<PAGE> 1
As filed with the Securities and Exchange Commission on March 26, 1999
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20006-3434
(202) 331-1112
(Address and Telephone Number, including Area Code, of Principal Executive
Offices)
WILLIAM L. WALTON, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ALLIED CAPITAL CORPORATION
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20006-3434
(Name and Address of Agent for Service)
Copies of information to:
<TABLE>
<S> <C>
STEVEN B. BOEHM
SUTHERLAND ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2415
</TABLE>
Approximate Date of Proposed Public Offering:
From time to time after the effective date of the Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT(1) PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.0001 par value per
share...................................... 5,785,785(2) $17.969 $103,964,770.70 $28,902.21(3)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) on the basis of the average of the high and low sales prices
of the common stock on March 19, 1999 as reported on the Nasdaq National
Market.
(2) In reliance upon Rule 429, this amount is in addition to the shares
previously registered by the Registrant under Form N-2 Registration No.
333-51899. All shares unsold under such prior registration statement (a
total of 214,215 as of March 26, 1999) are carried forward into this
registration statement.
(3) This amount does not include $1,631, which was previously paid in connection
with Registration No. 333-51899 and is credited as provided in Rule 429.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
ALLIED CAPITAL CORPORATION
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION OF
INFORMATION REQUIRED BY PARTS A AND B OF FORM N-2 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ITEM CAPTION OR LOCATION IN PROSPECTUS OR
NUMBER REGISTRATION STATEMENT ITEM AND HEADING STATEMENT OF ADDITIONAL INFORMATION
- ------ --------------------------------------- ------------------------------------
<C> <S> <C>
PART A: INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover................... Outside front cover page
2. Cover Pages; Other Offering
Information......................... Inside front cover page
3. Fee Table and Synopsis................ Prospectus Summary; Fees and Expenses;
Where You Can Find Additional
Information
4. Financial Highlights.................. Selected Consolidated Financial Data
5. Plan of Distribution.................. Plan of Distribution
6. Selling Shareholders.................. Not Applicable
7. Use of Proceeds....................... Use of Proceeds
8. General Description of the
Registrant.......................... Outside front cover; Prospectus
Summary; Risk Factors; The Company;
Business; Price Range of Common
Stock and Dividends; Senior
Securities; Portfolio Companies;
Financial Statements
9. Management............................ Management; Safekeeping, Transfer and
Dividend Paying Agent and Registrar
10. Capital Stock, Long-Term Debt, and
Other Securities.................... Price Range of Common Stock and
Dividends; Dividend Reinvestment
Plan; Taxation; Certain Government
Regulations; Description of Capital
Stock
11. Defaults and Arrears on Senior
Securities.......................... Not Applicable
12. Legal Proceedings..................... Business -- Legal Proceedings
13. Table of Contents of the Statement of
Additional Information.............. Table of Contents of the Statement of
Additional Information
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page............................ Outside front cover page of Statement
of Additional Information
15. Table of Contents..................... Outside front cover page of Statement
of Additional Information
16. General Information and History....... General Information and History
17. Investment Objective and Policies..... Investment Objectives and Policies
18. Management............................ Management
19. Control Persons and Principal
Shareholders........................ Control Persons and Principal Holders
of Securities
20. Investment Advisory and Other
Services............................ Investment Advisory Services;
Safekeeping, Transfer and Dividend
Paying Agent and Registrar;
Accounting Services
21. Brokerage Allocation and Other
Practices........................... Brokerage Allocation and Other
Practices
22. Tax Status............................ Tax Status
23. Financial Statements.................. Financial Statements in Prospectus
PART C: OTHER INFORMATION
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this registration statement.
<PAGE> 3
Allied Capital Logo
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED , 1999
6,000,000 SHARES
ALLIED CAPITAL CORPORATION
COMMON STOCK
------------------------
Please read this prospectus, and the accompanying prospectus supplement, if any,
before investing, and keep it for future reference. It contains important
information about the Company.
To learn more about the Company, you may want to look at the Statement of
Additional Information dated March , 1999 (known as the "SAI"). For a free
copy of the SAI, contact us at:
Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
1-888-818-5298
The Company has filed the SAI with the U.S. Securities and Exchange Commission
and has incorporated it by reference into this prospectus. The SAI's table of
contents appears on page 61 of this prospectus.
The Commission maintains an Internet website (http://www.sec.gov) that contains
the SAI, material incorporated by reference and other information about the
Company.
We may offer, from time to time, up to 6,000,000 shares of common stock, par
value $0.0001 per share, on terms to be determined at the time of offering. The
shares may be offered at prices and on terms to be described in one or more
supplements to this prospectus, provided, however, that the offering price per
share, less any underwriting commissions or discounts, must equal or exceed the
net asset value per share of our common stock.
We are an internally managed closed-end management investment company that has
elected to be regulated as a business development company under the Investment
Company Act of 1940, as amended.
Our investment objective is to achieve current income and capital gains. We seek
to achieve our investment objective by investing primarily in private small to
medium-sized growing businesses in a variety of industries and in diverse
geographic locations, primarily in the United States. No assurances can be given
that we will continue to achieve our objective.
Our common stock is traded on the Nasdaq National Market under the symbol
"ALLC." As of March , 1999, the last reported sales price for the common stock
was $ .
YOU SHOULD REVIEW THE INFORMATION INCLUDING THE RISK OF LEVERAGE, SET FORTH
UNDER "RISK FACTORS" ON PAGE 7 OF THIS PROSPECTUS BEFORE INVESTING IN COMMON
STOCK OF THE COMPANY.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
March , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE> 4
WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING SUPPLEMENT TO
THIS PROSPECTUS. YOU MUST NOT RELY UPON ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT AS IF WE HAD AUTHORIZED IT. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH THEY
RELATE, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF THE
DATES ON THEIR COVERS. WHEN WE DELIVER THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT, OR MAKE A SALE PURSUANT TO THIS PROSPECTUS, WE ARE NOT IMPLYING THAT
THE INFORMATION IS CURRENT AS OF THE DATE OF THE DELIVERY OR THE SALE.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary.......................................... 1
Selected Consolidated Financial Data........................ 4
Risk Factors................................................ 7
The Company................................................. 11
Use of Proceeds............................................. 11
Price Range of Common Stock and Dividends................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Senior Securities........................................... 26
Business.................................................... 30
Portfolio Companies......................................... 40
Determination of Net Asset Value............................ 45
Management.................................................. 45
Taxation.................................................... 51
Certain Government Regulations.............................. 53
Dividend Reinvestment Plan.................................. 55
Description of Capital Stock................................ 56
Plan of Distribution........................................ 59
Legal Matters............................................... 60
Safekeeping, Transfer and Dividend Paying Agent and
Registrar................................................. 61
Independent Public Accountants.............................. 61
Table of Contents of Statement of Additional Information.... 61
Index to Financial Statements............................... 62
</TABLE>
------------------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND
THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS OR SIMILAR WORDS OR PHRASES. THE
MATTERS DESCRIBED IN "RISK FACTORS" AND CERTAIN OTHER FACTORS NOTED THROUGHOUT
THIS PROSPECTUS, AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, AND IN ANY
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS, AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, IS A PART, CONSTITUTE CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
(i)
<PAGE> 5
PROSPECTUS SUMMARY
The following summary contains basic information about this offering. It
likely does not contain all the information that is important to an investor.
For a more complete understanding of this offering, we encourage you to read
this entire document and the documents to which we have referred.
Our current business and investment portfolio resulted from the merger of
five affiliated companies on December 31, 1997. The companies that merged were
Allied Capital Corporation (old), Allied Capital Corporation II, Allied Capital
Advisers, Inc., Allied Capital Commercial Corporation and Allied Capital Lending
Corporation. The five companies are referred to as the predecessor companies.
All information in this prospectus, unless otherwise indicated, has been
presented as if the predecessor companies had merged as of the beginning of the
earliest period presented. In this prospectus or any accompanying prospectus
supplement, unless otherwise indicated, the "Company", "ACC", "we", "us" or
"our" refer to the post-merger Allied Capital Corporation and its subsidiaries.
THE COMPANY (Page 11)
We are a lender to and investor in private small and medium-sized
businesses. We have been lending to private growing businesses for 40 years and
have financed thousands of borrowers nationwide in a variety of industries. Our
lending operations are conducted in three primary areas:
- mezzanine finance,
- commercial real estate finance, and
- Small Business Administration 7(a) lending.
Our principal loan products include:
- subordinated loans with equity features,
- commercial mortgage loans, and
- SBA 7(a) guaranteed loans.
We are a value-added full-service lender, and we source loans and
investments through our numerous relationships with:
- regional and boutique investment banks,
- mezzanine and private equity investors, and
- other intermediaries, including professional services firms.
In order to increase our sourcing and origination activities, we have offices in
Chicago, San Francisco, Detroit, Atlanta, and Philadelphia. We centralize our
credit approval function and service our loans through an experienced staff of
professionals at our headquarters in Washington, DC. Our common stock is quoted
on the Nasdaq National Market under the symbol "ALLC."
We have an advantageous structure that allows for the "pass-through" of
income to our shareholders without the imposition of a corporate level of
taxation. See "Taxation."
We are an internally managed closed-end management investment company that
has elected to be regulated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended ("1940 Act"). Our investment
objective is to achieve current income and capital gains. We seek to achieve our
investment objective by investing in growing businesses in a variety of
industries and in diverse geographic locations, primarily in the United States.
THE OFFERING (Page 59)
We may offer, from time to time, up to 6,000,000 shares of common stock,
par value $0.0001 per share, on terms to be determined at the time of offering.
Shares may be offered at prices and on terms
1
<PAGE> 6
described in one or more supplements to this prospectus, provided, however, that
the offering price per share, less any underwriting commissions or discounts,
must equal or exceed the net asset value per share of our common stock.
We may offer shares directly to one or more purchasers, through agents we
designate, or to or through underwriters or dealers. If any agents or
underwriters are involved in the sale of shares, their names, and any applicable
purchase price, fee, commission or discount, will be described in an
accompanying prospectus supplement. We will not sell shares without delivering a
prospectus supplement describing the method and terms of the offering of such
shares.
USE OF PROCEEDS (Page 11)
Unless otherwise specified in the prospectus supplement accompanying this
prospectus, we intend to use the net proceeds from selling shares for general
corporate purposes, which may include investment in small to medium-sized,
private growth companies in accordance with our investment objective, purchase
of commercial mortgage-backed securities, repayment of indebtedness,
acquisitions and other general corporate purposes.
DIVIDENDS (Page 12)
We pay quarterly dividends to shareholders. The amount of our quarterly
dividends is determined by the board of directors and is based upon our estimate
of annual taxable income.
DIVIDEND REINVESTMENT PLAN (Page 55)
We have adopted an "opt out" dividend reinvestment plan ("DRIP plan").
Under the DRIP plan, if your shares are registered in your name, your dividends
will be automatically reinvested in additional shares of common stock unless you
"opt out" of the DRIP plan.
PRINCIPAL RISK FACTORS (Page 7)
Investment in shares of common stock involves certain risks relating to our
structure and our investment objective that you should consider before
purchasing shares.
As a BDC, our consolidated portfolio includes securities primarily issued
by privately held companies. These investments may involve a high degree of
business and financial risk, and they are generally illiquid. A large number of
entities and individuals compete for the same kind of investment opportunities
as we do. We borrow funds to make investments in and loans to small and
medium-sized businesses. As a result, we are exposed to the risks of leverage,
which may be considered a speculative investment technique. In addition, the
loss of pass-through tax treatment could have a material adverse effect on our
total return, if any.
CERTAIN ANTI-TAKEOVER PROVISIONS (Page 57)
Our charter and bylaws, as well as certain statutory and regulatory
requirements, contain certain provisions that may have the effect of
discouraging a third party from making an acquisition proposal for the Company.
These anti-takeover provisions may inhibit a change in control in circumstances
that could give the holders of common stock the opportunity to realize a premium
over the market price for the common stock.
2
<PAGE> 7
FEES AND EXPENSES
This table describes the various costs and expenses that an investor in the
Company will bear directly or indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)....... --%
Dividend reinvestment plan fees(2)...................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF CONSOLIDATED NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)(3)
Operating expenses(4)................................... 4.9%
Interest payments on borrowed funds(5).................. 4.2%
-----
Total annual expenses(6)........................... 9.1%
=====
</TABLE>
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(1) In the event that shares to which this prospectus relates are sold to or
through underwriters, a corresponding prospectus supplement will disclose
the applicable sales load.
(2) The expenses of the Company's DRIP plan are included in "Operating
expenses." The Company has no cash purchase plan. The participants in the
DRIP plan will bear a pro rata share of brokerage commissions incurred with
respect to open market purchases, if any. See "Dividend Reinvestment Plan."
(3) "Consolidated net assets attributable to common shares" equals net assets
(i.e., total assets less total liabilities and preferred stock) at December
31, 1998.
(4) "Operating expenses" represent all operating expenses of the Company for the
year ended December 31, 1998 excluding interest on indebtedness. Operating
expenses exclude the formula and cut-off awards. See
"Management -- Compensation Plans."
(5) The "Interest payments on borrowed funds" percentage is based on interest
payments for the year ended December 31, 1998 divided by consolidated net
assets attributable to common shares. The Company had outstanding borrowings
of $334.4 million at December 31, 1998. See "Risk Factors."
(6) "Total annual expenses" as a percentage of consolidated net assets
attributable to common shares are higher than the total annual expenses
percentage would be for a company that is not leveraged. The Company borrows
money to leverage its net assets and increase its total assets. The
Securities and Exchange Commission requires that "Total annual expenses"
percentage be calculated as a percentage of net assets, rather than the
total assets, including assets that have been funded with borrowed monies.
If the "Total annual expenses" percentage were calculated instead as a
percentage of consolidated total assets, "Total annual expenses" for the
Company would be 5.2% of consolidated total assets.
EXAMPLE
The following example, required by the Commission, demonstrates the
projected dollar amount of total cumulative expenses that would be incurred over
various periods with respect to a hypothetical investment in the Company. In
calculating the following expense amounts, we assumed we would have no
additional leverage and that our operating expenses would remain at the levels
set forth in the table above. In the event that shares to which this prospectus
relates are sold to or through underwriters, a corresponding prospectus
supplement will restate this example to reflect the applicable sales load.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5.0% annual return........ $91 $273 $454 $904
</TABLE>
Although the example assumes (as required by the Commission) a 5.0% annual
return, our performance will vary and may result in a return of greater or less
than 5.0%. In addition, while the example assumes reinvestment of all dividends
and distributions at net asset value, participants in the DRIP plan may receive
shares that we issue at or above net asset value or are purchased by the
administrator of the DRIP plan, at the market price in effect at the time, which
may be higher than, at, or below net asset value. See "Dividend Reinvestment
Plan."
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND
THE ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE> 8
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the consolidated financial information below with the
Consolidated Financial Statements and Notes included in this prospectus.
Financial information for the years ended December 31, 1998, 1997, 1996 and 1995
has been derived from audited financial statements. Financial information for
the year ended December 31, 1994 has been derived from the audited financial
statements of the individual predecessor companies. The selected financial data
reflects the operations of the Company with all periods restated as if the
predecessor companies had merged as of the beginning of the earliest period
presented. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" ON PAGE 13 FOR MORE INFORMATION.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest and related portfolio income:
Interest...................................... $79,921 $86,882 $77,541 $61,550 $47,065
Net premiums from loan dispositions........... 5,949 7,277 4,241 2,796 2,380
Net gain on securitization of commercial
mortgage loans.............................. 14,812 -- -- -- --
Investment advisory fees and other income..... 6,056 3,246 3,155 4,471 2,710
------- ------- ------- ------- -------
Total interest and related portfolio
income................................. 106,738 97,405 84,937 68,817 52,155
------- ------- ------- ------- -------
Expenses:
Interest on indebtedness...................... 20,694 26,952 20,298 12,355 7,486
Salaries and employee benefits................ 11,829 10,258 8,774 8,031 6,929
General and administrative.................... 11,921 8,970 8,289 6,888 7,170
Merger........................................ -- 5,159 -- -- --
------- ------- ------- ------- -------
Total operating expenses................. 44,444 51,339 37,361 27,274 21,585
Formula and cut-off awards(1)................. 7,049 -- -- -- --
------- ------- ------- ------- -------
Portfolio income before net realized and
unrealized gains............................ 55,245 46,066 47,576 41,543 30,570
------- ------- ------- ------- -------
Net realized and unrealized gains:
Net realized gains............................ 22,541 10,704 19,155 12,000 6,236
Net unrealized gains (losses)................. 1,079 7,209 (7,412) 9,266 (2,244)
------- ------- ------- ------- -------
Total net realized and unrealized
gains.................................. 23,620 17,913 11,743 21,266 3,992
------- ------- ------- ------- -------
Income before minority interests and income
taxes........................................... 78,865 63,979 59,319 62,809 34,562
Minority interests................................ -- 1,231 2,427 546 --
Income tax expense................................ 787 1,444 1,945 1,784 672
------- ------- ------- ------- -------
Net increase in net assets resulting from
operations...................................... $78,078 $61,304 $54,947 $60,479 $33,890
======= ======= ======= ======= =======
PER SHARE:
Basic earnings per common share................... $ 1.50 $ 1.24 $ 1.19 $ 1.38 $ 0.80
Diluted earnings per common share................. $ 1.50 $ 1.24 $ 1.17 $ 1.37 $ 0.79
Total tax distributions per common share(2)....... $ 1.43 $ 1.71 $ 1.23 $ 1.09 $ 0.94
Weighted average basic common shares
outstanding(3).................................. 51,941 49,218 46,172 43,697 42,463
Weighted average diluted common shares
outstanding(3).................................. 51,974 49,251 46,733 44,010 42,737
</TABLE>
(footnotes appear on next page)
4
<PAGE> 9
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
BALANCE SHEET DATA: -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Portfolio at value...................... $800,274 $697,021 $607,368 $528,483 $443,316
Portfolio at cost....................... 796,389 690,720 613,276 526,979 451,078
Total assets............................ 856,079 807,775 713,360 605,434 501,817
Total debt outstanding(4)............... 334,350 347,663 274,997 200,339 130,236
Preferred stock issued to SBA(4)........ 7,000 7,000 7,000 7,000 7,000
Shareholders' equity.................... 485,117 420,060 402,134 367,192 344,043
Shareholders' equity per common
share................................. $ 8.68 $ 8.07 $ 8.34 $ 8.26 $ 8.02
Common shares outstanding at period
end(3)................................ 55,919 52,047 48,238 44,479 42,890
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
OTHER DATA: ---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Loan originations...................... $ 524,530 $364,942 $283,295 $216,175 $215,843
Loan repayments........................ 138,081 233,005 179,292 111,731 54,097
Loan sales(5).......................... 81,013 53,912 27,715 29,726 30,160
Total assets managed at period end..... 1,143,548 935,720 822,450 702,567 583,817
Realized gains......................... 25,757 15,804 30,417 16,679 9,144
Realized losses........................ (3,216) (5,100) (11,262) (4,679) (2,908)
</TABLE>
- -------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Comparison of Fiscal Years Ended
December 31, 1998, 1997 and 1996."
(2) Distributions are based on taxable income, which differs from income for
financial reporting purposes. In 1997, Allied Capital Corporation (old)
distributed $0.34 per common share representing the 844,914 shares of Allied
Capital Lending Corporation distributed in conjunction with the merger. The
distribution resulted in a partial return of capital. Also in conjunction
with the merger, the Company distributed $0.17 per common share representing
the undistributed earnings of the predecessor companies at December 31,
1997.
(3) Excludes 810,456 shares held in the deferred compensation trust at or for
the period ended December 31, 1998.
(4) See "Senior Securities" on page 26 for more information regarding the
Company's level of indebtedness.
(5) Excludes loans sold through securitization in January 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Comparison of Fiscal Years Ended
December 31, 1998, 1997 and 1996."
5
<PAGE> 10
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
QTR 4 QTR 3 QTR 2 QTR 1 QTR 4 QTR 3 QTR 2 QTR 1
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA:
Total interest and
related portfolio
income................. $25,974 $22,546 $21,321 $36,897 $25,984 $25,111 $24,911 $21,399
Portfolio income before
realized and unrealized
gains.................. 11,776 9,401 9,148 24,920 7,910 12,093 14,095 11,968
Net increase in net
assets resulting from
operations............. 16,631 14,906 14,476 32,065 13,216 17,146 18,296 12,646
Basic earnings per common
share.................. 0.31 0.29 0.28 0.62 0.25 0.35 .37 0.27
Diluted earnings per
common share........... 0.31 0.29 0.28 0.61 0.25 0.35 0.37 0.27
Net asset value per
common share(1)........ 8.68 8.13 8.14 8.23 8.07 8.42 8.50 8.39
Dividends declared per
common share........... 0.38 0.35 0.35 0.35 0.80(2) 0.31 0.30 0.30
</TABLE>
- -------------------------
(1) We determine net asset value per common share as of the last day of the
quarter. The net asset values shown are based on outstanding shares at the
end of each period, excluding common stock held in the Company's deferred
compensation trust.
(2) During the fourth quarter of 1997, the Company declared a quarterly dividend
of $0.61 per common share which included $0.34 per common share representing
the distribution of shares of Allied Capital Lending Corporation previously
held in Allied Capital Corporation's (old) portfolio. The Company also
declared an annual extra distribution of $0.02 per common share, and a
special distribution of previously undistributed earnings of $0.17 per
common share in conjunction with the merger.
WHERE YOU CAN FIND
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a registration statement and related exhibits under the Securities
Act of 1933, as amended (the "Securities Act"). The registration statement
contains additional information about us and the registered securities being
offered by this prospectus. You may inspect the registration statement and the
exhibits without charge at the Securities and Exchange Commission at 450 Fifth
Street, NW, Washington, DC 20549. You may obtain copies from the Commission at
prescribed rates.
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You can inspect, without charge, at the public
reference facilities of the Commission at 450 Fifth Street, NW, Washington, DC
20549; Seven World Trade Center, New York, New York 10048; and 500 West Madison
Street, Chicago, Illinois 60661. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other information
regarding public companies, including our Company. You can also obtain copies of
these materials from the public reference section of the Commission at 450 Fifth
Street, NW, Washington, DC 20549, at prescribed rates. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
room. You can also inspect reports and other information we file at the offices
of the Nasdaq Stock Market, 1735 K Street, NW, Washington, DC 20006.
6
<PAGE> 11
RISK FACTORS
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. In addition to the information contained in this prospectus, you
should consider carefully the following information before making investments in
the shares.
LENDING TO SMALL, PRIVATELY OWNED COMPANIES INVOLVES A HIGH DEGREE OF RISK
Our portfolio consists primarily of loans to small, privately owned
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 businesses 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 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.
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 small 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 our loan portfolio.
Without a readily ascertainable market value, the estimated value of our
portfolio of loans
7
<PAGE> 12
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 net asset 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, magnifies the potential for gain and
loss on amounts invested and, therefore, increases 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 December 31, 1998, the Company's debt as a percentage of total
liabilities and shareholders' equity was 39%. 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 December 31, 1998, the Company had $334.4 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 a least 2.9% on our portfolio.
Illustration. The following table illustrates the effect of leverage on
returns from an investment in our common stock assuming various annual returns,
net of expenses. The calculations in the table below are hypothetical and actual
returns may be greater than those appearing below.
ASSUMED RETURN ON THE COMPANY'S PORTFOLIO
(NET OF EXPENSES)
<TABLE>
<CAPTION>
-20% -10% -5% 0% 5% 10% 20%
------ ------ ------ ----- --- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Corresponding return to shareholder(1).... -40.5% -22.9% -14.0% -5.2% 3.6% 12.4% 30.1%
</TABLE>
- -------------------------
(1) The calculation assumes (i) $856.1 million in total assets, (ii) an average
cost of funds of 7.5%, (iii) $334.4 million in debt outstanding and (iv)
$485.1 million of shareholders' equity.
8
<PAGE> 13
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.
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL CAPITAL
We will continue to need capital to fund loans. 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 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
9
<PAGE> 14
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 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.
10
<PAGE> 15
THE COMPANY
Our company is principally engaged in lending to and investing in private
small and medium-sized businesses. The Company is organized in the state of
Maryland and is an internally managed closed-end management investment company
that has elected to be regulated as a business development company (as defined
above, a "BDC") under the 1940 Act.
We have two wholly owned subsidiaries that have also elected to be
regulated as BDCs. Allied Investment Corporation ("Allied Investment") is
licensed by the Small Business Administration ("SBA") as a Small Business
Investment Company ("SBIC"). Allied Capital SBLC Corporation ("Allied SBLC") is
licensed by the SBA as a Small Business Lending Company ("SBLC") and is a
participant in the SBA Section 7(a) Guaranteed Loan Program. In addition, we
have a real estate investment trust subsidiary, Allied Capital REIT, Inc.
("Allied REIT").
Our executive offices are located at 1919 Pennsylvania Avenue, NW,
Washington, DC 20006 and our telephone number is (202) 331-1112. In addition, we
maintain offices in Chicago, San Francisco, Detroit, Atlanta, Philadelphia and
Frankfurt, Germany.
USE OF PROCEEDS
Unless otherwise specified in the prospectus supplement accompanying this
prospectus, we intend to use the net proceeds from selling shares for general
corporate purposes, which may include investment in small to medium-sized,
private growth companies in accordance with our investment objective, purchase
of commercial mortgage-backed securities, repayment of indebtedness,
acquisitions and other general corporate purposes.
We anticipate that substantially all of the net proceeds of any offering of
shares will be used, as described above, within six months, and in any event
within two years. Pending investment, we intend to invest the net proceeds of
any offering of shares in time deposits, income-producing securities with
maturities of three months or less that are issued or guaranteed by the federal
government or an agency of the federal government, and high quality debt
securities maturing in one year or less from the time of investment.
11
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock is traded on the Nasdaq National Market under the symbol
"ALLC." The following table lists the high and low closing sales prices for the
Company's stock in 1998 and 1999 and for Allied Capital Lending Corporation's
stock, the predecessor company to the Company, in 1997. The stock quotations are
interdealer quotations and do not include markups, markdowns or commissions. On
March , 1999, the last reported closing sale price of the common stock was
$ per share.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
------------------
HIGH LOW
------- -------
<S> <C> <C>
ALLIED CAPITAL LENDING CORPORATION
YEAR ENDED DECEMBER 31, 1997
First Quarter............................. $17.000 $14.875
Second Quarter............................ 16.625 13.875
Third Quarter............................. 16.750 14.500
Fourth Quarter............................ 22.750 15.750
ALLIED CAPITAL CORPORATION
YEAR ENDED DECEMBER 31, 1998
First Quarter............................. $27.688 $21.000
Second Quarter............................ 29.000 21.750
Third Quarter............................. 24.813 14.938
Fourth Quarter............................ 18.875 12.500
YEAR ENDING DECEMBER 31, 1999
First Quarter (through March ,
1999).................................. $ $
</TABLE>
Allied Capital Lending Corporation's common stock historically traded at
prices in excess of its net asset value. Our common stock continues to trade in
excess of net asset value. There can be no assurance, however, that we will
maintain a premium to net asset value.
We pay quarterly dividends to stockholders. The amount of our quarterly
dividends is determined by the board of directors and is based upon an estimate
of annual taxable income. See "Taxation." We cannot assure that we will achieve
investment results or maintain a tax status that will permit any particular
level of dividend payment.
Our credit facilities limit our ability to declare dividends if we default
under certain provisions.
We have adopted an "opt out" dividend reinvestment plan ("DRIP plan").
Under the DRIP plan, if your shares are registered in your name, your dividends
will be automatically reinvested in additional shares of common stock unless you
"opt out" of the DRIP plan.
12
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction
with the Selected Consolidated Financial Data and the Company's 1998
Consolidated Financial Statements and Notes thereto.
OVERVIEW
The Company's primary business is investing in and lending to private small
and medium-sized businesses in three areas: mezzanine finance, commercial real
estate finance, and 7(a) lending.
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, loan
originations, and the Company's ability to secure financing for its investment
activities.
The total portfolio at value was $800.3 million, $697.0 million and $607.4
million at December 31, 1998, 1997 and 1996, respectively. During the year ended
December 31, 1998, the Company originated investments totaling $524.5 million
and received repayments and sold loans totaling $219.1 million. In addition, the
Company's portfolio was reduced by approximately $223 million as a result of an
asset securitization of commercial mortgage loans in January 1998. As a result,
the total portfolio increased by 15% from December 31, 1997 to December 31,
1998. The portfolio increased approximately 15% for each of the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION 1996 1997 1998
--------------------- ---- ---- ----
<S> <C> <C> <C>
Mezzanine Investments............................. 27% 25% 46%
Commercial Mortgage Loans......................... 52% 56% 27%
Commercial Mortgage-Backed Securities............. -- -- 13%
SBA 7(a) Loans.................................... 6% 5% 7%
Cash and Other Assets............................. 15% 14% 7%
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
MEZZANINE
Mezzanine loans, debt securities and equity interests were $388.6 million,
$207.7 million and $191.2 million at December 31, 1998, 1997 and 1996,
respectively. The effective yield on the mezzanine loans and debt securities was
14.6%, 12.6%, and 13.2% at December 31, 1998, 1997 and 1996, respectively.
Mezzanine loan originations and purchases were $236.0 million, $66.7 million and
$66.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Mezzanine repayments and sales were $41.3 million for the year
ended December 31, 1998. During the two years ended December 31, 1997, mezzanine
repayments and sales of equity interests were approximately equal to
originations, which kept the level of the portfolio relatively constant.
13
<PAGE> 18
During 1998, excluding certain high yield debt purchases, the Company made
19 new mezzanine investments with an average investment size of $10.6 million.
On average, these new portfolio companies had revenues of $81.3 million, cash
flows of $9.4 million, and had been in business for approximately 22 years.
During 1998, the Company also made two discounted purchases of high yield
debt investments for its mezzanine portfolio with an aggregate purchase price of
$22.2 million. This discounted debt is estimated to have an average effective
yield of 15%.
Prior to the Merger, mezzanine loan originations were made through Allied
Capital Corporation and Allied Capital Corporation II, which originated small
($2 million -- $10 million) mezzanine loans in order to maintain appropriate
portfolio diversity for regulated investment company purposes. Pursuant to the
terms of a Securities and Exchange Commission exemptive order, Allied Capital
Corporation and Allied Capital Corporation II loan originations were made
pursuant to a co-investment formula, based on relative total assets, which
required identical terms for each loan originated. As a result, Allied Capital
Corporation and Allied Capital Corporation II were unable to originate larger
loans or price loans based on their own capital structures. These inefficiencies
limited the ability of Allied Capital Corporation and Allied Capital Corporation
II to compete effectively in the marketplace.
Subsequent to the Merger, the Company's larger overall portfolio size
enables it to compete for larger mezzanine loans while maintaining adequate
diversity within the portfolio. As a result, the Company has been and will
continue to actively pursue mezzanine loans in sizes ranging from $5 million to
$25 million. The Company also is able to price its mezzanine loans using a
single capital structure, which enables the Company to price its loans more
competitively. The Company believes that its post-Merger strategies have been
successful in increasing mezzanine loan origination activity during 1998 and
will enable the Company to increase mezzanine loan originations in 1999.
COMMERCIAL MORTGAGE LOANS
Commercial mortgage loans were $233.2 million, $447.2 million and $373.7
million at December 31, 1998, 1997 and 1996, respectively. The commercial
mortgage loan portfolio declined by 48% during the year ended December 31, 1998
due to the sale through securitization of approximately $295 million in
commercial mortgage loans, and the sale of whole loans to third parties
aggregating approximately $44.0 million. For the year ended December 31, 1998,
the Company originated and purchased new commercial mortgage loans of $198.6
million and received repayments of $96.7 million. The commercial mortgage loan
portfolio increased by 20% and 35% for the years ended December 31, 1997 and
1996, respectively. Commercial mortgage loan originations and purchases were
$249.0 million and $176.3 million, and repayments were $154.5 million and $87.5
million for 1997 and 1996, respectively.
The weighted average current stated interest rate on the commercial
mortgage loan portfolio at December 31, 1998, 1997 and 1996 was 9.7%, 9.6% and
10.3%, respectively. The weighted average yield on the commercial mortgage loan
portfolio was 10.4%, 11.4% and 13.4% at December 31, 1998, 1997 and 1996,
respectively. 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.
The Company generally prices its commercial mortgage loans based on a fixed
spread over comparable U.S. Treasury rates given the term of the loan. During
1997 and 1998,
14
<PAGE> 19
interest rates on U.S. Treasury bonds declined significantly, and the spreads
charged by commercial real estate lenders in the marketplace narrowed. As a
result, the Company began to reevaluate its strategy regarding commercial real
estate lending as pricing for this type of loan became increasingly inexpensive
in the marketplace. Early in the third quarter of 1998, the Company
significantly reduced its commercial mortgage loan origination activity for its
own portfolio, and began exploring opportunities to originate commercial real
estate loans for sale to third parties. During the fourth quarter of 1998, the
Company sold $39.4 million in commercial mortgage loans to other lenders
realizing net premiums of approximately 2.1%. Additional loan sales from the
Company's existing commercial real estate portfolio are expected to continue.
The Company anticipates that it will continue to originate and sell commercial
real estate loans that do not meet its portfolio yield requirements.
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial Mortgage-Backed Securities (CMBS) were $113.7 million at
December 31, 1998. The portfolio consists of $67.2 million of Subordinated CMBS,
purchased on December 30, 1998 for $32.2 million, and $81.5 million of Residual
CMBS retained from a $295 million asset securitization the Company completed on
January 30, 1998 (discussed below). As of December 31, 1998, the estimated yield
to maturity on the Subordinated CMBS and the Residual CMBS was 15.0% and 9.7%,
respectively. As of December 31, 1998, the weighted average yield on the entire
CMBS portfolio was 11.2%.
The Company believes that it took advantage of a unique market opportunity
to acquire Subordinated CMBS at a significant discount at the end of the fourth
quarter. Recent turmoil in the CMBS market created a lack of liquidity for the
traditional buyers of the non-investment grade bonds. The Company plans to
continue to opportunistically purchase bonds at significant discounts throughout
the first quarter of 1999. The discounted purchases of the Subordinated CMBS
have had, and will continue to have, the full scrutiny of the Company's
stringent underwriting processes. The Company reunderwrites 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.
SBA 7(A) LOANS
The SBA 7(a) loan portfolio was $56.3 million, $40.7 million and $42.1
million at December 31, 1998, 1997 and 1996, respectively. SBA 7(a) loan
originations were $57.7 million, $49.2 million and $40.8 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Sales of the guaranteed
portions of SBA 7(a) loans were $37.0 million, $43.4 million and $25.0 million
for the years ended December 31, 1998, 1997 and 1996, respectively. 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.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Net increase in net assets resulting from operations (NIA) was $78.1
million, or $1.50 per share, $61.3 million, or $1.24 per share, and $54.9
million, or $1.17 per share, for the years ended December 31, 1998, 1997 and
1996, 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. NIA, as a percentage of
15
<PAGE> 20
average shareholders' equity, which is also known as return on equity, was 17%,
15% and 14% for 1998, 1997 and 1996, respectively. NIA, excluding the formula
and cut-off awards in 1998, as a percentage of average shareholders' equity for
1998 was 18.8%. NIA, excluding Merger expenses, as a percentage of average
shareholders' equity for 1997 was 16%.
A key element of the Company's post-Merger strategy was to allocate more of
its capital resources to the Company's higher yielding mezzanine and 7(a)
lending activities and reduce its lower yielding commercial mortgage loan
portfolio. As a result, the Company completed a commercial mortgage loan
securitization transaction in January 1998, in order to effectively liquidate
$223 million of its lower yielding commercial mortgage loans. The Company
securitized $295 million in loans and received cash proceeds, net of costs, of
$223 million. The Company retained a trust certificate for its residual interest
in mortgage securitization (the "Residual CMBS") in the loan pool sold, and will
receive interest income from this Residual CMBS as well as receive the net
spread of the interest earned on the loans sold less the interest paid on the
bonds over the life of the bonds (the "Residual Securitization Spread").
The 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, or $0.28 per share, 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). The Company will
continue to earn interest income from the Residual CMBS, and will receive the
actual net spread from the portion of the loans sold represented by the bonds
issued. As the net spread is received, a portion will be allocated to interest
income with the remainder applied to reduce the carrying amount of the Residual
Securitization Spread. The Residual CMBS and the Residual Securitization Spread
have been and will continue to be valued each quarter using updated prepayment,
interest rate and loss estimates. As of December 31, 1998, the mortgage loan
pool had an approximate weighted average stated interest rate of 9.4%. The value
of the Residual Securitization Spread of $10.7 million was determined based on a
constant prepayment rate of 7% and a discount rate of 12%. The value of the
Residual CMBS of $70.8 million was determined using a discount rate equal to the
average stated interest rate of the underlying mortgage loans. The Company
completed the securitization as a means to improve its liquidity for investment
in high yielding mezzanine and 7(a) loans. The Company does not anticipate
significant future securitization activity.
Total interest and related portfolio income was $106.7 million, $97.4
million and $84.9 million for the years ended December 31, 1998, 1997 and 1996,
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
premiums from loan sales, prepayment premiums, and advisory fee and other
income.
Interest income totaled $79.9 million, $86.9 million and $77.5 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Interest income
decreased 8% and increased 12% for 1998 and 1997, respectively. The decrease and
increase in interest income earned results primarily from changes in the amount
of loans outstanding during the periods presented. The Company's loan portfolio
decreased by 4% to $628.6 million at December 31, 1998 from $655.8 million at
December 31, 1997, and the loan portfolio
16
<PAGE> 21
increased by 13% to $655.8 million at December 31, 1997 from $580.9 million at
December 31, 1996. During 1998, the Company originated or purchased loans and
other investments totaling $524.5 million. This increase was offset by the sale
through securitization of $295 million in commercial mortgage loans, whole loan
sales of commercial mortgage loans of $44.0 million, and the sale of the
guaranteed portion of 7(a) loans totaling $37.0 million. In addition, the
Company received loan repayments totaling $138.1 million.
The Company's efforts to reduce its lower yielding commercial mortgage loan
portfolio in 1998 had the effect of reducing gross interest income in 1998 when
compared to 1997. The reduction in this portfolio, however, has increased the
overall weighted average yield on the portfolio, and should have the impact of
increasing interest income prospectively, as well as increasing the Company's
overall return on assets net of interest expense and return on equity capital.
The weighted average yield on the total loan portfolio at December 31, 1998 was
12.5%, as compared to 11.7% and 13.1% at December 31, 1997 and 1996,
respectively.
Net premiums from loan dispositions were $6.0 million, $7.3 million and
$4.2 million for the years ended December 31, 1998, 1997 and 1996, 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
$3.8 million, $3.2 million and $2.6 million for the years ended December 31,
1998, 1997 and 1996, respectively. This premium income results primarily from
the cash gain on the sale of the guaranteed portion of the Company's SBA 7(a)
loans 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 $2.2 million, $4.1 million and $1.6 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Commercial
mortgage loan repayments of $154.5 million in 1997 were primarily responsible
for the large level of prepayment premiums experienced in 1997. 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 $6.1 million, $3.2 million
and $3.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Investment advisory fees are received from the private funds
managed by the Company. Three of the Company's private, managed funds are no
longer making new investments, and are returning capital to their investors as
their assets pay off. In January 1998, the Company entered into an investment
advisory agreement with Kreditanstalt fur Wiederaufbau (KfW), the state-owned
public development bank of Germany, to manage a fund of approximately DM 160
million (approximately $95.4 million at December 31, 1998). For its services
related to sourcing, structuring, investing, monitoring and disposing of its
investments in small, private and medium-sized German businesses, the Company
will receive a 3% per annum fee on total committed capital, payable quarterly.
The increase in advisory fees and other income in 1998 is primarily the result
of the advisory fees earned from KfW of approximately $2.7 million.
17
<PAGE> 22
Total operating expenses were $44.4 million, $51.3 million ($46.2 million
without Merger expenses) and $37.4 million for the years ended December 31,
1998, 1997 and 1996, 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 $20.7 million, $27.0 million and $20.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Interest expense decreased 23%
for 1998 and increased 33% and 64% for 1997 and 1996, respectively. The
increases and decreases are attributable to increases and decreases in
borrowings by the Company and its subsidiaries under various credit facilities.
Again, the Company's efforts to decrease the commercial mortgage loan portfolio
during 1998 had the effect of reducing the overall level of the Company's
outstanding borrowings throughout the year. The Company's total borrowings were
$334.4 million, $347.7 million and $275.0 million at December 31, 1998, 1997 and
1996, respectively. Total borrowings decreased 4% for 1998 and increased 26% and
37% in 1997 and 1996, respectively. The Company's weighted average interest cost
on outstanding borrowings at December 31, 1998, 1997 and 1996 was 7.5%, 7.3% and
7.6%, respectively.
Salaries and employee benefits totaled $11.8 million, $10.3 million and
$8.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Total employees were 106, 80 and 66 at December 31, 1998, 1997 and 1996,
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 was an active recruiter in 1998 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 lease for the Company's
headquarters in Washington, DC, leases established in 1997 for the Company's
offices in Chicago and San Francisco, leases established in 1998 for the
Company's new offices in Atlanta and Detroit, travel costs, stock record
expenses, directors' fees, legal and accounting fees and various other expenses.
General and administrative expenses totaled $11.9 million, $9.0 million and $8.3
million, respectively, for the years ended December 31, 1998, 1997 and 1996. The
increase in general and administrative expenses was partially due to twelve full
months of costs associated with the two new offices that were established in the
third and fourth quarters of 1997.
In 1997, the Company incurred Merger expenses totaling $5.2 million, which
consisted primarily of investment banking fees of $3.1 million, legal fees of
$1.0 million and costs associated with the solicitation of proxies of
approximately $0.6 million.
