or indirectly, by such Person (including, without limitation, any
limited partnership in which such Person, directly or indirectly, shall have at
least a 50% vote on matters as to which limited partners may vote), (ii) any
general or limited partnership of which such Person shall be a general partner
or as to which such Person otherwise shall have unlimited liability, (iii) any
general or limited partnership a general partner of which can be changed or
removed by such Person (other than removals that could be accomplished by
voluntary withdrawal of such general partner only), or (iv) any general or
limited partnership in which (x) the amount represented by such Person's
capital account shall be equal to at least 50% of the aggregate amount
represented by the total of all partners' capital accounts or (y) such Person
shall be allocated at least 50% of the profit (or loss) or distributable cash
of the partnership; provided, however, that the term "Subsidiary", when used in
this Agreement without reference to any particular Person, shall mean a
Subsidiary of the Company.
"Subsidiary Bank Guaranty" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of the Company under the Bank
Credit Agreement.
"Subsidiary Existing Note Guaranty" means any agreement pursuant to
which a Consolidated Subsidiary has guaranteed the Debt of the Company under
the Existing Notes.
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Allied Capital Corporation Note Agreement
"Subsidiary Note Guaranty" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of the Company under the Notes.
"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).
"Wholly-owned" when used in connection with any Subsidiary shall mean
a Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares and Permitted Preferred Stock)
shall be owned by the Company and/or one or more of its Wholly-owned
Subsidiaries.
"Year 2000 Compliant" shall have the meaning assigned to it in
paragraph 19 of Exhibit B to this Agreement.
"Year 2000 Problem" shall have the meaning assigned to it in paragraph
19 of Exhibit B to this Agreement.
Section 8.2. Accounting Principles. Where the character or amount
of any asset or liability or item of income or expense is required to be
determined or any consolidation or other accounting computation is required to
be made for the purposes of this Agreement, the same shall be done in
accordance with GAAP, to the extent applicable, except where such principles
are inconsistent with the requirements of this Agreement.
Section 8.3. Directly or Indirectly. Where any provision in this
Agreement refers to action to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be applicable whether the action
in question is taken directly or indirectly by such Person.
SECTION 9. MISCELLANEOUS.
Section 9.1. Registered Notes. The Company shall cause to be kept
at the principal office of the Company a register for the registration and
transfer of the Notes (hereinafter called the "Note Register") and the Company
will register or transfer or cause to be registered or transferred as
hereinafter provided any Note issued pursuant to this Agreement.
At any time and from time to time the registered holder of any Note
which has been duly registered as hereinabove provided may transfer such Note
to another Institutional Holder upon surrender thereof at the principal office
of the Company duly endorsed or accompanied by a written instrument of transfer
duly executed by the registered holder of such Note or its attorney duly
authorized in writing.
The Person in whose name any registered Note shall be registered shall
be deemed and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, premium, if any, and
interest on any registered Note shall be made to or upon the written order of
such registered holder.
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Allied Capital Corporation Note Agreement
Section 9.2. Exchange of Notes. At any time and from time to time,
upon not less than ten days' notice to that effect given by the holder of any
Note initially delivered or of any Note substituted therefor pursuant to
SECTION 9.1, this SECTION 9.2 or SECTION 9.3, and, upon surrender of such Note
at its office, the Company will deliver in exchange therefor, without expense
to such holder, except as set forth below, a Note for the same aggregate
principal amount as the then unpaid principal amount of the Note so
surrendered, or Notes in the denomination of $500,000 or any amount in excess
thereof as such holder shall specify, dated as of the date to which interest
has been paid on the Note so surrendered or, if such surrender is prior to the
payment of any interest thereon, then dated as of the date of issue, registered
in the name of such one or more Institutional Holders as may be designated by
such holder, and otherwise of the same form and tenor as the Notes so
surrendered for exchange. The Company may require the payment of a sum
sufficient to cover any stamp tax or governmental charge imposed upon such
exchange or transfer.
Section 9.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
any Note, and in the case of any such loss, theft or destruction upon delivery
of a bond of indemnity in such form and amount as shall be reasonably
satisfactory to the Company, or in the event of such mutilation upon surrender
and cancellation of the Note, the Company will make and deliver without expense
to the holder thereof, a new Note, of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Note. If the Purchaser or any subsequent Institutional
Holder is the owner of any such lost, stolen or destroyed Note, then the
affidavit of an authorized officer of such owner, setting forth the fact of
loss, theft or destruction and of its ownership of such Note at the time of
such loss, theft or destruction shall be accepted as satisfactory evidence
thereof and no further indemnity shall be required as a condition to the
execution and delivery of a new Note other than the written agreement of such
owner to indemnify the Company.
Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the
transactions herein contemplated shall be consummated, the Company agrees to
pay directly all of the Purchasers' reasonable out-of-pocket expenses in
connection with the preparation, execution and delivery of this Agreement and
the transactions contemplated hereby, including but not limited to the
reasonable charges and disbursements of Chapman and Cutler, special counsel to
the Purchasers, duplicating and printing costs and charges for shipping the
Notes, adequately insured to each Purchaser's home office or at such other
place as such Purchaser may designate, the cost of obtaining a Private
Placement Number for the Notes from Standard & Poor's Corporation, and all such
reasonable expenses relating to any amendment, waivers or consents pursuant to
the provisions hereof, including, without limitation, any amendments, waivers,
or consents resulting from any work-out, renegotiation or restructuring
relating to the performance by the Company of its obligations under this
Agreement and the Notes. The Company also agrees that it will pay and save
each Purchaser harmless against any and all liability with respect to stamp and
other taxes, if any, which may be payable or which may be determined to be
payable in connection with the execution and delivery of this Agreement or the
Notes, (other than as specified in the last sentence of SECTION 9.2) whether or
not any Notes are then outstanding. The Company agrees to protect and
indemnify each Purchaser against any liability for any and all brokerage fees
and
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Allied Capital Corporation Note Agreement
commissions payable or claimed to be payable to any Person in connection
with the transactions contemplated by this Agreement.
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No
delay or failure on the part of the holder of any Note in the exercise of any
power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise thereof, or
the exercise of any other power or right, and the rights and remedies of the
holder of any Note are cumulative to, and are not exclusive of, any rights or
remedies any such holder would otherwise have.
Section 9.6. Notices. All communications provided for hereunder
shall be in writing and, if to a Holder, delivered or mailed prepaid by
registered or certified mail or overnight air courier, or by facsimile
communication (with a confirming copy of any such facsimile communication sent
via overnight courier service), in each case addressed to such Holder at its
address appearing on Schedule I to this Agreement or such other address as such
Holder may designate to the Company in writing, and if to the Company delivered
or mailed by registered or certified mail or overnight air courier, or by
facsimile communication, to the Company at 1919 Pennsylvania Avenue, N.W., 3rd
Floor, Washington, D.C. 20006, Attention: Joan M. Sweeney or to such other
address as the Company may in writing designate to the Holders; provided,
however, that a notice to a Holder by overnight air courier shall only be
effective if delivered to such Holder at a street address designated for such
purpose in Schedule I, and a notice to you by facsimile communication shall
only be effective if made by confirmed transmission to such Holder at a
telephone number designated for such purpose in Schedule I, or, in either case,
as such Holder may designate to the Company in writing.
Section 9.7. Successors and Assigns. This Agreement shall be
binding upon the Company and its successors and assigns and shall inure to the
benefit of each Purchaser and to the benefit of its successors and assigns,
including each successive Holder.