Total operating expenses excluding interest on indebtedness and Merger
expenses represented approximately 2.9%, 2.5% and 2.6% of the Company's average
assets for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, the Company began to expense a portion of the formula and
cut-off awards that were established in connection with the Merger. Prior to the
Merger, each of the predecessor companies had a stock option plan (the "Old
Plans"). In preparation for the Merger, the Compensation Committees of the
predecessor companies determined that the Old Plans should be terminated upon
the Merger, so that the new merged Company would be able to develop a new
incentive compensation plan for all officers and directors with a single equity
security. The existence of the Old Plans had resulted in certain
18
<PAGE> 23
inequities in option grants among the various officers of the predecessor
companies simply because of the differences in the underlying equity securities.
To balance stock option awards among the employees, and to account for the
deviations caused by the existence of five plans supported by five different
publicly traded stocks, the Company developed two special awards to be granted
in lieu of options under the Old Plans that would be foregone upon the
cancellation of the Old Plans.
CUT-OFF AWARD. The first award established a cut-off dollar amount as of
August 14, 1997 (the Merger announcement date) that would be computed for all
outstanding, but unvested options that would be canceled as of the date of the
Merger. The cut-off award was designed to cap the appreciated value in unvested
options at the Merger announcement date in order to set the foundation to
balance option awards upon the Merger. The cut-off award was designed to be
equal to the difference between the market prices of the shares of stock
underlying the canceled options under the Old Plans at August 14, 1997, less the
exercise prices of the options. The cut-off award was computed to be $2.9
million in the aggregate and will be payable for each canceled option as the
canceled options would have vested. The cut-off award will only be payable if
the award recipient is employed by the Company on a future vesting date. The
cut-off award expense totaled $0.8 million, or $0.02 per share, for 1998.
FORMULA AWARD. The formula award was designed to compensate officers from
the point in time when their unvested options would cease to appreciate in value
pursuant to the mechanics of the cut-off award (i.e., August 14, 1997) up until
the time in which they would be able to receive option awards in the Company
after the Merger became effective. In the aggregate, the formula award equaled
6% of the difference between the combined aggregate market capitalizations of
the Predecessor Companies as of the close of the market on December 30, 1997,
and the combined aggregate market capitalizations of the Predecessor Companies
on August 14, 1997.
The formula award was designed as a long-term incentive compensation
program that would replace canceled stock options and would balance share
ownership among key officers for past and prospective service.
The terms of the formula award require that the award be contributed to the
Company's deferred compensation plan, and be used to purchase shares of the
Company in the open market. The formula award vests over a three-year period, on
the anniversary date of the Merger, beginning on December 31, 1998.
In the aggregate, the market capitalizations of the Predecessor Companies
increased by approximately $319 million from August 14, 1997 to December 30,
1997, and the total formula award was computed to be $19.0 million. The total
expense recorded as a result of the formula awards during 1998 was $6.2 million,
or approximately $0.12 per share. 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 $6.4 million.
Net realized gains were $22.5 million, $10.7 million and $19.2 million for
the years ended December 31, 1998, 1997 and 1996, 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.
19
<PAGE> 24
Realized gains totaled $25.8 million, $15.8 million and $30.4 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Realized gains
during 1998 primarily resulted from transactions involving ten portfolio
companies: ARS ($1.1 million), Calendar Broadcasting ($1.1 million), Arlington
Square Associates ($1.9 million), DMI Furniture ($0.6 million), Virginia Beach
Associates ($2.4 million), Labor Ready, Inc. ($5.0 million), Broadcast Holdings,
Inc. ($1.1 million), Waterview Limited Partnership ($3.0 million), Z-Spanish
Radio Network, Inc. ($2.7 million) and El Dorado Communications, Inc. ($0.8
million). Gains resulting from investments in these ten companies totaled $19.7
million. The Company also realized a gain of $4.0 million from the sale of an
office building owned by Allied Capital Advisers Inc. prior to the Merger and
incurred an income tax liability related to that gain of $0.8 million. Realized
gains in 1997 resulted from transactions involving 83 portfolio companies.
Realized losses in 1998, 1997 and 1996 totaled $3.3 million, $5.1 million
and $11.2 million and represented 0.4%, 0.6% and 1.6% of the Company's total
assets, respectively. Realized losses in 1998 resulted primarily from the full
or partial liquidation of three portfolio investments: SunStates Refrigerated
Services, Inc. ($1.8 million), R-Tex Decoratives Company, Inc. ($0.6 million),
and Pines Hotel ($0.3 million). These three investments resulted in realized
losses of $2.7 million. Realized losses in 1997 resulted primarily from the full
or partial liquidation of four investments: Taco Tico, Inc. ($1.1 million),
SunStates Refrigerated Services, Inc. ($0.8 million), Enviroplan, Inc. ($0.8
million), and Vineyard Sycamore Plaza Associates ($0.4 million). Realized losses
resulting from these four investments totaled $3.1 million. Realized losses in
1996 included $6.6 million in losses from the liquidation of two portfolio
investments. The Company made loans to these two borrowers in the late 1980s and
early 1990s, and each borrower encountered significant difficulties during the
recession of the early 1990's. Losses realized in 1998, 1997 and 1996 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
$3.6 million, $9.7 million and $7.5 million when the related losses were
realized in 1998, 1997 and 1996, respectively.
The Company recorded net unrealized gains of $1.1 million and $7.2 million
for the years ended December 31, 1998 and 1997, respectively, and net unrealized
losses of $7.4 million for the year ended December 31, 1996. Net unrealized
gains for 1998 consisted of valuation changes resulting from the Board of
Directors' valuation of the Company's assets, the effect of valuation of
interest rate swap agreements, and the effect of reversals of net unrealized
appreciation resulting from net realized gains. At December 31, 1998, net
unrealized appreciation in the portfolio totaled $2.4 million, and was composed
of unrealized appreciation of $27.3 million resulting primarily from appreciated
equity interests in portfolio companies, and unrealized depreciation of $24.9
million resulting primarily from underperforming loan and equity investments in
the portfolio. At December 31, 1997, net unrealized appreciation in the
portfolio totaled $1.3 million and was composed of unrealized appreciation of
$19.2 million and unrealized depreciation of $17.9 million. At December 31,
1996, net unrealized depreciation in the portfolio totaled $5.9 million.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those loans from which a capital gain is expected. Grade 2
is used for loans performing in accordance with plan. Grade 3 is used for loans
that require closer monitoring; however, no loss of interest or principal is
expected. Grade 4 is used for loans for which some loss of contractually due
interest is expected, but no loss of principal is
20
<PAGE> 25
expected. Grade 5 is used for loans for which some loss of principal and
interest is expected and the loan 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 December 31, 1998, the Company's portfolio was graded as follows:
<TABLE>
<CAPTION>
PORTFOLIO BY GRADE
------------------ INVESTMENTS PERCENTAGE OF
AT VALUE TOTAL PORTFOLIO
------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1............................................ $104.4 13.0%
2............................................ 618.0 77.2
3............................................ 53.2 6.7
4............................................ 11.8 1.5
5............................................ 12.9 1.6
------ -----
$800.3 100.0%
====== =====
</TABLE>
Grade 5 mezzanine investments totaled $6.4 million at value at December 31,
1998, or 0.8% of the Company's total portfolio based on the valuation of the
Board of Directors. The value of these Grade 5 investments has been reduced from
an aggregate cost of $22.7 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 troubled portfolio company in order to recover the
maximum amount of the Company's investment, but records unrealized depreciation
for a substantial amount of the potential exposure when such exposure is
identified. During 1998, Grade 5 mezzanine investments decreased by $6.5 million
from $12.9 million at December 31, 1997.
At December 31, 1998, commercial real estate Grade 5 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. A Grade 5
classification for a commercial real estate loan prior to the use of the uniform
grading system meant that the loan was in workout. Because of the collateral
securing these loans, however, few previous Grade 5 loans were ever expected to
result in loss of principal. Of the loans included in Grade 5 at December 31,
1997, only one loan totaling $0.3 million at cost was expected to incur any loss
of principal, and this loan was valued at $0.2 million.
Grade 5 SBA 7(a) loans totaled $6.3 million at value at December 31, 1998,
and have been reduced from an aggregate cost basis of $7.9 million. The SBA 7(a)
loan portfolio was not graded at December 31, 1997.
For the total portfolio, loans greater than 120 days delinquent were $13.7
million at value at December 31, 1998, or 1.7% of the total portfolio. Included
in this category are loans valued at $9.9 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, 1997, were $20.2 million
at value or 2.9% of the total portfolio.
The Company incurred income tax expense of $0.8 million for the year ended
December 31, 1998, which resulted from the taxation of a net built-in gain
realized from
21
<PAGE> 26
the sale of an office building owned by Allied Capital Advisers Inc. prior to
the Merger. The Company incurred income tax expense of $1.4 million and $1.9
million, respectively, for the years ended December 31, 1997 and 1996 resulting
from the operations of Allied Capital Advisers Inc. 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.
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 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.
During 1998, 1997 and 1996, the Company or the Predecessor Companies
declared dividends to their shareholders representing all of each company's
ordinary taxable income, taxable net capital gains, and, in the case of Allied
Capital Corporation in 1997, a partial return of capital resulting from the
distribution of Allied Capital Corporation's ownership of Allied Capital Lending
Corporation's shares. Tax distributions differ from NIA due to timing
differences in the recognition of income and expenses, returns of capital and
net unrealized appreciation, which is not included in taxable income. Total tax
distributions declared were $75.1 million, $85.7 million and $57.4 million for
1998, 1997 and 1996, respectively. Tax distributions per share were $1.43, $1.71
and $1.23 for the three years ended December 31, 1998, 1997 and 1996,
respectively. The per share distributions for 1997 and 1996 have been exchange
adjusted for the Merger and include the exchange-adjusted shares of Allied
Capital Advisers Inc. for which no tax distributions had historically been
declared or paid.
Included in 1997 tax distributions was $18 million, or $0.34 per share,
representing a non-cash dividend of the shares of Allied Capital Lending
Corporation held in Allied Capital Corporation's portfolio. Allied Capital
Corporation declared and paid a dividend equal to 0.107448 shares of Allied
Capital Lending Corporation for each share of Allied Capital Corporation held on
the record date for such dividend. These shares had a market value of $21.25 per
share on December 30, 1997, the distribution date.
Also included in 1997 tax distributions was a special, one-time dividend
equal to $8.8 million, or $0.17 per share, representing all of the retained
earnings and profits of the Predecessor Companies at December 31, 1997. The
special dividend was declared in conjunction with the Merger in order for the
Company to maintain its RIC status.
Certain of the Company's credit facilities limit the Company's ability to
declare dividends if the Company has defaulted under certain provisions of the
credit agreement.
The weighted average common shares outstanding used to compute basic
earnings per share were 51.9 million, 49.2 million and 46.2 million for the
years ended December 31, 1998, 1997 and 1996, respectively. The increases in the
weighted average shares reflect the issuance of new shares, the exercise of
employee stock options to purchase shares of the Company and the issuance of
shares pursuant to a dividend reinvestment plan. Allied Capital Corporation's
ownership of Allied Capital Lending Corporation during the periods presented has
been eliminated in consolidation.
22
<PAGE> 27
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 52.0 million, 49.3 million and 46.7 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At December 31, 1998, the Company had $25.1 million in cash and cash
equivalents. ACC invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short-term repurchase
agreements fully collateralized by such securities. The Company'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 December 31, 1998 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.... $ 6,000 6.63%
Unsecured long-term notes payable..... 180,000 7.21%
SBA debentures........................ 47,650 8.22%
OPIC loan............................. 5,700 6.57%
--------
Total debentures and notes
payable....................... $239,350 7.38%
========
Revolving line of credit................... $ 95,000 7.66%
========
</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 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. The Company obtained $180 million in
financing through the issuance of unsecured long-term notes with private
institutional lenders, primarily insurance companies. The terms of the notes
include five- or seven-year maturities, priced at approximately 7.2%. The notes
require payment of interest semiannually, and all principal is due upon
maturity.
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.
23
<PAGE> 28
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 $200 million unsecured
revolving line of credit. The facility bears interest at LIBOR plus 1.25% and
requires a commitment fee equal to 0.2% of the committed unused amount. The
facility also has a facility fee equal to 0.15% of the initial commitment. The
line of credit requires monthly payments of interest, and all principal is due
upon maturity. The facility matures on June 30, 1999.
In March 1999, the Company replaced the $200 million facility with a new
$315 million unsecured bank revolving line of credit. At the Company's option,
the new 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 a facility fee equal to 0.25% of the committed amount, regardless of
the amount outstanding under the facility, which is payable quarterly in
arrears.
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's cash flow from operations was $68.9 million, $58.9 million
and $45.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. 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 securitizations, 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.
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.
YEAR 2000
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
24
<PAGE> 29
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 would be Year 2000 compliant by the
end of the first quarter of 1999. The Company's testing of all critical software
and IT systems is scheduled to be completed by the end of first quarter 1999. In
addition to the testing performed by Company personnel, the Company has 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. Implementation of tested software and IT systems is
scheduled to be completed by the end of the second quarter 1999. The Company
currently has service and maintenance contracts with all of its critical
software vendors; therefore, no additional costs are expected to be incurred by
the Company for the upgrades needed to become compliant.
The second area of focus is the Company's service providers. The Company is
in the process of obtaining compliance certificates from all critical service
providers, which include banks and utility companies. 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 non-compliance.
The Company has sent Year 2000 questionnaires to its portfolio companies to
assess their awareness and to evaluate their Year 2000 readiness. The Company
plans to complete its survey and evaluation of its portfolio companies by the
end of the first quarter of 1999 and will follow-up with any portfolio companies
that may have material exposure and inadequate contingency plans. 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 those 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) additional costs incurred 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 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 will be finalized after the
Year 2000 compliance tests and surveys described above are completed.
25
<PAGE> 30
SENIOR SECURITIES
Information about our senior securities is shown in the following tables.
The "-- " indicates information which the Commission expressly does not require
to be disclosed for certain types of senior securities.
<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
MASTER REPURCHASE AGREEMENT
AND MASTER LOAN AND
SECURITY AGREEMENT
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 23,210,000 3,695 -- N/A
1995........................ 0 0 -- N/A
1996........................ 85,775,000 2,485 -- N/A
1997........................ 225,821,000 2,215 -- N/A
1998........................ 6,000,000 2,734 -- N/A
UNSECURED LONG-TERM NOTES
PAYABLE
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 0 0 -- N/A
1995........................ 0 0 -- N/A
1996........................ 0 0 -- N/A
1997........................ 0 0 -- N/A
1998........................ 180,000,000 2,734 -- N/A
SBA DEBENTURES(7)
1989........................ $ 25,350,000 $4,015 $-- N/A
1990........................ 40,450,000 3,397 -- N/A
1991........................ 49,800,000 3,834 -- N/A
1992........................ 49,800,000 5,789 -- N/A
1993........................ 49,800,000 6,013 -- N/A
1994........................ 54,800,000 3,695 -- N/A
1995........................ 61,300,000 2,868 -- N/A
1996........................ 61,300,000 2,485 -- N/A
1997........................ 54,300,000 2,215 -- N/A
1998........................ 47,650,000 2,734 -- N/A
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
OVERSEAS PRIVATE INVESTMENT
CORPORATION LOAN
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 0 0 -- N/A
1995........................ 0 0 -- N/A
1996........................ 8,700,000 2,485 -- N/A
1997........................ 8,700,000 2,215 -- N/A
1998........................ 5,700,000 2,734 -- N/A
REVOLVING LINES OF CREDIT
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 32,226,000 3,695 -- N/A
1995........................ 20,414,000 2,868 -- N/A
1996........................ 45,099,000 2,485 -- N/A
1997........................ 38,842,000 2,215 -- N/A
1998........................ 95,000,000 2,734 -- N/A
SENIOR NOTE PAYABLE(5)
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 20,000,000 5,789 -- N/A
1993........................ 20,000,000 6,013 -- N/A
1994........................ 20,000,000 3,695 -- N/A
1995........................ 20,000,000 2,868 -- N/A
1996........................ 20,000,000 2,485 -- N/A
1997........................ 20,000,000 2,215 -- N/A
1998........................ 0 0 -- N/A
BONDS PAYABLE
1989........................ $ 0 $ 0 $-- N/A
1990........................ 0 0 -- N/A
1991........................ 0 0 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 0 0 -- N/A
1995........................ 98,625,000 2,868 -- N/A
1996........................ 54,123,000 2,485 -- N/A
1997........................ 0 0 -- N/A
1998........................ 0 0 -- N/A
</TABLE>
27
<PAGE> 32
<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF ASSET LIQUIDATING AVERAGE
TREASURY COVERAGE PREFERENCE MARKET VALUE
CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4)
-------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
REVERSE REPURCHASE AGREEMENTS(6)
1989........................ $ 29,386,000 $4,015 $-- N/A
1990........................ 28,361,000 3,397 -- N/A
1991........................ 2,761,000 3,834 -- N/A
1992........................ 0 0 -- N/A
1993........................ 0 0 -- N/A
1994........................ 0 0 -- N/A
1995........................ 0 0 -- N/A
1996........................ 0 0 -- N/A
1997........................ 0 0 -- N/A
1998........................ 0 0 -- N/A
REDEEMABLE CUMULATIVE PREFERRED STOCK(7)
1989........................ $ 0 $ 0 $ 0 N/A
1990........................ 1,000,000 308 100 N/A
1991........................ 1,000,000 338 100 N/A
1992........................ 1,000,000 526 100 N/A
1993........................ 1,000,000 546 100 N/A
1994........................ 1,000,000 351 100 N/A
1995........................ 1,000,000 277 100 N/A
1996........................ 1,000,000 242 100 N/A
1997........................ 1,000,000 217 100 N/A
1998........................ 1,000,000 267 100 N/A
NON-REDEEMABLE CUMULATIVE PREFERRED
STOCK(7)
1989........................ $ 6,000,000 $ 362 $100 N/A
1990........................ 6,000,000 308 100 N/A
1991........................ 6,000,000 338 100 N/A
1992........................ 6,000,000 526 100 N/A
1993........................ 6,000,000 546 100 N/A
1994........................ 6,000,000 351 100 N/A
1995........................ 6,000,000 277 100 N/A
1996........................ 6,000,000 242 100 N/A
1997........................ 6,000,000 217 100 N/A
1998........................ 6,000,000 267 100 N/A
</TABLE>
- -------------------------
(1) Total amount of each class of senior securities outstanding at the end
of the period presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Company's consolidated total assets,
less all liabilities and indebtedness not represented by senior
securities, divided by senior securities representing indebtedness. This
asset coverage ratio is multiplied by $1,000 to determine the Asset
Coverage Per Unit. The asset coverage ratio for a class of senior
securities that is preferred stock is calculated as the Company's
consolidated total assets, less all liabilities and indebtedness not
represented by senior securities, divided by senior securities
representing indebtedness, plus the involuntary liquidation preference
of the preferred stock (see footnote 3). The Asset Coverage Per Unit for
preferred stock is expressed in terms of dollar amounts per share.
(3) The amount to which such class of senior security would be entitled upon
the involuntary liquidation of the issuer in preference to any security
junior to it.
28
<PAGE> 33
(4) Not applicable, as senior securities are not registered for public
trading.
(5) The Company was the obligor on $15 million of the senior notes. The
Company's SBIC subsidiaries were the obligors on the remaining $5
million, which is not subject to the asset coverage requirements of the
1940 Act.
(6) U.S. government agency guaranteed loans sold under agreements to
repurchase. The Company was advised by the Staff of the Commission that
these reverse repurchase agreements were not considered a class of
senior security representing indebtedness and thus were not subject to
the asset coverage requirements of the 1940 Act.
(7) Issued by the Company's SBIC subsidiary to the SBA. These categories of
senior securities are not subject to the asset coverage requirements of
the 1940 Act. See "Certain Government Regulations -- SBA Regulations."
29
<PAGE> 34
BUSINESS
We are a value-added full-service lender. We invest in and lend to private,
growing businesses in a variety of industries and in diverse geographic
locations nationwide. We focus on investments in three primary areas:
- mezzanine finance
- commercial real estate finance, and
- SBA 7(a) lending.
Our investment portfolio consists primarily of small and medium-sized
subordinated loans with equity features, small and medium-sized commercial
mortgage loans, and small senior loans. At December 31, 1998, our investment
portfolio totaled $800 million representing 733 borrower relationships in 39
states and the District of Columbia.
The Company's investment objective is to achieve current income and capital
gains. We currently do not have a policy with respect to "concentrating" (i.e.,
investing 25% or more of our total assets) in any industry or group of
industries and currently our portfolio is not concentrated. We may or may not
concentrate in any industry or group of industries in the future.
THE 1997 MERGER
Allied Capital Corporation was formed through the merger, on December 31,
1997, of five affiliated public companies, the "predecessor companies", the
oldest of which was founded in 1958. The merger provided numerous benefits and
key competitive advantages:
- INCREASED SIZE. We are now the largest BDC in the United States and are
significantly larger than any of the predecessor companies that merged in
terms of total assets, total equity capital and total market
capitalization. A larger asset base allows us to make larger investments
in growing companies while maintaining portfolio diversity. A larger
market capitalization provides our stockholders with better liquidity,
and has increased our visibility in the debt and equity capital markets.
These improvements have provided the Company with a better foundation for
growth.
- IMPROVED MIX OF INCOME. We now have a portfolio that produces a higher
level of recurring investment income since the five companies merged. In
addition, as a single company, we have been able to expand our existing
businesses and improve our asset and liability management.
- EFFICIENCY. As one company, we now operate more efficiently. We have
been able to eliminate redundant processes and expenses, including
financial reporting, auditing, and corporate legal fees.
- SINGLE ENTITY FOCUSED ON HIGH RETURN INVESTMENTS. We now have one
business plan with a single investment goal of generating strong current
income and long-term capital gains. We are able to allocate both capital
and human resources more effectively to maximize our returns on
shareholder equity.
- INCREASED COMPETITIVENESS. Because of our increased size, focus, and
efficiency, we have become a formidable competitor in the mezzanine
finance marketplace. Our increased size has lowered our cost of capital
and increased our pricing competitiveness. Our increased size has also
enabled us to finance larger transactions while maintaining portfolio
diversity. Our increased efficiency has
30
<PAGE> 35
enabled us to grow both our sales and investment professional headcount
so that we can more aggressively compete in the marketplace.
As a result of the merger, we increased our annual loan originations and
improved the credit quality of our portfolio. We also increased our access to
capital, particularly our ability to borrow from lenders. During 1998, we
restructured our credit facilities and obtained unsecured debt financing at a
lower cost with more favorable financing terms. In addition, we believe our
larger market capitalization has increased our access to equity capital. Greater
access to capital at a lower cost has enabled us to price our loans to borrowers
more competitively.
MEZZANINE FINANCE
We provide mezzanine debt and equity financing in private transactions for
small- and medium-sized growth companies. We recognize that entrepreneurs need
an alternative to the high cost and dilutive nature of venture equity capital.
Therefore, our mezzanine finance activities target a market niche between the
senior debt financing provided by traditional lenders, such as banks and
insurance companies, and the equity capital provided by venture capitalists and
private equity investors.
Our mezzanine financing is generally used to fund growth, leveraged
buyouts, note purchases, loan restructurings, acquisitions, recapitalizations,
and bridge financings. We generally invest in private companies though, from
time to time, we may invest in thinly traded public companies that lack access
to public capital and whose securities are generally not marginable.
We originate and purchase investments ranging in size from $5 million to
$25 million, with an emphasis on investments on the larger end of this range.
Our mezzanine investments are generally structured as a subordinated loan that
carries a relatively high fixed interest rate (12% to 18%), with interest-only
payments in the early years and payments of both principal and interest in the
later years, with maturities of five to ten years. Our mezzanine investments may
also include equity features, such as warrants or options to buy a minority
interest in the portfolio company. At December 31, 1998, approximately 98% of
the Company's mezzanine investments had fixed interest rates.
We seek to generate a return on assets ranging from 14% to 20%, including
both interest income and capital gains from the sale of our equity interests.
Historically, we had structured our mezzanine investments so that approximately
one-half of the potential return was earned through current interest payments,
and one-half was earned in capital gains, which would arise from the sale of our
equity interest in the portfolio company. We now structure our mezzanine
investments with more emphasis on current interest, and less emphasis on the
potential return from capital gains. At December 31, 1998, our mezzanine
portfolio had a weighted average yield of 14.6%, as compared to a weighted
average yield of 12.6% at December 31, 1997.
Our equity investments, which include warrants, options, and common and
preferred stock, generally do not produce a current return, but are held for
potential investment appreciation and ultimate capital gains. Generally,
warrants are exercisable after a three- to five-year period, and the exercise
price is usually nominal. The warrants often include registration rights, which
allows us to sell the securities if the portfolio company completes a public
offering. In many cases, the warrants have a put option that requires that the
borrower repurchase our equity position after a specified period of time at a
formula price or at its fair market value.
31
<PAGE> 36
At December 31, 1998, our mezzanine portfolio had $339.2 million in
mezzanine loans and debt securities, and $49.4 million in equity interests,
which combined represented 49% of our total investment portfolio. The geographic
and industry composition of the mezzanine portfolio at December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION
-----------------
<S> <C>
Mid-Atlantic.................. 28%
Midwest....................... 27%
Southeast..................... 23%
West.......................... 11%
International................. 7%
Northeast..................... 4%
----
Total.................... 100%
====
Consumer products
manufacturing............... 25%
Telecommunications............ 14%
Business services............. 11%
Retail........................ 9%
Broadcasting.................. 9%
Industrial products
manufacturing............... 8%
Other......................... 24%
----
Total.................... 100%
====
</TABLE>
Private equity and mezzanine investment partnerships are our primary
competitors in the mezzanine finance business. We believe that we have certain
structural and operational advantages when compared to many of these
competitors. Our scale of operations, equity capital base, and successful track
record as a mezzanine lender has enabled us to borrow long-term capital to
leverage our equity and reduce our overall cost of capital. We use our lower
cost of capital to price our loans competitively. In addition, the perpetual
nature of our corporate structure enables us to be a better long-term partner
for our borrowers than traditional mezzanine partnerships, which typically have
a limited life. We also believe that high overhead, cumbersome regulatory
structures and large size hinder many traditional lenders from lending
effectively to our niche of small- and medium-sized businesses.
We hold a portion of our mezzanine investments in a wholly owned
subsidiary, Allied Investment Corporation. Allied Investment is a BDC and is
licensed and regulated by the Small Business Administration to operate as a
small business investment company ("SBIC"). See "Certain Government Regulations"
below for further information about SBIC regulation.
COMMERCIAL REAL ESTATE FINANCE
COMMERCIAL MORTGAGE LOANS. We originate and purchase mortgage loans to
small and medium-sized businesses secured by commercial real estate. We believe
that we successfully compete in the commercial real estate finance market due to
our creativity and flexible loan terms. We use an "enterprise value" approach to
assess new commercial mortgage loans, which requires an analysis of the
underlying cash flow of the real estate tenant or owner-occupant in addition to
more traditional real estate loan underwriting techniques, which may exclude the
impact of business cash flows from the underwriting considerations. We believe
that we are able to structure and finance more complicated loans than
traditional real estate lenders due to our significant expertise in this area,
and the experience of our investment professionals.
We generally price new commercial mortgage loans based on a fixed spread
ranging from 3% to 5% over five to ten year U.S. Treasury rates. During 1997 and
1998, interest rates on U.S. Treasury bonds declined significantly, and the
spreads charged by commercial real estate lenders in the marketplace narrowed.
As a result, we began to reevaluate our strategy regarding commercial real
estate lending in light of declining interest rates. During the third quarter of
1998, we significantly reduced our commercial
32
<PAGE> 37
mortgage loan origination activity for our own portfolio, and began exploring
opportunities to originate commercial mortgage loans for sale to various
financial institutions.
We are now pursuing various loan sale opportunities and we plan to continue
to originate commercial mortgage loans for sale. We can enhance the investment
return from our commercial mortgage loan portfolio by originating and selling
these lower-yielding loans, because we receive loan origination fees and cash
premiums on the sale from the purchaser. During 1998, we sold a total of $44.0
million of commercial mortgage loans.
We focus on originating commercial mortgage loans for our own portfolio
ranging in size from $1 million to $25 million with maturities of five to ten
years. These loans are generally priced at higher interest rates and include
subordinated real estate loans and sale-leaseback financing. Subordinated loans
are priced similarly to our mezzanine loans and may be accompanied by an equity
interest in the real estate or in the underlying business.
At December 31, 1998, 68% of the Company's portfolio of commercial mortgage
loans carried a fixed interest rate, and 32% carried a floating rate tied to
various indices. These loans may require payments of interest only, or they may
require level payments of principal and interest calculated to amortize the
principal on a 10- to 30-year basis with a balloon payment at maturity.
We derive income from the (1) interest charged on the commercial mortgage
loan portfolio and (2) amortization of original issue and purchased discounts.
The weighted average stated interest rate on the commercial mortgage loan
portfolio at December 31, 1998 was 9.7% and the weighted average yield was
10.4%. The effective yield on the mortgage loan portfolio is higher than the
stated interest rate due to the amortization of original issue discount and
purchased discount. At December 31, 1998, the average loan-to-value for the
commercial mortgage loan portfolio was 67.4%.
The Company's commercial mortgage loan portfolio totaled approximately
$233.2 million at December 31, 1998, or 29% of the Company's total investment
portfolio. The geographic composition and the property types securing the
commercial mortgage loan portfolio at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION
-----------------
<S> <C>
Mid-Atlantic.................. 36%
Southeast..................... 23%
West.......................... 22%
Midwest....................... 13%
Northeast..................... 6%
----
Total.................... 100%
====
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
-------------
<S> <C>
Hospitality................... 42%
Office........................ 29%
Retail........................ 14%
Recreation.................... 5%
Other......................... 10%
----
Total.................... 100%
====
</TABLE>
We compete with banks, real estate conduits, equity and mortgage real
estate investment trusts ("REITs") and other lenders for the commercial mortgage
loans we originate. We believe we have earned a reputation in the commercial
real estate finance market as a specialist in credits that require more
difficult structuring or underwriting techniques, and that we compete
successfully in this niche.
COMMERCIAL MORTGAGE-BACKED SECURITIES. Turmoil in the real estate capital
markets during the fourth quarter of 1998 created a unique opportunity for the
Company to acquire non-investment grade commercial mortgage-backed securities
("CMBS") at attractive yields. In late 1998, the Company purchased $67.2 million
of non-investment grade bonds for $32.2 million, with an estimated yield to
maturity of 15%. We plan to continue to
34
<PAGE> 38
purchase CMBS as long as we can achieve significant discounts and attractive
yields on such purchases.
In January 1998, we completed a $295 million asset securitization in which
we retained a residual interest in securitized loans. We continue to service all
of the loans in the pool. This transaction provided liquidity to our investment
portfolio, and allowed us to reinvest the cash proceeds from the securitization
into higher yielding mezzanine and SBA 7(a) loans. We do not anticipate
significant future securitization activity; we will gain liquidity from our
lower yielding loans primarily through whole loan sales.
At December 31, 1998, the Company had $113.7 million in commercial
mortgage-backed securities, which represented approximately 14% of the Company's
total investment portfolio.
The 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. Non-investment grade securities usually
pay a higher interest rate 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. They 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. When we evaluate a
CMBS purchase, we use the same stringent underwriting procedures and criteria
for the pooled loans as we do for the loans we originate and purchase. These
underwriting procedures and criteria are described in detail below. In addition,
we believe that the underlying real estate collateral for our purchased CMBS
adequately secures our position. At December 31, 1998, the average loan-to-value
ratio for our commercial mortgage-backed securities portfolio, including the
residual interest in our securitized pool, was 67.1%.
SBA 7(A) LENDING
We participate in the SBA's 7(a) Guaranteed Loan Program through a wholly
owned subsidiary, Allied Capital SBLC Corporation. Allied SBLC is licensed by
the SBA as a Small Business Lending Company (SBLC). It is one of only fourteen
non-bank SBLCs operating in the United States.
Under the SBA 7(a) program, we extend senior secured loans that are
partially guaranteed by the SBA. Our SBA 7(a) loans are provided to small
businesses for the purposes of acquiring real estate, purchasing machinery or
equipment, or providing working capital. The loans are secured by a mortgage or
other liens on the assets of the borrower, and in all cases the owners of the
business must personally guarantee the repayment of the loan. We focus our SBA
7(a) loan origination activity on loans secured by commercial real estate
assets.
Our 7(a) loans typically range in size from $250,000 to $1 million. The SBA
guarantees 80% of any qualified loan up to $100,000 regardless of maturity, and
75% of any qualified 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 (1) no more than $5 million in
annual sales or (2) no more than 500 employees. The SBA stipulates that loans
used to acquire real estate may have a maximum maturity of 25 years; loans used
to purchase machinery and equipment may have a maximum maturity of 15 years;
loans used for working capital may have a maximum maturity of seven years.
35
<PAGE> 39
We generally price our 7(a) loans with variable interest rates typically
ranging from 1.75% to 2.75% over the prime rate, adjusted monthly. Approximately
96% of the Company's SBA 7(a) loan portfolio had variable interest rates as of
December 31, 1998. Generally loans are payable in equal monthly installments of
principal and interest on the first day of the month following the month in
which the loan is funded, until maturity. Our post-Merger capital structure has
allowed us to lower our pricing on SBA 7(a) loans. As a result, we believe we
now compete more effectively in the marketplace, and we have increased our deal
flow.
We routinely sell the guaranteed portion of our SBA 7(a) loans in the well-
established secondary market. We earn a premium on the sale of the guaranteed
portion of our SBA 7(a) loans. Typically our premiums on loan sales, net of
origination costs, range from 4% to 7.5% of the face amount of each loan sold.
This premium income enhances the return on our 25% retained investment in the
loan, and our retained portion is not subordinate to the guaranteed portion
sold. We continue to service 100% of each loan we originate.
For the fiscal year ended September 30, 1998, the federal government
estimated that SBA 7(a) loans originations would approximate $10.5 billion.
Banks, non-bank SBLCs, and certain state-sponsored non-bank lenders serve this
large market. We believe that we compete successfully in the 7(a) loan market
because we focus in certain regional markets and because we are a "Preferred
Lender" in the regional markets in which we compete. As an SBA Preferred Lender,
we are permitted to make 7(a) guaranteed loans without prior SBA credit
approval, thus simplifying and expediting our loan approval process and the
related disbursements. At December 31, 1998, Allied SBLC was a designated
Preferred Lender in sixteen markets; we plan to attain Preferred Lender status
in additional markets during 1999.
Our SBA 7(a) loan portfolio totaled $56.3 million at December 31, 1998, or
7% of our total investment portfolio. The SBA 7(a) portfolio includes loans to,
among others, hotels and motels, automotive shops and gas stations, restaurants,
manufacturers, broadcasting and communications companies, service providers,
retail shops, and other small businesses. The following tables show our 7(a)
loan portfolio by geographic region and industry at December 31, 1998:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION
-----------------
<S> <C>
Midwest....................... 34%
Mid-Atlantic.................. 29%
Southeast..................... 16%
West.......................... 14%
Northeast..................... 7%
----
Total.................... 100%
====
</TABLE>
<TABLE>
<CAPTION>
INDUSTRY
--------
<S> <C>
Retail........................ 41%
Hospitality................... 30%
Consumer services............. 6%
Consumer products
manufacturing............... 6%
Business services............. 4%
Broadcasting.................. 4%
Other......................... 9%
----
Total.................... 100%
====
</TABLE>
INVESTMENT ADVISORY SERVICES
We are a registered investment adviser, pursuant to the Investment Advisers
Act of 1940, and have certain investment advisory agreements to manage private
investment funds. The revenue generated from these agreements is not material to
the Company's
36
<PAGE> 40
operations. See "Management's Discussion and Analysis -- Results of
Operations -- Comparison of Fiscal Years Ended December 31, 1998, 1997 and
1996."
LOAN SOURCING
During 1997 and 1998, we significantly increased the scope of our sales and
marketing activity by opening regional offices in Chicago, San Francisco,
Detroit and Atlanta. We also developed a full-time sales and marketing staff
with ten individuals dedicated to identifying and pursuing mezzanine
investments, commercial mortgage loans, and SBA 7(a) loans. To source new
investment opportunities, we work with thousands of intermediaries including:
- regional and boutique investment banks;
- private mezzanine and equity investors;
- business and mortgage brokers;
- national retail financial services companies; and
- banks, law firms and accountants.
We believe that our experience and reputation provide a competitive
advantage in originating new investment opportunities. We have established an
extensive network of investment referral relationships over our 40-year history.
We are recognized as a pioneer in the mezzanine finance industry, and have
developed a reputation in the commercial real estate finance market for our
ability to finance complex transactions.
ASSET APPROVAL AND UNDERWRITING PROCESS
In assessing new investment opportunities, we maintain rigorous credit
standards based on our underwriting guidelines, a thorough due diligence
process, and a credit approval process requiring committee review, all of which
are described below. The combination of conservative underwriting standards and
our credit-oriented culture has resulted in a record of minimal realized losses.
GENERAL INVESTMENT CRITERIA. The following table highlights general
underwriting criteria for each product type. We use these criteria as general
guidelines only, and the characteristics of individual investments may vary
significantly depending upon each unique investment opportunity.
37
<PAGE> 41
<TABLE>
<CAPTION>
MEZZANINE REAL ESTATE/SBA 7(A) LENDING
------------------------------- -------------------------------
<S> <C> <C>
INDUSTRY OR Consumer and industrial Office buildings, full service
PROPERTY products, business services hotels, manufacturing
TYPE (outsourcing), broadcasting, facilities, warehouses, retail
telecommunications, education, facilities, convenience stores,
and other industries that have gas stations, and other
low vulnerability to changes in properties requiring
economic cycles specialized underwriting
expertise
INVESTMENT Stable, growing companies, Amortization, collateral
CRITERIA strong cash flow, high returns coverage, cash flow coverage
on invested capital,
later-stage, strong management
LOAN SIZE $5 million to $25 million $0.2 million to $25 million
TERM 5 to 10 years 1 to 30 years
COLLATERAL Second lien on assets, if First lien on real estate,
available second lien on real estate,
personal guarantees
</TABLE>
LOAN UNDERWRITING PROCEDURES AND CRITERIA
MEZZANINE FINANCE. We generally consider financing companies that can
demonstrate strong market position, sales growth, positive cash flow, and
profitability. We emphasize the quality of management of our potential portfolio
companies, and specifically seek experienced entrepreneurs with a management
track record and relevant industry experience. We generally seek companies with
annual revenues of $20 million to $200 million, cash flow margins of greater
than 10% of revenues, operating histories of at least ten years, and seasoned
management teams who have a significant personal investment at risk in the
business. In addition, the business must generate a high return on its invested
capital, and must demonstrate a low level of vulnerability to changes in
economic cycles. The prospective portfolio company's total debt including our
loan is generally no greater than five times the company's current cash flow,
and the company's cash flow is generally no less than two times its total debt
service obligation to all of its lenders.
For each mezzanine financing, our investment professionals thoroughly
review, analyze and substantiate, through due diligence, the business plan and
operations of the potential portfolio company. Our financial due diligence,
which is often conducted with the assistance of an accounting firm, includes
analyzing the company's historical and projected financial information and
stress-testing the projections under adverse assumptions. Our business due
diligence, which is often conducted with the assistance of industry specialists
or consultants, thoroughly studies the industry and competitive landscape. We
assess the company's business plan and its cyclicality, to assess the borrower's
ability to weather economic cycles. In management due diligence, we conduct
numerous personal and professional reference checks, including employees, both
current and former, customers, suppliers and competitors. The typical mezzanine
financing will require two to three months of diligence and structuring before
funding occurs.
COMMERCIAL REAL ESTATE FINANCE AND SBA 7(A) LENDING. When we evaluate
commercial mortgage loans for origination or purchase, including CMBS purchases,
we generally receive an initial package of information that typically includes
underwriting
38
<PAGE> 42
information that was developed by the borrower or seller. Typical underwriting
information that we require from potential borrowers in order to conduct
appropriate due diligence includes: financial statements of the borrower,
appraisals, rent rolls and lease information, environmental reports, structural
and engineering reports, and any other information deemed appropriate under the
circumstances.
In the case of purchased loans, the seller generally provides financial
statements of the borrower, property appraisals and any other original
underwriting information. The seller also generally provides loan documents and
payment histories. When we originate or purchase commercial mortgage loans, we
generally consider a variety of other factors, including the borrower's
estimated current cash flow coverage, the creditworthiness of the borrower, the
net worth and financial strength of the borrower, the estimated current
liquidation value of the related mortgaged property, and trends in the
borrower's industry and in real estate values in the borrower's geographic
region. The loan officer inspects the property during the due diligence process,
and he or she values the property using internally developed valuation analyses.
Small businesses with less than 500 employees or less than $5 million in
annual sales qualify for SBA 7(a) loans. Our underwriting criteria are otherwise
very similar to our commercial mortgage loan criteria. We generally seek SBA
7(a) loans that are collateralized by real estate.
CREDIT APPROVAL PROCESS
All credit approval is obtained through a committee review process
centralized at our headquarters in Washington, DC. All of our lending
disciplines are represented on the investment committee, which is comprised of
our most senior lenders. The investment committee in its entirety, or certain
subcommittees of the investment committee, are required to approve all loan
transactions.
No one individual has the ability to approve a credit. The asset approval
process not only benefits from the experience of the investment committee
members, but also from the experience of our other investment professionals who,
on average, have over 13 years of professional experience. This experienced
staff of investment professionals underwrites each new loan and subjects each
potential investment to a rigorous due diligence process, as is described above.
In certain instances where risk/return characteristics warrant and for
every transaction larger than $10 million, we require approval from the
executive committee of the board of directors in addition to the investment
committee. Even after all such approvals are received, due diligence must be
successfully completed with final investment committee approval before funds are
disbursed to a new borrower.
PORTFOLIO MANAGEMENT
LOAN SERVICING: Our staff is responsible for routine loan servicing, which
includes:
- payment processing;
- borrower inquiries;
- escrow analysis and processing;
- third-party reporting; and
- insurance and tax administration.
39
<PAGE> 43
In addition, our staff is responsible for special servicing activities
including delinquency monitoring and collection, workout administration and
management of foreclosed assets.
PORTFOLIO MONITORING AND VALUATION: We use a grading system in order to
help us monitor our portfolio. The grading system assigns grades to loans from 1
to 5 as follows:
<TABLE>
<CAPTION>
GRADE DESCRIPTION
- ----- -----------
<C> <S>
1 Probable capital gain
2 Performing security
3 Close monitoring -- no loss of principal or interest
expected
4 Workout -- some loss of interest expected
5 Workout -- some loss of principal and interest expected.
Security is valued at net realized value.
</TABLE>
At December 31, 1998 Grade 1 investments totaled $104.4 million, or 13.0%
of the total portfolio at value; Grade 2 investments totaled $618.0 million, or
77.2% of the total portfolio; Grade 3 investments totaled $53.2 million, or 6.7%
of the total portfolio; Grade 4 investments totaled $11.8 million, or 1.5% of
the total portfolio; and Grade 5 investments totaled $12.9 million or 1.6% of
the total portfolio.
As a BDC, the board of directors is required to value the portfolio on a
quarterly basis. In valuing each individual investment, we consider the
financial performance of each borrower, loan payment histories, indications of
potential equity realization events and current collateral values, and determine
whether the value of the asset should be increased through unrealized
appreciation or decreased through unrealized depreciation. After each investment
professional has made his or her determination of value, members of senior
management review the valuations. These valuations are then presented to the
board of directors for their review and approval.
As a general rule, the Company does not value its loans above cost, but
loans are subject to depreciation events when the asset is considered impaired.
Also as a general rule, equity securities may be assigned appreciation if
circumstances warrant. With respect to private equity securities, each
investment is valued using industry valuation benchmarks, and then the value is
assigned a discount reflecting the illiquid nature of the investment as well as
our minority, non-control position. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurs, the pricing
indicated by the external event is used to corroborate our private equity
valuation. Equity securities in public companies that carry certain restrictions
on sale are generally valued at a discount from the public market value of the
securities. Restricted and unrestricted publicly traded stocks may also be
valued at discounts, due to the size of our investment or market liquidity
concerns.
DELINQUENCIES. We monitor loan delinquencies weekly. The following outlines
the treatment of each delinquency category:
30 DAYS PAST DUE............. Our loan servicing staff monitors loans and
contacts borrowers for collection.
60 DAYS PAST DUE............. We generally transfer loans to investment
professionals responsible for special servicing
activity for monitoring, collection, and
development of a workout plan, if necessary.
40
<PAGE> 44
90 DAYS PAST DUE............. Our accounting department reviews loans in
conjunction with the investment professional
responsible for special servicing to determine
whether the loan should be placed on a
non-accrual status or whether a valuation
adjustment is required.
120 DAYS PAST DUE............ Generally, we place such loans on non-accrual
status and the loan is an active workout.
At December 31, 1998, $13.7 million, or 1.7% of the Company's portfolio at
value was 120 days or more past due. Included in this category are loans valued
at $9.9 million that are secured by real estate.
LOAN LOSSES. We have a history of low levels of loan losses, and have a
demonstrated track record of successfully resolving troubled credit situations
with minimal loss. The following table shows realized losses in the Company's
portfolio over the last five years:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Realized Losses.............. $ 2,908 $ 4,679 $ 11,262 $ 5,100 $ 3,216
Total Assets............ 501,817 605,434 713,360 807,775 856,079
Realized Losses/Total
Assets..................... 0.6% 0.8% 1.6% 0.6% 0.4%
</TABLE>
EMPLOYEES
At December 31, 1998, we employed 106 individuals including investment
professionals, operations professionals and administrative staff. All
individuals are located in the Washington, DC office, except for five
individuals in the Chicago office, four in the San Francisco office, four in the
Detroit office and one in the Atlanta office. We believe that our relations with
employees are excellent.
LEGAL PROCEEDINGS
We are a party to certain lawsuits in the normal course of our business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, we do not expect that these actions will have a material effect
upon our financial condition or results of operations.
PORTFOLIO COMPANIES
The following is a listing of our portfolio companies in which we had an
equity investment at December 31, 1998. We make available significant managerial
assistance to our portfolio companies. Other than loans to the portfolio
company, our only relationship with each portfolio company is our investment.
For information relating to the amount and
41
<PAGE> 45
general terms of our loans to portfolio companies, see the Consolidated
Statement of Investments at December 31, 1998 at pages F-5 to F-9.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Acme Paging, L.P. ................ Paging Services Partnership Interests 1.8%
1336 Basswood, Suite F
Schaumburg, IL 60173
American Barbecue & Grill, Restaurant Chain 17.3%
Inc. ........................... Warrants to Purchase
7300 W. 110th Street, Suite 570 Common Stock
Overland Park, KS 66210
ASW Holding Corporation........... Steel Wool Manufacturer Warrants to Purchase 5.0%
2825 W. 31st Street Common Stock
Chicago, IL 60623
Au Bon Pain Co., Inc. ............ Restaurant Chain Warrants to Purchase 1.7%
19 Fid Kennedy Avenue Common Stock
Boston, MA 02210
Avborne, Inc. .................... Aviation Services Warrants to Purchase 2.5%
c/o Trivest, Inc. Company Common Stock
2665 S. Bayshore Dr., Suite 800
Miami, FL 33133-5462
Brazos Sportswear, Inc. .......... Sportswear Manufacturer Common Stock 7.8%
3860 Virginia Avenue & Distribution
Cincinnati, OH 45227
Candlewood Hotel Company.......... Extended Stay Series A Convertible 5.0%
9342 East Central Facilities Preferred Stock
Wichita, KS 67206
Celebrities, Inc. ................ Radio Stations Warrants to Purchase 25.0%
408-412 W. Oakland Park Common Stock
Boulevard
Ft. Lauderdale, FL 33311-1712
CeraTech Holdings Corporation..... Ceramic Plate Warrants to Purchase 33.7%
10435 Seymour Avenue Manufacturer Common Stock
Franklin Park, IL 60131
Cherry Tree Toys, Inc. ........... Direct Marketer of Common Stock 19.8%
7601 France Avenue South, #225 Woodcrafts
Edina, MN 55435
Convenience Corporation of
America......................... Convenience Store Chain Series A Preferred Stock 10.0%
711 N. 108th Court Warrants to Purchase 4.5%
Omaha, NE 68154 Common Stock
Cooper Natural Resources, Inc. ... Sodium Sulfate Producer Warrants to Purchase 25.3%
P.O. Box 1477 Common Stock
Seagraves, TX 79360
Cosmetic Manufacturing............ Cosmetic Manufacturer Options to Purchase 10.0%
Resources, LLC Shares
11312 Penrose Street
Sun Valley, CA 91352
Csabai Canning Factory Rt. ....... Food Processing Hungarian Quotas 9.2%
5600 Bekescasba
Bekis: vt 52-54 Hungary
DEH Printed Circuits, Inc. ....... Circuit Board Warrants to Purchase 12.5%
840 Church Road Manufacturer Common Stock
Elgin, IL 60123
</TABLE>
42
<PAGE> 46
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
DeVlieg-Bullard, Inc. ............ Tool Manufacturer Warrants to Purchase 1.7%
One Gorham Island Common Stock
Westport, CT 06680
Directory Investment Telephone Directories 50.0%
Corporation..................... Common Stock
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Directory Lending Corporation..... Telephone Directories Common Stock 50.0%
1919 Pennsylvania Avenue, N.W. Preferred Stock 50.0%
Washington, DC 20006
EDM Consulting, LLC............... Environmental Common Stock 25.0%
14 Macopin Avenue Consulting
Montclair, NJ 07043
Enterprise Software, Inc.
(formerly IndeNet Corp.) ....... Broadcasting Software Common Stock 2.7%
5475 Tech Enter Drive, Suite 300 Warrants to Purchase 3.8%
Colorado Springs, CO 80919 Common Stock
Esquire Communications Ltd. ...... Court Reporting Warrants to Purchase 3.0%
216 E. 45th Street, 8th floor Services Common Stock
New York, NY 10017
ExTerra Credit Recovery, Inc. .... Consumer Finance Preferred Stock 2.6%
35 Lennon Lane, Suite 200 Common Stock 1.1%
Walnut Creek, CA 94598 Warrants to Purchase 1.1%
Common Stock
Fairchild Industrial Products
Company......................... Industrial Controls Warrants to Purchase 21.5%
3920 Westpoint Boulevard Manufacturer Common Stock
Winston-Salem, NC 27013
Galaxy American Communications,
LLC............................. Cable Television Warrants to Purchase 6%
1220 N. Main Street Operator Common Stock
Sikeston, MO 63801
Gibson Guitar Corporation ........ Guitar Manufacturer Warrants to Purchase 3.0%
1818 Elm Hill Pike Common Stock
Nashville, TN 37210
Ginsey Industries, Inc. .......... Toilet Seat 7.0%
Manufacturer Convertible Debentures
281 Benigno Boulevard Warrants to Purchase 16.0%
Bellmawr, NJ 08031 Common Stock
Golden Eagle/Satellite
Archery, LLC.................... Sporting Equipment Convertible Debentures 26.9%
1733 Gunn Highway Manufacturer
Odessa, FL 33556
Grant Broadcasting System II...... Television Stations Warrants to Purchase 40.0%
919 Middle River Drive, Common Stock
Suite 409 Warrants to Purchase 40.0%
Ft. Lauderdale, FL 33304 Common Stock in
Affiliate Company
Grant Television, Inc. ........... Television Stations Warrants to Purchase 20.0%
(See Grant Broadcasting System II) Common Stock
Hotelevision, Inc. ............... Hotel Cable-TV Preferred Stock 14.2%
599 Lexington Avenue Network
Suite 2300
New York, NY 10022
</TABLE>
43
<PAGE> 47
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Jack Henry & Associates, Inc. .... Commercial Banking Common Stock 0.5%
663 Highway 60 Software Development
P.O. Box 807
Monett, MO 65708
JRI Industries, Inc. ............. Machinery Manufacturer Warrants to Purchase 7.5%
2958 East Division Common Stock
Springfield, MO 65803
Julius Koch USA, Inc. ............ Cord Manufacturer Warrants to Purchase 45.0%
387 Church Street Common Stock
New Bedford, MA 02745
Kirker Enterprises, Inc. ......... Nail Enamel Warrants to Purchase 22.5%
55 East 6th Street Manufacturer Common Stock
Paterson, NJ 07524 Equity Interest in 5.0%
Affiliate Company
Kirkland's, Inc. ................. Home Furnishing Warrants to Purchase 3.2%
P.O. Box 7222 Retailer Common Stock
Jackson, TN 38308-7222
Kyrus Corporation
(formerly MidSouth Data
Systems, Inc.) ................. Value-Added Reseller, Warrants to Purchase 8.0%
25 Westridge Market Place Computer Systems Common Stock
Chandler, NC 28715
Liberty-Pittsburgh Systems, Business Forms Printing 20.0%
Inc. ........................... Common Stock
265 Executive Drive
Plainview, NY 11803
Love Funding Corporation.......... Mortgage Services Series D Preferred Stock 26.0%
1220 19th Street, NW, Suite 801
Washington, DC 20036
Midview Associates, L.P. ......... Residential Land Options to purchase 35.0%
2 Eaton Street, Suite 1101 Development partnership interests
Hampton, VA 23669
Mill-It Striping, Inc. ........... Highway Paint Striping Common Stock 8.0%
1005 Sunshine Lane
Altamonte Springs, FL 32714
Monitoring Solutions, Inc. ....... Air Emissions Common Stock 25.0%
4303 South High School Road Monitoring Warrants to Purchase 40.0%
Indianapolis, IN 46241 Common Stock
Morton Industrial Group........... Friction Materials Common Stock 0.2%
5305 Oakbrook Parkway Manufacturer
Norcross, GA 30093
Nobel Education Dynamics, Inc. ... Educational Services Series D Convertible 100.0%
1400 N. Providence Road, Preferred Stock
Suite 3055 Warrants to Purchase 11.6%
Media, PA 19063 Common Stock
Nursefinders, Inc. ............... Home Healthcare Warrants to Purchase 3.5%
1200 Copeland Road, Suite 200 Providers Common Stock
Arlington, TX 76011
Old Mill Holdings, Inc............ Custom Embroidered Warrants to Purchase 24.0%
410 Severn Avenue, Suite 311 Apparel Manufacturer Common Stock
Annapolis, MD 21403
PIATL Holdings, Inc. ............. Asbestos Testing Labs Preferred Stock 35.5%
16000 Horizon Way, Suite 100 Common Stock 23.6%
Mt. Laurel, NJ 08054
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Pico Products, Inc. .............. Satellite/Television Common Stock 5.0%
12500 Foothill Boulevard Component Warrants to Purchase 15.0%
Lakeview Terr., CA 91342 Manufacturer Common Stock
Precision Industrial Co. (formerly
Herr-Voss Industries, Inc.) .... Machinery Manufacturer Common Stock 8.5%
Arch Street Extension
Carnegie, PA 15106
Progressive International
Corporation .................... Retail Kitchenware Redeemable Preferred 6.2%
6111 S. 228th Street Stock
P.O. Box 97045 Warrants to Purchase 8.0%
Kent, WA 98064 Common Stock
Quality Software Products
Holdings, PLC................... Accounting Software Common Stock 0.7%
Talipot House 5th Avenue Developer
Gateshead Tyne & Wear, NE110XA
UNITED KINGDOM
Radio One of Atlanta, Inc. ....... Radio Stations Common Stock 14.3%
5900 Princess Garden Parkway
Lanham, MD 20706
Schwinn/GT........................ Bicycle Manufacturer/ Warrants to Purchase 0.7%
1690 38th Street Distributor Common Stock
Boulder, CO 80301
Seasonal Expressions, Inc......... Decorative Ribbon Series A Preferred Stock 100.0%
230 5th Avenue, Suite 1007 Manufacturer
New York, NY 10001
Spa Lending Corporation........... Health Spas Series A Preferred Stock 100.0%
1919 Pennsylvania Avenue, N.W. Series B Preferred Stock 68.4%
Washington, DC 20006 Series C Preferred Stock 46.3%
Common Stock 62.1%
Sydran Food Services II, LP....... Operator of Fast Options to Purchase 2.5%
Bishop Ranch 8 Food Restaurants Common Stock
3000 Executive Parkway
Ste. 515
San Ramon, CA 94583-4254
Total Foam, Inc. ................. Packaging Systems Common Stock 49.0%
P.O. Box 688
Ridgefield, CT 06877
Unitel, Inc. ..................... Operator of Call 8.0%
Service Warrants to Purchase
8300 Greensboro Drive, 6th Floor Centers Common Stock
McLean, VA 22102
Vianova Resins GmbH............... Specialty Chemical Warrants to Purchase 0.2%
Rheingaustrasse 190 Producer Common Stock
D-65203 Weisbaden GERMANY
Williams Brothers Lumber
Company......................... Builders' Supplies Warrants to Purchase 14.1%
3165 Pleasant Hill Road Common Stock
Duluth, GA 30136
</TABLE>
45
<PAGE> 49
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES OF CLASS
OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1)
-------------------- ------------------ ------------------- -------------
<S> <C> <C> <C>
Wyo-Tech Acquisition Vocational School 100%
Corporation..................... Common Stock
4373 N. 3rd Street Preferred Stock 100%
Laramie, WY 82072
</TABLE>
- ---------------
(1) Percentages shown for warrants and options held represent the percentage of
class of security we may own, on a fully diluted basis, assuming we exercise
our warrants or options.
DETERMINATION OF NET ASSET VALUE
We determine the net asset value per share of our common stock quarterly.
The net asset value per share is equal to the value of our total assets minus
liabilities divided by the total number of common shares outstanding.
Portfolio assets are carried at fair value as determined by the board of
directors under the Company's valuation policy. As a general rule, the Company
does not value its loans above cost, but loans are subject to depreciation
events when the asset is considered impaired. Also as a general rule, equity
securities may be assigned appreciation if circumstances warrant. With respect
to private equity securities, each investment is valued using industry valuation
benchmarks, and then the value is assigned a discount reflecting the illiquid
nature of the investment as well as our minority, non-control position. When an
external event such as a purchase transaction, public offering, or subsequent
equity sale occurs, the pricing indicated by the external event is used to
corroborate our private equity valuation. Equity securities in public companies
that carry certain restrictions on sale are generally valued at a discount from
the public market value of the securities. Restricted and unrestricted publicly
traded stocks may also be valued at discounts, due to the size of our investment
or market liquidity concerns.
Determination of fair value involves subjective judgments that cannot be
substantiated by auditing procedures. Accordingly, under current standards, the
accountants' opinion on the Company's financial statements in our annual report
refers to the uncertainty with respect to the possible effect on the financial
statements of such valuation.
MANAGEMENT
The board of directors supervises the management of our Company. The
responsibilities of each director include, among other things, the oversight of
the loan approval process, the quarterly valuation of our assets, and oversight
of our financing arrangements. The board of directors maintains an Executive
Committee, Audit Committee, Compensation Committee, and Nominating Committee,
and may establish additional committees in the future. All of the Company's
directors also serve as directors of its subsidiaries.
Our investment decisions are made by an investment committee comprised of
the Company's most senior investment professionals. No one person is primarily
responsible for making recommendations to the investment committee.
The Company is internally managed and our investment professionals manage
our portfolio and the portfolios of companies for which we serve as investment
adviser. These investment professionals have extensive experience in managing
investments in private growing businesses in a variety of industries and in
diverse geographic locations, and are familiar with our approach of lending and
investing. Because the Company is internally managed, we pay no investment
advisory fees, but instead we pay the operating costs associated with employing
investment management professionals.
46
<PAGE> 50
STRUCTURE OF BOARD OF DIRECTORS
The Company's board of directors is classified into three approximately
equal classes with three-year terms, with only one of the three classes expiring
each year. Directors serve until their successors are elected and qualified.
DIRECTORS
Information regarding the board of directors is as follows:
<TABLE>
<CAPTION>
DIRECTOR EXPIRATION
NAME AGE POSITION SINCE(1) OF TERM
- ---- --- -------- -------- ----------
<S> <C> <C> <C> <C>
William L. Walton*........... 49 Chairman, Chief Executive
Officer and President 1986 2001
George C. Williams, Jr.*..... 72 Chairman Emeritus 1964 2001
Brooks H. Browne............. 49 Director 1990 2001
John D. Firestone............ 55 Director 1993 1999
Anthony T. Garcia............ 42 Director 1991 1999
Lawrence I. Hebert........... 52 Director 1989 1999
John I. Leahy................ 68 Director 1994 2000
Robert E. Long............... 67 Director 1972 2001
Warren K. Montouri........... 69 Director 1986 2000
Guy T. Steuart II............ 67 Director 1984 2000
T. Murray Toomey, Esq........ 75 Director 1959 2000
Laura W. van Roijen.......... 46 Director 1992 1999
</TABLE>
- ---------------
* Interested persons of the Company, as defined in the 1940 Act.
(1) Includes service as a director of any of the predecessor companies.
EXECUTIVE OFFICERS
Information regarding the Company's executive officers is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William L. Walton............ 49 Chairman, Chief Executive Officer and President
Philip A. McNeill............ 39 Managing Director
John M. Scheurer............. 46 Managing Director
Joan M. Sweeney.............. 39 Managing Director
G. Cabell Williams, III ..... 44 Managing Director
Penni F. Roll................ 33 Principal and Chief Financial Officer
</TABLE>
BIOGRAPHICAL INFORMATION
DIRECTORS
William L. Walton has been the Chairman, Chief Executive Officer and
President of the Company since 1997. Mr. Walton was President of Allied II from
1996 to 1997. Mr. Walton is the Chairman of Business Mortgage Investors, Inc
("BMI"), and is a director of Nobel Learning Communities, Inc. (a portfolio
company). Mr. Walton was Chief Executive Officer of Success Lab, Inc.
(children's educational services) from 1993 to 1996, and Chief Executive Officer
of Language Odyssey (educational publishing and services) from 1992 to 1996. Mr.
Walton was Managing Director of Butler Capital Corporation from 1987 to 1991.
Prior to that, Mr. Walton served as the investment advisor to William S. Paley,
founder and Chairman of CBS, from 1985 to 1987, and was an investment banker
with Lehman Brothers Kuhn Loeb from 1982 to 1985.
47
<PAGE> 51
George C. Williams, Jr. is Chairman Emeritus of the Company. Mr. Williams
was an officer of the predecessor companies from the later of 1959 or the
inception of the relevant entity and President or Chairman and Chief Executive
Officer of the predecessor companies from the later of 1964 or each entity's
inception until 1991. Mr. Williams is a director of BMI. Mr. Williams is the
father of G. Cabell Williams III, an executive officer of the Company.
Brooks H. Browne has been the President of Environmental Enterprises
Assistance Fund since 1993. Mr. Browne was the President, Executive Vice
President or Senior Vice President of Advisers from 1984 to 1993. Mr. Browne is
a director of SEAF, Corporation Financiera Ambiental (Panama), Empresas
Ambientales de Centro America (Costa Rica) and Yayasan Bina Usaha Lingkungan
(Indonesia) (environmental nonprofit or investment funds).
John D. Firestone has been a Partner of Secor Group (venture capital) since
1978. Mr. Firestone is a director of BMI and Security Storage Company of
Washington, DC, and is a senior advisor to Gilbert Capital, Inc.
Anthony T. Garcia has been General Manager of Breen Capital Group (investor
in tax liens) since 1997. Mr. Garcia was a Senior Vice President of Lehman
Brothers Inc. from 1985 to 1996.
Lawrence I. Hebert has been a director of Riggs National Corporation since
1988. He also serves as a director of Riggs Investment Management Corporation
and Riggs Bank Europe Limited (indirect subsidiaries of Riggs National
Corporation). Mr. Hebert is the President and a director of Perpetual
Corporation (owner of Allbritton Communications Company and Allnewsco, Inc.) and
the Chairman and Chief Executive Officer of Allbrittan Communications Company
(owner of television stations). Mr. Hebert is a director of Allnewsco, Inc., the
President of Westfield News Advertiser, Inc., and a trustee of The Allbritton
Foundation. Mr. Hebert was Vice President of University Bancshares, Inc. (a
Texas bank holding company) from 1975 to 1997.
John I. Leahy has been the President of Management and Marketing Associates
(a management consulting firm) since 1986. Mr. Leahy was the President and Group
Executive Officer, Western Hemisphere of Black & Decker Corporation from 1982 to
1985. Mr. Leahy is a director of Kar Kraft Systems, Inc., Cavanaugh Capital,
Inc., Acorn Products, Inc., The Wills Group, Thulman-Eastern Company and
Gallagher Fluid Seals, Inc.
Robert E. Long is the Managing Director of Goodwyn & Long Investment
Management, Inc. Mr. Long has been the President and Chief Executive Officer of
Business News Network, Inc. since 1995, was the Chairman and Chief Executive
Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995, and a
director and the President of Potomac Asset Management, Inc. from 1983 to 1991.
Mr. Long is a director of Ambase Inc., AHL Shipping Company, Inc., CSC
Scientific, Inc., and Global Travel, Inc.
Warren K. Montouri has been a Partner of Montouri & Roberson (real estate
investment firm) since 1980. Mr. Montouri was a director of C&S/Sovran Bank from
1970 to 1990, a director of Sovran Financial Corporation from 1989 to 1990, a
director of NationsBank, N.A. from 1990 to 1996, a trustee of Suburban Hospital
from 1991 to 1994, and a trustee of The Audubon Naturalist Society from 1979 to
1985. He has been a director of Franklin National Bank since 1996.
48
<PAGE> 52
Guy T. Steuart II has been a director and President of Steuart Investment
Company (manages, operates, and leases real and personal property and holds
stock in operating subsidiaries engaged in various businesses) since 1960. Mr.
Steuart is Trustee Emeritus of Washington and Lee University.
T. Murray Toomey, Esq. has been an attorney at law since 1949. Mr. Toomey
is a director of The National Capital Bank of Washington, and Federal Center
Plaza Corporation. He is also a trustee of The Catholic University of America.
Laura W. van Roijen has been a private real estate investor since 1992. Ms.
van Roijen was the Chairman of CWV & Associates (RTC qualified contracting firm)
from 1991 to 1994, a director and the Treasurer of Black Possum Inc. (retail
concern) from 1994 to 1996, the President of Volta Place, Inc. (real estate
advisory firm) from 1991 to 1994, and Vice President (from 1986 to 1991) and
Market Director (from 1989 to 1991) of Citicorp Real Estate, Inc.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Philip A. McNeill, Managing Director, has been employed by the Company
since 1993.
John M. Scheurer, Managing Director, has been employed by the Company since
1991. Mr. Scheurer is also President of BMI.
Joan M. Sweeney, Managing Director, has been employed by the Company since
1993. Ms. Sweeney is also a Managing Director of BMI.
G. Cabell Williams, III, Managing Director, has been employed by the
Company since 1981. Mr. Williams is also a Managing Director of BMI.
Penni F. Roll, Principal and Chief Financial Officer, has been employed by
the Company since 1995. Ms. Roll is also Principal and Chief Financial Officer
of BMI. Ms. Roll was a Manager at KPMG Peat Marwick, LLP from 1993 to 1995.
COMPENSATION PLANS
STOCK OPTION PLAN
The Company's stock option plan (the "New Plan") is intended to encourage
stock ownership in the Company by officers, thus giving them a proprietary
interest in the Company's performance. The Company's shareholders approved the
New Plan at the Special Meeting of Shareholders of Allied Lending held on
November 26, 1997. The principal objective of the Company's compensation
committee in awarding stock options to the Chief Executive Officer and other
eligible officers of the Company is to align each officer's interests with the
success of the Company and the financial interests of its shareholders. The
committee believes that the New Plan achieves this objective because it links a
portion of each executive's compensation with the performance of the Company's
stock and the value delivered to shareholders.
The committee grants stock options under the New Plan at a price not less
than the prevailing market value, and such options will have value only if the
Company's stock price increases. The committee determines the amount and
features of the stock options, if any, to be awarded to the Company's officers.
Historically, when granting stock options, the committee evaluated a number of
factors, including the recipient's current stock holdings, years of service,
position with the Company, and other factors. The committee
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has not applied a formula assigning specific weights to any of these factors
when making its determination.
For the year ended December 31, 1998, the Company's compensation committee
granted a total of 5,189,944 options, net of cancellations, to certain officers
of the Company. These options generally vest over a five-year period. See
"Control Persons and Principal Holders of Securities" in the SAI for currently
exercisable options granted to certain executive officers. The Company filed an
application with the Commission to request approval to grant options under the
New Plan to non-officer directors. There can be no assurance that such approval
will be granted.
The New Plan is designed to satisfy the conditions of Section 422 of the
Code so that options granted under the New Plan may qualify as "incentive stock
options." To qualify as "incentive stock options," options may not become
exercisable for the first time in any year if the number of incentive options
first exercisable in that year multiplied by the exercise price exceeds
$100,000.
CUT-OFF AWARD AND FORMULA AWARD
Prior to the merger, each of the five predecessor companies had a stock
option plan (each, an "Old Plan" and collectively, the "Old Plans"). Each
predecessor company's compensation committee had granted options under the
applicable Old Plan to various employees of Advisers, who were also officers of
that predecessor company. In preparation for the merger, the Advisers'
compensation committee in conjunction with the compensation committees of the
other predecessor companies, determined that the five Old Plans should be
terminated upon the merger, so that the new merged Company would be able to
develop a new plan that would incent all officers and directors with a single
equity security. The existence of the Old Plans had resulted in certain
inequities in option grants among the various officers of the predecessor
companies simply because of the differences in the underlying equity securities.
To balance stock option awards among employees, and to account for the
deviations caused by the existence of five plans supported by five different
publicly traded stocks, two special awards were developed to be granted in lieu
of options under the Old Plans that were forgone upon completion of the merger
and the cancellation of the Old Plans.
CUT-OFF AWARD. The first award established a cut-off dollar amount as of
the date of the announcement of the merger (August 14, 1997) that was computed
for all outstanding, but unvested options that were canceled as of the date of
the merger (the "Cut-Off Award"). 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, in the aggregate, was computed to be $2.9 million, and is equal to the
difference between the market price of the shares of stock underlying the
canceled options under the Old Plans at August 14, 1997, less the exercise
prices of the options. The Cut-Off Award is payable for each canceled option as
the canceled option would have vested, and vests automatically in the event of a
change of control. The Cut-Off Award is payable only if the award recipient is
employed by the Company on the future vesting date. A table indicating the
Cut-Off Award for certain officers, and the related vesting schedule, is
contained in the SAI.
FORMULA AWARD. The second award (the "Formula Award") was designed to
compensate officers from the point when their unvested options ceased to
appreciate in value pursuant to the Cut-Off Award (i.e., August 14, 1997) up
until the time in which they are able to receive option awards in the Company
after the merger became effective.
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In the aggregate, the Formula Award equaled six percent (6%) of the difference
between the combined aggregate market capitalizations of the predecessor
companies as of the close of the market on December 30, 1997, and the combined
aggregate market capitalizations of the predecessor companies on August 14,
1997. In total, the combined aggregate market capitalization of the predecessor
companies increased by $319 million from August 14, 1997 to December 30, 1997,
and the aggregate Formula Award was approximately $19 million.
The Formula Award was designed as a long-term incentive compensation
program to be a replacement for canceled stock options and to balance share
ownership among key officers for past and prospective service. The terms of the
Formula Award required that the award be contributed to the Company's deferred
compensation plan, as discussed below, and be used to purchase shares of the
Company in the open market.
The Formula Award vests and accrues equally over a three-year period, on
the anniversary of the merger date (December 31, 1997), and vests automatically
in the event of a change of control of the Company. If an officer terminates
employment with the Company prior to the vesting of any part of the Formula
Award, that amount will be forfeited to the Company. Assuming all officers meet
the vesting requirement, the Company will accrue the Formula Award over the
three-year period in equal amounts of approximately $6.4 million less any
forfeitures. For the year ended December 31, 1998, $6.2 million, net of
forfeitures of $0.3 million, was expensed for the Formula Award. A table
indicating the Formula Award for certain officers, and the related vesting
schedule, is contained in the SAI.
On January 4, 1999, the trust that holds the deferred compensation plan
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.
These shares are held in restricted accounts at a brokerage firm.
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the merger, the Company adopted an amended and restated
Employee Stock Ownership Plan, or ESOP. All eligible employees (i.e., employees
with one (1) year of service who are at least 21 years of age) of the Company
are eligible participants in the ESOP. Pursuant to this qualified plan, during
1998 the Company contributed 5% of each eligible participant's total cash
compensation for the year (up to a $30,000 limit per person) to a plan account
on the participant's behalf, which fully vests over a two-year period. The ESOP
has used substantially all of these cash contributions to purchase shares of the
Company, thus aligning every employee's interest with those of the Company and
its shareholders. At December 31, 1998, the ESOP held 0.5% of the outstanding
shares of the Company, and all of these shares had been allocated to
participants' plan accounts.
DEFERRED COMPENSATION PLAN
Pursuant to the merger, the Company succeeded to the deferred compensation
plan of Advisers (the "Deferred Compensation Plan"), and subsequently adopted
such plan as amended and restated. The Deferred Compensation Plan is a funded
plan that provides for the deferral of compensation by the Company's employees
and consultants. Any employee or consultant of the Company is eligible to
participate in the plan at such time and for such period as the board of
directors designates. The Deferred Compensation Plan is administered through a
trust, and the Company funds this plan through cash contributions.
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The Deferred Compensation Plan holds the unvested shares of the Company's common
stock purchased in connection with the Formula Award.
TAXATION
The following discussion is a general summary of the material federal
income tax considerations applicable to the Company and to an investment in the
common stock and does not purport to be a complete description of the income tax
considerations applicable to such an investment. The discussion is based upon
the Code, Treasury Regulations, and administrative and judicial interpretations
each as of the date of this prospectus and, all of which are subject to change.
You should consult your own tax advisor with respect to tax considerations which
pertain to your purchase of common stock.
This summary assumes that the investors in the Company hold shares as
capital assets. This summary does not discuss all aspects of federal income
taxation relevant to holders of the common stock in light of particular
circumstances, or to certain types of holders subject to special treatment under
federal income tax laws, including dealers in securities and financial
institutions. This summary does not discuss any aspects of foreign, state or
local tax laws.
TAXATION AS A RIC
The Company intends to be treated for tax purposes as a "regulated
investment company" or "RIC" within the meaning of Section 851 of the Code. If
the Company qualifies as a RIC and distributes to its shareholders in a timely
manner at least 90% of its "investment company taxable income," as defined in
the Code (the "90% Distribution Requirement"), each year, it will not be subject
to federal income tax on the portion of its taxable income and gains it
distributes to shareholders. In addition, if a RIC distributes in a timely
manner (or treats as "deemed distributed") 98% of its capital gain net income
for each one year period ending on December 31 (pursuant to Section
4982(e)(4)(A) of the Code), and distributes 98% of its ordinary income for each
calendar year, it will not be subject to the 4% nondeductible federal excise tax
on certain undistributed income of RICs. The Company generally endeavors to
distribute to shareholders all of its investment company taxable income and its
net capital gain, if any, for each taxable year so that it will not incur income
and excise taxes on its earnings.
In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things: (1) continue to qualify as a BDC under the 1940 Act;
(2) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale of
stock or other securities or other income derived with respect to its business
of investing in such stock or securities; and (3) diversify its holdings so that
at the end of each quarter of the taxable year (a) at least 50% of the value of
its assets consists of cash, cash items, U.S. government securities, securities
of other RICs, and other securities if such other securities of any one issuer
do not represent more than 5% of the Company's assets or 10% of the outstanding
voting securities of the issuer, and (b) no more than 25% of the value of the
Company's assets are invested in securities of one issuer (other than U.S.
government securities or securities of other RICs), or of two or more issuers
that are controlled by the Company and are engaged in the same or similar or
related trades or businesses. The failure of one or more of the Company's
subsidiaries to continue to qualify as RICs could adversely affect the Company's
ability to satisfy foregoing diversification requirements.
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If the Company fails to satisfy the 90% Distribution Requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in that year on all of its taxable income, regardless of whether it makes
any distribution to its shareholders. In that case, all of the Company's
distributions to its shareholders will be characterized as ordinary income (to
the extent of the Company's current and accumulated earnings and profits). In
contrast, as is explained below, if the Company qualifies as a RIC, a portion of
its distributions may be characterized as long-term capital gain in the hands of
shareholders.
TAXATION OF SHAREHOLDERS
Distributions of the Company generally are taxable to shareholders as
ordinary income or capital gains. Shareholders receive notification from the
Company at the end of each year as to the amount and nature of the income or
gains distributed to them for that year. The distributions from the Company to a
particular shareholder may be subject to the alternative minimum tax under the
provisions of the Code. Shareholders not subject to tax on income will not be
required to pay tax on amounts the Company distributed to them.
The Company's distributions of the ordinary income and net short-term
capital gain generally are taxable to shareholders as ordinary income.
Distributions of net capital gain, if any, that the Company designates as
capital gain dividends generally are taxable to shareholders as long-term
capital gain, regardless of the length of time a shareholder has held the
shares. All distributions are taxable, whether invested in additional shares or
received in cash. Dividends that the Company declares and are payable to
shareholders of record in October, November or December of a given year that are
paid during the following January, will be treated as having been received by
shareholders on December 31 of the year of declaration.
If certain conditions are met, the Company's ordinary income dividends to
its corporate shareholders may qualify for the dividends received deduction to
the extent that the Company receives qualifying dividend income during the
taxable year. Capital gain dividends distributed by the Company are not eligible
for the dividends received deduction.
In general, any gain or loss realized upon a taxable disposition of shares
of the Company, or upon receipt of a liquidating distribution, will be treated
as capital gain or loss. If gain is realized, it will be subject to taxation at
various tax rates depending on the length of time the taxpayer has held such
shares and other factors. The gain or loss will be short-term capital gain or
loss if the shares have been held for one year or less. If a shareholder has
received any capital gain dividends with respect to such shares, any loss
realized upon a taxable disposition of shares treated under the Code as having
been held for six months or less, to the extent of such capital gain dividends,
will be treated as a long-term capital loss. All or a portion of any loss
realized upon a taxable disposition of shares of the Company may be disallowed
if other shares of the Company are purchased (under a DRIP plan or otherwise)
within 30 days before or after the disposition.
A shareholder that is not a "United States person" within the meaning of
the Code (a "Non-U.S. shareholder") generally will be subject to a withholding
tax of 30% (or lower applicable treaty rate) on dividends from the Company
(other than capital gain dividends) that are not "effectively connected" with a
United States trade or business carried on by such shareholder. Accordingly,
investment in the Company is likely to be appropriate for a Non-U.S. shareholder
only if such person can utilize a foreign tax credit or corresponding tax
benefit in respect of such United States withholding tax. Non-effectively
connected capital gain dividends and gains realized from the sale of Shares will
not be subject to United States federal income tax in the case of (i) a Non-
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U.S. shareholder that is a corporation and (ii) a Non-U.S. shareholder that is
not present in the United States for more than 182 days during the taxable year
(assuming that certain other conditions are met). See "Tax Status -- Non-U.S.
Stockholders" in the SAI. Prospective foreign investors should consult their
U.S. tax advisors concerning the tax consequences to them of an investment in
shares.
The Company is required to withhold and remit to the Internal Revenue
Service (the "IRS") 31% of the dividends paid to any shareholder who (i) fails
to furnish the Company with a certified taxpayer identification number; (ii) has
underreported dividend or interest income to the IRS; or (iii) fails to certify
to the Company that he, she or it is not subject to backup withholding.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion
generally summarizes certain regulations.
BUSINESS DEVELOPMENT COMPANY ("BDC"). A business development company is
defined and regulated by the Investment Company Act of 1940. It is a unique kind
of investment company that focuses on investing in or lending to small private
companies and making managerial assistance available to them. A BDC may use
capital provided by public shareholders and from other sources to invest in
long-term, private investments in growing small businesses. A BDC provides
shareholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in privately owned
growth companies.
As a BDC, we may not acquire any asset other than "Qualifying Assets"
unless, at the time we make the acquisition, our Qualifying Assets represent at
least 70% of the value of our total assets (the "70% test"). The principal
categories of Qualifying Assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering,
the issuer of which is an eligible portfolio company. An eligible
portfolio company is defined to include any issuer that (a) is
organized and has its principal place of business in the United States,
(b) is not an investment company other than an SBIC wholly owned by a
BDC (our investments in Allied Investment, Allied SBLC and certain
other subsidiaries generally are Qualifying Assets), and (c) does not
have any class of publicly traded securities with respect to which a
broker may extend margin credit;
(2) Securities received in exchange for or distributed with respect to
securities described in (1) above or pursuant to the exercise of
options, warrants, or rights relating to such securities; and
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act), maturing in one year
or less from the time of investment.
To include certain securities described above as Qualifying Assets for the
purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans to a portfolio
company. We will provide managerial assistance on a
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continuing basis to any portfolio company that requests it, whether or not
difficulties are perceived.
As a BDC, the Company is entitled to issue senior securities in the form of
stock or senior securities representing indebtedness, as long as each class of
senior security has an asset coverage of at least 200% immediately after each
such issuance. This limitation is not applicable to borrowings by our SBIC or
SBLC subsidiaries, and therefore any borrowings by these subsidiaries are not
included in this asset coverage test. See "Risk Factors."
We may not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC unless authorized by vote of a "majority of the
outstanding voting securities," as defined in the 1940 Act, of our shares. Since
we made our BDC election, we have not made any substantial change in the nature
of our business.
REGULATED INVESTMENT COMPANY ("RIC"). Our status as a RIC enables us to
avoid the cost of federal and state taxation, and as a result achieve pre-tax
investment returns. We believe that this tax advantage enables us to achieve
strong equity returns without having to aggressively leverage our balance sheet.
In order to qualify as a RIC, the Company must, among other things:
(1) Derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of stock
or other securities or other income derived with respect to its
business of investing in such stock or securities.
(2) Diversify its holdings so that
(a) at least 50% of the value of the Company's assets consists of cash,
cash items, government securities and other securities if such other
securities of any one issuer do not represent more than 5% of the
Company's assets and 10% of the outstanding voting securities of the
issuer, and
(b) no more than 25% of the value of the Company's assets are invested
in securities of one issuer (other than U.S. government securities),
or of two or more issuers that are controlled by the Company.
(3) Distribute at least 90% of its "investment company taxable income" each
tax year to its shareholders. In addition, if a RIC distributes in a
timely manner (or treats as "deemed distributed") 98% of its capital
gain net income for each one year period ending on December 31 and
distributes 98% of its ordinary income for each calendar year, it will
not be subject to the 4% nondeductible federal excise tax on certain
undistributed income of RICs.
SBA REGULATIONS. Allied Investment is an SBIC and Allied SBLC is an SBLC.
SBIC REGULATIONS. Allied Investment, a wholly owned subsidiary of the
Company, is licensed by the SBA as an SBIC under Section 301(c) of the Small
Business Investment Act of 1958, as amended (the "1958 Act"), and has elected to
be regulated as a BDC. Allied Investment resulted from the merger of the
Company's two wholly owned SBIC subsidiaries in July 1998. Pursuant to this
merger, the Company's subsidiary that was then named 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"). Prior to the merger, Allied Financial was
licensed by the SBA as a Specialized Small Business Investment Company ("SSBIC")
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under 301(d) of the 1958 Act. After the merger, Allied Investment could make
SBIC eligible investments in addition to SSBIC eligible investments.