Section 9.8. Survival of Covenants and Representations. All
covenants, representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement and
the Notes and shall terminate upon payment in full of all amounts due under the
Notes and this Agreement.
Section 9.9. Severability. Should any part of this Agreement for
any reason be declared invalid or unenforceable, such decision shall not affect
the validity or enforceability of any remaining portion, which remaining
portion shall remain in force and effect as if this Agreement had been executed
with the invalid or unenforceable portion thereof eliminated and it is hereby
declared the intention of the parties hereto that they would have executed the
remaining portion of this Agreement without including therein any such part,
parts or portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 9.10. Governing Law. This Agreement and the Notes issued and
sold hereunder shall be governed by and construed in accordance with New York
law.
-31-
<PAGE> 35
Allied Capital Corporation Note Agreement
Section 9.11. Captions. The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.
-32-
<PAGE> 36
Allied Capital Corporation Note Agreement
The execution hereof by you shall constitute a contract between us for
the uses and purposes hereinabove set forth, and this Agreement may be executed
in any number of counterparts, each executed counterpart constituting an
original but all together only one agreement.
<TABLE>
<S> <C>
ALLIED CAPITAL CORPORATION
By /s/ Kelly A. Anderson
Name: Kelly A. Anderson
Title: Principal and Treasurer
Accepted as of May 1, 1999:
JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY
By /s/ Anthony J. Della Piana
Name: Anthony J. Della Piana
Title: Senior Investment Officer
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY
By /s/ Anthony J. Della Piana
Name: Anthony J. Della Piana
Title: Authorized Officer
INVESTORS PARTNER LIFE INSURANCE
COMPANY
By /s/ Anthony J. Della Piana
Name: Anthony J. Della Piana
Title: Authorized Officer
</TABLE>
-33-
<PAGE> 37
Allied Capital Corporation Note Agreement
<TABLE>
<S> <C>
JOHN HANCOCK REASSURANCE COMPANY Ltd.
By /s/ Francis X. Felcon
Name: Francis X. Felcon
Title: Investment Vice President
ANCHOR NATIONAL LIFE INSURANCE
COMPANY
By /s/ Christopher F. Ochs
Name: Christopher F. Ochs
Title: Authorized Agent
SUNAMERICA LIFE INSURANCE COMPANY
By /s/ Christopher F. Ochs
Name: Christopher F. Ochs
Title: Authorized Agent
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By: CIGNA Investments, Inc.
By /s/ James R. Kuzemchak
Name: James R. Kuzemchak
Title: Managing Director
</TABLE>
-34-
<PAGE> 38
Allied Capital Corporation Note Agreement
<TABLE>
<S> <C>
LIFE INSURANCE COMPANY OF NORTH
AMERICA
By: CIGNA Investments, Inc.
By /s/ James R. Kuzemchak
Name: James R. Kuzemchak
Title: Managing Director
OHIO NATIONAL LIFE INSURANCE
CORPORATION
By /s/ Michael A. Boedeker
Name: Michael A. Boedeker
Title: Vice President, Fixed Income
Securities
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By /s/ Loren S. Archibald
Name: Loren S. Archibald
Title: Managing Director, Private
Placements
GENERAL ELECTRIC CAPITAL ASSURANCE
COMPANY
By /s/ Jon M. Lucia
Name: Jon M. Lucia
Title: Assistant Vice President &
Investment Officer
</TABLE>
-35-
<PAGE> 39
Allied Capital Corporation Note Agreement
<TABLE>
<S> <C>
NATIONWIDE LIFE INSURANCE COMPANY
By /s/ Jerry D. Cohen
Name: Jerry D. Cohen
Title: Authorized Signatory
NATIONWIDE INDEMNITY COMPANY
By /s/ Jerry D. Cohen
Name: Jerry D. Cohen
Title: Authorized Signatory
KEMPER INVESTORS LIFE INSURANCE
COMPANY
By /s/ Gary W. Fridley
Name: Gary W. Fridley
Title: Chief Investment Officer
By /s/ David S. Jorgensen
Name: David S. Jorgensen
Title: Corporate Comptroller
</TABLE>
-36-
<PAGE> 40
Allied Capital Corporation Note Agreement
<TABLE>
<S> <C>
FEDERAL KEMPER LIFE ASSURANCE COMPANY
By /s/ Gary W. Fridley
Name: Gary W. Fridley
Title: Chief Investment Officer
By /s/ David S. Jorgensen
Name: David S. Jorgensen
Title: Corporate Comptroller
FIDELITY LIFE ASSOCIATION
By /s/ Gary W. Fridley
Name: Gary W. Fridley
Title: Chief Investment Officer
By /s/ David S. Jorgensen
Name: David S. Jorgensen
Title: Corporate Comptroller
ZURICH LIFE INSURANCE COMPANY OF
AMERICA
By /s/ Gary W. Fridley
Name: Gary W. Fridley
Title: Chief Investment Officer
By /s/ David S. Jorgensen
Name: David S. Jorgensen
Title: Corporate Comptroller
BERKSHIRE LIFE INSURANCE COMPANY
By /s/ Ellen I. Whitaker
Name: Ellen I. Whitaker
Title: Senior Investment Officer
</TABLE>
-37-
<PAGE> 41
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Series A $15,000,000
(for the General Account) Series B $13,000,000
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
Payments
All payments on account of the Notes or other obligations in accordance with
the provisions thereof shall be made by bank wire transfer of immediately
available funds for credit, not later than 12 noon, Boston time, to:
BankBoston
ABA #011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number 541-55417
On Order of: Allied Capital Corporation, PPN 01903# AD 4, 7.39%
Senior Notes Due 2004 and/or Allied Capital Corporation, PPN
01903# AE 2, 7.49% Senior Notes Due 2006
Notices
Contemporaneous with the above wire transfer, advice setting forth (1) the full
name, interest rate and maturity date of the Notes or other obligations; (2)
allocation of payment between principal and interest and any special payment;
and (3) name and address of Bank (or Trustee) from which wire transfer was
sent, shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
All notices with respect to prepayments, both scheduled and unscheduled,
whether partial or in full, and notice of maturity shall be delivered or faxed
and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
SCHEDULE I
(to Note Agreement)
<PAGE> 42
All other communications which shall include, but not be limited to, financial
statements and certificates of compliance with financial covenants, shall be
delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57
Fax: (617) 572-1605
A copy of any notices relating to change in issuer's name, address or principal
place of business or location of collateral and a copy of any legal opinions
shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-50
Fax: (617) 572-9268
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 04-1414660
I-2
<PAGE> 43
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY Series A $8,000,000
(for the Guaranteed Benefit Sub-Account) Series B $11,500,000
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
Payments
All payments on account of the Notes or other obligations in accordance with
the provisions thereof shall be made by bank wire transfer of immediately
available funds for credit, not later than 12 noon, Boston time, to:
BankBoston
ABA #011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number 541-55417
On Order of: Allied Capital Corporation, PPN 01903# AD 4, 7.39% Senior
Notes Due 2004 and/or Allied Capital Corporation, PPN 01903# AE
2, 7.49% Senior Notes Due 2006
Notices
Contemporaneous with the above wire transfer, advice setting forth (1) the full
name, interest rate and maturity date of the Notes or other obligations; (2)
allocation of payment between principal and interest and any special payment;
and (3) name and address of Bank (or Trustee) from which wire transfer was
sent, shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
All notices with respect to prepayments, both scheduled and unscheduled,
whether partial or in full, and notice of maturity shall be delivered or faxed
and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
I-3
<PAGE> 44
All other communications which shall include, but not be limited to, financial
statements and certificates of compliance with financial covenants, shall be
delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57
Fax: (617) 572-1605