SBICs are authorized to stimulate the flow of private equity capital to
eligible small businesses. Under present SBA regulations, eligible small
businesses include businesses that have a net worth not exceeding $18 million
and have average annual fully taxed net income not exceeding $6 million for the
most recent two fiscal years. In addition, an SBIC must devote 20% of its
investment activity to "smaller" concerns as defined by the SBA. A smaller
concern is one that has a net worth not exceeding $6 million and has average
annual fully taxed net income not exceeding $2 million for the most recent two
fiscal years. SBA regulations also provide alternative size standard criteria to
determine eligibility, which depend on the industry in which the business is
engaged and are based on such factors as the number of employees and gross
sales. According to SBA regulations, SBICs may make long-term loans to small
businesses, invest in the equity securities of such businesses, and provide them
with consulting and advisory services. Allied Investment provides long-term
loans to qualifying small businesses; equity investments and consulting and
advisory services are typically provided only in connection with such loans.
Allied Investment is periodically examined and audited by the SBA staff to
determine its compliance with SBIC regulations.
Allied Investment has the opportunity to sell to the SBA subordinated
debentures with a maturity of up to ten years, up to an aggregate principal
amount of $101 million. This limit generally applies to all financial assistance
provided by the SBA to any licensee and its "associates," as that term is
defined in SBA regulations. Historically, an SBIC was also eligible to sell
preferred stock to the SBA. Allied Investment had received $47.7 million of
subordinated debentures and $7.0 million of preferred stock investments from the
SBA at December 31, 1998; as a result of the $101 million limit, the Company is
limited on its ability to apply for additional financing from the SBA. Interest
rates on the SBA debentures currently outstanding have a weighted average
interest rate of 8.23%.
At December 31, 1998, we had an outstanding commitment from the SBA to
purchase up to $27.0 million in additional SBIC debentures. We may seek this
additional financing during 1999.
SBLC REGULATIONS. Allied SBLC is licensed to operate as an SBLC and is
periodically examined and audited by the SBA staff for purposes of determining
compliance with SBA regulations, including its participation in the Preferred
Lenders Program. See SBA 7(a) Lending, above.
DIVIDEND REINVESTMENT PLAN
We have adopted an "opt out" dividend reinvestment plan ("DRIP plan").
Under the DRIP plan, if you own shares registered in your own name, our transfer
agent, acting as reinvestment plan agent, will automatically reinvest any
dividend in additional shares of common stock. Shareholders may change
enrollment status in the DRIP plan at any time by contacting either the plan
agent or the Company.
A shareholder's ability to participate in a DRIP plan may be limited
according to how the shares are registered. A nominee may preclude beneficial
owners holding shares in street name from participating in the DRIP plan.
Shareholders who wish to participate in a DRIP plan may need to register their
shares in their own name. Shareholders will be informed of their right to opt
out of the DRIP plan in the Company's annual and quarterly
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reports to shareholders. Shareholders who hold shares in the name of a nominee
should contact the nominee for details.
All distributions to investors who do not participate (or whose nominee
elects not to participate) in the DRIP plan will be paid by check mailed
directly, or through the nominee, to the record holder by or under the
discretion of the plan agent. The plan agent is American Stock Transfer and
Trust Company, 40 Wall Street, New York, New York 10005. Their telephone number
is 800-937-5449.
Under the DRIP plan, we may issue new shares unless the market price of the
outstanding shares is less than 110% of the last reported net asset value.
Alternatively, the plan agent may buy shares in the market. We value newly
issued shares for the DRIP plan at the average of the reported last sale prices
of the outstanding shares on the last five trading days prior to the payment
date of the distribution, but not less than 95% of the opening bid price on such
date. The price in the case of shares bought in the market will be the average
actual cost of such shares, including any brokerage commissions. There are no
other fees charged to shareholders in connection with the DRIP plan. Any
distributions reinvested under the plan will nevertheless remain taxable to the
shareholders.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of common stock, par
value $0.0001. At March 19, 1999, there were 58,765,691 shares of common stock
outstanding and 5,113,898 shares of Common Stock reserved for issuance under the
New Plan. The following are the authorized classes of securities of the Company
as of March 19, 1999:
<TABLE>
<CAPTION>
(4)
(3) AMOUNT
AMOUNT HELD OUTSTANDING
(2) BY COMPANY EXCLUSIVE OF
(1) AMOUNT OR FOR ITS AMOUNTS SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT UNDER(3)
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allied Capital
Corporation........ Common Stock 100,000,000 810,456 57,955,235
</TABLE>
- -------------------------
* Represents shares of the Company held in a trust for the Deferred Compensation
Plan. See "Management -- Compensation Plans."
All shares of common stock have equal rights as to earnings, assets,
dividends, and voting privileges and all outstanding shares of common stock are
fully paid and non-assessable. Our common stock has no preemptive, conversion,
or redemption rights and are freely transferable. In the event of liquidation,
each share of common stock is entitled to its proportion of our assets after
debts and expenses. Each share is entitled to one vote and does not have
cumulative voting rights, which means that holders of a majority of the shares,
if they so choose, could elect all of the directors, and holders of less than a
majority of the shares would, in that case, be unable to elect any director. All
shares offered hereby will be, when issued and paid for, fully paid and
non-assessable.
The board of directors may classify and reclassify any unissued shares of
capital stock of the Company by setting or changing in one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms or conditions or redemption
or other rights of such shares of capital stock.
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LIMITATION ON LIABILITY OF DIRECTORS
The Company has adopted provisions in its charter and bylaws limiting the
liability of directors and officers of the Company for monetary damages. The
effect of these provisions in the charter and bylaws is to eliminate the rights
of the Company and its shareholders (through shareholders' derivative suits on
behalf of the Company) to recover monetary damages against a director or
officers for breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent or grossly negligent behavior)
except in certain limited situations. These provisions do not limit or eliminate
the rights of the Company or any shareholder to seek non-monetary relief such as
an injunction or rescission in the event of a breach of a director's or
officer's duty of care. These provisions will not alter the liability of
directors or officers under federal securities laws.
CERTAIN ANTI-TAKEOVER PROVISIONS
The charter and bylaws of the Company and certain statutory and regulatory
requirements contain certain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company to negotiate first with the board of
directors. We believe that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the charter and the bylaws.
CLASSIFIED BOARD OF DIRECTORS
The charter provides for the board of directors to be divided into three
classes of directors serving staggered three-year terms, with each class to
consist as nearly as possible of one-third of the directors then elected to the
board. A classified board may render more difficult a change in control of the
Company or removal of incumbent management. We believe, however, that the longer
time required to elect a majority of a classified board of directors helps to
ensure continuity and stability of the Company's management and policies.
ISSUANCE OF PREFERRED STOCK
The board of directors of the Company, without shareholder approval, has
the authority to reclassify common stock as preferred stock and to issue
preferred stock. Such stock could be issued with voting, conversion or other
rights designed to have an anti-takeover effect.
MARYLAND CORPORATE LAW
The Company is subject to the Maryland Business Combination Statute and the
Control Share Acquisition Statute, as defined below. The partial summary of the
foregoing statutes contained in this prospectus is not intended to be complete
and reference is made to the full text of such states for their entire terms.
BUSINESS COMBINATION STATUTE. Certain provisions of the Maryland Law
establish special requirements with respect to "business combinations" between
Maryland corporations and "interested shareholders" unless exemptions are
applicable (the "Business Combination Statute"). Among other things, the
Business Combination Statute prohibits
57
<PAGE> 62
for a period of five years a merger or other specified transactions between a
company and an interested shareholder and requires a super majority vote for
such transactions after the end of such five-year period.
"Interested shareholders" are all persons owning beneficially, directly or
indirectly, 10% or more of the outstanding voting stock of a Maryland
corporation. "Business combinations" include certain mergers or similar
transactions subject to a statutory vote and additional transactions involving
transfer of assets or securities in specified amounts to interested shareholders
or their affiliates.
Unless an exemption is available, a "business combination" may not be
consummated between a Maryland corporation and an interested shareholder or its
affiliates for a period of five years after the date on which the shareholder
first became an interested shareholder and thereafter may not be consummated
unless recommended by the board of directors of the Maryland corporation and
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
other than the interested shareholder or its affiliates or associates, unless,
among other things, the corporation's shareholders receive a minimum price (as
defined in the Business Combination Statute) for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested shareholder for its shares.
A business combination with an interested shareholder which is approved by
the board of directors of a Maryland corporation at any time before an
interested shareholder first becomes an interested shareholder is not subject to
the five-year moratorium or special voting requirements. An amendment to a
Maryland corporation charter electing not to be subject to the foregoing
requirements must be approved by the affirmative vote of at least 80% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
and 66 2/3% of the votes entitled to be cast by holders of outstanding shares of
voting stock who are not interested shareholders. Any such amendment is not
effective until 18 months after the vote of shareholders and does not apply to
any business combination of a corporation with a shareholder who became an
interested shareholder on or prior to the date of such vote.
CONTROL SHARE ACQUISITION STATUTE. The Maryland Law imposes limitations on
the voting rights of shares acquired in a "control share acquisition." The
control share statute defines a "control share acquisition" to mean the
acquisition, directly or indirectly, of "control shares" subject to certain
exceptions. "Control shares" of a Maryland corporation are defined to be voting
shares of stock which, if aggregated with all other shares of stock previously
acquired by the acquiror, would entitle the acquiror to exercise voting power in
electing directors with one of the following ranges of voting power:
(1) one-fifth or more but not less than one-third;
(2) one-third or more but less than a majority; or
(3) a majority of all voting power.
Control shares do not include shares which the acquiring person is entitled
to vote as a result of having previously obtained shareholder approval. Control
shares of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast by shareholders in the election of directors, excluding
shares of stock as to which the acquiring person, officers of the corporation
and directors of the corporation who are employees of the
58
<PAGE> 63
corporation are entitled to exercise or direct the exercise of the voting power
of the shares in the election of the directors.
The control share statute also requires Maryland corporations to hold a
special meeting at the request of an actual or proposed control share acquiror
generally within 50 days after a request is made with the submission of an
"acquiring person statement," but only if the acquiring person:
(1) gives a written undertaking and, if required by the directors of the
issuing corporation, posts a bond for the cost of the meeting; and
(2) submits definitive financing agreements for the acquisition of the
control shares to the extent that financing is not provided by the
acquiring person.
In addition, unless the issuing corporation's charter or bylaws provide
otherwise, the control share statute provides that the issuing corporation,
within certain time limitations, shall have the right to redeem control shares
(except those for which voting rights have previously been approved) for "fair
value" as determined pursuant to the control share statue in the event:
(1) there is a shareholder vote and the grant of voting rights is not
approved; or
(2) an "acquiring person statement" is not delivered to the target within
10 days following a control share acquisition.
Moreover, unless the issuing corporation's charter or bylaws provide
otherwise, the control share statute provides that if, before a control share
acquisition occurs, voting rights are accorded to control shares which result in
the acquiring person having majority voting power, then all shareholders other
than the acquiring person have appraisal rights as provided under the Maryland
Law. An acquisition of shares may be exempted from the control share statute
provided that a charter or bylaw provision is adopted for such purpose prior to
the control share acquisition by any person with respect to the Company. The
control share acquisition statute does not apply to shares acquired in a merger,
consolidation or share exchange to which the corporation is a party.
REGULATORY RESTRICTIONS
Allied Investment is an SBIC and Allied SBLC is an SBLC, and both are
wholly owned subsidiaries of the Company. The SBA prohibits, without prior SBA
approval, a "change of control" or transfers which would result in any person
(or group of persons acting in concert) owning 10% or more of any class of
capital stock of an SBIC. A "change of control" is any event which would result
in a transfer of the power, direct or indirect, to direct the management and
policies of an SBIC or SBLC, whether through ownership, contractual arrangements
or otherwise.
PLAN OF DISTRIBUTION
We may sell shares through underwriters or dealers, directly to one or more
purchasers, through agents or through a combination of any such methods of sale.
Any underwriter or agent involved in the offer and sale of shares will be named
in the applicable prospectus supplement.
The distribution of shares may be effected from time to time in one or more
transactions at a fixed price or prices, which may be changed, at prevailing
market prices at the time of sale, at prices related to such prevailing market
prices, or at negotiated
59
<PAGE> 64
prices, provided, however, that the offering price per share, less any
commissions or discounts, must equal or exceed the net asset value ("NAV") per
share of our common stock.
In connection with the sale of shares, underwriters or agents may receive
compensation from the Company or from purchasers of shares, for whom they may
act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell shares to or through dealers and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
shares may be deemed to be underwriters under the Securities Act, and any
discounts and commissions they receive from the Company and any profit realized
by them on the resale of shares may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified and any such compensation received from the Company will be described
in the applicable prospectus supplement.
Any shares sold pursuant to a prospectus supplement will be quoted on the
Nasdaq National Market, or another exchange on which the shares are traded.
Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of shares may be entitled to
indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, the Company in the ordinary course of business.
If so indicated in the applicable prospectus supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase shares from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
shares shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The underwriters and such other
agents will not have any responsibility in respect of the validity or
performance of such contracts. Such contracts will be subject only to those
conditions set forth in the prospectus supplement, and the prospectus supplement
will set forth the commission payable for solicitation of such contracts.
In order to comply with the securities laws of certain states, if
applicable, shares offered hereby will be sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
states, the shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for the Company by Sutherland Asbill &
Brennan LLP, Washington, D.C. Certain legal matters will be passed upon for
underwriters, if any, by the counsel named in the prospectus supplement.
60
<PAGE> 65
SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT
AND REGISTRAR
The Company's and its subsidiaries' investments are held in safekeeping by
Riggs Bank, N.A. at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle
National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove
Village, Illinois 60007, serves as trustee with respect to assets of the Company
held for securitization purposes. American Stock Transfer and Trust Company, 40
Wall Street, 46th Floor, New York, New York 10005 acts as the Company's
transfer, dividend paying and reinvestment plan agent and registrar.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements included in this prospectus and elsewhere in the
registration statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report with respect thereto, and is included in this
prospectus with their consent.
TABLE OF CONTENTS OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
General Information and History............................. B-2
Investment Objective and Policies........................... B-2
Management.................................................. B-2
Compensation of Executive Officers and Directors....... B-2
Compensation of Directors.............................. B-3
Stock Option Awards.................................... B-4
Cut-off Award and Formula Award........................ B-4
Committees of the Board of Directors................... B-6
Control Persons and Principal Holders of Securities......... B-7
Investment Advisory Services................................ B-8
Safekeeping, Transfer and Dividend Paying Agent and
Registrar................................................. B-8
Accounting Services......................................... B-8
Brokerage Allocation and Other Practices.................... B-8
Tax Status.................................................. B-9
</TABLE>
61
<PAGE> 66
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet -- December 31, 1998 and 1997.... F-1
Consolidated Statement of Operations -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-2
Consolidated Statement of Changes in Net Assets -- For the
Years Ended December 31, 1998, 1997 and 1996.............. F-3
Consolidated Statement of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statement of Investments -- December 31,
1998...................................................... F-5
Notes to Consolidated Financial Statements.................. F-10
Report of Independent Public Accountants.................... F-31
</TABLE>
62
<PAGE> 67
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) -------- --------
<S> <C> <C>
ASSETS
Portfolio at value:
Mezzanine loans and debt securities (cost:
1998-$354,870; 1997-$181,184)........................ $339,163 $167,842
Commercial mortgage loans (cost: 1998-$232,745;
1997-$446,114)....................................... 233,186 447,244
Commercial mortgage-backed securities (cost:
1998-$115,174; 1997-$0).............................. 113,674 --
Small Business Administration 7(a) loans (cost:
1998-$57,651; 1997-$41,103).......................... 56,285 40,709
Equity interests in portfolio companies (cost:
1998-$27,618; 1997-$20,050).......................... 49,391 39,906
Other portfolio assets (cost: 1998-$8,331;
1997-$2,269)......................................... 8,575 1,320
-------- --------
Total portfolio at value.......................... 800,274 697,021
-------- --------
Cash and cash equivalents................................... 25,075 70,437
U.S. government securities.................................. -- 11,091
Other assets................................................ 30,730 29,226
-------- --------
Total assets...................................... $856,079 $807,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures and notes payable.......................... $239,350 $308,821
Revolving lines of credit............................. 95,000 38,842
Accounts payable and other liabilities................ 27,912 23,984
Dividends and distributions payable................... 1,700 9,068
-------- --------
Total liabilities................................. 363,962 380,715
-------- --------
Commitments and Contingencies
Preferred stock issued to Small Business Administration..... 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 56,729,502 and 52,047,318 issued and
outstanding at December 31, 1998 and 1997,
respectively......................................... 6 5
Additional paid-in capital............................ 526,824 451,044
Common stock held in deferred compensation trust
(810,456 shares)..................................... (19,431) --
Notes receivable from sale of common stock............ (23,735) (29,611)
Net unrealized appreciation on portfolio.............. 2,380 1,301
Distributions in excess of earnings................... (927) (2,679)
-------- --------
Total shareholders' equity........................ 485,117 420,060
-------- --------
Total liabilities and shareholders' equity........ $856,079 $807,775
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE> 68
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- ---------
<S> <C> <C> <C>
Interest and related portfolio income:
Interest.............................................. $79,921 $86,882 $77,541
Net premiums from loan dispositions................... 5,949 7,277 4,241
Net gain on securitization of commercial mortgage
loans............................................... 14,812 -- --
Investment advisory fees and other income............. 6,056 3,246 3,155
------- ------- -------
Total interest and related portfolio income....... 106,738 97,405 84,937
------- ------- -------
Expenses:
Interest on indebtedness.............................. 20,694 26,952 20,298
Salaries and employee benefits........................ 11,829 10,258 8,774
General and administrative............................ 11,921 8,970 8,289
Merger................................................ -- 5,159 --
------- ------- -------
Total operating expenses.......................... 44,444 51,339 37,361
Formula and cut-off awards............................ 7,049 -- --
------- ------- -------
Portfolio income before net realized and unrealized gains... 55,245 46,066 47,576
------- ------- -------
Net realized and unrealized gains:
Net realized gains.................................... 22,541 10,704 19,155
Net unrealized gains (losses)......................... 1,079 7,209 (7,412)
------- ------- -------
Total net realized and unrealized gains........... 23,620 17,913 11,743
------- ------- -------
Income before minority interests and income taxes........... 78,865 63,979 59,319
Minority interests.......................................... -- 1,231 2,427
Income tax expense.......................................... 787 1,444 1,945
------- ------- -------
Net increase in net assets resulting from operations........ $78,078 $61,304 $54,947
======= ======= =======
Basic earnings per common share............................. $ 1.50 $ 1.24 $ 1.19
======= ======= =======
Diluted earnings per common share........................... $ 1.50 $ 1.24 $ 1.17
======= ======= =======
Weighted average common shares outstanding -- basic......... 51,941 49,218 46,172
======= ======= =======
Weighted average common shares outstanding -- diluted....... 51,974 49,251 46,733
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 69
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- ---------
<S> <C> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................ $ 55,245 $ 46,066 $ 47,576
Net realized gains..................................... 22,541 10,704 19,155
Net unrealized gains (losses).......................... 1,079 7,209 (7,412)
Minority interests and income tax expense.............. (787) (2,675) (4,372)
-------- -------- --------
Net increase in net assets resulting from
operations...................................... 78,078 61,304 54,947
-------- -------- --------
Shareholder distributions:
Portfolio income....................................... (49,397) (38,751) (39,030)
Excess of portfolio income............................. -- (605) (2,533)
Net capital gains...................................... (24,976) (15,172) (11,546)
Excess of net capital gains............................ (714) -- --
Return of capital...................................... -- (22,302) (4,289)
Undistributed earnings................................. -- (8,848) --
Preferred stock dividend............................... (230) (220) (220)
-------- -------- --------
Net decrease in net assets resulting from
shareholder distributions....................... (75,317) (85,898) (57,618)
-------- -------- --------
Capital share transactions:
Sale of common stock................................... 69,675 -- 22,365
Net decrease (increase) in notes receivable from sale
of common stock...................................... 5,576 (14,120) (8,176)
Issuance of common stock upon the exercise of stock
options.............................................. 221 28,426 12,176
Issuance of common stock in lieu of cash
distributions........................................ 6,184 26,612 11,986
Purchase of common stock by deferred compensation
trust................................................ (19,431) -- --
Other.................................................. 71 1,602 (738)
-------- -------- --------
Net increase in net assets resulting from capital
share transactions.............................. 62,296 42,520 37,613
-------- -------- --------
Total increase in net assets................................ $ 65,057 $ 17,926 $ 34,942
-------- -------- --------
Net assets at beginning of year............................. $420,060 $402,134 $367,192
-------- -------- --------
Net assets at end of year................................... $485,117 $420,060 $402,134
======== ======== ========
Net asset value per common share............................ $ 8.68 $ 8.07 $ 8.34
======== ======== ========
Common shares outstanding at end of year.................... 55,919 52,047 48,238
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 70
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
(IN THOUSANDS) --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations..... $ 78,078 $ 61,304 $ 54,947
Adjustments
Net unrealized (gains) losses......................... (1,079) (7,209) 7,412
Net gain on securitization of commercial mortgage
loans............................................... (14,812) -- --
Depreciation and amortization......................... 702 450 393
Amortization of loan discounts and fees............... (6,032) (10,804) (9,027)
Deferred income taxes................................. -- 1,087 (381)
Minority interests.................................... -- 1,231 2,427
Changes in other assets and liabilities............... 11,998 12,881 (10,606)
--------- --------- ---------
Net cash provided by operating activities........... 68,855 58,940 45,165
--------- --------- ---------
Cash flows from investing activities:
Investments in small business concerns................... (524,530) (364,942) (283,295)
Collections of investment principal...................... 138,081 233,005 179,292
Proceeds from loan sales................................. 81,013 53,912 27,715
Proceeds from securitization of commercial mortgage
loans................................................. 223,401 -- --
Net redemption (purchase) of U.S. government
securities............................................ 11,091 (10,301) --
Collections of notes receivable from sale of common
stock................................................. 5,591 6,534 2,199
Other investing activities............................... (2,539) (182) 2,635
--------- --------- ---------
Net cash used in investing activities............... (67,892) (81,974) (71,454)
--------- --------- ---------
Cash flows from financing activities:
Sale of common stock..................................... 69,896 8,615 24,166
Purchase of common stock by deferred compensation
trust................................................. (19,431) -- --
Common dividends and distributions paid.................. (69,536) (58,194) (47,089)
Special undistributed earnings distribution paid......... (8,848) -- --
Preferred stock dividends................................ (450) (220) (220)
Net (payments on) borrowings under debentures and notes
payable............................................... (69,471) 78,923 (35,202)
Net borrowings under (payments on) revolving lines of
credit................................................ 56,158 (6,257) 110,460
Other financing activities............................... (4,643) (1,237) (3,029)
--------- --------- ---------
Net cash (used in) provided by financing
activities....................................... (46,325) 21,630 49,086
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents....... $ (45,362) $ (1,404) $ 22,797
Cash and cash equivalents at beginning of year............. $ 70,437 $ 71,841 $ 49,044
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 25,075 $ 70,437 $ 71,841
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 71
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
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
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>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally non-income producing and
restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 72
<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>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally non-income producing and
restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 73
<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 Education Dynamics, 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>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally non-income producing and
restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 74
<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>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally non-income producing and
restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 75
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <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> <C>
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
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
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 7(a) loans 446 $ 57,651 $ 56,285
- ------------------------------------------------------------------------------------------------
Other portfolio assets 6 $ 8,331 $ 8,575
- ------------------------------------------------------------------------------------------------
Total portfolio at value 733 $796,389 $800,274
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants and equity interests are generally
non-income producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 76
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 years ended December 31, 1997 and 1996 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).
F-10
<PAGE> 77
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements for the periods presented have been
restated to include the accounts of the Predecessor Companies for all periods
presented. Transaction fees and expenses related to the Merger were expensed in
the fourth quarter of 1997. The consolidated financial statements include the
accounts of the Company or its wholly owned or majority owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1997 and 1996 balances to
conform with the 1998 financial statement presentation.
VALUATION OF PORTFOLIO INVESTMENTS
Portfolio assets are carried at fair value as determined by the Board of
Directors under the Company's valuation policy.
LOAN AND DEBT SECURITIES
The values of loans and debt securities are considered to be amounts which
could be realized in the normal course of business which, generally, anticipates
the Company holding the loan to maturity and realizing the face value of the
loan. For loans and debt securities, value normally corresponds to cost unless
the borrower's condition or external factors lead to a determination of value at
a lower amount.
Interest income is recorded on the accrual basis to the extent that such
amounts are expected to be collected. Loan origination fees, original issue
discount, and market discount are amortized into interest income using the
effective interest method.
EQUITY SECURITIES
Equity interests in portfolio companies for which there is no public market
are valued based on various factors including a history of positive cash flow
from operations, the market value of comparable publicly traded companies and
other pertinent factors, such as recent offers to purchase a portfolio company's
securities or other liquidation events. The determined values are generally
discounted to account for liquidity issues and minority control positions.
The Company's equity interests in public companies that carry certain
restrictions on sale are typically valued at a discount from the public market
value of the security at the balance sheet date. Restricted and unrestricted
publicly traded stocks may also be valued at a discount due to the investment
size or market liquidity concerns.
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial mortgage-backed securities consist of subordinated commercial
mortgage-backed securities ("Subordinated CMBS"), residual interest in mortgage
securitization ("Residual CMBS") and residual securitization spread.
SUBORDINATED CMBS
The Subordinated CMBS is carried at fair value. The Company recognizes
income from Subordinated CMBS using the effective interest method, using the
anticipated yield over the
F-11
<PAGE> 78
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
projected life of the investment. Changes in estimated yields are due to
revisions in estimates of future credit losses, actual losses incurred and
actual prepayment speeds. Changes in estimated yield are currently recognized as
an adjustment to the estimated yield over the remaining life of the Subordinated
CMBS. The Company recognizes unrealized depreciation on its Subordinated CMBS
whenever it determines that the value of its Subordinated CMBS is less than the
carrying amount.
RESIDUAL CMBS
The Company values its residual interest in securitization and recognizes
income using the same accounting policies used for the Subordinated CMBS.
RESIDUAL SECURITIZATION SPREAD (INTEREST-ONLY STRIP)
The residual securitization spread is carried at fair value based on the
amortized cost of the residual securitization spread and the estimated future
cash flows. The Company recognizes income using the effective interest method.
At each reporting date, the effective yield is recalculated and used to
recognize income until the next reporting date.
NET REALIZED AND UNREALIZED GAINS
Realized gains or losses are measured by the difference between the net
proceeds from the sale and the cost basis of the investment without regard to
unrealized gains or losses previously recognized, and include investments
charged off during the year, net of recoveries. Unrealized gains or losses
reflect the change in portfolio investment values during the reporting period.
DEFERRED FINANCING COSTS
Financing costs are based on actual costs incurred in obtaining financing
and are deferred and amortized as part of interest expense over the term of the
related debt instrument.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may use derivative financial instruments to reduce interest
rate risk. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative financial
instrument activities. The Company does not hold or issue derivative financial
instruments for trading purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and all highly liquid
investments with original maturities of three months or less.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date.
FEDERAL AND STATE INCOME TAXES
With the exception of Advisers, the Predecessor Companies qualified as
regulated investment companies ("RIC") or a real estate investment trust
("REIT"); however, Advisers was a corporation
F-12
<PAGE> 79
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
subject to federal and state income taxes. Income tax expense reported on the
consolidated statement of operations relates to the operations of Advisers for
all periods presented.
The Company and its wholly owned subsidiaries intend to comply with the
requirements of the Code that are applicable to RICs and REITs. The Company and
its wholly owned subsidiaries intend to distribute annually all of their taxable
income to shareholders; therefore, the Company has made no provision for income
taxes.
PER SHARE INFORMATION
Basic earnings per share is calculated using the weighted average number of
shares outstanding for the period presented. Diluted earnings per share reflects
the potential dilution that could occur if options to issue common stock were
exercised into common stock. Earnings per share is computed after subtracting
dividends on Preferred Shares.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
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 December 31, 1998 and 1997, approximately 98 percent of the Company's
mezzanine loan portfolio was composed of fixed interest rate loans. The weighted
average yield (at value) on the mezzanine portfolio at December 31, 1998 and
1997 was 14.6 percent, and 12.6 percent, respectively. At December 31, 1998 and
1997, mezzanine loans and debt securities with a cost basis of $20,977,000 and
$13,661,000, respectively, were not accruing interest.
F-13
<PAGE> 80
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
December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Mid-Atlantic................................................ 28% 29%
Midwest..................................................... 27 17
Southeast................................................... 23 27
West........................................................ 11 13
International............................................... 7 6
Northeast................................................... 4 8
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Consumer Products Manufacturing............................. 25% 25%
Telecommunications.......................................... 14 7
Business Services........................................... 11 7
Retail...................................................... 9 14
Broadcasting................................................ 9 23
Industrial Products Manufacturing........................... 8 9
Other....................................................... 24 15
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
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 December 31, 1998 and 1997, approximately 68 percent and 32 percent, and
73 percent and 27 percent of the Company's commercial mortgage loan portfolio
was composed of fixed and adjustable interest rate loans, respectively. The
weighted average yield (at value) on the real estate portfolio as of December
31, 1998 and 1997 equaled 10.4 percent and 11.4 percent, respectively. As of
December 31, 1998 and 1997, loans with a cost basis of $5,443,000 and
$11,987,000, respectively, were not accruing interest.
F-14
<PAGE> 81
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
The geographic composition and the property types securing the commercial
mortgage loan portfolio at December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Mid-Atlantic................................................ 36% 38%
Southeast................................................... 23 14
West........................................................ 22 18
Midwest..................................................... 13 18
Northeast................................................... 6 12
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Hospitality................................................. 42% 34%
Office...................................................... 29 32
Retail...................................................... 14 17
Recreation.................................................. 5 4
Other....................................................... 10 13
--- ---
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. 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 December 31, 1998, the estimated yield to maturity on the
Subordinated CMBS was approximately 15 percent. 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.
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.
F-15
<PAGE> 82
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
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 December 31, 1998, 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 12 percent.
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 December 31, 1998 and 1997,
approximately 96 percent and 92 percent of the Company's portfolio of 7(a) loans
were variable interest rate loans.
As permitted by SBA regulations, the Company sells to investors, without
recourse, the guaranteed portion of its loans while retaining the right to
service 100 percent of such loans.
As of December 31, 1998 and 1997, 7(a) loans with a cost basis of
$11,227,000 and $4,346,000, respectively, were not accruing interest.
F-16
<PAGE> 83
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
The geographic and industry composition of the SBA 7(a) portfolio at
December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 34% 36%
Mid-Atlantic................................................ 29 29
Southeast................................................... 16 18
West........................................................ 14 7
Northeast................................................... 7 10
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Retail...................................................... 41% 37%
Hospitality................................................. 30 26
Consumer Services........................................... 6 4
Consumer Products Manufacturing............................. 6 7
Business Services........................................... 4 6
Broadcasting................................................ 4 8
Other....................................................... 9 12
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
NOTE 5. DEBT
At December 31, 1998 and 1997, the Company had the following credit
facilities:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
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 $ 6,000 $250,000 $ 23,116
Unsecured long-term notes payable............ 180,000 180,000 -- --
SBA debentures............................... 74,650 47,650 54,300 54,300
OPIC loan.................................... 5,700 5,700 20,000 8,700
Master repurchase agreement.................. 250,000 -- 250,000 202,705
Senior note payable.......................... -- -- 20,000 20,000
-------- -------- -------- --------
Total debentures and notes payable...... 760,350 239,350 594,300 308,821
======== ======== ======== ========
Revolving lines of credit......................... 200,000 95,000 80,000 38,842
-------- -------- -------- --------
Total Debt.............................. $960,350 $334,350 $674,300 $347,663
======== ======== ======== ========
</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
F-17
<PAGE> 84
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT, CONTINUED
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 6.6 percent and 6.7 percent, at December 31,
1998 and 1997, respectively. Average debt outstanding, maximum amount borrowed,
and weighted average interest rate charged on this facility for the years ended
December 31, 1998 and 1997 were $21,932,000 and $17,899,000; $56,000,000 and
$23,116,000; and 6.5 percent and 6.7 percent; respectively. The agreement
matures on October 7, 1999.
UNSECURED LONG-TERM NOTES PAYABLE
In June 1998 the Company issued three classes of unsecured long-term notes
held by private institutional investors. The notes have terms of 5 or 7 years
with an aggregate principal balance of $180,000,000. The weighted average
interest rate on the notes is 7.2 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 December 31, 1998 and 1997, the Company had drawn debentures totaling
$47,650,000 and $54,300,000, respectively, 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.
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 and 6.8 percent at December
31,1998 and 1997, respectively. 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.
MASTER REPURCHASE AGREEMENT
The Company and BMI can borrow up to $250,000,000, of which $100,000,000 is
committed, through repurchase agreements using commercial mortgage loans as
collateral. The Company pledges commercial mortgage loans as collateral for the
facility such that the amount borrowed is approximately equal to 80 percent to
90 percent of the value of the collateral pledged. The terms of the master
repurchase agreement require interest only payments with all principal due at
maturity. Principal may be repaid at any time without penalty. The master
repurchase agreement bears interest at the one-month LIBOR plus 1.13 percent, or
6.8 percent at December 31, 1998 and 1997. Average debt outstanding, maximum
amount borrowed, and weighted average interest rate charged on the master
repurchase agreement for the years ended December 31, 1998 and 1997 were
$16,927,000 and
F-18
<PAGE> 85
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT, CONTINUED
$166,362,000; and $202,705,000 and $209,591,000; and 6.8 percent and 6.6
percent; respectively. The master repurchase agreement matured on January 31,
1999, and was not renewed by the Company.
SENIOR NOTE PAYABLE
At December 31, 1997, the Company had a $20,000,000 unsecured senior note
payable to an insurance company with an interest rate of 9.15 percent, payable
semi-annually. The note was paid-off in June 1998.
REVOLVING LINES OF CREDIT
Subsequent to the Merger, the Company repaid all of its previous unsecured
revolving lines of credit and entered into a new $200,000,000 unsecured
revolving line of credit. The new facility bears interest at LIBOR plus 1.25
percent, or 6.9 percent at December 31, 1998, and requires a commitment fee
equal to 0.2 percent of the committed amount, and a facility fee equal to 0.15
percent of the initial commitment. The new line expires June 30, 1999. The 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 $51,904,000 and
$30,033,000 for the years ended December 31, 1998 and 1997, respectively. The
maximum amount borrowed under these facilities and the weighted average interest
rate for the years ended December 31, 1998 and 1997 were $105,000,000 and
$45,759,000, and 6.8 percent and 8.1 percent, respectively.
The Company has plans to increase the capacity of its revolving line of
credit in 1999, as well as extend the maturity date. The Company is currently
negotiating with its lenders in order to accomplish these changes.
NOTE 6. INCOME TAXES
For the years ended December 31, 1998, 1997 and 1996, the Company's
effective tax rate was 1.0 percent, 2.3 percent and 3.5 percent, respectively.
For the year ended December 31, 1998, the Company incurred income tax
expense of $787,000 which resulted from the realization of a taxable net
built-in gain associated with property owned by Advisers prior to the Merger.
For the years ended December 31, 1997 and 1996, the Company's income
subject to federal and state taxes related to the income generated by the
pre-Merger operations of Advisers. The income generated by the other Predecessor
Companies is not subject to federal and state income taxes because these
companies qualified as regulated investment companies or a real estate
investment trust.
NOTE 7. PREFERRED STOCK
Allied Investment has outstanding a total of 60,000 shares of $100 par
value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value,
4 percent redeemable cumulative preferred stock issued to the SBA pursuant to
Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3
percent cumulative preferred stock does not have a required redemption date.
Allied Investment has the option to redeem in whole or in part the preferred
stock by paying the SBA the par
F-19
<PAGE> 86
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. PREFERRED STOCK, CONTINUED
value of such securities and any dividends accumulated and unpaid to the date of
redemption. The 4 percent redeemable cumulative preferred stock has a required
redemption date of June 4, 2005.
NOTE 8. SHAREHOLDERS' EQUITY
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.
In 1996, the Company completed two non-transferable subscription rights
offerings to common shareholders. The Company issued 1,433,414 shares of common
stock pursuant to these offerings raising net proceeds to the Company of
$17,147,000, after costs including a 2.5 percent fee paid to eligible
broker/dealers.
In 1996, the Company also sold 400,000 shares of its common stock through
an underwriter for net proceeds of $5,218,000.
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 years ended
December 31, 1998, 1997 and 1996 the Company issued 241,482, 550,971 and 913,206
shares, respectively, at an average price per share of $20.35, $15.67 and
$13.13, respectively.
F-20
<PAGE> 87
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
PER COMMON
INCOME SHARES SHARE AMOUNT
-------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
1998
Net increase in net assets resulting from operations... $78,078
Less: Preferred stock dividends........................ (230)
-------
Income available to common shareholders................ $77,848
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,941 $1.50
=====
Options outstanding to officers........................ 33
------
DILUTED EARNINGS PER COMMON SHARE...................... 51,974 $1.50
====== =====
1997
Net increase in net assets resulting from operations... $61,304
Less: Preferred stock dividends........................ (220)
-------
Income available to common shareholders................ $61,084
=======
BASIC EARNINGS PER COMMON SHARE........................ 49,218 $1.24
=====
Options outstanding to officers........................ 33
------
DILUTED EARNINGS PER COMMON SHARE...................... 49,251 $1.24
====== =====
1996
Net increase in net assets resulting from operations... $54,947
Less: Preferred stock dividends........................ (220)
-------
Income available to common shareholders................ $54,727
=======
BASIC EARNINGS PER COMMON SHARE........................ 46,172 $1.19
=====
Options outstanding to officers........................ 561
------
DILUTED EARNINGS PER COMMON SHARE...................... 46,733 $1.17
====== =====
</TABLE>
NOTE 10. EMPLOYEE STOCK OWNERSHIP PLAN AND DEFERRED COMPENSATION PLAN
The Company has an employee stock ownership plan ("ESOP"). Pursuant to the
ESOP, the Company is obligated to contribute 5 percent of each eligible
participant's total cash compensation for the year to a plan account on the
participant's behalf, which vests over a two-year period. ESOP contributions are
used to purchase shares of the Company's common stock.
As of December 31, 1998 and 1997, the ESOP held 282,500 shares and 433,047
shares, respectively, of the Company's common stock, all of which had been
allocated to participants' accounts. The plan is funded annually and the total
ESOP contribution expense for the years ended December 31, 1998, 1997, and 1996
was $489,000, $351,000 and $1,018,000, respectively, net of forfeitures of
$4,000, $0 and $36,000, respectively.
The Company also has a deferred compensation plan (the "DC Plan"). Eligible
participants in the DC Plan may elect to defer some of their compensation and
have such compensation credited to a participant account. All amounts credited
to a participant's account shall be credited solely for purposes of accounting
and computation and remain assets of the Company and subject to the claims of
the Company's general creditors. Amounts credited to participants under the DC
Plan are at all times 100 percent vested and non-forfeitable except for amounts
credited to participants' accounts related to the Formula Award (see Note 12). A
participant's account shall become distributable upon
F-21
<PAGE> 88
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. EMPLOYEE STOCK OWNERSHIP PLAN AND DEFERRED COMPENSATION PLAN, CONTINUED
his or her separation from service, retirement, disability, death, or at a
future determined date. All DC Plan accounts will be distributed in the event of
a change of control of the Company or in the event of the Company's insolvency.
Amounts deferred by participants under the DC Plan are funded to a trust, the
trustee of which administers the DC Plan on behalf of the Company.
NOTE 11. STOCK OPTION PLAN
In conjunction with the Merger, all stock option plans that existed for
Allied Lending and the Predecessor Companies before the Merger ("Old Plans")
were cancelled on December 31, 1997, and at a special meeting of shareholders on
November 26, 1997, the Company's shareholders approved a new stock option plan
("ACC Plan") for the Company to be effected post-Merger.
THE ACC PLAN
The purpose of the ACC Plan is to provide officers and non-officer
directors of the Company with additional incentives. Options may be granted from
time to time on up to 6,250,000 shares, which represents approximately 11
percent of the outstanding shares as of December 31, 1998.
Options are exercisable at a price equal to the fair market value of the
shares on the day the option is granted. Each option states the period or
periods of time within which the option may be exercised by the optionee, which
may not exceed ten years from the date the option is granted.
All rights to exercise options terminate 60 days after an optionee ceases
to be (i) a non-officer director, (ii) both an officer and a director, if such
optionee serves in both capacities, or (iii) an officer (if such officer is not
also a director) of the Company for any cause other than death or total and
permanent disability. If an optionee dies or becomes totally and permanently
disabled before expiration of the options without fully exercising them, he or
she or the executors or administrators or legatees or distributees of the estate
shall, as may be provided at the time of the grant, have the right, within one
year after the optionee's death or total and permanent disability, to exercise
the options in whole or in part before the expiration of their term. In the
event of a change of control of the Company, all outstanding options will become
fully vested and exercisable as of the change of control. For the year ended
December 31, 1998, the Company's compensation committee granted a total of
5,189,944 options 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 $20.14 per share. At December 31, 1998, options for 1,465,768 shares were
vested. Options were exercised for 10,408 shares, and options were canceled for
65,638 shares during the year ended December 31, 1998.
OLD PLAN ACTIVITY
During 1997 and 1996, the Predecessor Companies granted 1,474,000 and
866,000 options, respectively, under the Old Plans at exercise prices ranging
from $9.53 to $22.58 per share. Total shares issued pursuant to the exercise of
stock options totaled 2,395,000 and 1,051,000 during 1997 and 1996,
respectively.
F-22
<PAGE> 89
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. STOCK OPTION PLAN, CONTINUED
NOTES RECEIVABLE FROM THE SALE OF COMMON STOCK
The Company provides loans to officers for the exercise of options. The
loans have varying terms not exceeding ten years, bear interest at the
applicable federal interest rate in effect at the date of issue and have been
recorded as a reduction to shareholders' equity. For the years ended December
31, 1998, 1997 and 1996, the Company had outstanding loans to officers of
$23,735,000, $29,611,000 and $15,491,000, respectively. Officers with
outstanding loans repaid principal of $5,591,000, $6,534,000, and $2,199,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company
recognized interest income from these loans of $1,600,000, $1,031,000 and
$529,000, respectively, during these same periods.
The Company accounts for its stock options as required by the Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
no compensation cost has been recognized. Had compensation cost for the plan
been determined consistent with SFAS No. 123 "Accounting for Stock Based
Compensation," the Company's net increase in net assets resulting from
operations and basic and diluted earnings per common share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net increase in net assets resulting from operations:
As reported.......................................... $78,078 $61,304 $54,947
Pro forma............................................ $72,684 $60,656 $53,372
Basic earnings per common share:
As reported.......................................... $ 1.50 $ 1.24 $ 1.19
Pro forma............................................ $ 1.39 $ 1.23 $ 1.16
Diluted earnings per common share:
As reported.......................................... $ 1.50 $ 1.24 $ 1.17
Pro forma............................................ $ 1.39 $ 1.23 $ 1.14
</TABLE>
Pro forma expenses are based on the underlying value of the options granted
by the Company and the Predecessor Companies. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model.
NOTE 12. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award is
computed for each unvested option as of the Merger date. The Cut-off Award is
equal to the difference between the market price on August 14, 1997 (the Merger
announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award is payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the 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 year ended December 31, 1998,
$807,000 of the Cut-off Award vested.
F-23
<PAGE> 90
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. CUT-OFF AWARD AND FORMULA AWARD, CONTINUED
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 year
ended December 31, 1998, $6,242,000 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. During 1998, $270,000 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.
F-24
<PAGE> 91
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. DIVIDENDS AND DISTRIBUTIONS
For the years ended December 31, 1998, 1997 and 1996, the Company declared
the following distributions:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
TOTAL TOTAL TOTAL
TOTAL PER TOTAL PER TOTAL PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
First quarter............................ $18,025 $0.35 $14,347 $0.30 $11,158 $0.25
Second quarter........................... 17,966 0.35 14,795 0.30 11,911 0.26
Third quarter............................ 17,976 0.35 15,548 0.31 12,743 0.27
Fourth quarter........................... 19,444 0.35 31,022 0.61 13,678 0.29
Annual extra distribution................ 1,676 0.03 1,118 0.02 7,908 0.16
Special undistributed earnings
distribution........................... -- -- 8,848 0.17 -- --
------- ----- ------- ----- ------- -----
Total distributions to common
shareholders........................... $75,087 $1.43 $85,678 $1.71 $57,398 $1.23
======= ===== ======= ===== ======= =====
</TABLE>
For income tax purposes, distributions for 1998, 1997 and 1996 were
comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
TOTAL TOTAL TOTAL
TOTAL PER TOTAL PER TOTAL PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- ----- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Ordinary income.......................... $49,397 $0.94 $39,356 $0.79 $41,563 $0.89
Long-term capital gains.................. 25,690 0.49 31,037 0.62 15,835 0.34
Return of capital (tax).................. -- -- 6,437 0.13 -- --
------- ----- ------- ----- ------- -----
Total distributions before special
distribution........................... 75,087 1.43 76,830 1.54 57,398 1.23
------- ----- ------- ----- ------- -----
Special undistributed earnings
distribution........................... -- -- 8,848 0.17 -- --
Total distributions to common
shareholders........................... $75,087 $1.43 $85,678 $1.71 $57,398 $1.23
======= ===== ======= ===== ======= =====
</TABLE>
F-25
<PAGE> 92
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. DIVIDENDS AND DISTRIBUTIONS, CONTINUED
The following table summarizes the differences between financial statement
net income and taxable income for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Financial statement net income.............................. $ 78,078 $61,304 $54,947
Adjustments:
Net unrealized (gains) losses.......................... (1,079) (7,209) 7,412
Amortization of discount............................... 2,207 (1,124) (2,779)
Net gain on securitization of commercial mortgage
loans................................................ (14,812) -- --
Interest income from securitized commercial mortgage
loans................................................ 4,910 -- --
Gains from disposition of portfolio assets............. 1,177 17,890 874
Expenses not deductible for tax:
Merger expenses................................... -- 5,159 --
Formula award..................................... 6,242 -- --
Other............................................. 1,393 853 2,306
Other.................................................. (3,029) (9,050) (1,372)
Income tax expense..................................... -- 1,444 1,945
-------- ------- -------
Taxable income.............................................. $ 75,087 $69,267 $63,333
======== ======= =======
</TABLE>
NOTE 14. CONCENTRATIONS OF CREDIT RISK
The Company places its cash with financial institutions and, at times, cash
held in checking accounts in financial institutions may be in excess of the
Federal Deposit Insurance Corporation insured limit. At December 31, 1998 and
1997, cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C>
Cash and cash equivalents................................. $31,833 $76,791
Less escrows held......................................... (6,758) (6,354)
------- -------
Total..................................................... $25,075 $70,437
======= =======
</TABLE>
NOTE 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During 1998, 1997 and 1996, the Company paid $21,708,000, $26,874,000 and
$21,391,000, respectively, for interest and income taxes. During 1998, 1997 and
1996, the Company's non-cash financing activities totaled $6,237,000,
$48,207,000 and $22,361,000, respectively, related primarily to common stock
issuances resulting from stock option exercises and dividend reinvestment shares
issued. During 1998, 1997 and 1996, the Company's non-cash investing activities
totaled $1,265,000, $12,022,000 and $2,004,000 respectively.
F-26
<PAGE> 93
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. SELECTED QUARTERLY DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998
-------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest and related portfolio income............. $36,897 $21,321 $22,546 $25,974
Portfolio income before realized and unrealized gains... $24,920 $ 9,148 $ 9,401 $11,776
Net increase in net assets resulting from operations.... $32,065 $14,476 $14,906 $16,631
Basic earnings per common share......................... $ 0.62 $ 0.28 $ 0.29 $ 0.31
Diluted earnings per common share....................... $ 0.61 $ 0.28 $ 0.29 $ 0.31
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest and related portfolio income............. $21,399 $24,911 $25,111 $25,984
Portfolio income before realized and unrealized gains... $11,968 $14,095 $12,093 $ 7,910
Net increase in net assets resulting from operations.... $12,646 $18,296 $17,146 $13,216
Basic earnings per common share......................... $ 0.27 $ 0.37 $ 0.35 $ 0.25
Diluted earnings per common share....................... $ 0.27 $ 0.37 $ 0.35 $ 0.25
</TABLE>
F-27
<PAGE> 94
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------
ALLIED ALLIED CONSOLIDATED
ACC INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
-------- ---------- ------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Portfolio at value:
Mezzanine loans and debt securities..... $264,968 $ 74,195 $ -- $ -- $ -- $339,163
Commercial mortgage loans............... 206,463 -- -- 26,723 -- 233,186
Commercial mortgage-backed securities... 32,221 -- -- 81,453 -- 113,674
Small Business Administration 7(a)
loans................................. -- -- 56,285 -- -- 56,285
Equity interests in portfolio
companies............................. 27,641 21,750 -- -- -- 49,391
Investments in subsidiaries............. 159,945 -- -- (335) (159,610) --
Other portfolio assets.................. 277 -- 50 8,248 -- 8,575
-------- -------- ------- -------- --------- --------
Total portfolio at value............ 691,515 95,945 56,335 116,089 (159,610) 800,274
-------- -------- ------- -------- --------- --------
Cash and cash equivalents.................... 5,308 15,068 2,776 1,923 -- 25,075
Intercompany notes and receivables........... 90,194 1,824 90 -- (92,108) --
Other assets................................. 16,822 1,932 9,360 2,734 (118) 30,730
-------- -------- ------- -------- --------- --------
Total assets........................ $803,839 $114,769 $68,561 $120,746 $(251,836) $856,079
======== ======== ======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures and notes payable............ $191,700 $ 47,650 $ -- $ -- $ -- $239,350
Revolving lines of credit............... 95,000 -- -- -- -- 95,000
Accounts payable and other
liabilities........................... 25,003 858 1,655 396 -- 27,912
Dividends and distributions payable..... 1,700 5,085 5,594 -- (10,679) 1,700
Intercompany notes and payables......... 5,319 98 46,116 30,001 (81,534) --
-------- -------- ------- -------- --------- --------
318,722 53,691 53,365 30,397 (92,213) 363,962
-------- -------- ------- -------- --------- --------
Commitments and contingencies
Preferred stock issued to Small Business
Administration............................. -- 7,000 -- -- -- 7,000
Shareholders' equity:
Common stock............................ 6 -- -- 1 (1) 6
Additional paid-in capital.............. 526,824 38,604 17,563 82,294 (138,461) 526,824
Common stock held in deferred
compensation trust.................... (19,431) -- -- -- -- (19,431)
Notes receivable from sale of common
stock................................. (23,735) -- -- -- -- (23,735)
Net unrealized appreciation
(depreciation) on portfolio........... 2,380 1,486 (2,072) (1,503) 2,089 2,380
Undistributed (distributions in excess
of) earnings.......................... (927) 13,988 (295) 9,557 (23,250) (927)
-------- -------- ------- -------- --------- --------
Total shareholders' equity.......... 485,117 54,078 15,196 90,349 (159,623) 485,117
-------- -------- ------- -------- --------- --------
Total liabilities and shareholders'
equity............................ $803,839 $114,769 $68,561 $120,746 $(251,836) $856,079
======== ======== ======= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 95
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
ALLIED ALLIED CONSOLIDATED
ACC INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
-------- ---------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and related portfolio
income:
Interest.................. $ 51,247 $11,836 $ 6,257 $10,581 $ -- $ 79,921
Intercompany interest
income.................. 4,846 -- -- -- (4,846) --
Net premiums from loan
dispositions............ 2,920 240 2,789 -- -- 5,949
Net gain on securitization
of commercial mortgage
loans................... -- -- -- 14,812 -- 14,812
Income from investments in
wholly owned
subsidiaries............ 48,873 -- -- -- (48,873) --
Investment advisory fees
and other income........ 4,343 9 837 867 -- 6,056
-------- ------- ------- ------- -------- --------
Total interest and
related portfolio
income.............. 112,229 12,085 9,883 26,260 (53,719) 106,738
-------- ------- ------- ------- -------- --------
Expenses:
Interest on
indebtedness............ 15,092 4,651 711 240 -- 20,694
Intercompany interest on
indebtedness............ -- 503 2,693 1,643 (4,839) --
Salaries and employee
benefits................ 11,829 -- -- -- -- 11,829
General and
administrative.......... 9,417 437 944 1,123 -- 11,921
-------- ------- ------- ------- -------- --------
Total operating
expenses............ 36,338 5,591 4,348 3,006 (4,839) 44,444
-------- ------- ------- ------- -------- --------
Formula and cut-off
awards.................. 7,049 -- -- -- -- 7,049
-------- ------- ------- ------- -------- --------
Portfolio income before realized
and unrealized gains
(losses)...................... 68,842 6,494 5,535 23,254 (48,880) 55,245
-------- ------- ------- ------- -------- --------
Net realized and unrealized
gains:
Net realized gains
(losses)................ 8,156 10,407 (39) 4,017 -- 22,541
Net unrealized gains
(losses)................ 956 (3,502) (1,679) (1,377) 6,681 1,079
-------- ------- ------- ------- -------- --------
Total net realized and
unrealized gains
(losses)............ 9,112 6,905 (1,718) 2,640 6,681 23,620
-------- ------- ------- ------- -------- --------
Income before minority interests
and income taxes.............. 77,954 13,399 3,817 25,894 (42,199) 78,865
-------- ------- ------- ------- -------- --------
Minority interests.............. -- -- -- -- -- --
Income tax expense.............. -- -- -- 787 -- 787
-------- ------- ------- ------- -------- --------
Net increase in net assets
resulting from operations..... $ 77,954 $13,399 $ 3,817 $25,107 $(42,199) $ 78,078
======== ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 96
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
ALLIED ALLIED CONSOLIDATED
ACC INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
--------- ---------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting
from operations..................... $ 77,954 $ 13,399 $ 3,817 $ 25,107 $(42,199) $ 78,078
Adjustments
Net unrealized (gains) losses....... (956) 3,502 1,679 1,377 (6,681) (1,079)
Net gain on securitization of
commercial mortgage loans......... -- -- -- (14,812) -- (14,812)
Depreciation and amortization....... 702 -- -- -- -- 702
Amortization of loan discounts and
fees.............................. (4,741) (583) (708) -- -- (6,032)
Changes in other assets and
liabilities....................... 3,267 908 (2,329) 10,152 -- 11,998
--------- -------- -------- -------- -------- ---------
Net cash provided by operating
activities...................... 76,226 17,226 2,459 21,824 (48,880) 68,855
--------- -------- -------- -------- -------- ---------
Cash flows from investing activities:
Investments in small business
concerns.......................... (426,797) (18,870) (57,725) (25,333) 4,195 (524,530)
Collections of investment
principal......................... 112,535 21,210 4,183 153 -- 138,081
Proceeds from loan sales............ 44,063 -- 36,950 -- -- 81,013
Proceeds from securitization of
commercial mortgage loans......... 223,401 -- -- -- -- 223,401
Net (purchase) redemption of U.S.
government securities............. -- 11,091 -- -- -- 11,091
Collections (advances) under
intercompany notes................ (42,170) (19,756) 34,458 27,468 -- --
Collections of notes receivable from
sale of common stock.............. 5,591 -- -- -- -- 5,591
Other investing activities.......... (2,539) -- -- -- -- (2,539)
--------- -------- -------- -------- -------- ---------
Net cash (used in) provided by
investing activities............ (85,916) (6,325) 17,866 2,288 4,195 (67,892)
--------- -------- -------- -------- -------- ---------
Cash flows from financing activities:
Sale of common stock................ 69,896 -- -- -- -- 69,896
Purchase of common stock by deferred
compensation trust................ (19,431) -- -- -- -- (19,431)
Purchase of common stock of
subsidiaries...................... (5,000) -- 5,000 -- -- --
Common dividends and distributions
paid.............................. (69,536) -- -- -- -- (69,536)
Special undistributed earnings
distribution paid................. (8,848) -- -- -- -- (8,848)
Dividends paid to parent company.... -- (22,204) (5,594) (16,887) 44,685 --
Preferred stock dividends........... -- (450) -- -- -- (450)
Net payments on debentures and notes
payable........................... (53,871) (15,600) -- -- -- (69,471)
Net borrowings under revolving lines
of credit......................... 74,706 -- (18,548) -- -- 56,158
Other financing activities.......... 1,124 -- -- (5,767) -- (4,643)
--------- -------- -------- -------- -------- ---------
Net cash used in financing
activities...................... (10,960) (38,254) (19,142) (22,654) 44,685 (46,325)
--------- -------- -------- -------- -------- ---------
Net (decrease) increase in cash and cash
equivalents............................. (20,650) (27,353) 1,183 1,458 -- (45,362)
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at beginning of
year.................................... 25,958 42,421 1,593 465 -- 70,437
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at end of
year.................................... $ 5,308 $ 15,068 $ 2,776 $ 1,923 $ -- $ 25,075
========= ======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES:
We have audited the consolidated balance sheet of Allied Capital
Corporation and subsidiaries as of December 31, 1998 and 1997, including the
consolidated statement of investments as of December 31, 1998, and the related
consolidated statements of operations, changes in net assets and cash flows for
each of the three years in the period ended December 31, 1998. These
consolidated financial statements and supplementary consolidating financial
information referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and supplementary consolidating financial information
referred to below based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. These procedures
included physical counts of investments. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allied
Capital Corporation and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations, changes in net assets and cash flows
for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
As discussed in Note 3, the consolidated financial statements include
investments valued at $800,274,000 as of December 31, 1998 and $697,021,000 as
of December 31, 1997, (93 percent and 86 percent, respectively, of total assets)
whose values have been estimated by the board of directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by the
board of directors in arriving at its estimate of value of such investments and
have inspected the underlying documentation, and in the circumstances we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, the board of directors'
estimate of values may differ significantly from the values that would have been
used had a ready market existed for the investments, and the differences could
be material.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and related consolidating statements of operations
and cash flows are presented for purposes of additional analysis and are not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Arthur Anderson
Vienna, Virginia
February 18, 1999
F-31
<PAGE> 98
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION 1999.
ALLIED CAPITAL CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
, 1999
-------------------------
This Statement of Additional Information ("SAI") is not a prospectus, and
should be read in conjunction with the prospectus dated , 1999
relating to this offering and the accompanying prospectus supplement, if any.
You can obtain a copy of the prospectus by calling Allied Capital Corporation at
1-888-818-5298 and asking for Investor Relations. Terms not defined herein have
the same meaning as given to them in the prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN THE LOCATION
STATEMENT OF RELATED
OF ADDITIONAL DISCLOSURE IN
INFORMATION THE PROSPECTUS
------------- --------------
<S> <C> <C>
General Information and History............................. B-2 1;11;30
Investment Objective and Policies........................... B-2 1;11;30
Management.................................................. B-2 45
Compensation of Executive Officers and Directors....... B-2 48
Compensation of Directors.............................. B-3 48
Stock Option Awards.................................... B-4 49
Cut-Off Award and Formula Award........................ B-4 49
Committees of the Board of Directors................... B-6 N/A
Control Persons and Principal Holders of Securities......... B-7 N/A
Investment Advisory Services................................ B-8 45
Safekeeping, Transfer and Dividend Paying Agent and
Registrar................................................. B-8 61
Accounting Services......................................... B-8 61
Brokerage Allocation and Other Practices.................... B-8 N/A
Tax Status.................................................. B-9 51
</TABLE>
-------------------------
B-1
<PAGE> 99
GENERAL INFORMATION AND HISTORY
This SAI contains information with respect to Allied Capital Corporation
(the "Company"). The Company changed its name from "Allied Capital Lending
Corporation" to "Allied Capital Corporation," effective upon the merger, which
was consummated on December 31, 1997. The Company is a registered investment
adviser. The Company was initially organized as a corporation in the District of
Columbia in 1976 and was reincorporated in the state of Maryland in 1990.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Company is to achieve current income and
capital gains. The Company seeks to achieve its investment objective by lending
to and investing primarily in private, growing businesses in a variety of
industries and in diverse geographic locations primarily in the United States.
We focus on investments in three primary areas: mezzanine finance, commercial
real estate finance and SBA 7(a) lending. Our investment portfolio consists
primarily of small and medium-sized subordinated loans with equity features,
small and medium-sized commercial mortgage loans, and small senior loans. At
December 31, 1998, our investment portfolio totaled $800.3 million. A discussion
of the selected financial data, supplementary financial information and
management's discussion and analysis of financial condition and results of
operations is included in the prospectus. In addition to its core lending
business, the Company also provides advisory services to private investment
funds.
MANAGEMENT
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Under Commission rules applicable to BDCs, we are required to set forth
certain information regarding the compensation of certain executive officers and
directors. The following table sets forth compensation paid by the Company in
all capacities during the year ended December 31, 1998, to the directors and the
three highest paid executive officers of the Company (collectively, the
"Compensated Persons").
B-2
<PAGE> 100
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE SECURITIES RETIREMENT BENEFITS DIRECTORS FEES
COMPENSATION FROM UNDERLYING ACCRUED AS PART OF PAID BY THE
NAME AND POSITION THE COMPANY(1) OPTIONS/SARS(4) COMPANY EXPENSES COMPANY(5)
----------------- ----------------- --------------- ------------------- --------------
<S> <C> <C> <C> <C>
William L. Walton, Chairman and Chief
Executive Officer(2)................. $2,158,599 754,188 $ -- $17,667
Joan M. Sweeney, Managing
Director(2).......................... 1,178,920 374,275 -- 0
G. Cabell Williams III, Managing
Director(2).......................... 896,873 278,403 -- 0
Brooks H. Browne, Director............. 10,500 -- -- 10,500
John D. Firestone, Director............ 11,500 -- -- 11,500
Anthony T. Garcia, Director............ 12,500 -- -- 12,500
Lawrence I. Hebert, Director........... 8,500 -- -- 8,500
John I. Leahy, Director................ 17,167 -- -- 17,167
Robert E. Long, Director............... 18,667 -- -- 18,667
Warren K. Montouri, Director........... 15,667 -- -- 15,667
Guy T. Steuart II, Director............ 11,000 -- -- 11,000
T. Murray Toomey, Director............. 7,500 -- -- 7,500
Laura W. van Roijen, Director.......... 8,500 -- -- 8,500
George C. Williams, Jr. Director,
Chairman Emeritus(3)................. 626,206 151,395 -- 18,167
</TABLE>
- -------------------------
(1) There were no perquisites paid by the Company in excess of the lesser of
$50,000 or 10% of the Compensated Person's total salary and bonus for the
year.
(2) The following table provides detail for 1998 as to the aggregate
compensation of the three highest paid executive officers of the Company.
<TABLE>
<CAPTION>
VESTED DEFERRED
FORMULA CUT-OFF ESOP COMPENSATION DIRECTORS
SALARY BONUS AWARD AWARD CONTRIBUTION CONTRIBUTION FEES
-------- -------- ---------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Mr. Walton........... $351,517 $525,000 $1,056,683 $170,156 $8,000 $29,576 $17,667
Ms. Sweeney.......... 222,191 275,000 619,154 38,965 8,000 15,610 --
G. Cabell Williams
III................ 225,327 275,000 287,523 88,257 8,000 12,766 --
</TABLE>
The Formula Award, which totaled approximately $19 million in the aggregate,
vests in three equal installments on December 31, 1998, 1999, and 2000, and will
be expensed for financial reporting purposes similarly. The amount of the
Formula Award expensed in 1998 for financial reporting purposes for Mr. Walton,
Ms. Sweeney and Mr. Williams was $1,472,451, $862,761 and $400,664,
respectively. The amount expensed was based on the value of the Company's common
stock at the date of the Formula Award contribution to the deferred compensation
plan in January 1998. On January 4, 1999, the first vested installment of the
Formula Award was generally distributed to participants at the market value of
the Company's common stock on that day. The distribution amount for Mr. Walton,
Ms. Sweeney and Mr. Williams was $1,056,683, $619,154 and $287,523,
respectively. The Company distributed the vested shares to brokerage accounts
for the participants that restrict the sale of the vested shares.
The Cut-Off Award, which totaled $2.9 million in the aggregate, will be paid
to individuals on the respective vesting date of any options under the Old Plans
which were canceled in connection with the merger. See "-- Cut-Off Award and
Formula Award."
(3) In addition to director's fees, Mr. Williams received $144,000 in consulting
fees, $32,686 in Cut-Off Award and $431,353 in vested Formula Award. The
amount of the Formula Award expensed in 1998 for Mr. Williams was $601,068.
(4) See "Stock Option Awards" for terms of options granted in 1998. The Company
does not maintain a restricted stock plan or a long-term incentive plan.
(5) Consists only of directors' fees paid by the Company during 1998. Such fees
are also included in the column titled "Aggregate Compensation from the
Company."
COMPENSATION OF DIRECTORS
During the first quarter of 1998, each director received a fee of $1,000
for each meeting of the board of directors or any separate committee meeting
attended, and $500 for each committee meeting attended on the same day as a
board of directors meeting. Beginning in April 1998, each director received
$1,000 for each board or committee meeting attended, except with respect to the
members
B-3
<PAGE> 101
of the executive committee, who each received an annual retainer of $10,000 in
lieu of fees paid for each executive committee meeting attended. For 1998, this
annual retainer was prorated. Non-officer directors are eligible for stock
option awards under the Company's current stock option plan, provided that the
Commission grants exemptive relief to permit such awards. No grants have been
made to non-officer directors under the Company's stock option plan. See
"-- Stock Option Awards" and "Management -- Compensation Plans -- Stock Option
Plan" in the prospectus.
STOCK OPTION AWARDS
The following table sets forth the details relating to option grants in
1998 to the Company's Compensated Persons and the potential realizable value of
each grant, as prescribed to be calculated by the Commission.
OPTION GRANTS DURING 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT RATES OF
SECURITIES OF TOTAL EXERCISE STOCK APPRECIATION
UNDERLYING OPTIONS PRICE OVER 10-YEAR TERM(3)
OPTIONS GRANTED PER EXPIRATION ------------------------
NAME GRANTED(1) IN 1998(2) SHARE DATE 5% 10%
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
William L. Walton......... 659,188 12.7% $21.375 1/8/08 $8,861,216 $22,456,060
95,000 1.8 $17.875 12/8/08 $1,067,942 $ 2,706,374
Joan M. Sweeney........... 319,275 6.2 $21.375 1/8/08 $4,291,893 $10,876,500
55,000 1.1 $17.875 12/8/08 $ 618,282 $ 1,566,848
G. Cabell Williams III.... 223,403 4.3 $21.375 1/8/08 $3,003,122 $ 7,610,501
55,000 1.1 $17.875 12/8/08 $ 618,282 $ 1,566,848
George C. Williams,
Jr. .................... 141,395 2.7 $21.375 1/8/08 $1,900,720 $ 4,816,797
10,000 0.2 $17.875 12/8/08 $ 112,415 $ 284,881
</TABLE>
- -------------------------
(1) Options granted in 1998 generally vest in six equal installments beginning
on the date of grant, with full vesting occurring on the fifth anniversary
of the grant date or change of control of the Company.
(2) In 1998, the Company granted options to purchase a total of 5,189,944
shares.
(3) Potential realizable value is calculated on 1998 options granted, and is net
of the option exercise price but before any tax liabilities that may be
incurred. These amounts represent certain assumed rates of appreciation, as
mandated by the Commission. Actual gains, if any, or stock option exercises
are dependent on the future performance of the shares, overall market
conditions, and the continued employment by the Company of the option
holder. The potential realizable value will not necessarily be realized.
CUT-OFF AWARD AND FORMULA AWARD
As discussed in the prospectus, prior to the merger options had been
granted under the Old Plans to various employees of Advisers, who were also
officers of the predecessor companies. In preparation for the merger, the
compensation committee of Advisers, in conjunction with the compensation
committee of the other predecessor companies, determined that the five Old Plans
should be terminated upon the merger, so that the new merged Company would be
able to develop a new plan that would incent all officers and directors with a
single equity security. The existence of the Old Plans had resulted in certain
inequities in option grants among the various officers of the predecessor
companies simply because of the differences in the underlying equity securities.
To balance stock option awards among employees, and to account for the
deviations caused by the existence of five plans by five different publicly
traded stocks, two special awards were developed to be granted in lieu of
options under the Old Plans that were foregone upon the merger and the
cancellation of the Old Plans.
B-4
<PAGE> 102
Cut-Off Award. The first award established a cut-off dollar amount as of
the date of the announcement of the merger (August 14, 1997) that was computed
for all outstanding, but unvested options that were canceled as of the date of
the merger (the "Cut-Off Award"). The Cut-Off Award was designed to cap the
appreciated value in unvested options as of the merger announcement date in
order to set the foundation to balance option awards upon the merger. The
Cut-Off Award, in the aggregate, was computed to be $2.9 million, and is equal
to the difference between the market price of the shares of stock underlying the
canceled options under the Old Plans at August 14, 1997, less the exercise
prices of the options. The Cut-Off Award is payable for each canceled option as
the canceled options would have vested and will vest automatically in the event
of a change of control. The Cut-Off Award is only payable if the award recipient
is employed by the Company on the future vesting date. The following table
indicates the Cut-Off Award for each Compensated Person, and the related vesting
schedule.
<TABLE>
<CAPTION>
CUT-OFF AWARD
RECIPIENT 1998 1999 2000 2001 2002
- ---------------------------------------------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
William L. Walton............................. $170,157 $170,157 $170,157 $ 0 $ 0
Joan M. Sweeney............................... 38,964 37,678 36,602 2,026 0
G. Cabell Williams III........................ 88,257 46,802 39,677 21,152 18,916
George C. Williams, Jr........................ 32,686 4,688 52,373 0 0
</TABLE>
Formula Award. The second award (the "Formula Award") was designed to
compensate officers from the point when their unvested options ceased to
appreciate in value pursuant to the Cut-Off Award (i.e., August 14, 1997) up
until the time at which they would be able to receive option awards in the
Company after the merger became effective. In the aggregate, the Formula Award
equaled six percent (6%) of the difference between the combined aggregate market
capitalizations of the predecessor companies as of the close of the market on
December 30, 1997, and the combined aggregate market capitalizations of the
predecessor companies on August 14, 1997. In total, the combined aggregate
market capitalization of the predecessor companies increased by $319 million
from August 14, 1997 to December 30, 1997, and the aggregate Formula Award was
approximately $19 million.
The Formula Award was designed as a long-term incentive compensation
program to be a replacement for canceled stock options and to balance share
ownership among key officers for past and prospective service. The terms of the
Formula Award required that the award be contributed to the Company's deferred
compensation plan, and be used to purchase shares of the Company in the open
market.
The Formula Award vests and accrues equally over a three-year period, on
the anniversary of the merger date (December 31, 1997), and vests automatically
in the event of a change of control of the Company. If an officer terminates
employment with the Company prior to the vesting of any part of the Formula
Award, that amount will be forfeited to the Company. Assuming all officers meet
the vesting requirement, the Company will accrue the Formula Award over the
three-year period in equal amounts of approximately $6.4 million, less any
forfeitures. For the year ended December 31, 1998, $6.2 million, net of
forfeitures of $0.3 million, was expensed for the Formula Award. The following
table indicates the Formula Award for each Compensated Person, and the related
vesting schedule.
<TABLE>
<CAPTION>
FORMULA AWARD RECIPIENT 1998 1999 2000
----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
William L. Walton..................................... $1,472,451 $1,472,451 $1,472,451
Joan M. Sweeney....................................... 862,761 862,761 862,761
G. Cabell Williams III................................ 400,664 400,664 400,664
George C. Williams, Jr................................ 601,068 601,068 601,068
</TABLE>
B-5
<PAGE> 103
On January 4, 1999, the portion of the Formula Award that vested on
December 31, 1998 was generally distributed to participants in the form of
shares of the Company's common stock. These shares are held in restricted
accounts at a brokerage firm.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's board of directors has established an Executive Committee, an
Audit Committee, a Nominating Committee and a Compensation Committee.
The Executive Committee has and may exercise those rights, powers and
authority of the board of directors as the board of directors may from time to
time grant to it, except where action by the board of directors is required by
statute, an order of the Commission or the Company's charter or bylaws. In
addition, the Executive Committee is authorized to approve all investments over
$10 million, or any investment that possesses unusual risk/reward
characteristics. The Executive Committee consists of Messrs. Walton, Leahy,
Long, Montouri, and Williams. The Executive Committee met sixteen times during
1998.
The Audit Committee recommends the selection of independent public
accountants for the Company, reviews with such independent public accountants
the planning, scope and results of their audit of the Company's financial
statements and the fees for services performed, reviews with the independent
public accountants the adequacy of internal control systems, reviews the annual
financial statements and receives the Company's audit reports and financial
statements. The Audit Committee consists of Messrs. Browne, Leahy and Steuart.
The Audit Committee met twice during 1998.
The Compensation Committee determines the compensation for the Company's
executive officers and the amount of salary and bonus to be included in the
compensation package for each of the Company's officers and employees. In
addition, the Compensation Committee approves stock option grants for the
Company's officers under the Company's Stock Option Plan. The Compensation
Committee consists of Messrs. Browne, Long, Firestone and Garcia. The
Compensation Committee met four times during 1998.
The Nominating Committee recommends candidates for election as directors.
The Nominating Committee consists of Messrs. Walton, Hebert, Toomey and Steuart,
and Ms. van Roijen. The Nominating Committee met once in 1998.
B-6
<PAGE> 104
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 19, 1999, there were no persons that owned 25% or more of the
Company's outstanding voting securities, and no person would be deemed to
control the Company, as such term is defined in the 1940 Act.
The following table sets forth, at March 19, 1999, the beneficial ownership
of each current director, the Chief Executive Officer, the Company's executive
officers, and the executive officers and directors as a group. The address for
each director and executive officer is 1919 Pennsylvania Avenue, NW, Washington,
DC 20006. At this time the Company is unaware of any shareholder owning 5% or
more of the outstanding shares of common stock of the Company. Unless otherwise
indicated, the Company believes that each beneficial owner set forth in the
table has sole voting and investment power.
<TABLE>
<CAPTION>
NAME OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER OWNED BENEFICIALLY CLASS (1)
- ------------------------------------------------------ ------------------ -------------
<S> <C> <C>
DIRECTORS:
William L. Walton..................................... 779,650(2,3) 1.3%
Brooks H. Browne...................................... 40,056 *
John D. Firestone..................................... 19,332 *
Anthony T. Garcia..................................... 52,507 *
Lawrence I. Hebert.................................... 16,800 *
John I. Leahy......................................... 16,818 *
Robert E. Long........................................ 9,796 *
Warren K. Montouri.................................... 196,182 *
Guy T. Steuart II..................................... 317,180(4) *
T. Murray Toomey, Esq................................. 32,666(5) *
Laura W. van Roijen................................... 28,302 *
George C. Williams, Jr................................ 380,277(2) *
EXECUTIVE OFFICERS:
Philip A. McNeill..................................... 196,038(2) *
Penni F. Roll......................................... 64,444(2) *
John M. Scheurer...................................... 369,573(2) *
Joan M. Sweeney....................................... 319,933(2) *
G. Cabell Williams III................................ 732,153(2,3) 1.2%
All directors and executive officers as a group (17 in
number)............................................. 3,252,237(6) 5.5%
</TABLE>
- -------------------------
* Less than 1%
(1) Based on a total of 58,765,691 shares of the Company's common stock issued
and outstanding on March 19, 1999 and shares of the Company's common stock
issuable upon the exercise of immediately exercisable stock options held by
each individual executive officer. At this time, no options have been
granted to non-officer directors.
(2) Share ownership for the following directors and executive officers includes:
<TABLE>
<CAPTION>
OPTIONS
EXERCISABLE ALLOCATED
OWNED WITHIN 60 DAYS TO ESOP
DIRECTLY OF MARCH 19, 1999 ACCOUNT
-------- ----------------- ---------
<S> <C> <C> <C>
Mr. Walton................................................ 261,566 235,564 547
Mr. Williams, Jr.......................................... 284,346 95,931 --
Mr. McNeill............................................... 112,337 76,677 7,024
Ms. Roll.................................................. 35,975 25,959 2,510
Mr. Scheurer.............................................. 235,267 114,876 19,430
Ms. Sweeney............................................... 196,355 115,592 7,986
Mr. Williams III.......................................... 365,998 83,635 61,636
</TABLE>
(3) Includes 282,520 shares held by the ESOP, of which Messrs. Walton and
Williams III are co-trustees. Participants in the ESOP may direct the voting
of these shares; however, if a participant does not direct the voting, the
co-trustees of the ESOP will vote the shares on behalf of the participants.
Messrs. Walton and Williams III disclaim beneficial ownership of such
shares. As of December 31, 1998, all shares held in the ESOP had been
allocated.
B-7
<PAGE> 105
(4) Includes 276,691 shares held by a corporation for which Mr. Steuart serves
as an executive officer.
(5) Shares are held by a trust for the benefit of Mr. Toomey and his wife.
(6) Includes a total of 748,234 shares underlying stock options exercisable
within 60 days of March 19, 1999, which are assumed to be outstanding for
the purpose of calculating the group's percentage ownership, and 282,520
shares held by the ESOP.
INVESTMENT ADVISORY SERVICES
The Company is internally managed and therefore has not entered into any
advisory agreement with, nor pays advisory fees to, an outside investment
adviser. The Company is a registered investment adviser under the Advisers Act
and provides advisory services to other entities. The Company currently has 73
investment and other portfolio management professionals, who manage the
investments of the Company as well as the investments of other managed entities,
as well as 33 other professional employees and staff. All investments of the
Company must be approved by the Company's investment committee, which is
composed of senior investment professionals of the Company. In addition, in
certain instances where risk/return characteristics warrant and for every
transaction larger than $10 million, the executive committee of the board of
directors must also approve the transaction. See "Management" in the prospectus.
SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
The investments of the Company and its subsidiaries are held in safekeeping
by Riggs Bank N.A. ("Riggs") at 808 17th Street, N.W., Washington, D.C. 20006.
LaSalle National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk
Grove Village, Illinois 60007, serves as the trustee and custodian with respect
to assets of the Company held for securitization purposes. American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005
acts as the Company's transfer, dividend paying and reinvestment plan agent and
registrar.
ACCOUNTING SERVICES
Arthur Andersen LLP ("Andersen") has served as the independent accountant
to the Company since December 31, 1997. Prior to the year ended December 31,
1997, Allied Lending's financial statements were audited by Matthews, Carter and
Boyce, P.C., or its predecessor ("Matthews"). On December 12, 1997, Matthews
resigned, effective upon the consummation of the merger, and Andersen was
engaged and continues as the independent accountants of the Company. The
decision to change accountants was recommended by the Company's Audit Committee
and was approved by the board of directors of the Company.
For the year ended December 31, 1996, and up to the date of resignation of
Matthews, there were no disagreements with Matthews on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Matthews, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report. The independent accountants' report on the 1996
financial statements did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. Each of Andersen and Matthews has advised the Company
that neither it nor any present member or associate of the relevant firm has any
financial interest, direct or indirect, in the Company or its subsidiaries.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since the Company generally acquires and disposes of its investments in
privately negotiated transactions, it infrequently uses brokers in the normal
course of business.
B-8
<PAGE> 106
TAX STATUS
The following discussion is a general summary of the material federal
income tax considerations applicable to the Company and to an investment in the
common stock and does not purport to be a complete description of the income tax
considerations applicable to such an investment. The discussion is based upon
the Code, Treasury Regulations, and administrative and judicial interpretations,
each as of the date of this SAI and all of which are subject to change. You
should consult your own tax advisor with respect to tax considerations which
pertain to your purchase of common stock.
This summary assumes that the investors in the Company hold shares as
capital assets. This summary does not discuss all aspects of federal income
taxation relevant to holders of the common stock in light of particular
circumstances, or to certain types of holders subject to special treatment under
federal income tax laws, including dealers in securities and financial
institutions. This summary does not discuss any aspects of foreign, state or
local tax laws.
The Company. The Company has elected for each taxable year to be treated
as a "regulated investment company" or "RIC" under Subchapter M of the Code and
intends to continue to maintain that status. If the Company qualifies as a RIC
and distributes to stockholders in a timely manner at least 90% of its
"investment company taxable income," as defined in the Code (i.e., net
investment income, including accrued original issue discount, and net short-term
capital gains) (the "90% Distribution Requirement") each year, it will not be
subject to federal income tax on the portion of its investment company taxable
income and net capital gains (net long-term capital gain in excess of net
short-term capital loss) it distributes to stockholders. In addition, if the
Company distributes in a timely manner 98% of its capital gain net income for
each one-year period ending on December 31, and distributes 98% of its net
ordinary income for each calendar year (as well as any income not distributed in
prior years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of RICs. The Company
generally endeavors to distribute to stockholders all of its investment company
taxable income and its net capital gain, if any, for each taxable year so that
such Company will not incur income and excise taxes on its earnings.
In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things: (a) continue to qualify as a BDC under the 1940 Act,
(b) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale of
stock or other securities, or other income derived with respect to its business
of investing in such stock or securities (the "90% Income Test"); and (c)
diversify its holdings so that at the end of each quarter of the taxable year
(i) at least 50% of the value of the Company's assets consists of cash, cash
items, U.S. government securities, securities of other RICs, and other
securities if such other securities of any one issuer do not represent more than
5% of the Company's assets or 10% of the outstanding voting securities of the
issuer, and (ii) no more than 25% of the value of the Company's assets is
invested in the securities of one issuer (other than U.S. government securities
or securities of other RICs) or of two or more issuers that are controlled (as
determined under applicable Code rules) by the Company and are engaged in the
same or similar or related trades or businesses. The failure of one or more of
the Company's subsidiaries to continue to qualify as RICs could adversely affect
the Company's ability to satisfy the foregoing diversification requirements.
If the Company acquires or is deemed to have acquired debt obligations that
were issued originally at a discount or that otherwise are treated under
applicable tax rules as having original issue discount, it must include in
income each year a portion of the original issue discount that accrues over the
life of the obligation regardless of whether cash representing such income is
received by the relevant entity in the same taxable year and to make
distributions accordingly.
B-9
<PAGE> 107
Although it does not presently expect to do so, the Company is authorized
to borrow funds and to sell assets in order to satisfy distribution
requirements. However, under the 1940 Act, the Company is not permitted to make
distributions to stockholders while the Company's debt obligations and other
senior securities are outstanding unless certain "asset coverage" tests are met.
Moreover, the Company's ability to dispose of assets to meet its distribution
requirements may be limited by other requirements relating to its status as a
RIC, including the diversification requirements. If the Company disposes of
assets in order to meet distribution requirements, the Company may make such
dispositions at times which, from an investment standpoint, are not
advantageous.
If the Company fails to satisfy the 90% Distribution Requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in that year on all of its taxable income, regardless of whether it makes
any distributions to its stockholders. In that case, all of the Company's
distributions to its stockholders will be characterized as ordinary income (to
the extent of the Company's current and accumulated earnings and profits). In
contrast, as is explained below, if the Company qualifies as a RIC, a portion of
its distributions may be characterized as long-term capital gain in the hands of
stockholders.
U.S. Stockholders. Other than distributions properly designated as
"capital gain dividends" as is described below, dividends to U.S. Stockholders
(as defined below) of the investment company taxable income of the Company will
be taxable as ordinary income to stockholders to the extent of the Company's
current or accumulated earnings and profits, whether paid in cash or reinvested
in additional shares. A "U.S. Stockholder" is a stockholder who is (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created in or organized under the laws of the United States or any
political subdivision thereof, (iii) an estate, the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust subject to the supervision of a court within the United States and the
control of a United States person. Distributions of the Company's net capital
gain properly designated by the Company as "capital gain dividends" will be
taxable to stockholders as a long-term capital gain regardless of the
stockholder's holding period for his or her shares. Distributions in excess of
the Company's earnings and profits will first reduce the adjusted tax basis of
the stockholder's shares and, after the adjusted basis is reduced to zero, will
constitute capital gains to the stockholder. For a summary of the tax rates
applicable to capital gains, including capital gains dividends, see discussion
below.