A copy of any notices relating to change in issuer's name, address or principal
place of business or location of collateral and a copy of any legal opinions
shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-50
Fax: (617) 572-9268
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 04-1414660
I-4
<PAGE> 45
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY Series A $1,000,000
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
Payments
All payments on account of the Notes or other obligations in accordance with
the provisions thereof shall be made by bank wire transfer of immediately
available funds for credit, not later than 12 noon, Boston time, to:
BankBoston
ABA #011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number 541-55417
Notices
Contemporaneous with the above wire transfer, advice setting forth (1) the full
name, interest rate and maturity date of the Notes or other obligations; (2)
allocation of payment between principal and interest and any special payment;
and (3) name and address of Bank (or Trustee) from which wire transfer was
sent, shall be delivered or faxed and mailed to:
John Hancock Variable Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
All notices with respect to prepayments, both scheduled and unscheduled,
whether partial or in full, and notice of maturity shall be delivered or faxed
and mailed to:
John Hancock Variable Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
All other communications which shall include, but not be limited to, financial
statements and certificates of compliance with financial covenants, shall be
delivered or faxed and mailed to:
I-5
<PAGE> 46
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57
Fax: (617) 572-1605
A copy of any notices relating to change in issuer's name, address or principal
place of business or location of collateral and a copy of any legal opinions
shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-50
Fax: (617) 572-9268
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 04-2664016
I-6
<PAGE> 47
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
INVESTORS PARTNER LIFE INSURANCE COMPANY Series A $1,000,000
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
Payments
All payments on account of the Notes or other obligations in accordance with
the provisions thereof shall be made by bank wire transfer of immediately
available funds for credit, not later than 12 noon, Boston time, to:
BankBoston
ABA #011000390
Boston, Massachusetts 02110
Account of: John Hancock Mutual Life Insurance Company
Private Placement Collection Account
Account Number 541-55417
On Order of: Allied Capital Corporation, PPN 01903# AD 4, 7.39% Senior
Notes Due 2004
Notices
Contemporaneous with the above wire transfer, advice setting forth (1) the full
name, interest rate and maturity date of the Notes or other obligations; (2)
allocation of payment between principal and interest and any special payment;
and (3) name and address of Bank (or Trustee) from which wire transfer was
sent, shall be delivered or faxed and mailed to:
Investors Partner Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
All notices with respect to prepayments, both scheduled and unscheduled,
whether partial or in full, and notice of maturity shall be delivered or faxed
and mailed to:
Investors Partner Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
I-7
<PAGE> 48
All other communications which shall include, but not be limited to, financial
statements and certificates of compliance with financial covenants, shall be
delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Group, T-57
Fax: (617) 572-1605
A copy of any notices relating to change in issuer's name, address or principal
place of business or location of collateral and a copy of any legal opinions
shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-50
Fax: (617) 572-9268
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 13-3072894
I-8
<PAGE> 49
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
JOHN HANCOCK REASSURANCE COMPANY LTD. Series B $500,000
John Hancock Place
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
Payments
All payments on account of the Notes or other obligations in accordance with
the provisions thereof shall be made by bank wire transfer of immediately
available funds for credit, not later than 12 noon, Boston time, to:
State Street Bank & Trust Company - Boston
ABA #011-00-0028
A/C: 6894-481-8
Attention: Boston Securities Processing
Income Collection Dept. B03
Reference: John Hancock Reassurance Trust 105303-001
Allied Capital Corporation, PPN 01903# AE 2, 7.49% Senior Notes due
2006
Notices
Contemporaneous with the above wire transfer, advice setting forth (1) the full
name, interest rate and maturity date of the Notes or other obligations; (2)
allocation of payment between principal and interest and any special payment;
and (3) name and address of Bank (or Trustee) from which wire transfer was
sent, shall be delivered or faxed and mailed to:
State Street Bank & Trust Company
Corporate Trust Department
P. O. Box 230177
Hartford, Connecticut 06123-0177
Attention: Debra Johnson, Administration Support
Fax: (860) 244-1884
with a copy to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Manager, Investment Accounting Division, B-3
Fax: (617) 572-0628
I-9
<PAGE> 50
All other communications which shall include, but not be limited to, financial
statements and certificates of compliance with financial covenants, shall be
delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Francis X. Felcon, Bond and Corporate Finance Group, T-57
Fax: (617) 572-1605
A copy of any notices relating to change in issuer's name, address or principal
place of business or location of collateral and a copy of any legal opinions
shall be delivered or faxed and mailed to:
John Hancock Mutual Life Insurance Company
200 Clarendon Street
Boston, Massachusetts 02117
Attention: Investment Law Division, T-50
Fax: (617) 572-9268
Name of Nominee in which Notes are to be issued: EMBASSY & CO.
Taxpayer I.D. Number: 04-3126890
I-10
<PAGE> 51
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
ANCHOR NATIONAL LIFE INSURANCE COMPANY Series A $10,000,000
SunAmerica Corporate Finance
700 Louisiana, Suite 3905
Houston, Texas 77002
Attn: Debbie Adami
Telephone: (713) 546-1116
Fax: (713) 222-1402
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Bankers Trust Company
ABA #021-001-033
Account Number: 99-911-145
FFC: A/C 099527
Re: Allied Capital Corporation
Prin: _________ Int: _________
Notices
All notices of payment on or in respect of the Notes and written confirmation
of each such payment to be addressed as first provided above.
All other notices and communications to be addressed to:
SunAmerica Corporate Finance
700 Louisiana, Suite 3905
Houston, Texas 77002
Attention: Chris Ochs
Telephone: (713) 546-1115
Fax: (713) 222-1402
Name of Nominee in which Notes are to be issued: OKGBD & CO.
Taxpayer I.D. Number: 13-3020293
Taxpayer I.D. Number for Anchor National Life Insurance Company: 86-0198983
I-11
<PAGE> 52
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
SUNAMERICA LIFE INSURANCE COMPANY Series A $10,000,000
SunAmerica Corporate Finance
700 Louisiana, Suite 3905
Houston, Texas 77002
Attn: Debbie Adami
Telephone: (713) 546-1116
Fax: (713) 222-1402
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Bankers Trust Company
ABA #021-001-033
Account Number: 99-911-145
FFC: A/C 099530
Re: Allied Capital Corporation
Prin: _________ Int: _________
Notices
All notices of payment on or in respect of the Notes and written confirmation
of each such payment to be addressed as first provided above.
All other notices and communications to be addressed to:
SunAmerica Corporate Finance
700 Louisiana, Suite 3905
Houston, Texas 77002
Attention: Chris Ochs
Telephone: (713) 546-1115
Fax: (713) 222-1402
Name of Nominee in which Notes are to be issued: OKGBD & CO.
Taxpayer I.D. Number: 13-3020293
Taxpayer I.D. Number for SunAmerica Life Insurance Company: 52-0502540
I-12
<PAGE> 53
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY Series A $10,200,000
c/o CIGNA Investments, Inc. Series A $3,200,000
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Attention: Private Securities Division - S-307
Fax: 860-726-7203
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Chase NYC/CTR/
BNF=CIGNA Private Placements/AC=9009001802
ABA #021000021
Address for Notices Related to Payments:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Securities Processing S-309
900 Cottage Grove Road
Hartford, Connecticut 06152-2309
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities - S-307
Operations Group
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: 860-726-7203
with a copy to:
Chase Manhattan Bank, N.A.
Private Placement Servicing
P. O. Box 1508
Bowling Green Station
New York, New York 10081
Attention: CIGNA Private Placements
Fax: 212-552-3107/1005
I-13
<PAGE> 54
Address for All Other Notices:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities Division - S-307
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: 860-726-7203
Name of Nominee in which Notes are to be issued: CIG & CO.
Taxpayer I.D. Number for CIG & Co.: 13-3574027
I-14
<PAGE> 55
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
LIFE INSURANCE COMPANY OF NORTH AMERICA Series A $1,600,000
c/o CIGNA Investments, Inc.
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Attention: Private Securities Division - S-307
Fax: (860) 726-7203
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Chase NYC/CTR/
BNF=CIGNA Private Placements/AC=9009001802
ABA #021000021
Address for Notices Related to Payments:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Securities Processing S-309
900 Cottage Grove Road
Hartford, Connecticut 06152-2309
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities S-307
Operations Group
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: (860) 726-7203
with a copy to:
Chase Manhattan Bank, N.A.
Private Placement Servicing
P. O. Box 1508
Bowling Green Station
New York, New York 10081
Attention: CIGNA Private Placements
Fax: (212) 552-3107/1005
I-15
<PAGE> 56
Address for All Other Notices:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities Division S-307
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: (860) 726-7203
Name of Nominee in which Notes are to be issued: CIG & CO.
Taxpayer I.D. Number for CIG & Co.: 13-3574027
I-16
<PAGE> 57
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
THE OHIO NATIONAL LIFE INSURANCE COMPANY Series A $10,000,000
P. O. Box 237
Cincinnati, Ohio 45201
Attention: Investment Department
Telefacsimile: (513) 794-4506
Overnight Delivery Address:
One Financial Way
Cincinnati, Ohio 45242
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Firstar Bank, N.A. (ABA #042-0000-13)
Fifth and Walnut Streets
Cincinnati, Ohio 45202
for credit to: The Ohio National Life Insurance Company
Account Number 910-275-7
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 31-0397080
I-17
<PAGE> 58
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
TEACHERS INSURANCE AND ANNUITY Series A $10,000,000
ASSOCIATION OF AMERICA
730 Third Avenue
New York, New York 10017-3263
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
The Chase Manhattan Bank
ABA #021000021
New York, New York
Account of: Teachers Insurance and Annuity Association of America
Private Placements
Account Number 910-2-000200
For further credit to: Account Number G07319
On order of: Allied Capital Corporation, PPN 01903# AD 4
Notices
All notices of payment on or in respect of the Notes and written confirmation
of each such payment to:
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
Attention: Securities Accounting Division
Telephone: (212) 916-6004
Telefacsimile: (212) 916-6955
All other notices and communications to be addressed to:
TIAA-CREF
730 Third Avenue, 4th Floor
New York, New York 10017-3206
Attention: Securities Division
Telephone: (212) 916-6578 (John Goodreds) or (212) 490-9000 (General
Number)
Telefacsimile: (212) 916-6582 (Team Fax Number)
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 13-1624203
I-18
<PAGE> 59
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
GENERAL ELECTRIC CAPITAL ASSURANCE COMPANY Series A $9,000,000
c/o GE Financial Assurance
Account: General Electric Capital Assurance Company
Two Union Square
601 Union Street
Seattle, Washington 98101
Attention: Investment Accounting
Telephone Number: (206) 516-2871
Telefacsimile Number: (206) 516-4740
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Bankers Trust Company
14 Wall Street
New York, New York 10005
SWIFT Code: BKTR US 33
ABA #021-001-033
Account Number: 99-911-145
FCC #097833
Notices
All notices and communications with respect to payments and written
confirmation of each such payment, to be addressed as first provided above. All
other communications to be addressed:
General Electric Capital Assurance Company
c/o GE Financial Assurance
Two Union Square
601 Union Street
Seattle, Washington 98101
Attention: Investment Department, Private Placements
Telephone Number: (206) 516-4954
Telefacsimile Number: (206) 516-4863
Name of Nominee in which Notes are to be issued: SALKELD & CO.
Taxpayer I.D. Number: 91-6027719
I-19
<PAGE> 60
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
GENERAL ELECTRIC CAPITAL ASSURANCE COMPANY Series A $1,000,000
c/o GE Financial Assurance
Account: PNC
Two Union Square
601 Union Street
Seattle, Washington 98101
Attention: Investment Accounting
Telephone Number: (206) 516-2871
Telefacsimile Number: (206) 516-4740
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
Bankers Trust Company
14 Wall Street
New York, New York 10005
SWIFT Code: BKTR US 33
ABA #021-001-033
Account Number: 99-911-145
FCC #097837
Reference: Security Description, coupon, maturity, PPN Number,
identify principal or interest
Notices
All notices and communications with respect to payments and written
confirmation of each such payment, to be addressed as first provided above. All
other communications to be addressed:
General Electric Capital Assurance Company
c/o GE Financial Assurance
Two Union Square
601 Union Street
Seattle, Washington 98101
Attention: Investment Department, Private Placements
Telephone Number: (206) 516-4954
Telefacsimile Number: (206) 516-4863
Name of Nominee in which Notes are to be issued: SALKELD & CO.
Taxpayer I.D. Number: 91-6027719
I-20
<PAGE> 61
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
NATIONWIDE LIFE INSURANCE COMPANY Series A $5,000,000
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Attention: Corporate Fixed-Income Securities
Telefacsimile: (614) 249-4553
Confirmation: (614) 249-7882
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O Nationwide Life Insurance Company
Attention: P&I Department
Notices
All notices of payment on or in respect of the Notes and written confirmation
of each such payment to:
Nationwide Life Insurance Company
c/o The Bank of New York
P. O. Box 19266
Newark, New Jersey 07195
Attention: P&I Department
With a copy to:
Nationwide Life Insurance Company
One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
Attention: Investment Accounting
All notices and communications other than those in respect to payments to be
addressed as first provided above.
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 31-4156830
I-21
<PAGE> 62
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
NATIONWIDE INDEMNITY COMPANY Series A $5,000,000
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43215-2220
Attention: Corporate Fixed-Income Securities
Telefacsimile: (614) 249-4553
Confirmation: (614) 249-7882
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O Nationwide Indemnity Company
Attention: P&I Department
Notices
All notices of payment on or in respect of the Notes and written confirmation
of each such payment to:
Nationwide Indemnity Company
c/o The Bank of New York
P. O. Box 19266
Newark, New Jersey 07195
Attention: P&I Department
With a copy to:
Nationwide Indemnity Company
One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
Attention: Investment Accounting
All notices and communications other than those in respect to payments to be
addressed as first provided above.