To the extent that the Company retains any net capital gain, it may
designate such retained gain as "deemed distributions" and pay a tax thereon for
the benefit of its stockholders. In that event, the stockholders will be
required to report their share of retained net capital gain on their tax returns
as if it had been distributed to them and report a credit, or claim or refund
for the tax paid thereon by the Company. The amount of the deemed distribution
net of such tax will be added to the stockholder's cost basis for his or her
shares. Since the Company expects to pay tax on net capital gain at its regular
corporate capital gain tax rate, and since that rate is in excess of the maximum
rate currently payable by individuals on net capital gain, the amount of tax
that individual stockholders will be treated as having paid will exceed the
amount of tax that such stockholders would be required to pay on net capital
gain.
Stockholders who are not subject to federal income tax or tax on capital
gains should be able to file a Form 990T or an income tax return on the
appropriate form that allows them to recover the taxes paid on their behalf.
Any dividend declared by the Company in October, November, or December of
any calendar year, payable to stockholders of record on a specified date in such
a month and actually paid during January of the following year, will be treated
as if it had been received by the stockholders on December 31 of the year in
which the dividend was declared.
B-10
<PAGE> 108
You should consider the tax implications of buying shares just prior to a
distribution. Even if the price of the shares includes the amount of the
forthcoming distribution, you may be taxed upon receipt of the distribution and
will not be entitled to offset the distribution against the tax basis in your
shares.
You may recognize taxable gain or loss if you sell or exchange your shares.
Any gain arising from (or, in the case of distributions in excess of earnings
and profits, treated as arising from) the sale or exchange of shares generally
will be a capital gain or loss. This capital gain or loss normally will be
treated as a long-term capital gain or loss if you have held your shares for
more than one year; otherwise, it will be classified as short-term capital gain
or loss. However, any capital loss arising from the sale or exchange of shares
held for six months or less will be treated as a long-term capital loss to the
extent of the amount of capital gain dividends received with respect to such
shares and, for this purpose, the special rules of Section 246(c)(3) and (4) of
the Code generally apply in determining the holding period of shares. It is
unclear how any such long-term capital loss offsets capital gains taxable at
different rates. All or a portion of any loss realized upon a taxable
disposition of shares of the Company may be disallowed if other shares of the
Company are purchased (under a DRIP plan or otherwise) within 30 days before or
after the disposition.
In general, net capital gain (the excess of net long-term capital gain over
net short-term capital loss) of non-corporate taxpayers currently is subject to
a maximum federal income tax rate of 28% (subject to reduction in many
situations) while other income may be taxed at rates as high as 39.6%. Capital
gains derived from the disposition of assets held for more than 18 months
generally are subject to federal income tax at the rate of 20%. Corporate
taxpayers currently are subject to federal income tax on net capital gain at the
maximum 35% rate also applied to ordinary income. Tax rates imposed by states
and local jurisdictions on capital gain and ordinary income may differ.
The Company will send to each of its stockholders, as promptly as possible
after the end of each fiscal year, a notice detailing, on a per share and per
distribution basis, the amounts includible in such stockholder's taxable income
for such year as ordinary income and as long-term capital gain. In addition, the
federal tax status of each year's distributions generally will be reported to
the IRS. Distributions may also be subject to additional state, local, and
foreign taxes depending on a stockholder's particular situation. The Company's
ordinary income dividends to its corporate shareholders may, if certain
conditions are met, qualify for the dividends received deduction to the extent
that the Company has received qualifying dividend income during the taxable
year; capital gain dividends distributed by the Company are not eligible for the
dividends received deduction.
Non-U.S. Stockholders. A Stockholder that is not a U.S. Stockholder (a
"Non-U.S. Stockholder") generally is subject to withholding of United States
federal income tax at a 30% rate (or lower applicable treaty rate) on dividends
from the Company (other than capital gain dividends) that are not "effectively
connected" with a United States trade or business carried on by such
stockholder. Accordingly, investment in the Company is likely to be appropriate
for a Non-U.S. Stockholder only if such person can utilize a foreign tax credit
or corresponding tax benefit in respect of such United States withholding tax.
Non-effectively connected capital gain dividends and gains realized from
the sale of stock will not be subject to United States federal income tax in the
case of (i) a Non-U.S. Stockholder that is a corporation and (ii) a Non-U.S.
Stockholder that is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Stockholders may nonetheless be subject to backup
withholding on capital gain dividends and gross proceeds paid to them upon the
sale of their stock. See "Backup Withholding" below.
If income from the Company or gains realized from the sale of stock is
effectively connected with a Non-U.S. Stockholder's United States trade or
business, then such amounts will be subject to
B-11
<PAGE> 109
United States federal income tax at the tax rates applicable to United States
persons. Non-U.S. Stockholders that are corporations may be also subject to an
additional "branch profits tax" with respect to income from the Company that is
effectively connected with a United States trade or business.
The United States Treasury Department recently issued Treasury regulations
generally effective for payments made after December 31, 1999 concerning the
withholding of tax and information reporting for certain amounts paid to
nonresident alien individuals and foreign corporations (the "Final Withholding
Regulations"). Among other things, the Final Withholding Regulations may require
Non-U.S. Stockholders to furnish new certification of their foreign status not
later than December 31, 1999. Prospective investors should consult their tax
advisors concerning the applicability and effect of the Final Withholding
Regulations on an investment in stock.
The tax consequences to a Non-U.S. Stockholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. An applicable tax treaty may reduce the rate or the scope of U.S.
taxation imposed on the income of an eligible Non-U.S. Stockholder. Non-U.S.
Stockholders may be required to provide appropriate documentation to establish
their entitlement to the benefits of such a treaty. Foreign investors are
advised to consult their tax advisors with respect to the tax implications of
purchasing, holding and disposing of stock.
Backup Withholding. The Company may be required to withhold United States
federal income tax at a rate of 31% ("backup withholding") from dividends and
redemption proceeds paid to non-corporate stockholders. This tax may be withheld
from dividends if (i) the stockholder fails to furnish the Company with its
correct taxpayer identification number, (ii) the IRS notifies the Company that
the stockholder has failed to properly report certain interest and dividend
income to the IRS and to respond to notices to that effect or (iii) when
required to do so, the stockholder fails to certify that he or she is not
subject to backup withholding. Redemption proceeds may be subject to withholding
under the circumstances described in (i) above.
The Company may be required to report annually to the IRS and to each
Non-U.S. Stockholder the amount of dividends paid to such stockholder and the
amount, if any, of tax withheld pursuant to the backup withholding rules with
respect to such dividends. This information may also be made available to the
tax authorities in the Non-U.S. Stockholder's country of residence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a stockholder may be refunded or
credited against such stockholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF AN INVESTMENT IN THE COMPANY, INCLUDING THE POSSIBLE
EFFECT OF ANY PENDING LEGISLATION OR PROPOSED REGULATION.
B-12
<PAGE> 110
PART C
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS.
The following financial statements of Allied Capital Corporation (the
"Company" or the "Registrant") are included in this registration statement in
"Part A: Information Required in a Prospectus":
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet -- As of December 31, 1998 and
1997...................................................... F-1
Consolidated Statement of Operations -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-2
Consolidated Statement of Changes in Net Assets -- For the
Years Ended December 31, 1998, 1997 and 1996.............. F-3
Consolidated Statement of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statement of Investments -- December 31,
1998...................................................... F-5
Notes to Consolidated Financial Statements.................. F-10
Report of Independent Public Accountants.................... F-31
</TABLE>
2. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
a.1(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
a.2(2) Articles of Merger.
b.(3) Bylaws.
c. Not applicable.
d.(6) Specimen certificate of the Company's Common Stock, par
value $0.0001, the rights of holders of which are defined in
Exhibits a.1, a.2 and b.
e.(3) Dividend Reinvestment Plan.
f.1(4) Form of debenture between certain subsidiaries of ACC and
the U.S. Small Business Administration.
f.2* 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.
f.3(7) Note Agreement dated as of April 30, 1998.
f.4(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.
f.6(8) Amended and Restated Master Loan & Security Agreement dated
October 7, 1997 among the Company, BMI and Morgan Stanley
Mortgage Capital, Inc.
f.7.a(6) Sale and Servicing Agreement dated, as of January 1, 1998,
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and Allied Capital Corporation and
LaSalle National Bank and ABN AMRO Bank N.V.
</TABLE>
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<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
f.7.b(6) Indenture dated as of January 1, 1998, between the Allied
Capital Commercial Mortgage Trust 1998-1 and LaSalle
National Bank.
f.7.c(6) Amended and Restated Trust Agreement, dated January 1, 1998
between Allied Capital CMT, LaSalle National Bank Inc. and
Wilmington Trust Company.
f.7.d(6) Guaranty dated as of January 1, 1998 by the Company.
g. Not applicable.
h.1* Form of Underwriting Agreement, if applicable.
i.1(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
i.1a(7) First Amendment to the Allied Capital Corporation Employee
Stock Ownership Plan dated April 30, 1998.
i.2(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
i.3(9) Stock Option Plan.
i.4 Description of Formula Award and Cut-Off Award Arrangements.
A discussion of the Formula and Cut-off Awards is set forth
on pages 49 and 50 of the Prospectus to the Registration
Statement and pages B-4 through B-6 of the SAI.
j.1(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
j.2(6) Form of Custody Agreement with LaSalle National Bank.
l.* Opinion of counsel and consent to its use.
m. Not applicable.
n.1* Consent of Arthur Andersen LLP, independent public
accountants.
n.2* Consent of Sutherland, Asbill & Brennan LLP (included in
Exhibit l).
o. Not applicable.
p. Not applicable.
q. Not applicable.
r.* Financial Data Schedule.
</TABLE>
- -------------------------
<TABLE>
<C> <S>
* Filed herewith.
(1) Incorporated by reference to exhibit 3(i) filed 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).
(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 the exhibit f.7 filed with
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 the 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 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.
</TABLE>
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<PAGE> 112
ITEM 25. MARKETING ARRANGEMENTS
The information contained under the heading "Plan of Distribution" on page
59 of the prospectus is incorporated herein by reference, and any information
concerning any underwriters will be contained in the accompanying prospectus
supplement, if any.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Commission registration fee*................................ $ 28,902
NASD filing fee*............................................ $ 10,896
Nasdaq National Market Additional Listing Fee*.............. $ 17,500
Accounting fees and expenses................................ $100,000
Legal fees and expenses..................................... $300,000
Printing and engraving...................................... $250,000
Miscellaneous fees and expenses............................. $ 2,702
--------
Total.................................................. $710,000
========
</TABLE>
- -------------------------
* Estimated for filing purposes.
All of the expenses set forth above shall be borne by the Company.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Direct Subsidiaries
The following list sets forth each of the Company's subsidiaries, the state
or country under whose laws the subsidiary is organized, and the percentage of
voting securities or membership interests owned by the Company in such
subsidiary:
<TABLE>
<S> <C>
Allied Investment Corporation (Maryland).................... 100%
Allied Capital SBLC Corporation (Maryland).................. 100%
Allied Capital REIT, Inc. ("Allied REIT") (Maryland)........ 100%
Allied Capital Holdings LLC (Delaware)...................... 100%
PC Acquisition Corporation (Maryland)....................... 100%
Allied Capital Beteiligungsberatung GmbH (Germany).......... 100%
</TABLE>
Each of the Company's subsidiaries are consolidated with the Company for
financial reporting purposes, except as noted below.
Indirect Subsidiaries
The Company indirectly controls the entities set forth below through Allied
REIT. Allied REIT owns either all of the membership interests (in the case of a
limited liability company, "LLC") or all of the outstanding voting stock (in the
case of a corporation) of each entity. The following list sets forth each of
Allied REIT's subsidiaries, the state under whose laws the subsidiary is
organized, and the percentage of voting securities or membership interests owned
by Allied REIT of such subsidiary:
<TABLE>
<S> <C>
Allied Capital Property LLC (Delaware)...................... 100%
Allied Capital Equity LLC (Delaware)........................ 100%
9586 I-25 East Frontage Road, Longmont, CO 80504 LLC
(Delaware)................................................ 100%
8930 Stanford Boulevard LLC (Delaware)...................... 100%
Allied Capital CMT, Inc. (Delaware)......................... 100%
</TABLE>
Allied REIT also indirectly owns Allied Capital Commercial Mortgage Trust
1998-1, a Delaware business trust that is wholly owned by Allied Capital CMT,
Inc. ("CMT"). Each subsidiary of Allied
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<PAGE> 113
REIT and CMT is not required to maintain financial and other reports required
under the Securities Act because each does not have a class of securities
registered under the Securities Act.
The Company indirectly controls Allied Capital SBLC Holdings LLC (Delaware)
through Allied Capital SBLC Corporation, which owns 100% of the membership
interests. The Company indirectly controls Allied Investment Holdings LLC
(Delaware) through Allied Investment Corporation, which owns 100% of the
membership interests.
Other Entities Deemed to be Controlled by the Company
The Company provides investment advisory services to the certain entities
and therefore may be deemed to control such entities and their respective
subsidiaries. The following list sets forth each such entity and its respective
subsidiaries and the state under whose laws the entity or subsidiary is
organized:
Allied Capital Germany Fund LLC (Delaware)(1, 2)
Allied Capital Syndication LLC(2)
Business Mortgage Investors, Inc. (Maryland)(1)
Wholly owned subsidiaries of Business Mortgage Investors, Inc.:
BMI Holdings, Inc. (Maryland)
BMI Funding, Inc. (Delaware)
Indirect subsidiary of Business Mortgage Investors, Inc.
BMI Funding LLC (Delaware), of which BMI Funding, Inc. owns substantially
all membership interests
The Company has also established certain limited purpose entities in order to
facilitate certain portfolio transactions.
- -------------------------
(1) By so including these entities herein, the Registrant does not concede that
it controls such entities.
(2) Subsidiary does not consolidate for financial reporting purposes.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth the approximate number of record holders of
the Company's Common Stock at March 19, 1999.
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
<S> <C>
Common Stock, $0.0001 par value........................... 4,500
</TABLE>
ITEM 29. INDEMNIFICATION
The Annotated Code of Maryland, Corporations and Associations (the
"Maryland Law"), Section 2-418 provides that a Maryland corporation may
indemnify any director of the corporation and any person who, while a director
of the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, made a party to any proceeding by reason of service in
that capacity unless it is established that the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; or the director
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements, and reasonable expenses
actually
C-4
<PAGE> 114
incurred by the director in connection with the proceeding, but if the
proceeding was one by or in the right of the corporation, indemnification may
not be made in respect of any proceeding in which the director shall have been
adjudged to be liable to the corporation. Such indemnification may not be made
unless authorized for a specific proceeding after a determination has been made,
in the manner prescribed by the law, that indemnification is permissible in the
circumstances because the director has met the applicable standard of conduct.
On the other hand, the director must be indemnified for expenses if he or she
has been successful in the defense of the proceeding or as otherwise ordered by
a court. The law also prescribes the circumstances under which the corporation
may advance expenses to, or obtain insurance or similar cover for, directors.
The law also provides for comparable indemnification for corporate officers
and agents.
The Articles of Incorporation of the Company provide that its directors and
officers shall, and its agents in the discretion of the board of directors may,
be indemnified to the fullest extent permitted from time to time by the laws of
Maryland (with such power to indemnify officers and directors limited to the
scope provided for in Section 2-418 as currently in force). The Company's
Bylaws, however, provide that the Company may not indemnify any director or
officer against liability to the Company or its security holders to which he or
she might otherwise be subject by reason of such person's willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office unless a determination is made by final decision of
a court, by vote of a majority of a quorum of directors who are disinterested,
non-party directors or by independent legal counsel that the liability for which
indemnification is sought did not arise out of such disabling conduct.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described above, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
an action, suit or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of the court of the issue.
The Company carries liability insurance for the benefit of its directors
and officers on a claims-made basis of up to $5,000,000, subject to a $250,000
retention and the other terms thereof.
The Agreement and Plan of Merger (the "Merger Agreement") by and among
Advisers, Allied I, Allied II, Allied Lending and Allied Commercial provides
that, from and after consummation of the Merger the Company shall indemnify any
person who at the date of the Merger Agreement, or had been at any time prior to
such date or who becomes prior to the effective time of the merger, an officer
or director of Allied I, Allied II, Allied Commercial or Advisers, or any of
their respective subsidiaries, from any and all liabilities resulting from their
acts and omissions prior to the effective time of the merger to the full extent
permitted by Maryland Law and the 1940 Act, including but not limited to acts
and omissions arising out of or pertaining to the merger, and shall maintain in
effect for at least 72 months directors' and officers' liability insurance
policies with respect to matters occurring prior to the effective time of the
merger.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not applicable.
C-5
<PAGE> 115
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Company maintains at its principal office physical possession of each
account, book or other document required to be maintained by Section 31(a) of
the 1940 Act and the rules thereunder.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
The Registrant hereby undertakes:
(1) to suspend the offering of shares until the prospectus is amended
if subsequent to the effective date of this Registration Statement, its net
asset value declines more than ten percent from its net asset value as of
the effective date of this Registration Statement;
(2) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) under the Securities Act of 1933 if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(3) that, for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(4) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(5) that, for the purpose of determining any liability under the
Securities Act of 1933, each post effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering thereof; and
(6) to send by first class mail or other means designed to ensure
equally prompt delivery, within two business days of receipt of a written
or oral request, any Statement of Additional Information.
C-6
<PAGE> 116
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions of its charter and bylaws permitting
indemnification, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
C-7
<PAGE> 117
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, in the
District of Columbia, on the 26th day of March, 1999.
ALLIED CAPITAL CORPORATION
By: /s/ William L. Walton
----------------------------------------
William L. Walton
Chief Executive Officer and
President
KNOW ALL MEN BY THESE PRESENT, each person whose signature appears below
hereby constitutes and appoints William L. Walton and Joan M. Sweeney and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her name,
place, and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 26, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ William L. Walton Chairman of the Board, Chief Executive Officer, and
- --------------------------------------------- President
William L. Walton
/s/ Brooks H. Browne Director
- ---------------------------------------------
Brooks H. Browne
/s/ John D. Firestone Director
- ---------------------------------------------
John D. Firestone
/s/ Anthony T. Garcia Director
- ---------------------------------------------
Anthony T. Garcia
/s/ Lawrence I. Hebert Director
- ---------------------------------------------
Lawrence I. Hebert
/s/ John I. Leahy Director
- ---------------------------------------------
John I. Leahy
/s/ Robert E. Long Director
- ---------------------------------------------
Robert E. Long
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Warren K. Montouri Director
- ---------------------------------------------
Warren K. Montouri
/s/ Guy T. Steuart II Director
- ---------------------------------------------
Guy T. Steuart II
/s/ T. Murray Toomey Director
- ---------------------------------------------
T. Murray Toomey
/s/ Laura W. van Roijen Director
- ---------------------------------------------
Laura W. van Roijen
/s/ George C. Williams Director
- ---------------------------------------------
George C. Williams
/s/ Penni F. Roll Principal and Chief Financial Officer (Principal
- --------------------------------------------- Financial and Accounting Officer)
Penni F. Roll
</TABLE>
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------- -----------
<S> <C>
Ex - 99.2f.2 Credit Agreement dated as of March 9, 1999
Ex - 99.2h.1 Form of Underwriting Agreement
Ex - 99.2l Opinion of counsel and consent to its use
Ex - 99.2n.1 Consent of Arthur Andersen LLP, independent public
accountants.
Ex - 99.2r Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT F.2
CREDIT AGREEMENT
among
ALLIED CAPITAL CORPORATION,
Borrower
NATIONSBANK, N.A.,
Administrative Agent
NATIONSBANC MONTGOMERY SECURITIES LLC,
Sole Lead Arranger and Sole Book Manager
FIRST UNION NATIONAL BANK,
Syndication Agent
BANKBOSTON, N.A.,
Documentation Agent
RIGGS BANK, N.A.,
Managing Agent
CHEVY CHASE BANK, F.S.B.
and
CREDIT LYONNAIS NEW YORK BRANCH,
Co-Agents
and
THE LENDERS NAMED HEREIN,
Lenders
UP TO $400,000,000
DATED AS OF MARCH 9, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS AND TERMS............................................1
1.1 Definitions................................................1
1.2 General; References to Times..............................16
1.3 Accounting Principles.....................................16
SECTION 2 CREDIT FACILITY.................................................17
2.1 Loans.....................................................17
2.2 Swing Line Subfacility....................................17
2.3 Borrowing Procedures......................................18
2.4 Rates and Payment of Interest on Loans....................18
2.5 Number of Interest Periods................................19
2.6 Repayment of Loans........................................19
2.7 Prepayments...............................................19
2.8 Continuation..............................................20
2.9 Conversion................................................20
2.10 Notes.....................................................21
2.11 Reductions of the Commitment..............................21
2.12 Increases of Commitments..................................22
2.13 Optional Renewal of Commitments...........................22
SECTION 3 PAYMENTS, FEES AND OTHER GENERAL PROVISIONS.....................24
3.1 Payments..................................................24
3.2 Pro Rata Treatment........................................24
3.3 Sharing of Payments, Etc..................................25
3.4 Offset....................................................25
3.5 Booking Borrowings........................................25
3.6 Several Obligations.......................................25
3.7 Minimum Amounts...........................................25
3.8 Fees......................................................26
3.9 Computations..............................................26
3.10 Maximum Rate..............................................26
3.11 Interest Recapture........................................27
3.12 Agreement Regarding Interest and Charges..................27
3.13 Defaulting Lenders........................................27
SECTION 4 YIELD PROTECTION, ETC...........................................28
4.1 Increased Cost and Reduced Return.........................28
4.2 Limitation on Types of Loans..............................30
4.3 Illegality................................................30
4.4 Treatment of Affected Loans...............................30
4.5 Compensation..............................................31
</TABLE>
CREDIT AGREEMENT
<PAGE> 3
<TABLE>
<S> <C>
4.6 Taxes.....................................................31
4.7 Removal of Lenders........................................33
SECTION 5 CONDITIONS PRECEDENT............................................33
5.1 Initial Conditions Precedent..............................33
5.2 Conditions Precedent to All Loans.........................35
SECTION 6 REPRESENTATIONS AND WARRANTIES..................................35
6.1 Representations and Warranties............................35
6.2 Survival of Representations and Warranties, Etc...........40
SECTION 7 AFFIRMATIVE COVENANTS...........................................41
7.1 Preservation of Existence and Similar Matters.............41
7.2 Compliance with Applicable Law and Material Contracts.....41
7.3 Maintenance of Property...................................41
7.4 Conduct of Business.......................................41
7.5 Insurance.................................................41
7.6 Payment of Taxes and Claims...............................41
7.7 Visits and Inspections....................................42
7.8 Use of Proceeds...........................................42
7.9 Environmental Matters.....................................42
7.10 Books and Records.........................................42
7.11 Status of RIC and BDC.....................................42
7.12 ERISA Exemptions..........................................43
7.13 Further Assurances........................................43
7.14 Year 2000 Compliance......................................43
SECTION 8 INFORMATION.....................................................43
8.1 Quarterly Financial Statements............................43
8.2 Year-End Statements.......................................43
8.3 Compliance Certificate; Asset Reports.....................44
8.4 Other Information.........................................44
SECTION 9 NEGATIVE COVENANTS..............................................46
9.1 Financial Covenants.......................................46
9.2 Interest Rate Agreements..................................47
9.3 Liens; Agreements Regarding Liens; Other Matters..........47
9.4 Distributions to Shareholders.............................48
9.5 Merger, Consolidation and Sales of Assets.................48
9.6 Fiscal Year...............................................49
9.7 Modifications to Material Contracts.......................49
9.8 Transactions with Affiliates..............................49
9.9 Subsidiary Senior Note Guaranty...........................50
9.10 Payment of Obligation.....................................50
SECTION 10 DEFAULT.........................................................50
10.1 Events of Default.........................................50
</TABLE>
CREDIT AGREEMENT
(ii)
<PAGE> 4
<TABLE>
<S> <C>
10.2 Remedies Upon Event of Default............................53
10.3 Remedies Upon Certain Defaults............................54
10.4 Allocation of Proceeds....................................54
10.5 Performance by Administrative Agent.......................55
10.6 Rights Cumulative.........................................55
10.7 Company Waivers...........................................55
10.8 Delegation of Duties and Rights...........................55
10.9 Not in Control............................................55
10.10 Course of Dealing.........................................56
10.11 Cumulative Rights.........................................56
SECTION 11 AGREEMENT AMONG LENDERS.........................................56
11.1 Appointment, Powers, and Immunities.......................56
11.2 Reliance by Administrative Agent..........................57
11.3 Defaults..................................................57
11.4 Rights as Lender..........................................57
11.5 Indemnification...........................................58
11.6 Non-Reliance on Administrative Agent and Other Lenders....58
11.7 Resignation of Administrative Agent.......................58
11.8 Relationship of Lenders...................................59
11.9 Benefits of Agreement.....................................59
11.10 Obligations Several.......................................59
11.11 Agents....................................................59
SECTION 12 MISCELLANEOUS...................................................59
12.1 Notices...................................................59
12.2 Expenses..................................................60
12.3 Jurisdiction; Consent to Service of Process;
Waiver of Jury Trial......................................60
12.4 Successors and Assigns....................................61
12.5 Amendments................................................63
12.6 Nonliability of Agent and Lenders.........................63
12.7 Confidentiality...........................................64
12.8 INDEMNIFICATION...........................................64
12.9 Termination; Survival.....................................65
12.10 Severability of Provisions................................65
12.11 Governing Law.............................................65
12.12 Counterparts..............................................65
12.13 Entirety..................................................65
12.14 Construction..............................................65
12.15 Discharge Only Upon Payment in Full;
Reinstatement in Certain Circumstances....................65
12.16 Existing Credit Agreement.................................66
</TABLE>
CREDIT AGREEMENT
(iii)
<PAGE> 5
SCHEDULES AND EXHIBITS
Schedule 2 - Lenders and Commitments
Schedule 6.1(a) - Qualification
Schedule 6.1(b) - Ownership Structure
Schedule 6.1(g) - Indebtedness
Schedule 6.1(h) - Material Contracts
Exhibit A - Form of Assignment and Acceptance Agreement
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Continuation
Exhibit D - Form of Notice of Conversion
Exhibit E-1 - Form of Revolving Note
Exhibit E-2 - Form of Swing Line Note
Exhibit F - Form of Opinion of Counsel
Exhibit G - Form of Compliance Certificate
CREDIT AGREEMENT
(iv)
<PAGE> 6
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of March 9, 1999, by and among ALLIED
CAPITAL CORPORATION, a corporation organized under the laws of the State of
Maryland ("BORROWER"), certain Lenders (hereinafter defined), certain Agents
(hereinafter defined), and NATIONSBANK, N.A., as a Lender and as Administrative
Agent (hereinafter defined) for itself and the other Lenders (hereinafter
defined).
RECITALS
A. Borrower has requested that the Lenders extend credit to Borrower,
providing for a revolving loan facility in the amount of $315,000,000, as such
amount may be increased to $400,000,000 in accordance with the terms of SECTION
2.12, for the purpose of funding Borrower's working capital requirements and for
general corporate purposes of Borrower and its Subsidiaries (hereinafter
defined).
B. Upon and subject to the terms and conditions of this Agreement, the
Lenders are willing to extend such credit to Borrower.
Accordingly, in consideration of the mutual covenants contained herein,
Borrower, Agents, Administrative Agent, and the Lenders agree as follows.
SECTION 1 DEFINITIONS AND TERMS.
1.1 DEFINITIONS. In addition to terms defined elsewhere herein, the
following terms shall have the following meanings for the purposes of this
Agreement:
"ADJUSTED EBIT" means, for any period with respect to Borrower and its
Consolidated Subsidiaries, income after deduction of all expenses and other
proper charges other than taxes and Interest Expense, all as determined in
accordance with GAAP.
"ADJUSTED EURODOLLAR RATE" means, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) determined by Administrative Agent to be equal to the
quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan
for such Interest Period by (b) one minus the Reserve Requirement for such
Eurodollar Loan for such Interest Period.
"ADMINISTRATIVE AGENT" means NationsBank, N.A., and its permitted
successor or successors as administrative agent for the Lenders under this
Agreement.
"AFFECTED LENDER" has the meaning given that term in SECTION 4.7.
"AFFILIATE" means any Person: (a) directly or indirectly controlling,
controlled by, or under common control with such Person; (b) directly or
indirectly owning or holding 5.0% or more of any equity interest in such Person;
or (c) 5.0% or more of whose voting stock or other equity interest is directly
or indirectly owned or held by such Person. For purposes of this definition, (x)
"control" (including with correlative meanings, the terms "controlling,"
"controlled by," and "under common control with") 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 securities or
by contract or otherwise, other than by investment advisory
CREDIT AGREEMENT
<PAGE> 7
contracts entered into in the ordinary course of business of Borrower or a
Subsidiary of Borrower, and (y) neither Administrative Agent nor any Lender
shall be deemed to be an "Affiliate" of Borrower.
"AGENTS" means, collectively, Syndication Agent, Documentation Agent,
Managing Agent, and Co-Agents.
"AGREEMENT" means this Credit Agreement (as the same may thereafter be
amended, modified, supplemented, or restated from time to time).
"AGREEMENT DATE" means the date as of which this Agreement is dated.
"APPLICABLE LAW" means all applicable provisions of constitutions,
statutes, rules, regulations, and orders of all governmental bodies and all
orders and decrees of all courts, tribunals, and arbitrators.
"ARRANGER" means NationsBanc Montgomery Securities LLC and its successors
and assignees in its capacity as "Lead Arranger."
"ASSET COVERAGE RATIO" shall mean, on a consolidated basis for Borrower
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 Borrower thereunder), bears to the
aggregate amount of senior securities representing indebtedness of Borrower and
its Consolidated Subsidiaries.
"ASSIGNMENT AND ACCEPTANCE AGREEMENT" means an Assignment and Acceptance
Agreement among a Lender, an Eligible Assignee, and Administrative Agent,
substantially in the form of EXHIBIT A or such other form as may be agreed to by
such Lender, such Eligible Assignee and Administrative Agent.
"BASE RATE" means the per annum rate of interest equal to the greater of
(a) the Prime Rate or (b) the Federal Funds Rate for such day plus 0.5%. Any
change in the Base Rate resulting for such day from a change in the Prime Rate
or the Federal Funds Rate shall be effective on the effective date of such
change in the Prime Rate or Federal Funds Rate.
"BASE RATE LOAN" means a Loan bearing interest at a rate based on the Base
Rate.
"BENEFIT ARRANGEMENT" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by any member of the ERISA
Group.
"BOOK VALUE" means, at any date of determination with respect to any
asset, the value thereof as the same would be reflected on a consolidated
balance sheet of Borrower and its Consolidated Subsidiaries as at such time in
accordance with GAAP.
"BORROWER" is defined in the preamble to this Agreement and includes any
permitted successors of Borrower.
"BUSINESS DAY" means (a) any day other than a Saturday, Sunday, or other
day on which banks in New York City, New York are authorized or required to
close and (b) in addition to the foregoing, with
CREDIT AGREEMENT
2
<PAGE> 8
reference to a Eurodollar Loan, any such day that is also a day on which
dealings in Dollar deposits are carried out in the London interbank market and
commercial banks are open for international business in London.
"CAPITALIZED LEASE OBLIGATION" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with such principles.
"CO-AGENTS" means, collectively, Chevy Chase Bank, F.S.B. and Credit
Lyonnais New York Branch and their respective permitted successors or assigns as
"Co-Agents" under this Agreement.
"COMMERCIAL MORTGAGE LOAN" means a loan secured by a Lien on improved real
estate used for commercial purposes.
"COMMITMENT" means, as to each Lender, such Lender's obligation to make
Loans pursuant to SECTION 2.1 in an amount up to, but not exceeding, the amount
set forth for such Lender on SCHEDULE 2 as such Lender's "Commitment Amount" or
as set forth in the applicable Assignment and Acceptance Agreement, as the same
may be reduced from time to time pursuant to SECTION 2.10 or as appropriate to
reflect any assignments to or by such Lender effected in accordance with SECTION
12.4.
"COMMITMENT PERCENTAGE" means, as to each Lender, the ratio, expressed as
a percentage, of (a) the amount of such Lender's Commitment to (b) the sum of
the aggregate amount of the Commitments of all Lenders hereunder; provided,
however, that if at the time of determination, the Commitments have terminated
or been reduced to zero, the "COMMITMENT PERCENTAGE" of each Lender shall be the
Commitment Percentage of such Lender in effect immediately prior to such
termination or reduction.
"COMPLIANCE CERTIFICATE" means a certificate signed by the chief financial
officer of Borrower, substantially in the form of EXHIBIT G.
"CONSOLIDATED DEBT" shall mean as of the date of any determination
thereof, the aggregate unpaid amount of all Debt of Borrower 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 Borrower and its
Consolidated Subsidiaries as the same would appear on a consolidated balance
sheet of Borrower and its Consolidated Subsidiaries prepared as of such date in
accordance with GAAP, including, in any case, common stock of Borrower (valued
at cost) held in the Allied Capital Corporation Deferred Compensation Trust and
Permitted Preferred Stock of Borrower and its Consolidated Subsidiaries, but
excluding any stock, common or preferred, not both issued and outstanding.
"CONSOLIDATED SUBSIDIARIES" shall mean any Subsidiary which is required to
be consolidated on financial statements of Borrower prepared in accordance with
GAAP.
"CONTINGENT OBLIGATION" as applied to any Person, means any direct or
indirect liability, contingent or otherwise, of that Person: (a) with respect to
any indebtedness, lease, dividend, or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected
CREDIT AGREEMENT
3
<PAGE> 9
(in whole or in part) against loss with respect thereto; (b) with respect to any
letter of credit issued for the account of that Person or as to which that
Person is otherwise liable for reimbursement of drawings; (c) under Interest
Rate Agreements; or (d) under any foreign exchange contract, currency swap
agreement, or other similar agreement or arrangement designed to protect that
Person against fluctuations in currency values. "Contingent Obligations" shall
include (i) the direct or indirect guaranty, endorsement (other than for
collection or deposit in the ordinary course of business), comaking, discounting
with recourse, or sale with recourse by such Person of the obligation of
another, (ii) the obligation to make take or pay or similar payments if required
regardless of nonperformance by any other party or parties to an agreement, and
(iii) any liability of such Person for the obligations of another through any
agreement to purchase, repurchase, or otherwise acquire such obligation or any
property constituting security therefor, to provide funds for the payment or
discharge of such obligation, or to maintain the solvency, financial condition,
or any balance sheet item or level of income of another. The amount of any
Contingent Obligation shall be equal to the amount of the obligation so
guaranteed or otherwise supported or, if not a fixed and determined amount, the
maximum amount so guaranteed. The amount of any Contingent Obligation
outstanding under CLAUSE (c) shall be determined in accordance with the
definition of Interest Rate Agreement. The amount of any Contingent Obligation
outstanding under CLAUSE (d) shall be the net amount determined in good faith by
Administrative Agent using any convention or method used by Administrative Agent
in quantifying its own exposure under such agreements or arrangements.
"CONTINUE," "CONTINUATION," and "CONTINUED" each refers to the
continuation of a Eurodollar Loan from one Interest Period to another Interest
Period pursuant to SECTION 2.8.
"CONVERT," "CONVERSION," and "CONVERTED" each refers to the conversion of
a Loan of one Type into a Loan of another Type pursuant to SECTION 2.9.
"CREDIT EVENT" means any of the following: (a) the making (or deemed
making) of any Loan and (b) the Conversion of a Loan.
"CREDIT RATING" means, at any time as to any Person, the lowest rating
assigned by a Rating Agency to each series of rated senior unsecured long term
indebtedness of such Person.
"DEBT" means, with respect to any Person, without duplication,
(a) its liabilities for borrowed money and under repurchase
agreements;
(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 Lease Obligations;
(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
CREDIT AGREEMENT
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(e) any Contingent Obligation 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" means any of the events specified in SECTION 10.1, whether or
not there has been satisfied any requirement for the giving of notice, the lapse
of time, or both.
"DEFAULTING LENDER" has the meaning given that term in SECTION 3.13.
"DOCUMENTATION AGENT" means BankBoston, N.A. and its permitted successors
or assigns as "Documentation Agent" under this Agreement.
"DOLLARS" or "$" means the lawful currency of the United States of
America.
"EFFECTIVE DATE" means the later of: (a) the Agreement Date; and (b) the
date on which all of the conditions precedent set forth in SECTION 5.1 shall
have been satisfied or waived but (c) must be, if at all, a Business Day
occurring no later than March 31, 1999.
"ELIGIBLE ASSIGNEE" means (i) a Lender; (ii) an Affiliate of a Lender; and
(iii) any other Person approved by Administrative Agent and (unless an Event of
Default has occurred and is continuing at the time any assignment is effected in
accordance with SECTION 12.4) Borrower, such approval not to be unreasonably
withheld or delayed by Borrower or Administrative Agent and such approval to be
deemed given by Borrower if no objection is received by the assigning Lender and
Administrative Agent from Borrower within five Business Days after notice of
such proposed assignment has been provided by the assigning Lender to Borrower;
provided, however, that neither Borrower nor an Affiliate of Borrower shall
qualify as an Eligible Assignee.
"ENVIRONMENTAL LAWS" means any Applicable Law relating to environmental
protection or the manufacture, storage, disposal, or clean-up of Hazardous
Materials, including, without limitation, the following: Clean Air Act, 42
U.S.C. 7401 et seq.; Federal Water Pollution Control Act, 33 U.S.C. 1251 et
seq.; Solid Waste Disposal Act, 42 U.S.C. 6901 et seq.; Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.;
National Environmental Policy Act, 42 U.S.C. 4321 et seq.; regulations of the
Environmental Protection Agency, and any applicable rule of common law and any
judicial interpretation thereof relating primarily to the environment or
Hazardous Materials.
"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" means the Employee Retirement Income Security Act of 1974, as in
effect from time to time.
"ERISA GROUP" means Borrower, any Subsidiary, and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together
CREDIT AGREEMENT
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<PAGE> 11
with Borrower or any Subsidiary, are treated as a single employer under Section
414 of the Internal Revenue Code.
"EURODOLLAR LOAN" means a Loan bearing interest at a rate based on the
Eurodollar Rate.
"EURODOLLAR RATE" means, for any Eurodollar Loan for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Dow Jones Markets Page 3750 (or any successor page) as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "EURODOLLAR RATE" shall mean, for any Eurodollar
Loan for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, however, if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if necessary,
to the nearest 1/100 of 1%).
"EVENT OF DEFAULT" means any of the events specified in SECTION 10.1,
provided that, any requirement for notice or lapse of time or any other
condition has been satisfied.
"EXCHANGE ACT" has the meaning given that term in SECTION 10.1(m).
"EXISTING CREDIT AGREEMENT" means that certain Second Amended and Restated
Credit Agreement dated as of June 4, 1998, by and among Borrower, each of the
financial institutions initially a signatory thereto, BankBoston, N.A., a
national banking association, as Disbursing Agent, First Union National Bank, a
national banking association, as Syndication Agent, NationsBank, N.A., a
national banking association, as Co-Agent and Riggs Bank, N.A., a national
banking association, as Managing Agent.
"EXTENSION REQUEST" has the meaning given that term in SECTION 2.13.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day; provided that (a) if such day is not a Business Day, the Federal Funds Rate
for such day shall be such rate on such transactions on the next preceding
Business Day as so published on the next succeeding Business Day, and (b) if no
such rate is so published on such next succeeding Business Day, the Federal
Funds Rate for such day shall be the average rate charged to Administrative
Agent (in its individual capacity) on such day on such transactions as
determined by Administrative Agent.
"FEES" means the fees and commissions provided for or referred to in
SECTION 3.8 and any other fees payable by Borrower hereunder or under any other
Loan Document.
"FORECLOSURE PROPERTY" means assets acquired by foreclosure (or sale in
lieu of foreclosure) of any Investment (other than Investments in a Consolidated
Subsidiary) of Borrower or any of its Subsidiaries.
CREDIT AGREEMENT
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<PAGE> 12
"GAAP" means, subject to SECTION 1.3, accounting principles as promulgated
from time to time in statements, opinions and pronouncements by the American
Institute of Certified Public Accountants and the Financial Accounting Standards
Board and in such statements, opinions and pronouncements of such other entities
with respect to financial accounting of for-profit entities as shall be accepted
by a substantial segment of the accounting profession in the United States.
"GOVERNMENTAL APPROVALS" means all authorizations, consents, approvals,
licenses, and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"GOVERNMENTAL AUTHORITY" means any national, state, or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public, or statutory
instrumentality, authority, body, agency, bureau, or entity (including, without
limitation, the Federal Deposit Insurance Corporation, the Comptroller of the
Currency, or the Federal Reserve Board, any central bank, or any comparable
authority) or any arbitrator with authority to bind a party at law.
"HAZARDOUS MATERIALS" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable Environmental Laws as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
"TLCP" toxicity, or "EP toxicity"; (b) oil, petroleum, or petroleum derived
substances, natural gas, natural gas liquids, or synthetic gas and drilling
fluids, produced waters, and other wastes associated with the exploration,
development, or production of crude oil, natural gas, or geothermal resources;
(c) any flammable substances or explosives or any radioactive materials; (d)
asbestos in any form; or (e) electrical equipment which contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of
fifty parts per million.
"INDEBTEDNESS" means, with respect to a Person, at the time of computation
thereof, all of the following (without duplication): (a) obligations of such
Person in respect of money borrowed; (b) obligations of such Person (other than
trade debt incurred in the ordinary course of business), whether or not for
money borrowed (i) represented by notes payable or drafts accepted, in each case
representing extensions of credit, (ii) evidenced by bonds, debentures, notes,
or similar instruments, (iii) consisting of repurchase agreements, whether on a
recourse or a non-recourse basis, or (iv) constituting purchase money
indebtedness, conditional sales contracts, title retention debt instruments, or
other similar instruments, upon which interest charges are customarily paid or
that are issued or assumed as full or partial payment for property; (c)
Capitalized Lease Obligations of such Person; (d) all reimbursement obligations
of such Person under any letters of credit or acceptances (whether or not the
same have been presented for payment), and all obligations of such Person as the
issuer of any letters of credit or acceptances (whether or not the same have
been presented for payment); and (e) all Indebtedness of other Persons which (i)
such Person has guaranteed or which is otherwise recourse to such Person or (ii)
are secured by a Lien on any property of such Person.