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 31-1399201
I-22
<PAGE> 63
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
KEMPER INVESTORS LIFE INSURANCE COMPANY Series A $5,750,000
c/o Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606-5808
Attention: Private Placements
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, interest and/or Make-Whole Amount") to:
HARE & CO - Account No. 195279
at
The Bank of New York
ABA #021000018
BNF
IOC 566
Attention: Security Income Collection
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: HARE & CO
Taxpayer I.D. Number: 36-3050975
I-23
<PAGE> 64
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
FEDERAL KEMPER LIFE ASSURANCE COMPANY Series A $2,750,000
c/o Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606-5808
Attention: Private Placements
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, interest and/or Make-Whole Amount") to:
HARE & CO - Account No. 195269
at
The Bank of New York
ABA #021000018
BNF
IOC 566
Attention: Security Income Collection
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: HARE & CO
Taxpayer I.D. Number: 04-6046830
I-24
<PAGE> 65
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
FIDELITY LIFE ASSOCIATION Series A $1,000,000
c/o Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606-5808
Attention: Private Placements
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, interest and/or Make-Whole Amount") to:
HARE & CO - Account No. 195271
at
The Bank of New York
ABA #021000018
BNF
IOC 566
Attention: Security Income Collection
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: HARE & CO
Taxpayer I.D. Number: 36-1068685
I-25
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
ZURICH LIFE INSURANCE COMPANY OF AMERICA Series A $500,000
c/o Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606-5808
Attention: Private Placements
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, interest and/or Make-Whole Amount") to:
HARE & CO - Account No. 399609
at
The Bank of New York
ABA #021000018
BNF
IOC 566
Attention: Security Income Collection
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: HARE & CO
Taxpayer I.D. Number: 36-6071398
I-26
<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NAME AND ADDRESS SERIES OF OF NOTES
OF PURCHASER NOTES TO BE PURCHASED
<S> <C> <C>
BERKSHIRE LIFE INSURANCE COMPANY Series A $2,000,000
700 South Street
Pittsfield, Massachusetts 01201
Attention: Securities Department
Telefacsimile: (413) 442-9763
Telephone: (413) 499-4321
</TABLE>
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Allied Capital Corporation, 7.39% Senior Notes due 2004, PPN 01903# AD 4,
principal, premium or interest") to:
The Chase Manhattan Bank, N.A.
ABA #021000021
for credit to: Berkshire Life Insurance Company
Account Number 002-4-020877
Notices
All notices and communications, including notices with respect to payments and
written confirmation of each such payment, to be addressed as first provided
above.
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 04-1083480
I-27
<PAGE> 68
ALLIED CAPITAL CORPORATION
7.39% Senior Note, Series A
Due May 1, 2004
No. RA-
----------------, ------
$
ALLIED CAPITAL CORPORATION, a Maryland corporation (the "Company"), for
value received, hereby promises to pay to
or registered assigns
on the first day of May, 2004
the principal amount of
DOLLARS ($____________)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at
the rate of 7.39% per annum from the date hereof until maturity, payable
semiannually on the first day of each May and November in each year (commencing
on the first of such dates after the date hereof) and at maturity. The Company
agrees to pay interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and (to the extent
legally enforceable) on any overdue installment of interest, at the rate of
9.39% per annum after the due date, whether by acceleration or otherwise, until
paid. Both the principal hereof and interest hereon are payable at the
principal office of the Company in Washington, D.C. in coin or currency of the
United States of America which at the time of payment shall be legal tender for
the payment of public and private debts.
This Note is one of the 7.39% Senior Notes, Series A, due May 1, 2004
(the "Series A Notes") of the Company in the aggregate principal amount of
$112,000,000 issued or to be issued together with the $25,000,000 aggregate
principal amount of 7.49% Senior Notes, Series B, due May 1, 2006 (the "Series
B Notes" and together with the Series A Notes, the "Notes") of the Company,
under and pursuant to the terms and provisions of the Note Agreement, dated as
of May 1, 1999 (the "Note Agreement"), entered into by the Company with the
Purchasers named therein and this Series A Note and the holder hereof are
entitled with the holders of all other Notes outstanding under the Note
Agreement to all the benefits provided for thereby or referred to therein to
the extent provided in the Note Agreement. Reference is hereby made to the Note
Agreement for a statement of such rights and benefits.
EXHIBIT A-1
(to Note Agreement)
<PAGE> 69
This Series A Note and the other Series A Notes outstanding under the
Note Agreement may be declared due prior to their expressed maturity dates in
the events, on the terms and in the manner and amounts as provided in the Note
Agreement.
The Series A Notes are not subject to prepayment or redemption at the
option of the Company prior to their expressed maturity dates except on the
terms and conditions and in the amounts and with the premium, if any, set forth
in the Note Agreement.
This Series A Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Series A Note or its attorney duly authorized
in writing. Payment of or on account of principal, premium, if any, and
interest on this Series A Note shall be made only to or upon the order in
writing of the registered holder.
ALLIED CAPITAL CORPORATION
By
Name:__________________________________
Title:_________________________________
A-1-2
<PAGE> 70
ALLIED CAPITAL CORPORATION
7.49% Senior Note, Series B
Due May 1, 2006
No. RB-
----------------, ------
$
ALLIED CAPITAL CORPORATION, a Maryland corporation (the "Company"), for
value received, hereby promises to pay to
or registered assigns
on the first day of May, 2006
the principal amount of
DOLLARS ($____________)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at
the rate of 7.49% per annum from the date hereof until maturity, payable
semiannually on the first day of each May and November in each year (commencing
on the first of such dates after the date hereof) and at maturity. The Company
agrees to pay interest on overdue principal (including any overdue required or
optional prepayment of principal) and premium, if any, and (to the extent
legally enforceable) on any overdue installment of interest, at the rate of
9.49% per annum after the due date, whether by acceleration or otherwise, until
paid. Both the principal hereof and interest hereon are payable at the
principal office of the Company in Washington, D.C. in coin or currency of the
United States of America which at the time of payment shall be legal tender for
the payment of public and private debts.
This Note is one of the 7.49% Senior Notes, Series B, due May 1, 2006
(the "Series B Notes") of the Company in the aggregate principal amount of
$25,000,000 issued or to be issued together with the $112,000,000 aggregate
principal amount of 7.39% Senior Notes, Series A, due May 1, 2004 (the "Series
A Notes" and together with the Series B Notes, the "Notes") of the Company,
under and pursuant to the terms and provisions of the Note Agreement, dated as
of May 1, 1999 (the "Note Agreement"), entered into by the Company with the
Purchasers named therein and this Series B Note and the holder hereof are
entitled with the holders of all other Notes outstanding under the Note
Agreement to all the benefits provided for thereby or referred to therein to
the extent provided in the Note Agreement. Reference is hereby made to the Note
Agreement for a statement of such rights and benefits.
EXHIBIT A-2
(to Note Agreement)
<PAGE> 71
This Series B Note and the other Series B Notes outstanding under the
Note Agreement may be declared due prior to their expressed maturity dates all
in the events, on the terms and in the manner and amounts as provided in the
Note Agreement.
The Series B Notes are not subject to prepayment or redemption at the
option of the Company prior to their expressed maturity dates except on the
terms and conditions and in the amounts and with the premium, if any, set forth
in the Note Agreement.
This Series B Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Series B Note or its attorney duly authorized
in writing. Payment of or on account of principal, premium, if any, and
interest on this Series B Note shall be made only to or upon the order in
writing of the registered holder.
ALLIED CAPITAL CORPORATION
By
Name:______________________________________
Title:_____________________________________
A-2-2
<PAGE> 72
REPRESENTATIONS AND WARRANTIES
The Company represent and warrant to each Purchaser as follows:
1. Subsidiaries. Annex A attached hereto states the name of each of the
Company's Subsidiaries, its jurisdiction of incorporation and the percentage of
its Voting Stock owned by the Company and/or its Subsidiaries. Those
Subsidiaries listed in Section 1 of said Annex A constitute Consolidated
Subsidiaries. The Company and each Subsidiary has good and marketable title to
all of the shares it purports to own of the stock of each Subsidiary, free and
clear in each case of any Lien. All such shares have been duly issued and are
fully paid and non-assessable. The Company is a Business Development Company
under the Investment Company Act.
2. Corporate Organization and Authority. Except where failure to be
qualified or authorized would not have a Material Adverse Effect on the Company
and its Consolidated Subsidiaries, the Company and each Consolidated
Subsidiary,
(a) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on
its business as now conducted and as presently proposed to be
conducted; and
(c) is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction wherein the nature of the
business transacted by it or the nature of the property owned or leased
by it makes such licensing or qualification necessary.
3. Financial Statements. (a) The consolidated balance sheet at December
31, 1998 and 1997 and the consolidated statements of operations, changes in net
assets and cash flows of the Company for three years ended December 31, 1998,
each accompanied by a report thereon containing an opinion unqualified as to
scope limitations imposed by the Company and otherwise without qualification
except as therein noted, by Arthur Andersen LLP, have been prepared in
accordance with GAAP consistently applied except as therein noted, are correct
and complete and present fairly the financial position of the Company and its
Consolidated Subsidiaries as of such dates and the results of their operations
for such periods. The unaudited consolidated balance sheet of the Company and
its Consolidated Subsidiaries as of March 31, 1999, and the unaudited
statements of operations, changes in net assets and cash flows for the three
month period ended on said date prepared by the Company have been prepared in
accordance with GAAP consistently applied, are correct and complete and present
fairly the financial position of the Company and its Consolidated Subsidiaries
as of such date and the results of their operations and changes in their
financial position for such period.
(b) Since December 31, 1998, there has been no change in the condition,
financial or otherwise, of the Company and its Consolidated Subsidiaries as
shown on the consolidated
EXHIBIT B
(to Note Agreement)
<PAGE> 73
balance sheet as of such date except changes in the ordinary course of
business, none of which individually or in the aggregate has been materially
adverse.
4. Debt. Annex B attached hereto correctly describes all Debt
(including, without limitation, Debt held by the SBA) and Capitalized Leases of
the Company and its Consolidated Subsidiaries outstanding on March 31, 1999
since which date there has been no material change in the amounts, interest
rates, sinking funds, installment payments or maturities of the Indebtedness of
the Company or its Consolidated Subsidiaries.
5. Full Disclosure. The Company, through its agent, NationsBanc
Montgomery Securities LLP, has delivered to each of you a copy of a Private
Placement Memorandum, dated March, 1999 (the "Memorandum"), relating to the
transactions contemplated hereby. The Memorandum fairly describes, in all
material respects, the general nature of the business and principal properties
of the Company and its Consolidated Subsidiaries. Except as disclosed in this
Agreement, the Memorandum, the documents, certificates or other writings
delivered to you by or on behalf of the Company in connection with the
transactions contemplated hereby and the financial statements described in
paragraph 3 hereof, taken as a whole, do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading in light of the circumstances under which
they were made. Except as disclosed in the Memorandum or in one of the
documents, certificates or other writings identified therein, or in the
financial statements described in paragraph 3 hereof, since December 31, 1998,
there has been no change in the financial condition, operations, business,
properties or prospects of the Company or any Consolidated Subsidiary except
changes that individually or in the aggregate could not reasonably be expected
to materially affect adversely the properties, business, prospects, profits or
condition (financial or otherwise) of the Company and its Consolidated
Subsidiaries taken as a whole. There is no fact known to the Company that could
reasonably be expected to materially affect adversely the properties, business,
prospects, profits or condition (financial or otherwise) of the Company and its
Consolidated Subsidiaries that has not been set forth herein or in the
Memorandum or in the other documents, certificates and other writings delivered
to you by or on behalf of the Company specifically for use in connection with
the transactions contemplated hereby, except matters of an economic or
regulatory nature generally affecting businesses of the type engaged in by the
Company.
6. Pending Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Company, threatened against or affecting
the Company or any Consolidated Subsidiary in any court or before any
governmental authority or arbitration board or tribunal which involve the
possibility of materially and adversely affecting the properties, business,
profits or condition (financial or otherwise) of the Company and its
Consolidated Subsidiaries, taken as a whole.
7. Title to Properties. The Company and each Consolidated Subsidiary
has good and marketable title in fee simple (or its equivalent under applicable
law) to all material parcels of real property and has good title to all the
other material items of property it purports to own, including that reflected
in the most recent balance sheet referred to in paragraph 3 hereof, except as
sold or otherwise disposed of in the ordinary course of business and except for
Liens permitted by the Agreement. The Company and each Consolidated Subsidiary
has the right to, and does,
B-2
<PAGE> 74
enjoy peaceful and undisturbed possession under all leases to which it is a
party or under which it is a party. All such leases are valid, subsisting and
in full force and effect, none of such leases is in default and no event has
occurred and is continuing, and no condition exists which, after the passage of
time or giving of notice or both could become an event of default under any
such lease.
8. Patents and Trademarks. The Company and each Consolidated Subsidiary
owns or possesses all the patents, trademarks, trade names, service marks,
copyrights, licenses, permits, registrations, consents (governmental or other)
and rights with respect to the foregoing necessary for the present and planned
future conduct of its business, without any known conflict with the rights of
others.
9. Sale is Legal and Authorized. The sale of the Notes to the
Purchasers, compliance by the Company with all of the provisions of the Notes
and compliance by the Company with all of the provisions of the Agreement --
(a) are within the corporate powers of the Company;
(b) will not violate any provisions of any law or any order of
any court or governmental authority or agency and will not conflict
with or result in any breach of any of the terms, conditions or
provisions of, or constitute a default under the Articles of
Incorporation or By-laws of the Company or any indenture or other
agreement or instrument to which the Company is a party or by which it
may be bound or result in the imposition of any Liens or encumbrances
on any property of the Company; and
(c) have been duly authorized by proper corporate action on the
part of the Company (no action by the stockholders of the Company being
required by law, by the Articles of Incorporation or By-laws of the
Company or otherwise), the Agreement and the Notes have been executed
and delivered by the Company and upon payment of the purchase price of
the Notes by the Purchaser, the Notes and the Agreement constitute the
legal, valid and binding obligations, contracts and agreements of the
Company enforceable in accordance with their terms.
10. No Defaults. No Default or Event of Default has occurred and is
continuing. The Company is not in default in the payment of principal or
interest on any Debt and is not in default under any instrument or instruments
or agreements under and subject to which any Debt has been issued and no event
has occurred and is continuing under the provisions of any such instrument or
agreement which with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder.
11. Governmental Consent. No approval, consent or authorization of, or
registration, filing or declaration with or withholding of objection on the
part of, any regulatory body, state, Federal or local, is necessary in
connection with the execution and delivery by the Company of the Notes and the
Agreement or compliance by the Company with any of the provisions of the
Agreement or the Notes.