"INTELLECTUAL PROPERTY" has the meaning given that term in SECTION 6.1(r).
"INTERCREDITOR AGREEMENT" means an intercreditor agreement pursuant to
which the Lenders and the holders of any other Debt of Borrower have agreed to
share payments made by any Consolidated Subsidiary under a Subsidiary Bank
Guaranty, a Subsidiary Senior Note Guaranty, or any other guaranty of any Debt
of Borrower on an equal and ratable basis.
CREDIT AGREEMENT
7
<PAGE> 13
"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 Lease
Obligations) of such Person and in any event shall include all interest expense
with respect to any Indebtedness in respect of which such Person is wholly or
partially liable.
"INTEREST PERIOD" means, with respect to any Eurodollar Loan, each period
commencing on the date such Eurodollar Loan is made or the last day of the next
preceding Interest Period for such Loan and ending on the numerically
corresponding day in the first, second, third, or sixth calendar month
thereafter, as Borrower may select in a Notice of Borrowing, Notice of
Continuation or Notice of Conversion, as the case may be, except that each
Interest Period for a Eurodollar Loan that commences on the last Business Day of
a calendar month (or on any day for which there is no numerically corresponding
day in the appropriate subsequent calendar month) shall end on the last Business
Day of the appropriate subsequent calendar month. Notwithstanding the foregoing:
(i) if any Interest Period would otherwise end after the Termination Date, such
Interest Period shall end on the Termination Date, (ii) each Interest Period
that would otherwise end on a day which is not a Business Day shall end on the
next succeeding Business Day (or, if such next succeeding Business Day falls in
the next succeeding calendar month, on the next preceding Business Day), and
(iii) notwithstanding the immediately preceding CLAUSE (i), no Interest Period
for any Eurodollar Loan shall have a duration of less than one month and, if the
Interest Period for any Eurodollar Loan would otherwise be a shorter period,
such Loan shall not be available hereunder for such period.
"INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest
rate cap agreement, interest rate collar agreement, or other similar contractual
agreement or arrangement entered into with a nationally recognized financial
institution then having an Investment Grade Rating for the purpose of protecting
against fluctuations in interest rates. For the purposes of this Agreement, the
amount of any obligation under any Interest Rate Agreement shall be the amount
determined in respect thereof as of the end of the most recently ended fiscal
quarter of such Person, based on the assumption that such Interest Rate
Agreement had terminated at the end of such fiscal quarter, and in making such
determination, if such Interest Rate Agreement provides for the netting of
amounts payable by and to such Person thereunder or if such Interest Rate
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.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended, together with the rules and regulations promulgated thereunder.
"INVESTMENT" means, with respect to any Person and whether or not such
investment constitutes a controlling interest in such Person (a) the purchase or
other acquisition of any share of capital stock, evidence of Indebtedness or
other security issued by any other Person; (b) any loan, advance, or extension
of credit to, or contribution (in the form of money or goods) to the capital of
or the acquisition of a sale leaseback asset from and the lease thereof to, any
other Person; (c) any guaranty of the Indebtedness of any other Person; (d) any
other investment in any other Person; and (e) any commitment or option to make
an Investment in any other Person.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
"INVESTMENT GRADE RATING" means a Credit Rating of BBB- or higher by S&P,
Baa3 or higher by Moody's, or the equivalent or higher of either such rating by
another Rating Agency.
CREDIT AGREEMENT
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<PAGE> 14
"LENDERS" means, on any date of determination, the financial institutions
named on SCHEDULE 2 (as the same may be amended from time to time by
Administrative Agent to reflect the assignments made in accordance with SECTION
12.4(a) of this Agreement), and subject to the terms and conditions of this
Agreement, their respective successors and assigns.
"LENDING OFFICE" means, for each Lender and for each Type of Loan, the
"LENDING OFFICE" of such Lender (or of an Affiliate of such Lender) designated
for such Type of Loan on SCHEDULE 2 or in the applicable Assignment and
Acceptance Agreement or such other office of such Lender (or an Affiliate of
such Lender) as such Lender may from time to time specify to Administrative
Agent and Borrower by written notice in accordance with the terms hereof as the
office by which its Loans of such Type are to be made and maintained.
"LENDING PARTY" has the meaning given that term in SECTION 12.7.
"LIEN" as applied to the property of any Person means: (a) any security
interest, encumbrance, mortgage, deed to secure debt, deed of trust, pledge,
lien, charge, ground lease, or lease constituting a Capitalized Lease
Obligation, conditional sale or other title retention agreement, or other
security title or encumbrance of any kind in respect of any property of such
Person, or upon the income or profits therefrom; (b) any arrangement, express or
implied, under which any property of such Person is transferred, sequestered, or
otherwise identified for the purpose of subjecting the same to the payment of
Indebtedness or performance of any other obligation in priority to the payment
of the general, unsecured creditors of such Person; (c) the filing of any
financing statement under the Uniform Commercial Code or its equivalent in any
jurisdiction; and (d) any agreement by such Person to grant, give, or otherwise
convey any of the foregoing.
"LOANS" means any amount disbursed (a) by one or more Lenders to Borrower
under the Loan Documents (whether under the Revolving Facility or the Swing Line
Subfacility), whether such amount constitutes an original disbursement of funds
or the continuation of any amount outstanding, or (b) by any Lender in
accordance with, and to satisfy the obligations of any Borrower or any
Subsidiary of Borrower under, any Loan Document.
"LOAN DOCUMENTS" means (a) this Agreement and the Notes, (b) all
agreements, documents, or instruments in favor of Administrative Agent or the
Lenders ever delivered pursuant to this Agreement or otherwise delivered in
connection with all or any part of the Obligations on and after the Effective
Date, (c) any Interest Rate Agreement between Borrower or any of its
Subsidiaries and any Lender or any Affiliate of any Lender, and (d) any and all
future renewals, extensions, restatements, reaffirmations, amendments of, or
supplements to, all or any part of the foregoing.
"MANAGING AGENT" means Riggs Bank N.A. and its permitted successors or
assigns as "Managing Agent" under this Agreement.
"MATERIAL ADVERSE EFFECT" means a materially adverse effect on (a) the
business, assets, liabilities, financial condition, results of operations, or
business prospects of Borrower and its Consolidated Subsidiaries taken as a
whole, (b) the ability of Borrower to perform its obligations under any Loan
Document to which it is a party which does not result from a material adverse
effect on the items described in the immediate preceding CLAUSE (a), (c) the
validity or enforceability of any of the Loan Documents, (d) the rights and
remedies of the Lenders and Administrative Agent under any of such Loan
Documents, or (e) the timely payment of the principal of or interest on the
Loans or other amounts payable in connection therewith. Except with respect to
representations made or deemed made by Borrower or any Subsidiary in any of the
other Loan
CREDIT AGREEMENT
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<PAGE> 15
Documents to which it is a party, all determinations of materiality shall be
made by the Requisite Lenders in their reasonable judgment unless expressly
provided otherwise.
"MATERIAL CONTRACT" means any contract or other arrangement (other than
Loan Documents), whether written or oral, to which Borrower or any Subsidiary is
a party as to which the breach, nonperformance, cancellation, or failure to
renew by any party thereto could have a Material Adverse Effect.
"MATERIAL PLAN" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $5,000,000.
"MATERIAL SUBSIDIARY" means, as of the date of any determination thereof,
any Subsidiary which has total assets having a value (determined in accordance
with the market valuation method pursuant to GAAP) greater than or equal to
$20,000,000.
"MAXIMUM AMOUNT" and "MAXIMUM RATE" respectively mean, for each Lender,
the maximum non-usurious amount and the maximum non-usurious rate of interest
which, under Applicable Law, such Lender is permitted to contract for, charge,
take, reserve, or receive on the Obligations.
"MONEY MARKET RATE" means, as to any Swing Line Loan made pursuant to
SECTION 2.2, a rate per annum equal to the sum of (a) 1.50% and (b) the rate per
annum equal to NationsBank's cost of funds.
"MOODY'S" means Moody's Investors Services, Inc.
"MORTGAGE REPURCHASE FACILITY" means financing agreements providing for
(i) the pledge and assignment of Commercial Mortgage Loans owned by Borrower and
its Consolidated Subsidiaries as security for loans to Borrower 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 Borrower or a Consolidated Subsidiary at a future date.
"MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for these
purposes any Person which ceased to be a member of the ERISA Group during such
five year period.
"NATIONSBANK" means NationsBank, N.A. and its permitted successors and
assigns.
"NET PROCEEDS" means, with respect to an Equity Issuance by a Person, the
aggregate amount of all cash (including any cash received by way of deferred
payment pursuant to a promissory note, or otherwise, but only as and when
received) 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.
"NOTES" means, at the time of any determination thereof, all outstanding
and unpaid Revolving Notes and Swing Line Notes.
CREDIT AGREEMENT
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<PAGE> 16
"NOTICE OF BORROWING" means a notice in the form of EXHIBIT B to be
delivered to the Administrative Agent pursuant to SECTION 2.3(a) evidencing
Borrower's request for a borrowing of Loans.
"NOTICE OF CONTINUATION" means a notice in the form of EXHIBIT C to be
delivered to the Administrative Agent pursuant to SECTION 2.8 evidencing
Borrower's request for the Continuation of a Eurodollar Loan.
"NOTICE OF CONVERSION" means a notice in the form of EXHIBIT D to be
delivered to the Administrative Agent pursuant to SECTION 2.9 evidencing
Borrower's request for the Conversion of a Loan from one Type to another Type.
"NOTICE OF DEFAULT" has the meaning given that term in SECTION 11.3.
"PARTICIPANT" has the meaning given that term in SECTION 12.4(d).
"OBLIGATIONS" means, individually and collectively: (a) the aggregate
principal balance of and all accrued and unpaid interest on, all Loans and (b)
all other indebtedness, liabilities, obligations, covenants and duties of
Borrower owing to Administrative Agent or any Lender of every kind, nature and
description, under or in respect of this Agreement or any of the other Loan
Documents, including, without limitation, all Fees and indemnification
obligations, whether direct or indirect, absolute or contingent, due or not due,
contractual or tortious, liquidated or unliquidated, and whether or not
evidenced by any promissory note.
"OFFERING MEMORANDUM" means the Confidential Offering Memorandum dated
January 1999, for the Allied Capital Corporation $300,000,000 senior revolving
credit facility relating to the syndication of the credit facility evidenced by
this Agreement.
"OTHER RELEVANT SUBSIDIARY" means any Subsidiary, individually or together
with other Subsidiaries, the occurrence of any of the events described in
SECTIONS 10.1(f) or 10.1(g) with respect to which could reasonably be expected
to have a Material Adverse Effect.
"OTHER TAXES" has the meaning given that term in SECTION 4.6(b).
"PBGC" means the Pension Benefit Guaranty Corporation and any successor
agency.
"PERMITTED LIENS" means, as to any Person: (a) Liens securing taxes,
assessments, and other charges or levies imposed by any Governmental Authority
(excluding any Lien imposed pursuant to any of the provisions of ERISA) or the
claims of materialmen, mechanics, carriers, warehousemen, or landlords for
labor, materials, supplies, or rentals incurred in the ordinary course of
business, which are not at the time required to be paid or discharged under
SECTION 7.6; (b) Liens consisting of deposits or pledges made, in the ordinary
course of business, in connection with, or to secure payment of, obligations
under workmen's compensation, unemployment insurance, or similar Applicable
Laws; (c) Liens in favor of Administrative Agent for the benefit of the Lenders;
and (d) covenants, restrictions, rights of way, easements, and other matters of
public record, and other matters to which like properties are commonly subject,
that singly or in the aggregate do not materially and adversely affect the value
or marketability of, or materially interfere with the use or enjoyment of any
asset of such Person.
CREDIT AGREEMENT
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<PAGE> 17
"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
investment trust under Sections 856 through 860 of the Internal Revenue Code and
having an aggregate stated value not exceeding $500,000 at any one time
outstanding; provided that, in any event Permitted Preferred Stock shall not
include any Voting Stock.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or unincorporated organization, or a government or
any agency or political subdivision thereof.
"PLAN" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
was at such time a member of the ERISA Group for employees of any Person which
was at such time a member of the ERISA Group.
"POST-DEFAULT RATE" means, in respect of any principal of any Loan or any
other Obligation that is not paid when due (whether at stated maturity, by
acceleration, by optional or mandatory prepayment or otherwise), a rate per
annum equal to the lesser of (i) the Maximum Rate and (ii) the sum of 2.0% plus
the Base Rate as in effect from time to time.
"PRIME RATE" means the per annum rate of interest established from time to
time by NationsBank as its prime rate, which rate may not be the lowest rate of
interest charged by NationsBank to its customers.
"PRINCIPAL DEBT" means, at any time of determination thereof, the
aggregate unpaid principal balance of all Loans.
"PRINCIPAL OFFICE" means the principal office of NationsBank, presently
located at 901 Main Street, 66th Floor, Dallas, Texas 75202.
"PRIORITY DEBT" means the sum of (i) all Secured Indebtedness of Borrower
and its Consolidated Subsidiaries, and (ii) all unsecured Debt of Consolidated
Subsidiaries (excluding in each case, Debt owing to Borrower or another
Consolidated Subsidiary).
"QUARTERLY DATE" means the last Business Day of March, June, September,
and December in each year, the first of which shall be March 31, 1999.
"RATING AGENCY" means S&P, Moody's or any other nationally recognized
securities rating agency selected by Borrower and acceptable to the Requisite
Lenders.
"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.
CREDIT AGREEMENT
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"REGISTER" has the meaning given that term in SECTION 12.4(b).
"REIT" means Allied Capital REIT, Inc., a Maryland corporation.
"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.
"REQUISITE LENDERS" means (a) on any date of determination prior to the
Termination Date, those Lenders holding 66 2/3% or more of the aggregate
Commitments of all Lenders; and (b) on any date of determination on or after the
Termination Date, those Lenders holding 66 2/3% of the aggregate unpaid
principal balance of all outstanding Loans.
"RESERVE REQUIREMENT" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against, in the case of
Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation
D of the Board of Governors of the Federal Reserve System, as amended). Without
limiting the effect of the foregoing, the Reserve Requirement shall reflect any
other reserves required to be maintained by such member banks with respect to
any category of liabilities which includes deposits by reference to which the
Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions
of credit or other assets which include Eurodollar Loans. The Adjusted
Eurodollar Rate shall be adjusted automatically on and as of the effective date
of any change in the Reserve Requirement.
"RESPONSE DATE" has the meaning given that term in SECTION 2.13.
"REVOLVING FACILITY" means the credit facility as described in and subject
to the limitations of SECTION 2, including the Swing Line Facility.
"REVOLVING LOAN" means any Loan under the Revolving Facility other than a
Swing Line Loan.
"REVOLVING NOTE" has the meaning given that term in SECTION 2.10(a).
"RIC" means a Person qualifying for treatment as a "regulated investment
company" under the Internal Revenue Code.
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"SBA" means the Small Business Administration.
"SBA ACT" means the Small Business Investment Act of 1958, as amended.
"SBIC" means Allied Investment Corporation, a Maryland corporation.
"SBLC" means Allied Capital SBLC Corporation, a Maryland corporation.
"SECURED INDEBTEDNESS" means, with respect to any Person, any Indebtedness
of such Person that is secured in any manner by any Lien.
"SENIOR DEBT" means Debt under the Senior Note Agreement or any similar
facility entered into by Borrower or its Consolidated Subsidiaries.
"SENIOR NOTE AGREEMENT" means the Note Agreement, dated as of April 30,
1998, among Borrower and the purchasers parties thereto, pursuant to which
Borrower 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
thereof.
"SENIOR NOTE HOLDER" means any registered holder of a note or notes issued
under the Senior Note Agreement.
"SENIOR NOTES" means the notes issued by Borrower pursuant to the Senior
Note Agreement.
"SOLVENT" means, when used with respect to any Person, that (a) the fair
value and the fair salable value of its assets (excluding any Indebtedness due
from any affiliate of such Person) are each in excess of the fair valuation of
its total liabilities (including all contingent liabilities); (b) such Person is
able to pay its debts or other obligations in the ordinary course as they
mature; and (c) the Person has capital not unreasonably small to carry on its
business and all business in which it proposes to be engaged.
"S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill
Companies, Inc.
"SPECIAL PURPOSE SUBSIDIARY" means a Subsidiary (other than a Consolidated
Subsidiary) of Borrower the sole purpose of which is to purchase assets from
Borrower or a Subsidiary of Borrower and to effect a sale to a third party
(directly or through one or more Subsidiaries of such purchasing Subsidiary) of
the assets so purchased or of securities or Debt secured by or evidencing an
interest in such assets or in the holder thereof, and matters incidental to the
foregoing.
"SUBORDINATED DEBT" means Indebtedness of Borrower or any of its
Subsidiaries that is subordinated in right of payment and otherwise to the Loans
and the other Obligations in a manner satisfactory to Administrative Agent and
the Requisite Lenders in their sole and absolute discretion.
"SUBSIDIARY" means, for any Person, any corporation, partnership, limited
liability company, or other entity of which at least a majority of the
securities or other ownership interests having by the terms thereof ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions of such corporation, partnership, or other entity
(without regard to the occurrence of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more Subsidiaries of
such
CREDIT AGREEMENT
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Person or by such Person and one or more Subsidiaries of such Person.
Notwithstanding the foregoing, a portfolio Investment of Borrower or a
Subsidiary shall not be a Subsidiary of Borrower or such Subsidiary.
"SUBSIDIARY BANK GUARANTY" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of Borrower under the Notes.
"SUBSIDIARY SENIOR NOTE GUARANTY" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of Borrower under the Senior
Notes.
"SWING LINE COMMITMENT" means an amount (subject to reduction or
cancellation as herein provided) equal to $25,000,000.
"SWING LINE LOAN" means any Loan made under the Swing Line Subfacility.
"SWING LINE NOTE" has the meaning given that term in SECTION 2.10(b).
"SWING LINE SUBFACILITY" means the subfacility under the Revolving
Facility (the portion of the Loans attributable to which may never exceed in the
aggregate $25,000,000), as described in, and subject to the limitations of,
SECTION 2.2.
"SWING PRINCIPAL DEBT" means, on any date of determination, the aggregate
unpaid principal amount of all Loans outstanding under the Swing Line
Subfacility.
"SYNDICATION AGENT" means First Union National Bank and its permitted
successors or assigns as "Syndication Agent" under this Agreement.
"TAXES" has the meaning given that term in SECTION 4.6.
"TERMINATION DATE" means the earlier of either (a) March 9, 2001, (or such
later date to which the Termination Date is extended pursuant to the provisions
of SECTION 2.13) or (b) such earlier date upon which the whole of the
Commitments are terminated pursuant to SECTIONS 2.11 or otherwise.
"TYPE" with respect to any Loan, refers to whether such Loan is a
Eurodollar Loan or Base Rate Loan.
"UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the
amount (if any) by which (a) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed by
the PBGC for purposes of Section 4044 of ERISA, exceeds (b) the fair market
value of all Plan assets allocable to such liabilities under Title IV of ERISA
(excluding any accrued but unpaid contributions), all determined as of the then
most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.
"UNRESTRICTED SUBSIDIARY" means a Subsidiary of Borrower (a) that is not a
Consolidated Subsidiary or (b) is a Consolidated Subsidiary the sole purpose of
which is to acquire, hold, manage, and dispose of Foreclosure Property, and
matters incidental to such purposes.
CREDIT AGREEMENT
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"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 means any
corporation, partnership, limited liability company, or other entity of which
all of the equity securities or other ownership interests (other than Permitted
Preferred Stock and, in the case of a corporation, directors' qualifying shares)
are so owned or controlled.
"YEAR 2000 PROBLEM" has the meaning given that term in SECTION 6.1(w).
"YEAR 2000 COMPLIANT" has the meaning given that term in SECTION 6.1(w).
1.2 GENERAL; REFERENCES TO TIMES. References in this Agreement to
"Sections," "Exhibits," and "Schedules" are to sections, exhibits, and schedules
herein and hereto unless otherwise indicated. References in this Agreement to
any document, instrument, or agreement (a) shall include all exhibits,
schedules, and other attachments thereto, (b) shall include all documents,
instruments, or agreements issued or executed in replacement thereof, to the
extent permitted hereby and (c) shall mean such document, instrument, or
agreement, or replacement or predecessor thereto, as amended, supplemented,
restated, or otherwise modified from time to time to the extent permitted hereby
and in effect at any given time. Wherever from the context it appears
appropriate, each term stated in either the singular or plural shall include the
singular and plural, and pronouns stated in the masculine, feminine, or neuter
gender shall include the masculine, the feminine and the neuter. Unless
explicitly set forth to the contrary, a reference to "Subsidiary" means a
Subsidiary of Borrower or a Subsidiary of such Subsidiary and a reference to an
"Affiliate" means a reference to an Affiliate of Borrower. Titles and captions
of Sections, subsections, and clauses in this Agreement are for convenience
only, and neither limit nor amplify the provisions of this Agreement. Unless
otherwise indicated, all references to time are references to Dallas, Texas,
time.
1.3 ACCOUNTING PRINCIPLES. All accounting and financial terms used in the
Loan Documents and the compliance with each financial covenant therein shall be
determined in accordance with GAAP, and, all accounting principles shall be
applied on a consistent basis so that the accounting principles in a current
period are comparable in all material respects to those applied during the
preceding comparable period. If Borrower or any Lender determines that a change
in GAAP from that in effect on the date hereof has altered the treatment of
certain financial data to its detriment under this Agreement, such party may, by
written notice to the others and Administrative Agent not later than 30 days
after Borrower's delivery of any financial statements pursuant to SECTION 8.1 or
8.2 reflecting such change in GAAP, request renegotiation of the financial
covenants affected by such change. If Borrower and Requisite Lenders have not
agreed on revised covenants within 30 days after delivery of such notice, then,
for purposes of this Agreement, GAAP will mean generally accepted accounting
principles on the date just prior to the date on which the change that gave rise
to the renegotiation occurred.
SECTION 2 CREDIT FACILITY.
2.1 LOANS. Subject to the terms and conditions hereof, during the period
from the Effective Date to but excluding the Termination Date, each Lender
severally and not jointly agrees to make Revolving Loans to Borrower in an
aggregate principal amount at any one time outstanding up to, but not exceeding,
the amount of such Lender's Commitment; provided, however, that in no event
shall the aggregate principal amount of all outstanding Loans exceed the
aggregate amount of the Commitments as in effect from time to time. Subject
CREDIT AGREEMENT
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to the terms and conditions of this Agreement, during the period from the
Effective Date to but excluding the Termination Date, Borrower may borrow, repay
and reborrow Revolving Loans hereunder.
2.2 SWING LINE SUBFACILITY.
(a) For the convenience of the parties and as an integral part of
the transactions contemplated by the Loan Documents, NationsBank, solely
for its own account, may make any requested Loan of $250,000 or a greater
integral multiple thereof, subject to those terms and conditions
applicable to Loans set forth in CLAUSES (a) and (b) of the first sentence
of SECTION 5.2, directly to Borrower as a Swing Line Loan without
requiring any other Lender to fund its ratable portion thereof unless and
until SECTION 2.2(b) is applicable; provided that: (i) each such Swing
Line Loan must occur on a Business Day prior to, and not on or after, the
Termination Date; (ii) the aggregate Swing Principal Debt outstanding on
any date of determination shall not exceed the Swing Line Commitment;
(iii) on any date of determination, the aggregate principal amount of all
Loans shall never exceed the aggregate amount of the Commitments of the
Lenders; (iv) at the time of such Swing Line Loan, no Default or Event of
Default shall have occurred and be continuing; (v) each Swing Line Loan
shall be at a rate per annum equal to the lesser of (a) the Money Market
Rate, and (b) the Maximum Rate; provided that at any time after Revolving
Lenders are deemed to have purchased pursuant to SECTION 2.2(b) a
participation in any Swing Line Borrowing, such Borrowing shall bear
interest at the Post-Default Rate; and (vi) no additional Swing Line Loan
shall be made at any time after any Lender has refused, notwithstanding
the requirements of SECTION 2.2(b), to purchase a participation in any
Swing Line Loan as provided in such Section, and until such purchase shall
occur or until the Swing Line Loan has been repaid. Each Swing Line Loan
under the Swing Line Subfacility shall be available and may be prepaid on
same day telephonic notice from Borrower to NationsBank, so long as such
notice is received by NationsBank prior to 1:00 p.m. Dallas, Texas time.
Each Swing Line Loan shall be repaid in full, together with all accrued
and unpaid interest thereon, not later than the tenth Business Day after
the date on which such Swing Line Loan was funded.
(b) If Borrower fails to repay any Swing Line Loan as provided
herein (and in any event upon the earlier to occur of a Default or the
Termination Date), Administrative Agent shall timely notify each Lender of
such failure and of the date and amount not paid. No later than the close
of business on the date such notice is given (if such notice was given
prior to 12:00 noon on any Business Day, or, if made at any other time, on
the next Business Day following the date of such notice), each Lender
shall be deemed to have irrevocably and unconditionally purchased and
received from NationsBank a pro rata (in proportion to their respective
Commitments) undivided interest and participation in such Swing Line Loan,
and each Lender shall make available to NationsBank in immediately
available funds such Lender's ratable part of such unpaid principal
amount. All such amounts payable by any Lender shall include interest
thereon from the date on which such payment is payable by such Lender to,
but not including, the date such amount is paid by such Lender to
Administrative Agent, at the Federal Funds Rate. If such Lender does not
promptly pay such amount upon Administrative Agent's demand therefor, and
until such time as such Lender makes the required payment, NationsBank
shall be deemed to continue to have outstanding a Swing Line Loan in the
amount of such unpaid obligation. Each payment by Borrower of all or any
part of any Swing Line Loan shall be paid to Administrative Agent for the
ratable benefit of NationsBank and those Lenders who have funded their
participations in such Swing Line Loan under this SECTION 2.2(b); provided
that, with respect to any such participation, all interest accruing on the
Swing Principal Debt to which
CREDIT AGREEMENT
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such participation relates prior to the date of funding such participation
shall be payable solely to NationsBank for its own account.
2.3 BORROWING PROCEDURES. The following procedures apply to all Loans
(except Swing Line Loans).
(a) Requesting Loans. Borrower shall give Administrative Agent
notice pursuant to a Notice of Borrowing or telephonic notice of each
borrowing of Loans. Each Notice of Borrowing shall be delivered to
Administrative Agent before 12:00 noon (a) in the case of Eurodollar
Loans, on the date two Business Days prior to the proposed date of such
borrowing and (b) in the case of Base Rate Loans, on the proposed date of
such borrowing. Any such telephonic notice shall include all information
to be specified in a written Notice of Borrowing and shall be promptly
confirmed in writing by Borrower pursuant to a Notice of Borrowing sent to
Administrative Agent by telecopy on the same day of the giving of such
telephonic notice. Administrative Agent will transmit by telecopy the
Notice of Borrowing (or the information contained in such Notice of
Borrowing) to each Lender promptly upon receipt by Administrative Agent
(but in any event not later than 1:00 p.m. on the date of receipt
thereof). Each Notice of Borrowing or telephonic notice of each borrowing
shall be irrevocable once given and binding on Borrower.
(b) Disbursements of Loan Proceeds. No later than 3:00 p.m. on the
date specified in the Notice of Borrowing, each Lender will make available
for the account of its applicable Lending Office to Administrative Agent
at the Principal Office, in immediately available funds, the proceeds of
the Revolving Loan to be made by such Lender. With respect to Revolving
Loans to be made after the Effective Date, unless Administrative Agent
shall have been notified by any Lender prior to the specified date of
borrowing that such Lender does not intend to make available to
Administrative Agent the Revolving Loan to be made by such Lender on such
date, Administrative Agent may assume that such Lender will make the
proceeds of such Revolving Loan available to Administrative Agent on the
date of the requested borrowing as set forth in the Notice of Borrowing
and Administrative Agent may (but shall not be obligated to), in reliance
upon such assumption, make available to Borrower the amount of such
Revolving Loan to be provided by such Lender. Subject to satisfaction of
the applicable conditions set forth in SECTION 5 for such borrowing,
Administrative Agent will make the proceeds of such borrowing available to
Borrower no later than 4:00 p.m. on the date and at the account specified
by Borrower in such Notice of Borrowing.
2.4 RATES AND PAYMENT OF INTEREST ON LOANS.
(a) Rates. Borrower promises to pay to Administrative Agent for the
account of each Lender, interest on the unpaid principal amount of each
Revolving Loan for the period from and including the date of the making of
such Revolving Loan to but excluding the date such Revolving Loan shall be
paid in full, at the following per annum rates:
(i) during such periods as such Revolving Loan is a Base Rate
Loan, the lesser of (A) the Base Rate (as in effect from time to
time) and (B) the Maximum Rate; and
(ii) during such periods as such Revolving Loan is a Eurodollar
Loan, the lesser of (A) the sum of the Adjusted Eurodollar Rate for
such Revolving Loan for the Interest Period therefor, plus 1.25%
and (B) the Maximum Rate.
CREDIT AGREEMENT
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Notwithstanding the foregoing, (i) during the continuance of an Event of
Default, and prior to maturity or acceleration of the Obligations,
Borrower hereby promises to pay to Administrative Agent for account of
each Lender interest at 2% per annum in excess of the rates otherwise
payable hereunder on the aggregate outstanding principal of all Revolving
Loans made by such Lender and on any other amount payable by Borrower
hereunder or under the Note held by such Lender (including without
limitation, the Swing Principal Debt, and overdue accrued but unpaid
interest to the extent permitted under Applicable Law), and (ii) upon the
maturity or acceleration of the Obligations in accordance with the terms
hereof, Borrower promises to pay to Administrative Agent for the account
of each Lender interest at the Post-Default Rate on such amounts.
(b) Payment of Interest. Accrued interest on each Revolving Loan
shall be payable as provided in each of the following clauses which apply
to such Revolving Loan: (i) in the case of a Base Rate Loan, monthly on
the last Business Day of each calendar month, (ii) in the case of a
Eurodollar Loan, on the last day of each Interest Period therefor;
provided that, with respect to Eurodollar Loans having an Interest Period
in excess of three months, then accrued interest shall also be due and
payable at the end of each three-month period occurring after the
commencement of such Interest Period until such Eurodollar Rate borrowing
is paid or converted, (iii) in the case of a Eurodollar Loan, upon the
payment, prepayment or Continuation thereof or the Conversion of such Loan
to a Loan of another Type (but only on the principal amount so paid,
prepaid, Continued, or Converted), and (iv) in the case of any Base Rate
Loan, upon the payment or prepayment thereof in full. Interest payable
during the continuance of an Event of Default but prior to maturity or
acceleration of the Obligations shall be payable in accordance with the
immediately preceding sentence. Interest payable at the Post-Default Rate
shall be payable from time to time on demand. Promptly after the
determination of any interest rate provided for herein or any change
therein, Administrative Agent shall give notice thereof to the Lenders to
which such interest is payable and to Borrower. All determinations by
Administrative Agent of an interest rate hereunder shall be conclusive and
binding on the Lenders and Borrower for all purposes, absent manifest
error.
2.5 NUMBER OF INTEREST PERIODS. There may be no more than ten different
Interest Periods for Eurodollar Loans outstanding at the same time.
2.6 REPAYMENT OF LOANS. Borrower shall repay the entire outstanding
principal amount of, and all accrued but unpaid interest on, the Loans on the
Termination Date.
2.7 PREPAYMENTS.
(a) Optional. Subject to SECTION 4.5, Borrower may prepay any Loan
made to it at any time without premium or penalty.
(b) Mandatory.
(i) If at any time the aggregate principal amount of all
outstanding Loans exceeds the aggregate amount of the Commitments of
the Lenders in effect at such time, or the Swing Principal Debt
exceeds the Swing Line Commitment, then Borrower shall immediately
pay to Administrative Agent for the respective accounts of the
appropriate Lenders the amount of such excess; and
CREDIT AGREEMENT
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(ii) If (A) as a result of any asset disposition by Borrower
or any of its Subsidiaries, Borrower or any such Subsidiary is
required to redeem or prepay (or to offer to redeem or prepay) any
Debt (other than the Obligations) by a particular date (the "SUBJECT
DATE") in an amount equal to all or a portion of the net cash
proceeds received by such entity from such asset disposition (the
"ASSET DISPOSITION PROCEEDS"), and (B) such obligations to redeem or
prepay (or to offer to redeem or prepay) such other Debt may be
avoided by prepayment of the Obligations in an amount equal to such
Asset Disposition Proceeds on or prior to the Subject Date, then not
less than 30 days prior to the Subject Date, Borrower shall pay to
Administrative Agent (for the ratable benefit of Lenders) a
mandatory prepayment of the Obligations (and the Commitment shall be
concurrently reduced) in an amount equal to such Asset Disposition
Proceeds.
If Borrower is required to pay any outstanding Eurodollar Loans by reason
of this Section prior to the end of the applicable Interest Period
therefor, then Borrower shall pay all amounts due under SECTION 4.5.
2.8 CONTINUATION. So long as no Default or Event of Default shall have
occurred and be continuing, Borrower may on any Business Day, with respect to
any Eurodollar Loan, elect to maintain such Eurodollar Loan or any portion
thereof as a Eurodollar Loan, as applicable, by selecting a new Interest Period
for such Loan. Each new Interest Period selected under this Section shall
commence on the last day of the immediately preceding Interest Period. Each
selection of a new Interest Period shall be made by Borrower giving to
Administrative Agent a Notice of Continuation not later than 12:00 noon on the
second Business Day prior to the date of any such Continuation. Such notice by
Borrower of a Continuation shall be by telephone or telecopy, confirmed
immediately in writing if by telephone, in the form of a Notice of Continuation,
specifying (a) the proposed date of such Continuation, (b) the Eurodollar Loan,
and portion thereof subject to such Continuation and (c) the duration of the
selected Interest Period, all of which shall be specified in such manner as is
necessary to comply with all limitations on Loans outstanding hereunder. Each
Notice of Continuation shall be irrevocable by and binding on Borrower once
given. Promptly after receipt of a Notice of Continuation (and in any event not
later than 1:00 p.m. on the date of receipt thereof), Administrative Agent shall
notify each Lender by telex or telecopy, or other similar form of transmission
of the proposed Continuation. If Borrower shall fail to select in a timely
manner a new Interest Period for any Eurodollar Loan in accordance with this
Section, such Loan will automatically, on the last day of the current Interest
Period therefor, Convert into a Base Rate Loan.
2.9 CONVERSION. Borrower may on any Business Day, upon Borrower's giving
of a Notice of Conversion to Administrative Agent, Convert all or a portion of a
Revolving Loan of one Type into a Revolving Loan of another Type. Any Conversion
of a Eurodollar Loan into a Base Rate Loan shall be made on, and only on, the
last day of an Interest Period for such Eurodollar Loan. Each such Notice of
Conversion shall be given by Borrower not later than 12:00 noon (a) on the
Business Day prior to the date of any proposed Conversion into Base Rate Loans
or (b) on the second Business Day prior to the date of any proposed Conversion
into Eurodollar Loans. Promptly upon receipt of a Notice of Conversion (and in
any event not later than 1:00 p.m. on the date of receipt thereof),
Administrative Agent shall notify each Lender by telecopy or other similar form
of transmission of the proposed Conversion. Subject to the restrictions
specified above, each Notice of Conversion shall be by telephone or telecopy
confirmed immediately in writing if by telephone, in the form of a Notice of
Conversion, specifying (1) the requested date of such Conversion, (2) the Type
of Revolving Loan to be Converted, (3) the portion of such Type of Revolving
Loan to be Converted, (4) the Type of Revolving
CREDIT AGREEMENT
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Loan into which such Revolving Loan is to be Converted, and (5) if such
Conversion is into a Eurodollar Loan, the requested duration of the Interest
Period of such Revolving Loan. Each Notice of Conversion shall be irrevocable by
and binding on Borrower once given. Notwithstanding the foregoing, the right to
convert from a Base Rate Loan to a Eurodollar Loan, or to continue a Eurodollar
Loan, shall not be available during the occurrence of a Default or an Event of
Default.
2.10 NOTES.
(a) Revolving Note. The Loans (other than Swing Line Loans) made by
each Lender shall, in addition to this Agreement, also be evidenced by a
promissory note of Borrower substantially in the form of EXHIBIT E-1 (each
a "REVOLVING NOTE"), payable to the order of such Lender. The Revolving
Note issued by Borrower to each Lender shall be in a principal amount
equal to the amount of such Lender's Commitment as originally in effect.
(b) Swing Line Note. The Swing Line Loans made by NationsBank
pursuant to SECTION 2.2, in addition to this Agreement, shall be evidenced
by a promissory note of Borrower substantially in the form of EXHIBIT E-2
(the "SWING LINE NOTE") hereto. The Swing Line Note issued by Borrower to
NationsBank shall be in a principal amount equal to the Swing Line
Commitment, as originally in effect.
(c) Records; Endorsement on Transfer. The date, amount, interest
rate, Type and duration of Interest Periods (if applicable) of each Loan
made by each Lender, and each payment made on account of the principal
thereof, shall be recorded by such Lender on its books and such entries
shall be prima facie evidence of such matters. Prior to the transfer of
any Note, the Lender shall endorse such items on such Note or any allonge
thereof; provided that, the failure of such Lender to make any such
recordation or endorsement shall not affect the obligations of Borrower to
make a payment when due of any amount owing hereunder or under such Note
in respect of the Loans evidenced by such Note.
2.11 REDUCTIONS OF THE COMMITMENT. Borrower shall have the right to
terminate or reduce the aggregate unused amount of the Commitments of the
Lenders (other than the portion of the Commitments applicable to Swing Line
Loans) at any time and from time to time without penalty or premium upon not
less than five Business Days prior written notice to Administrative Agent of
each such termination or reduction, which notice shall specify the effective
date thereof and the amount of any such reduction and shall be irrevocable once
given and effective only upon receipt by Administrative Agent. Administrative
Agent will promptly transmit such notice to each Lender. The Swing Line
Commitment shall be automatically and permanently reduced from time to time, on
the date of each reduction in the Commitments of the Lenders, by the amount, if
any, by which the Swing Line Commitment exceeds the aggregate Commitments of the
Lenders then in effect. The Commitments, once terminated or reduced, may not be
increased or reinstated.
2.12 INCREASES OF COMMITMENTS. Borrower may from time to time request any
one or more Lenders to increase their respective Commitments or request other
financial institutions first approved by Administrative Agent to agree to a
Commitment, so that the total Commitments may be increased to no more than
$400,000,000. That increase must be effected by an amendment that is executed in
accordance with SECTION 12.5 by Borrower, Administrative Agent, and the one or
more Lenders who have agreed to increase their Commitments or by new Lenders who
have agreed to new Commitments in accordance with SECTION 12.5. In the event the
total Commitments are increased, Borrower shall execute and deliver to each
Lender extending
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such additional Commitment a Revolving Note in the stated amount of its new or
increased Commitment. No Lender is obligated to increase its Commitment under
any circumstances, and no Lender's Commitment may be increased except by its
execution of an amendment to this Agreement in accordance with SECTION 12.5.
Each new Lender providing such additional Commitment shall be a "Lender"
hereunder, entitled to the rights and benefits, and subject to the duties, of a
Lender under the Loan Documents. In such case, each Lender's Commitment
Percentage shall be recalculated to reflect the new proportionate share of the
revised total Commitments and the Lender responsible for the additional
Commitments (the "PURCHASING LENDER") shall, immediately upon receiving notice
from Administrative Agent, pay to each Lender an amount equal to its pro rata
share of the Revolving Loans outstanding as of such date. All such payments
shall reduce the outstanding principal balance of the Revolving Note of each
Lender receiving such payments and shall represent Revolving Loans to Borrower
under the purchasing Lender's Revolving Note. The purchasing Lender shall be
entitled to share ratably in interest accruing on the balances purchased, at the
rates provided herein for such balances, from and after the date of purchase.
All new Revolving Loans occurring after an increase of the total Commitments
shall be funded in accordance with the Lender's revised Commitment Percentages.
2.13 OPTIONAL RENEWAL OF COMMITMENTS.
(a) Optional Renewal Procedures. Borrower may request that the
Termination Date be extended for all or a portion of the Commitment to a
date which is no later than one year after the then-current Termination
Date; provided that, (i) any such extension request shall be made in
writing (an "EXTENSION REQUEST") by Borrower and delivered to
Administrative Agent no more than 60 days prior to (but no later than 30
days prior to) the then-current Termination Date; and (ii) no more than
one such Extension Request may be made by Borrower. Promptly upon receipt
of an Extension Request, Administrative Agent shall notify the Lenders of
such request.
(i) Lenders' Response to Extension Request. The Lenders may, at
their option, accept or reject such Extension Request by giving
written notice to Administrative Agent delivered no earlier than 60
days prior to (but no later than 15 days prior to) the
then-effective Termination Date (the date that is 15 days prior to
the then effective Termination Date being the "RESPONSE DATE"). If
any Lender shall fail to give such notice to Administrative Agent
by the Response Date, such Lender shall be deemed to have rejected
the requested extension. If the Extension Request is not consented
to by Requisite Lenders by the Response Date, the Extension Request
will be rejected, and this Agreement will terminate on the
Termination Date. If the Requisite Lenders consent to the Extension
Request by the Response Date, the Termination Date for those
Lenders consenting to the extension (for purposes of this SECTION
2.13(a), the "ACCEPTING LENDERS") shall be automatically extended
to the date which is one year after the then-current Termination
Date.