B-3
<PAGE> 75
12. Taxes. All tax returns required to be filed by the Company or any
Consolidated Subsidiary in any jurisdiction have, in fact, been filed, and all
taxes, assessments, fees and other governmental charges upon the Company or any
Consolidated Subsidiary or upon any of their respective properties, income or
franchises, which are shown to be due and payable in such returns have been
paid. For all taxable years ending on or before December 31, 1994, the Federal
income tax liability of the Company has been satisfied and either the period of
limitations on assessment of additional Federal income tax has expired or the
Company has entered into an agreement with the Internal Revenue Service closing
conclusively the total tax liability for the taxable year. The Company does not
know of any proposed additional tax assessment against it for which adequate
provision has not been made on its accounts, and no material controversy in
respect of additional Federal or state income taxes due since said date is
pending or to the knowledge of the Company threatened. The provisions for taxes
on the books of the Company and its Consolidated Subsidiaries are adequate for
all open years, and for its current fiscal period.
13. Use of Proceeds. The net proceeds from the sale of the Notes will be
used by the Company as follows: for general corporate purposes. None of the
transactions contemplated in the Agreement (including, without limitation
thereof, the use of proceeds from the issuance of the Notes) will violate or
result in a violation of Section 7 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any regulation issued pursuant thereto,
including, without limitation, Regulations U, T and X of the Board of Governors
of the Federal Reserve System, 12 C.F.R., Chapter II. The Company is not
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any "margin stock"
within the meaning of said Regulation U. None of the proceeds from the sale of
the Notes will be used to purchase, or refinance any borrowing the proceeds of
which were used to purchase, any such margin stock.
14. Private Offering. Neither the Company, directly or indirectly, nor
any agent on its behalf has offered or will offer the Notes or any similar
Security or has solicited or will solicit an offer to acquire the Notes or any
similar Security from or has otherwise approached or negotiated or will
approach or negotiate in respect of the Notes or any similar Security with any
Person other than such Purchaser and not more than 60 other institutional
investors, each of whom was offered a portion of the Notes at private sale for
investment. Neither the Company, directly or indirectly, nor any agent on its
behalf has offered or will offer the Notes or any similar Security or has
solicited or will solicit an offer to acquire the Notes or any similar Security
from any Person so as to bring the issuance and sale of the Notes within the
provisions of Section 5 of the Securities Act of 1933, as amended. When issued
the Notes will not be of the same class as Securities listed on a national
securities exchange registered under Section 6 of the Securities Exchange Act
of 1934, as amended, or quoted in a U.S. automated inter-dealer quotation
system, and will not be convertible or exchangeable into any such Securities.
15. ERISA. The consummation of the transactions provided for in the
Agreement and compliance by the Company with the provisions thereof and of the
Notes issued thereunder will not involve any non-exempt prohibited transaction
within the meaning of Section 406(a) of ERISA or Sections 4975(c)(1)(A)-(D) of
the Code. Neither the Company nor any ERISA Affiliate has heretofore, is
presently or presently intends to, contribute to, maintain or establish,
B-4
<PAGE> 76
any Plan subject to the minimum funding requirements of Section 302 of ERISA or
Section 412 of the Code. Neither the Company nor any ERISA Affiliate has any
contingent liability with respect to any post-retirement "welfare benefit plan"
(as such term is defined in ERISA) except as has been disclosed to the
Purchaser. The representation by the Company in the first sentence of this
SECTION 15 is made in reliance upon and subject to the accuracy of the
representation in SECTION 3.2 as to the sources of the funds used to pay the
purchase price of the Notes to be purchased by each Purchaser.
16. Compliance with Law. Neither the Company nor any Consolidated
Subsidiary (a) is in violation of any law, ordinance, franchise, governmental
rule or regulation to which it is subject; or (b) has failed to obtain any
license, permit, registration, consent, franchise or other governmental
authorization necessary to the ownership of its property or to the conduct of
its business, which violation or failure to obtain would materially adversely
affect the business, profits, properties or condition (financial or otherwise)
of the Company and its Consolidated Subsidiaries, taken as a whole, or impair
the ability of the Company to perform its obligations contained in the
Agreements or the Notes. Neither the Company nor any Consolidated Subsidiary is
in default with respect to any order of any court or governmental authority or
arbitration board or tribunal.
17. Compliance with Environmental Laws. The Company is not in violation
of any applicable Federal, state, or local laws, statutes, rules, regulations
or ordinances relating to public health, safety or the environment, including,
without limitation, relating to releases, discharges, emissions or disposals to
air, water, land or ground water, to the withdrawal or use of ground water, to
the use, handling or disposal of polychlorinated biphenyls (PCB's), asbestos or
urea formaldehyde, to the treatment, storage, disposal or management or
hazardous substances (including, without limitation, petroleum, crude oil or
any fraction thereof, or other hydrocarbons), pollutants or contaminants, or to
exposure to toxic, hazardous or other controlled, prohibited or regulated
substances, which violation could have a material adverse effect on the
business, profits, properties or condition (financial or otherwise) of the
Company and its Consolidated Subsidiaries, taken as a whole. The Company does
not know of any liability or class of liability of the Company or any
Subsidiary under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.), or the
Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section
6901 et seq.).
18. Foreign Assets Control Regulations, etc. Neither the sale of the
Notes by the Company hereunder nor its use of the proceeds thereof will violate
the Trading with the Enemy Act, as amended, or any of the foreign assets
control regulations of the United States Treasury Department (31 CFR, Subtitle
B, Chapter V, as amended) or any enabling legislation or executive order
relating thereto.
19. Year 2000 Compliance. The Company has (i) initiated a review and
assessment of all areas within its and each of its Subsidiaries' business and
operations (including those affected by suppliers and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Company or any of its Subsidiaries (or its suppliers
and vendors) may be unable to recognize and perform properly date-sensitive
functions
B-5
<PAGE> 77
involving certain dates prior to and any date after December 31, 1999), (ii)
developed a plan and timeline for addressing the Year 2000 Problem on a timely
basis, and (iii) to date, implemented that plan in accordance with that
timetable. The Company reasonably believes that all computer applications
(including those of its suppliers and vendors) that are material to its or any
of its Subsidiaries' business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after
January 1, 2000 (that is, be "Year 2000 Compliant"), except to the extent that
a failure to do so could not reasonably be expected to have Material Adverse
Effect.
B-6
<PAGE> 78
ALLIED CAPITAL CORPORATION
SUBSIDIARIES OF THE COMPANY
1. CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
JURISDICTION OF STOCK OWNED BY COMPANY
NAME OF SUBSIDIARY INCORPORATION AND EACH OTHER SUBSIDIARY
<S> <C> <C>
Allied Investment Corporation Maryland 100%
Allied Investment Holdings LLC Delaware 100%
Allied Capital SBLC Corporation Maryland 100%
Allied Capital SBLC Holdings LLC Delaware 100%
Allied Capital Holdings LLC Delaware 100%
PC Acquisition Corporation Maryland 100%
Allied Capital REIT, Inc. Maryland 100%
Allied Capital Property LLC Delaware 100%
Allied Capital Equity LLC Delaware 100%
9586 I-25 East Frontage Road, Delaware 100%
Longmont, CO 80504 LLC
8930 Stanford Boulevard LLC Delaware 100%
Allied Capital Beteiligungs Beratung Republic of Germany 100%
GmbH
</TABLE>
2. UNCONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
JURISDICTION OF STOCK OWNED BY COMPANY
NAME OF SUBSIDIARY INCORPORATION AND EACH OTHER SUBSIDIARY
<S> <C> <C>
Allied Capital CMT, Inc. Delaware 100%
Allied Capital Commercial Mortgage Delaware 100%
Trust 1998-1
Allied Capital Germany Fund LLC Delaware 100%
Allied Capital Syndication LLC Delaware 100%
</TABLE>
ANNEX A
(to Exhibit B)
<PAGE> 79
DESCRIPTION OF DEBT AND CAPITALIZED LEASES
<TABLE>
<CAPTION>
DEBT OF COMPANY
AND CONSOLIDATED OBLIGOR
SUBSIDIARIES BALANCE COMPANIES COLLATERAL
<S> <C> <C> <C>
Revolving line of credit $121,000,000 ACC None
Master loan and security 56,392,178 ACC Commercial Mortgage
agreement Loans
Unsecured long-term notes 180,000,000 ACC None
OPIC loan 5,700,000 ACC None
$363,092,178
============
</TABLE>
<TABLE>
<CAPTION>
DEBT OF
CONSOLIDATED
SUBSIDIARIES
<S> <C> <C> <C>
SBA debentures $47,650,000 AIC None
Mortgage loan 2,657,067 Allied Capital Office Building
--------- Equity LLC
$50,307,067
===========
</TABLE>
- ---------------------------------------
ACC -- the Company
AIC -- Allied Investment Corporation
ANNEX B
(to Exhibit B)
<PAGE> 80
DESCRIPTION OF SPECIAL COUNSEL'S CLOSING OPINION
The closing opinion of Chapman and Cutler, special counsel to the
Purchasers, called for by SECTION 4.1 of the Agreement, shall be dated the
Closing Date and addressed to the Purchasers, shall be satisfactory in form and
substance to the Purchasers and shall be to the effect that:
1. The Company is a corporation, validly existing and in good
standing under the laws of the State of Maryland and has the corporate
power and the corporate authority to execute and deliver the Agreement;
and the Company has the corporate power and the corporate authority to
issue the Notes.
2. The Agreement has been duly authorized by all necessary
corporate action on the part of the Company, has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance or similar
laws affecting creditors' rights generally, and general principles of
equity (regardless of whether the application of such principles is
considered in a proceeding in equity or at law).
3. Each Series of Notes has been duly authorized by all
necessary corporate action on the part of the Company, has been duly
executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent conveyance or
similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
4. The issuance, sale and delivery of the Notes under the
circumstances contemplated by the Agreement do not, under existing law,
require the registration of the Notes under the Securities Act of 1933,
as amended, or the qualification of an indenture under the Trust
Indenture Act of 1939, as amended.
The opinion of Chapman and Cutler shall also state that the opinion of
Sutherland Asbill & Brennan, LLP is satisfactory in scope and form to Chapman
and Cutler and that, in their opinion, the Purchaser is justified in relying
thereon.
In rendering the opinion set forth in paragraph 1 above, Chapman and
Cutler may rely solely upon an examination of the Articles of Incorporation
certified by, and a certificate of good standing of the Company from, the
Secretary of State of the State of Maryland and the By-laws of the Company.
With respect to matters of fact upon which such opinion is based,
Chapman and Cutler may rely on appropriate certificates of public officials and
officers of the Company.
EXHIBIT C
(to Note Agreement)
<PAGE> 81
DESCRIPTION OF CLOSING OPINION
OF COUNSEL FOR THE COMPANY
The closing opinion of Sutherland Asbill & Brennan, LLP, counsel for
the Company, which is called for by SECTION 4.1 of the Agreement, shall be
dated the Closing Date and addressed to the Purchasers purchasing Notes on the
Closing Date, shall be satisfactory in scope and form to the Purchasers and
shall be to the effect that:
1. The Company is a corporation, duly incorporated, validly
existing and in good standing under the laws of the State of Maryland
and has the full corporate power and the corporate authority to conduct
the activities in which it is now engaged and is duly licensed or
qualified and is in good standing as a foreign corporation in the
States of California and Illinois and the District of Columbia.
2. The Company has the corporate power and the corporate
authority to execute and perform the Agreement and to issue the Notes.
3. The Agreement has been duly authorized by all necessary
corporate action on the part of the Company, has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance or similar
laws affecting creditors' rights generally, and general principles of
equity (regardless of whether the application of such principles is
considered in a proceeding in equity or at law).
4. Each Series of Notes has been duly authorized by all
necessary corporate action on the part of the Company, has been duly
executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent conveyance or
similar laws affecting creditors' rights generally, and general
principles of equity (regardless of whether the application of such
principles is considered in a proceeding in equity or at law).
5. No other approval, consent or withholding of objection on
the part of, or filing, registration or qualification with, any
governmental body, Federal or state, is necessary in connection with
the execution and delivery of the Agreement or the Notes.
6. The issuance and sale of the Notes and the execution,
delivery and performance by the Company of the Agreement do not
conflict with or result in any breach of any of the provisions of or
constitute a default under or result in the creation or imposition of
any Lien upon any of the property of the Company pursuant to the
provisions of the Articles of Incorporation or By-laws of the Company
or any agreement or other instrument known to such counsel to which the
Company is a party or by which the Company may be bound.
EXHIBIT D
(to Note Agreement)
<PAGE> 82
7. The issuance, sale and delivery of the Notes under the
circumstances contemplated by the Agreement do not, under existing law,
require the registration of the Notes under the Securities Act of 1933,
as amended, or the qualification of an indenture under the Trust
Indenture Act of 1939, as amended.
In rendering the opinion set forth in paragraph 1 above, Sutherland
Asbill & Brennan, LLP may rely solely upon an examination of the Charter of the
Company certified by, and a certificate of good standing of the Company from,
the State Department of Assessments and Taxation of the State of Maryland and
the By-laws of the Company.
The opinion of Sutherland Asbill & Brennan, LLP shall cover such other
matters relating to the sale of the Notes as the Purchaser may reasonably
request. With respect to matters of fact on which such opinion is based, such
counsel shall be entitled to rely on appropriate certificates of public
officials and officers of the Company.
D-2
<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 IN FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<INVESTMENTS-AT-COST> 1,003,769
<INVESTMENTS-AT-VALUE> 1,006,926
<RECEIVABLES> 0
<ASSETS-OTHER> 44,639
<OTHER-ITEMS-ASSETS> 25,495
<TOTAL-ASSETS> 1,077,060
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 388,012
<OTHER-ITEMS-LIABILITIES> 140,257
<TOTAL-LIABILITIES> 528,269
<SENIOR-EQUITY> 6
<PAID-IN-CAPITAL-COMMON> 583,867
<SHARES-COMMON-STOCK> 59,442
<SHARES-COMMON-PRIOR> 55,919
<ACCUMULATED-NII-CURRENT> (6,060)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,073
<NET-ASSETS> 541,791
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 52,842
<OTHER-INCOME> 8,022
<EXPENSES-NET> 30,415
<NET-INVESTMENT-INCOME> 30,449
<REALIZED-GAINS-CURRENT> 11,562
<APPREC-INCREASE-CURRENT> (1,310)
<NET-CHANGE-FROM-OPS> 40,701
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 47,030
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,099
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 54
<NET-CHANGE-IN-ASSETS> 56,674
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 927
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,481
<INTEREST-EXPENSE> 14,407
<GROSS-EXPENSE> 30,415
<AVERAGE-NET-ASSETS> 513,454
<PER-SHARE-NAV-BEGIN> 8.68
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.18
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.11
<EXPENSE-RATIO> 0.12
</TABLE>