(ii) Additional Procedures to Extend the Rejected Amount. If
the Extension Request is consented to by Requisite Lenders, but
fewer than all Lenders (any Lender not consenting to the Extension
Request being referred to in this SECTION 2.13(a) as a "REJECTING
LENDER"), then Administrative Agent shall, within 48 hours of
making such determination, notify the Accepting Lenders and
Borrower of the aggregate Commitments held by the Rejecting Lenders
(as used in this SECTION 2.13(a), the "REJECTED AMOUNT"). Each
Accepting Lender shall have the right, but not the obligation, to
elect to increase its respective Commitment by an amount not to
exceed the Rejected Amount, which election shall be made by notice
from each Accepting Lender to the Administrative Agent given not
later than ten
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days after the date notified by Administrative Agent, specifying the
amount of such proposed increase in such Accepting Lender's
Commitment. If the aggregate amount of the proposed increases in the
Commitment of all Accepting Lenders making such an election does not
equal or exceed the Rejected Amount, then Borrower shall have the
right to add one or more financial institutions (which are not
Rejecting Lenders and which are Eligible Assignees) as Lenders (as
used in this SECTION 2.13(a), a "PURCHASING LENDER") to replace such
Rejecting Lenders, which Purchasing Lenders shall have aggregate
Commitments not greater than those of the Rejecting Lenders (less
any increases in the Commitment of Accepting Lenders, as described
in the following CLAUSE (iii)). The transfer of Commitments and
outstanding Loans from Rejecting Lenders to Purchasing Lenders or
Accepting Lenders shall take place on the effective date of, and
pursuant to the execution, delivery, and acceptance of, an
Assignment and Acceptance Agreement in accordance with the
procedures set forth in SECTION 12.4.
(iii) Adjustments to, and Terminations of, Commitments.
(A) If less than 100% (but at least 66 2/3%) of the
Commitments is extended (whether by virtue of Borrower's
failure to request an extension of the full Commitments or by
virtue of any Lender not consenting to any Extension Request),
then the Commitments shall automatically be reduced on the
Termination Date on which the applicable approved extension is
effective by an amount equal to (as the case may be) (i) the
portion of the Commitments not requested to be extended by
Borrower in its Extension Request or (ii) the amount of the
Rejected Amount (to the extent not replaced by Accepting
Lenders or Purchasing Lenders pursuant to the procedures set
forth in the foregoing SECTION 2.13(a)(ii)). Each Rejecting
Lender shall have no further obligation or Commitment
following the Termination Date on which the applicable
approved extension is effective, other than any obligation
accruing prior to such date as provided herein.
(B) If the aggregate amount of the proposed increases in
the Commitments of all Accepting Lenders making an election to
increase their respective Commitments is in excess of the
Rejected Amount, then (i) the Rejected Amount shall be
allocated pro rata among such Accepting Lenders based on the
respective amounts of the proposed increases to Commitments
elected by such Accepting Lenders; and (ii) the respective
Commitments of each such Accepting Lender shall be increased
by the respective amount allocated pursuant to CLAUSE (i) of
this SECTION 2.13(a)(iii)(B), such that, after giving effect
to the approved extensions and all such terminations and
increases, no reduction will occur in the aggregate amount of
the Commitments.
(C) If the aggregate amount of the proposed increases to
the Commitments of all Accepting Lenders making such an
election to so increase their respective Commitments equals
the Rejected Amount, then the respective Commitments of such
Accepting Lenders shall be increased by the respective amounts
of their proposed increases, such that, after giving effect to
the approved extensions and all such terminations and
increases, no reduction will occur in the aggregate amount of
the Commitments.
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(D) If the aggregate amount of the proposed increases to
the Commitments of all Accepting Lenders making such an
election is less than the Rejected Amount, then (i) the
respective Commitments of each such Accepting Lender shall be
increased by the respective amount of its proposed increase;
and (ii) the amount of the Commitments shall be reduced by the
amount of the Rejected Amount (to the extent not replaced by
the Accepting Lenders or the Purchasing Lenders, if any).
(b) No Obligation to Renew. Borrower acknowledges that (i) neither
Administrative Agent nor any Lender has made any representations to
Borrower regarding its intent to agree to any extensions set forth in this
Section, (ii) neither Administrative Agent nor any Lender shall have any
obligation to extend the Commitments (or any portion thereof), and (iii)
Administrative Agent's and Lenders' agreement to one or more extensions
shall not commit Administrative Agent or the Lenders to any additional
extensions.
SECTION 3 PAYMENTS, FEES AND OTHER GENERAL PROVISIONS.
3.1 PAYMENTS. Each payment or prepayment on the Obligations shall be made
in Dollars, without deduction, setoff, or counterclaim, and is due and must be
paid at Administrative Agent's Principal Office in Dallas, Texas in funds which
are or will be available for immediate use by Administrative Agent by 12:00 noon
on the day due. Payments made after 12:00 noon shall be deemed made on the
Business Day next following. Administrative Agent shall pay to each Lender any
payment or prepayment to which such Lender is entitled hereunder on the same day
Administrative Agent shall have received the same from Borrower; provided such
payment or prepayment is received by Administrative Agent prior to 12:00 noon,
and otherwise before 12:00 noon on the Business Day next following. If and to
the extent Administrative Agent shall not make such payments to the Lenders when
due as set forth in the preceding sentence, such unpaid amounts shall accrue
interest, payable by Administrative Agent, at the Federal Funds Rate from the
due date until (but not including) the date on which Administrative Agent makes
such payments to the Lenders.
3.2 PRO RATA TREATMENT. Except to the extent otherwise provided herein:
(a) each borrowing from the Lenders under SECTION 2.1 shall be made from the
Lenders, each payment of the Fees under SECTION 3.6(a) shall be made for account
of the Lenders, and each termination or reduction of the amount of the
Commitments under SECTION 2.11 shall be applied to the respective Commitments of
the Lenders, pro rata according to the amounts of their respective Commitment
Percentages; (b) each payment or prepayment of principal of Revolving Loans
shall be made for account of the Lenders pro rata in accordance with the
respective unpaid principal amounts of the Revolving Loans held by them;
provided that, if immediately prior to giving effect to any such payment in
respect of any Revolving Loans the outstanding principal amount of the Revolving
Loans shall not be held by the Lenders pro rata in accordance with their
respective Commitment Percentages in effect at the time such Revolving Loans
were made, then such payment shall be applied to the Revolving Loans in such
manner as shall result, as nearly as is practicable, in the outstanding
principal amount of the Revolving Loans being held by the Lenders pro rata in
accordance with their respective Commitment Percentages; (c) each payment of
interest on Revolving Loans shall be made for account of the Lenders pro rata in
accordance with the amounts of interest on such Revolving Loans then due and
payable to the respective Lenders; and (d) the making, Conversion and
Continuation of Revolving Loans of a particular Type (other than Conversions
provided for by SECTION 4.4) shall be made pro rata among the Lenders according
to the amounts of their respective Commitment Percentages (in the case of making
of Revolving Loans) or their respective
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Revolving Loans (in the case of Conversions and Continuations of Revolving
Loans) and the then current Interest Period for each Lender's portion of each
Revolving Loan of such Type shall be coterminous.
3.3 SHARING OF PAYMENTS, ETC. If any Lender shall obtain any payment
(whether voluntary, involuntary, or otherwise, including, without limitation, as
a result of exercising its rights under SECTION 3.4) which is in excess of its
ratable share of any such payment, such Lender shall purchase from the other
Lenders such participations as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided, however,
that if all or any portion of such excess payment is thereafter recovered from
such purchasing Lender, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery. Borrower agrees that any Lender so
purchasing a participation from another Revolver Lender pursuant to this Section
may, to the fullest extent permitted by Applicable Law, exercise all of its
rights of payment (including the right of offset) with respect to such
participation as fully as if such Lender were the direct creditor of Borrower in
the amount of such participation.
3.4 OFFSET. Upon the occurrence and during the continuance of an Event of
Default, each Lender shall be entitled to exercise (for the benefit of the
Lenders in accordance with SECTION 3.3) the rights of offset and/or banker's
lien against each and every account and other property, or any interest therein,
which any Borrower may now or hereafter have with, or which is now or hereafter
in the possession of, such Lender to the extent of the full amount of the
Obligations.
3.5 BOOKING BORROWINGS. To the extent permitted by Applicable Law, any
Lender may make, carry, or transfer its Loans at, to, or for the account of any
of its branch offices or the office of any of its Affiliates; provided that, no
Affiliate shall be entitled to receive any greater payment under SECTION 4 than
the transferor Lender would have been entitled to receive with respect to such
Loans.
3.6 SEVERAL OBLIGATIONS. No Lender shall be responsible for the failure of
any other Lender to make a Loan or to perform any other obligation to be made or
performed by such other Lender hereunder, and the failure of any Lender to make
a Loan or to perform any other obligation to be made or performed by it
hereunder shall not relieve the obligation of any other Lender to make any Loan
or to perform any other obligation to be made or performed by such other Lender.
3.7 MINIMUM AMOUNTS.
(a) Borrowings and Conversions. Each borrowing of Base Rate Loans
shall be in an aggregate minimum amount of $1,000,000 and integral
multiples of $1,000,000 in excess thereof. Each borrowing of Eurodollar
Loans, and each Conversion of Loans to Eurodollar Loans shall be in an
aggregate minimum amount of $1,000,000 and integral multiples of
$1,000,000 in excess of that amount.
(b) Prepayments. Each voluntary prepayment of Loans shall be in an
aggregate minimum amount of $1,000,000.
(c) Reductions of Commitments. Each reduction of the Commitments
under SECTION 2.11 shall be in an aggregate minimum amount of $5,000,000
and integral multiples of $1,000,000 in excess thereof.
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3.8 FEES.
(a) Facility Fee. Borrower agrees to pay to Administrative Agent for
the account of the Lenders a facility fee in an amount equal to 0.25%
multiplied by the amount of the average daily Commitment (whether used or
unused), in each case during the period from and including the last
payment date (or in respect of the initial payment, the Effective Date) to
and excluding the payment date for such installment. Such facility fee
shall be payable quarterly in arrears on each Quarterly Date and on the
Termination Date, beginning with March 31, 1999.
(b) Upfront Fee. Borrower agrees to pay an upfront fee to
Administrative Agent for the account of Lenders in the amount stated next
to such Lender's name on the attached SCHEDULE 2.
(c) Administrative and Other Fees. Borrower agrees to pay the
administrative and other fees of Administrative Agent set forth in that
certain separate letter agreement dated January 15, 1999, among Borrower,
Administrative Agent, and Arranger.
3.9 COMPUTATIONS. Unless otherwise expressly set forth herein, any
accrued interest on any Base Rate Loan due hereunder shall be computed on the
basis of a 365/366 day year, and in all other instances, any accrued interest
on any Eurodollar Loan, any Fees or other Obligations due hereunder shall be
computed on the basis of a year of 360 days and the actual number of days
elapsed.
3.10 MAXIMUM RATE. Regardless of any provision contained in any Loan
Document, neither Administrative Agent nor any Lender shall ever be entitled to
contract for, charge, take, reserve, receive, or apply, as interest on the
Obligations, or any part thereof, any amount in excess of the Maximum Rate, and,
if the Lenders ever do so, then such excess shall be deemed a partial prepayment
of principal and treated hereunder as such and any remaining excess shall be
refunded to Borrower. In determining if the interest paid or payable exceeds the
Maximum Rate, Borrower and the Lenders shall, to the maximum extent permitted
under applicable Law, (a) treat all Loans as but a single extension of credit
(and Lenders and Borrower agree that such is the case and that provision herein
for multiple Loans is for convenience only), (b) characterize any nonprincipal
payment as an expense, fee, or premium rather than as interest, (c) exclude
voluntary prepayments and the effects thereof, and (d) amortize, prorate,
allocate, and spread the total amount of interest throughout the entire
contemplated term of the Obligations; provided that, if the Obligations are paid
and performed in full prior to the end of the full contemplated term thereof,
and if the interest received for the actual period of existence thereof exceeds
the Maximum Amount, the Lenders shall refund such excess, and, in such event,
the Lenders shall not, to the extent permitted by Applicable Law, be subject to
any penalties provided by any Applicable Laws for contracting for, charging,
taking, reserving, or receiving interest in excess of the Maximum Amount.
3.11 INTEREST RECAPTURE. If the designated rate applicable to any Loan
exceeds the Maximum Rate, the rate of interest on such Loan shall be limited to
the Maximum Rate, but any subsequent reductions in such designated rate shall
not reduce the rate of interest thereon below the Maximum Rate until the total
amount of interest accrued thereon equals the amount of interest which would
have accrued thereon if such designated rate had at all times been in effect. In
the event that at maturity (stated or by acceleration), or at final payment of
the Principal Debt, the total amount of interest paid or accrued is less than
the amount of interest which would have accrued if such designated rates had at
all times been in effect, then, at such time and to the extent permitted by law,
Borrower shall pay an amount equal to the difference between (a) the lesser of
the amount of interest which would have accrued if such designated rates had at
all times been in effect and
CREDIT AGREEMENT
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the amount of interest which would have accrued if the Maximum Rate had at all
times been in effect, and (b) the amount of interest actually paid or accrued on
the Principal Debt.
3.12 AGREEMENT REGARDING INTEREST AND CHARGES. The parties hereto hereby
agree and stipulate that the only charge imposed upon Borrower for the use of
money in connection with this Agreement is and shall be the interest
specifically described in SECTION 2.4(a). Notwithstanding the foregoing, the
parties hereto further agree and stipulate that all agency fees, syndication
fees, facility fees, underwriting fees, default charges, late charges, funding
or "breakage" charges, increased cost charges, attorneys' fees and reimbursement
for costs and expenses paid by Administrative Agent or any Lender to third
parties or for damages incurred by Administrative Agent or any Lender, are
charges made to compensate Administrative Agent or any such Lender for
underwriting or administrative services and costs or losses performed or
incurred, and to be performed or incurred, by Administrative Agent and the
Lenders in connection with this Agreement and shall under no circumstances be
deemed to be charges for the use of money.
3.13 DEFAULTING LENDERS.
(a) Generally. If for any reason any Lender (a "DEFAULTING LENDER")
shall fail or refuse to perform any of its obligations under this
Agreement or any other Loan Document to which it is a party within the
time period specified for performance of such obligation or, if no time
period is specified, if such failure or refusal continues for a period of
two Business Days after notice from Administrative Agent, then, in
addition to the rights and remedies that may be available to
Administrative Agent or Borrower under this Agreement or Applicable Law,
such Defaulting Lender's right to participate in the administration of the
Loans, this Agreement, and the other Loan Documents, including without
limitation, any right to vote in respect of, to consent to, or to direct
any action or inaction of Administrative Agent or to be taken into account
in the calculation of the Requisite Lenders, shall be suspended during the
pendency of such failure or refusal. If a Lender is a Defaulting Lender
because it has failed to make timely payment to Administrative Agent of
any amount required to be paid to Administrative Agent hereunder (without
giving effect to any notice or cure periods), in addition to other rights
and remedies which Administrative Agent or Borrower may have under the
immediately preceding provisions or otherwise, Administrative Agent shall
be entitled (i) to collect interest from such Defaulting Lender on such
delinquent payment for the period from the date on which the payment was
due until the date on which the payment is made at the Federal Funds Rate,
and (ii) to withhold or setoff and to apply in satisfaction of the
defaulted payment and any related interest, any amounts otherwise payable
to such Defaulting Lender under this Agreement or any other Loan Document.
Any amounts received by Administrative Agent in respect of a Defaulting
Lender's Loans shall not be paid to such Defaulting Lender and shall be
held uninvested by Administrative Agent and either applied against the
purchase price of such Loans under the following SUBSECTION (b) or paid to
such Defaulting Lender upon the Defaulting Lender's curing of its default.
Borrower shall not have any liability in respect of such action by
Administrative Agent.
(b) Purchase of Defaulting Lender's Commitment. Any Lender who is
not a Defaulting Lender shall have the right, but not the obligation, in
its sole discretion, to acquire all of a Defaulting Lender's Commitment.
Any Lender desiring to exercise such right shall give written notice
thereof to Administrative Agent no sooner than two Business Days and not
later than ten Business Days after such Defaulting Lender became a
Defaulting Lender. If more than one Lender exercises such right, each such
Lender shall have the right to acquire an amount of such Defaulting
Lender's Commitment in proportion to the Commitments of the other Lenders
exercising such right. Upon any such purchase,
CREDIT AGREEMENT
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the Defaulting Lender's interest in the Revolving Loans and its rights
hereunder (but not its liability in respect thereof or under the Loan
Documents or this Agreement to the extent the same relate to the period
prior to the effective date of the purchase) shall terminate on the date
of purchase, and the Defaulting Lender shall promptly execute all
documents reasonably requested to surrender and transfer such interest to
the purchaser thereof including an appropriate Assignment and Acceptance
Agreement and, notwithstanding SECTION 12.4(a), shall pay to
Administrative Agent an assignment fee in the amount of $3,500. The
purchase price for the Commitment of a Defaulting Lender shall be equal to
the amount of the principal balance of the Revolving Loans (together with
the principal amount of any funded participations in any Swing Line Loans
held by the Defaulting Lender pursuant to SECTION 2.2(b)) outstanding and
owed by Borrower to the Defaulting Lender. Prior to payment of such
purchase price to a Defaulting Lender, Administrative Agent shall apply
against such purchase price any amounts retained by Administrative Agent
pursuant to the second to last sentence of the immediately preceding
SUBSECTION (a). The Defaulting Lender shall be entitled to receive amounts
owed to it by Borrower under the Loan Documents which accrued prior to the
date of the default by the Defaulting Lender, to the extent the same are
received by Administrative Agent from or on behalf of Borrower. There
shall be no recourse against any Lender or Administrative Agent for the
payment of such sums except to the extent of the receipt of payments from
any other party or in respect of the Revolving Loans or the principal
amount of any funded participations in any Swing Line Loan. If, prior to a
Lender's acquisition of a Defaulting Lender's Commitment pursuant to this
subsection, such Defaulting Lender shall cure the event or condition which
caused it to become a Defaulting Lender and shall have paid all amounts
owing by it hereunder as a result thereof, then such Lender shall no
longer have the right to acquire such Defaulting Lender's Commitment.
SECTION 4 YIELD PROTECTION, ETC.
4.1 INCREASED COST AND REDUCED RETURN.
(a) If, after the date hereof, the adoption of any Applicable Law,
rule, or regulation, or any change in any Applicable Law, or any change in
the interpretation or administration thereof by any Governmental
Authority, or compliance by any Lender (or its applicable Lending Office)
with any request or directive (whether or not having the force of law) of
any such Governmental Authority:
(i) shall subject such Lender (or its applicable Lending
Office) to any tax, duty, or other charge with respect to any
Eurodollar Loans, its Note, or its obligation to make Eurodollar
Loans, or change the basis of taxation of any amounts payable to
such Lender (or its applicable Lending Office) under the Loan
Documents in respect of any Eurodollar Loans (other than taxes
imposed on the overall net income of such Lender by the jurisdiction
in which such Lender has its principal office or such applicable
Lending Office);
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment, or similar requirement (other than the
Reserve Requirement utilized in the determination of the Adjusted
Eurodollar Rate) relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or commitments
of, such Lender (or its applicable Lending Office), including the
Commitment of such Lender hereunder; or
CREDIT AGREEMENT
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(iii) shall impose on such Lender (or its applicable Lending
Office) or on the London interbank market any other condition
affecting the Loan Documents or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such
Lender (or its applicable Lending Office) of making, Converting into,
Continuing, or maintaining any Eurodollar Loans or to reduce any sum
received or receivable by such Lender (or its applicable Lending Office)
under the Loan Documents with respect to any Eurodollar Loans, then
Borrower shall pay to such Lender on demand such amount or amounts as will
compensate such Lender for such increased cost or reduction. If any Lender
requests compensation by Borrower under this SECTION 4.1(a), Borrower may,
by notice to such Lender (with a copy to Administrative Agent), suspend
the obligation of such Lender to make or Continue Revolving Loans of the
Type with respect to which such compensation is requested, or to Convert
Revolving Loans of any other Type into Revolving Loans of such Type, until
the event or condition giving rise to such request ceases to be in effect
(in which case the provisions of SECTION 4.4 shall be applicable);
provided that such suspension shall not affect the right of such Lender to
receive the compensation so requested.
(b) If, after the date hereof, any Lender shall have determined that
the adoption of any Applicable Law, regarding capital adequacy or any
change therein or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether
or not having the force of law) of any such Governmental Authority
(excluding those of the foregoing applying to a Lender solely by reason of
a formal determination by the applicable regulator that such Lender is in
a financially troubled condition) has or would have the effect of reducing
the rate of return on the capital of such Lender or any corporation
controlling such Lender as a consequence of such Lender's obligations
hereunder to a level below that which such Lender or such corporation
could have achieved but for such adoption, change, request, or directive
(taking into consideration its policies with respect to capital adequacy),
then from time to time upon demand Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender for such
reduction.
(c) Each Lender shall promptly notify Borrower and Administrative
Agent of any event of which it has knowledge, occurring after the date
hereof, which will entitle such Lender to compensation pursuant to this
Section and will designate a different applicable Lending Office if
such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the judgment of such Lender, be otherwise
disadvantageous to it. Any Lender claiming compensation under this Section
shall furnish to Borrower and Administrative Agent a statement setting
forth the additional amount or amounts to be paid to it hereunder which
shall be conclusive in the absence of manifest error. In determining such
amount, such Lender may use any reasonable averaging and attribution
methods.
4.2 LIMITATION ON TYPES OF LOANS. If on or prior to the first day of any
Interest Period for any Eurodollar Loan:
(a) Administrative Agent determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar
Rate for such Interest Period; or
CREDIT AGREEMENT
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(b) the Requisite Lenders determine (which determination shall be
conclusive) and notify Administrative Agent that the Adjusted Eurodollar
Rate will not adequately and fairly reflect the cost to the Lenders of
funding Eurodollar Loans for such Interest Period;
then Administrative Agent shall give Borrower prompt notice thereof
specifying the relevant Revolving Loans and the relevant amounts or
periods, and so long as such condition remains in effect, the Lenders
shall be under no obligation to make additional Eurodollar Loans, Continue
Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans, and
Borrower shall, on the last day(s) of the then current Interest Period(s)
for the outstanding Eurodollar Loans, either prepay such Loans or Convert
such Loans into Base Rate Loans in accordance with the terms of this
Agreement.
4.3 ILLEGALITY. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for any Lender or its applicable Lending
Office to make, maintain, or fund Eurodollar Loans hereunder, then such Lender
shall promptly notify Borrower thereof and such Lender's obligation to make or
Continue Eurodollar Loans and to Convert other Base Rate Loans into Eurodollar
Loans shall be suspended until such time as such Lender may again make,
maintain, and fund Eurodollar Loans (in which case the provisions of SECTION 4.4
shall be applicable).
4.4 TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make a
Eurodollar Loan or to Continue, or to Convert Base Rate Loans into Eurodollar
Loans shall be suspended pursuant to SECTION 4.1, 4.2, or 4.3 hereof, such
Lender's Eurodollar Loans shall be automatically Converted into Base Rate Loans
on the last day(s) of the then current Interest Period(s) for Eurodollar Loans
(or, in the case of a Conversion required by SECTION 4.3 hereof, on such earlier
date as such Lender may specify to Borrower with a copy to Administrative Agent)
and, unless and until such Lender gives notice as provided below that the
circumstances specified in SECTION 4.1, 4.2, or 4.3 hereof that gave rise to
such Conversion no longer exist:
(a) to the extent that such Lender's Eurodollar Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's Eurodollar Loans shall be applied instead to
its Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such
Lender as Eurodollar Loans shall be made or Continued instead as Base Rate
Loans, and all Loans of such Lender that would otherwise be Converted into
Eurodollar Loans shall be Converted instead into (or shall remain as) Base
Rate Loans.
If such Lender gives notice to Borrower (with a copy to Administrative Agent)
that the circumstances specified in SECTION 4.1, 4.2, or 4.3 hereof that gave
rise to the Conversion of such Lender's Eurodollar Loans pursuant to this
SECTION 4.4 no longer exist (which such Lender agrees to do promptly upon such
circumstances ceasing to exist) at a time when Eurodollar Loans made by other
Lenders are outstanding, such Lender's Base Rate Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Eurodollar Loans, to the extent necessary so that, after giving
effect thereto, all Revolving Loans held by the Lenders holding Eurodollar Loans
and by such Lender are held pro rata (as to principal amounts, Types, and
Interest Periods) in accordance with their respective Commitments.
4.5 COMPENSATION. Upon the request of any Lender, Borrower shall pay to
such Lender such amount or amounts as shall be sufficient (in the reasonable
opinion of such Lender) to compensate it for any loss, cost, or expense
(including loss of anticipated profits) incurred by it as a result of:
CREDIT AGREEMENT
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(a) any payment, prepayment (including, without limitation, any
principal reduction effected pursuant to SECTION 2.12 as a result of an
increase in the Commitment), or Conversion of a Eurodollar Loan for any
reason (including, without limitation, the acceleration of the Revolving
Loans pursuant to SECTION 10.2) on a date other than the last day of the
Interest Period for such Loan; or
(b) any failure by Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in SECTION 5
to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan
on the date for such borrowing, Conversion, Continuation, or prepayment
specified in the relevant notice of borrowing, prepayment, Continuation,
or Conversion under this Agreement.
4.6 TAXES.
(a) Any and all payments by Borrower to or for the account of any
Lender or Administrative Agent hereunder or under any other Loan Document
shall be made free and clear of and without deduction for any and all
present or future taxes, duties, levies, imposts, deductions, charges, or
withholdings, and all liabilities with respect thereto, excluding, in the
case of each Lender and Administrative Agent, taxes imposed on its income,
and franchise taxes imposed on it, by the jurisdiction under the laws of
which such Lender (or its applicable Lending Office) or Administrative
Agent (as the case may be) is organized or any political subdivision
thereof (all such non-excluded taxes, duties, levies, imposts, deductions,
charges, withholdings, and liabilities being hereinafter referred to as
"TAXES"). If Borrower shall be required by law to deduct any Taxes from or
in respect of any sum payable under this Agreement or any other Loan
Document to any Lender or Administrative Agent, (i) the sum payable shall
be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
SECTION 4.6) such Lender or Administrative Agent receives an amount equal
to the sum it would have received had no such deductions been made, (ii)
Borrower shall make such deductions, (iii) Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with Applicable Law, and (iv) Borrower shall furnish to
Administrative Agent, at its address referred to in SECTION 12.1, the
original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, Borrower agrees to pay any and all present or
future stamp or documentary taxes and any other excise or property taxes
or charges or similar levies which arise from any payment made under this
Agreement or any other Loan Document or from the execution or delivery of,
or otherwise with respect to, this Agreement or any other Loan Document
(hereinafter referred to as "OTHER TAXES").
(c) Borrower agrees to indemnify each Lender and Administrative
Agent for the full amount of Taxes and Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed or asserted by any
jurisdiction on amounts payable under this SECTION 4.6) paid by such
Lender or Administrative Agent (as the case may be) and any liability
(including penalties, interest, and expenses) arising therefrom or with
respect thereto.
(d) Each Lender organized under the laws of a jurisdiction outside
the United States, on or prior to the date of its execution and delivery
of this Agreement in the case of each Lender listed on the signature pages
hereof and on or prior to the date on which it becomes a Lender in the
case of each other Lender, and from time to time thereafter if requested
in writing by Borrower or Administrative
CREDIT AGREEMENT
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Agent (but only so long as such Lender remains lawfully able to do so),
shall provide Borrower and Administrative Agent with (i) Internal Revenue
Service Form 1001 or 4224, as appropriate, or any successor form
prescribed by the Internal Revenue Service, certifying that such Lender is
entitled to benefits under an income tax treaty to which the United States
is a party which reduces the rate of withholding tax on payments of
interest or certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a trade or business
in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as
appropriate, or any successor form prescribed by the Internal Revenue
Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and
881(c) of the Internal Revenue Code), certifying that such Lender is
entitled to an exemption from or a reduced rate of tax on payments
pursuant to this Agreement or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to
provide Borrower and Administrative Agent with the appropriate form
pursuant to SECTION 4.6(d) (unless such failure is due to a change in
treaty, law, or regulation occurring subsequent to the date on which a
form originally was required to be provided), such Lender shall not be
entitled to indemnification under SECTION 4.6(a) or 4.6(b) with respect to
Taxes imposed by the United States; provided, however, that should a
Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to deliver
a form required hereunder, Borrower shall take such steps as such Lender
shall reasonably request to assist such Lender to recover such Taxes.
(f) If Borrower is required to pay additional amounts to or for the
account of any Lender pursuant to this SECTION 4.6, then such Lender will
agree to use reasonable efforts to change the jurisdiction of its
applicable Lending Office so as to eliminate or reduce any such additional
payment which may thereafter accrue if such change, in the judgment of
such Lender, is not otherwise disadvantageous to such Lender.
(g) Within 30 days after the date of any payment of Taxes, Borrower
shall furnish to Administrative Agent the original or a certified copy of
a receipt evidencing such payment.
(h) Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower contained
in this SECTION 4.6 shall survive the termination of the Commitments and
the payment in full of the Notes.
4.7 REMOVAL OF LENDERS. If (a) a Lender or a Participant requests
compensation pursuant to SECTIONS 4.1 or 4.6 and the Requisite Lenders are not
also doing the same, or (b) the obligation of a Lender to make Eurodollar Loans
or to Continue, or to Convert Loans into Eurodollar Loans shall be suspended
pursuant to SECTION 4.1 or SECTION 4.3, but the obligation of the Requisite
Lenders shall not have been suspended under such Sections, Borrower may either
(A) demand that such Lender or Participant (the "AFFECTED LENDER"), and upon
such demand the Affected Lender shall promptly, assign its Commitment and all of
its Loans to an Eligible Assignee subject to and in accordance with the
provisions of SECTION 12.4 for a purchase price equal to the aggregate principal
balance of Loans then owing to the Affected Lender (together with any
participation held by the affected Lender in any Swing Line Loan pursuant to
SECTION 2.2(b)) plus any accrued but unpaid interest thereon, accrued but unpaid
Fees owing to the Affected Lender, and any amounts owing the Affected Lender
under SECTION 4, or (B) pay to the Affected Lender the aggregate principal
balance of Loans (together with any participation held by the Affected Lender in
any Swing Line Loan pursuant to SECTION 2.2(b)) then owing to the Affected
Lender plus any accrued but unpaid interest thereon, accrued but unpaid Fees
owing to
CREDIT AGREEMENT
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the Affected Lender, and any amounts owing the Affected Lender under SECTION 4,
whereupon the Affected Lender shall no longer be a party hereto or have any
rights or obligations hereunder or under any of the other Loan Documents,
subject to the survival of certain provisions as set forth in SECTION 12.9. Each
of Administrative Agent and the Affected Lender shall reasonably cooperate in
effectuating the replacement of an Affected Lender under this Section, but at no
time shall Administrative Agent, the Affected Lender, or any other Lender be
obligated in any way whatsoever to initiate any such replacement or to assist in
finding an Eligible Assignee. The exercise by Borrower of its rights under this
Section shall be at Borrower's sole cost and expenses and at no cost or expense
to Administrative Agent, the Affected Lender, or any of the other Lenders. The
terms of this Section shall not in any way limit Borrower's obligation to pay to
any Affected Lender compensation owing to such Affected Lender pursuant to
SECTION 4.
SECTION 5 CONDITIONS PRECEDENT.
5.1 INITIAL CONDITIONS PRECEDENT. The obligation of the Lenders to
effect the occurrence of the first Credit Event hereunder is subject to the
following conditions precedent:
(a) Administrative Agent shall have received each of the following,
in form and substance satisfactory to the Lenders:
(i) Counterparts of this Agreement executed by each of the
parties hereto;
(ii) Notes executed by Borrower, payable to each Lender and
complying with the terms of SECTIONS 2.10(a) and 2.10(b);
(iii) Copies (certified by the Secretary or Assistant
Secretary of Borrower) of the Articles of Incorporation and Bylaws
of Borrower;
(iv) An opinion of Sutherland, Asbill & Brennan LLP, counsel
to Borrower, addressed to Administrative Agent and the Lenders, in
substantially the form of EXHIBIT F;
(v) A certificate of incumbency signed by the Secretary or
Assistant Secretary of Borrower with respect to each of the officers
of Borrower authorized to execute and deliver the Loan Documents and
the officers of Borrower then authorized to deliver Notices of
Borrowing, Notices of Continuation, and Notices of Conversion;
(vi) Copies (certified by the Secretary or Assistant Secretary
of Borrower) of all corporate action taken by Borrower to authorize
the execution, delivery, and performance of the Loan Documents;
(vii) A copy of each of the documents, instruments, and
agreements evidencing any of the Indebtedness described on SCHEDULE
6.1(g) and a copy of each Material Contract described on SCHEDULE
6.1(h), certified as true, correct, and complete by the chief
financial officer of Borrower;
(viii) The Fees then due under SECTION 3.6;
(ix) A pro-forma Compliance Certificate calculated as of
December 31, 1998; and
CREDIT AGREEMENT
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(x) Such other documents, agreements and instruments as
Administrative Agent on behalf of the Lenders may reasonably
request.
(b) In the good faith judgment of Administrative Agent and the
Lenders:
(i) There shall not have occurred or become known to
Administrative Agent or the Lenders, from and including September
30, 1998, any event, condition, situation, or status since the date
of the information contained in the financial and business
projections, budgets, pro forma data and forecasts concerning
Borrower and its Subsidiaries delivered to Administrative Agent and
the Lenders prior to the Agreement Date that has had or could
reasonably be expected to result in a Material Adverse Effect;
(ii) No litigation, action, suit, investigation, or other
arbitral, administrative, or judicial proceeding shall be pending or
threatened which could reasonably be expected to (A) result in a
Material Adverse Effect or (B) restrain or enjoin, impose materially
burdensome conditions on, or otherwise materially and adversely
affect the ability of Borrower to fulfill its obligations under the
Loan Documents;
(iii) Borrower and its Subsidiaries shall have received all
approvals, consents, and waivers, and shall have made or given all
necessary filings and notices as shall be required to consummate the
transactions contemplated hereby without the occurrence of any
default under, conflict with, or violation of (A) any Applicable Law
or (B) any agreement, document, or instrument to which Borrower or
any Subsidiary is a party or by which any of them or their
respective properties is bound, except for such approvals, consents,
waivers, filings and notices the receipt, making, or giving of which
would not reasonably be likely to (1) have a Material Adverse
Effect, or (2) restrain or enjoin, impose materially burdensome
conditions on, or otherwise materially and adversely affect the
ability of Borrower to fulfill its obligations under the Loan
Documents; and
(iv) There shall not have occurred or exist any other material
disruption of financial or capital markets that could reasonably be
expected to materially and adversely affect the transactions
contemplated by the Loan Documents.
(c) Borrower shall have produced evidence satisfactory to
Administrative Agent and the Lenders that (i) Borrower and its
Subsidiaries are taking all necessary and appropriate steps to ascertain
the extent of, and to quantify and successfully address, business and
financial risks facing Borrower and its Subsidiaries as a result of the
Year 2000 Problem, including the risks resulting from the failure of key
vendors and customers of Borrower and its Subsidiaries to successfully
address the Year 2000 Problem, and (ii) Borrower's and its Subsidiaries'
material computer applications and those of its key vendors and customers
will, on a timely basis, adequately address the Year 2000 Problem.
(d) The loans outstanding under the Existing Credit Agreement shall
be paid in full and the Existing Credit Agreement terminated.
5.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Lenders to
make any Loans is subject to the further conditions precedent that: (a) no
Default or Event of Default shall have occurred and be
CREDIT AGREEMENT
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continuing as of the date of the making of such Loan or would exist immediately
after giving effect thereto; (b) the representations and warranties made or
deemed made by Borrower and its Subsidiaries in the Loan Documents to which any
of them is a party, shall be true and correct on and as of the date of the
making of such Loan with the same force and effect as if made on and as of such
date 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 on and as of such earlier date) and
except for changes in factual circumstances specifically and expressly permitted
hereunder; and (c) in the case of the borrowing of Loans (other than Swing Line
Loans), Administrative Agent shall have received a timely Notice of Borrowing.
Each Credit Event shall constitute a certification by Borrower to the effect set
forth in the preceding sentence (both as of the date of the giving of notice
relating to such Credit Event and, unless Borrower otherwise notifies
Administrative Agent prior to the date of such Credit Event, as of the date of
the occurrence of such Credit Event). In addition, if such Credit Event is the
making of a Loan, Borrower shall be deemed to have represented to Administrative
Agent and the Lenders at the time such Loan is made that all conditions to the
making of such Loan contained in SECTION 5 have been satisfied. Each condition
precedent in this Agreement is material to the transactions contemplated in this
Agreement, and time is of the essence in respect of each thereof. Subject to the
prior approval of Requisite Lenders, the Lenders may fund any Loan without all
conditions being satisfied, but, to the extent permitted by Applicable Law, the
same shall not be deemed to be a waiver of the requirement that each such
condition precedent be satisfied as a prerequisite for any subsequent funding or
issuance, unless Requisite Lenders specifically waive each such item in writing.
SECTION 6 REPRESENTATIONS AND WARRANTIES.
6.1 REPRESENTATIONS AND WARRANTIES. In order to induce Administrative
Agent and each Lender to enter into this Agreement and to make Loans, Borrower
represents and warrants to Administrative Agent and each Lender as follows:
(a) Organization; Power; Qualification. Except as disclosed on
SCHEDULE 6.1(a), each of Borrower and its Subsidiaries is a corporation,
partnership, or other legal entity, duly organized or formed, validly
existing and in good standing under the jurisdiction of its incorporation
or formation, has the power and authority to own or lease its respective
properties and to carry on its respective business as now being and
hereafter proposed to be conducted, and is duly qualified and is in good
standing as a foreign corporation, partnership, or other legal entity, and
authorized to do business, in each jurisdiction in which the character of
its properties or the nature of its business requires such qualification
or authorization and where the failure to be so qualified or authorized
would have, in each instance a Material Adverse Effect.
(b) Ownership Structure. As of the Agreement Date, SCHEDULE 6.1(b)
correctly sets forth the corporate structure and ownership interests of
the Subsidiaries including the correct legal name of each Subsidiary, its
jurisdiction of formation, the Persons holding equity interests in such
Subsidiary, and their percentage equity or voting interest in such
Subsidiary. As of the Agreement Date, SBLC, SBIC, 8930 Stanford Boulevard
LLC, REIT, and Allied Capital CMT Inc. are the only Material Subsidiaries.
Except as set forth in such Schedule, and except for Permitted Preferred
Stock:
(i) no Consolidated Subsidiary has issued to any third party
any securities convertible into such Consolidated Subsidiary's
capital stock or other equity interests or any options, warrants, or
other rights to acquire any securities convertible into such capital
stock or other equity interests, and
CREDIT AGREEMENT
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(ii) the outstanding capital stock of, or other equity
interests in, each Consolidated Subsidiary are owned by Borrower and
its Consolidated Subsidiaries indicated on such Schedule free and
clear of all Liens, warrants, options and rights of others of any
kind whatsoever. All such outstanding capital stock and other equity
interests have been validly issued and, in the case of capital
stock, are fully paid and nonassessable.
(c) Authorization of Agreement, Notes, Loan Documents and
Borrowings. Borrower has the right and power, and has taken all necessary
action to authorize it, to borrow hereunder. Borrower has the right and
power, and has taken all necessary action to authorize it to execute,
deliver, and perform each of the Loan Documents to which it is a party in
accordance with their respective terms and to consummate the transactions
contemplated hereby and thereby. The Loan Documents have been duly
executed and delivered by the duly authorized officers of Borrower, and
each is a legal, valid, and binding obligation of Borrower, enforceable
against it in accordance with its respective terms.
(d) Compliance of Agreement, Notes, Loan Documents, and Borrowing
with Laws, etc. The execution, delivery and performance of this Agreement,
the Notes, and the other Loan Documents in accordance with their
respective terms, and the borrowings hereunder do not and will not, by the
passage of time, the giving of notice, or otherwise: (i) require any
Governmental Approval, other than such as have been obtained and are in
full force and effect, or violate any Applicable Law (including all
Environmental Laws) relating to Borrower or any Subsidiary; (ii) conflict
with, result in a breach of, or constitute a default under the articles of
incorporation or the bylaws of Borrower or the organizational documents of
any Subsidiary, or any indenture, agreement, or other instrument to which
Borrower or any Subsidiary is a party or by which it or any of its
respective properties may be bound; or (iii) result in or require the
creation or imposition of any Lien upon or with respect to any property
now owned or hereafter acquired by Borrower or any Subsidiary.
(e) Compliance with Law; Governmental Approvals. Borrower and each
Subsidiary is in compliance with each Governmental Approval applicable to
it and in compliance with all other Applicable Law relating to it, except
for noncompliances which, and Governmental Approvals the failure to
possess which, would not, individually or in the aggregate, cause a
Default or Event of Default or have a Material Adverse Effect.
(f) Ownership of Assets; Liens. Each of Borrower and its
Consolidated Subsidiaries has good title to all of its assets. There are
no Liens against any of such assets except for Liens permitted by SECTION
9.3.
(g) Indebtedness. SCHEDULE 6.1(g) is, as of the Effective Date, a
complete and correct listing of all Indebtedness of Borrower and its
Subsidiaries, including all guaranties of Borrower and its Subsidiaries
and all letters of credit and acceptance facilities extended to Borrower
or any Subsidiary.
(h) Material Contracts. SCHEDULE 6.1(h) is a true, correct, and
complete listing of all Material Contracts as of the Effective Date.
CREDIT AGREEMENT
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(i) Litigation. There are no actions, suits, or proceedings pending
(nor, to the knowledge of Borrower or any Subsidiary, are there any
actions, suits, or proceedings threatened, nor is there any basis
therefor) against or in any other way relating adversely to or affecting
Borrower or any Subsidiary or any of its respective property in any court
or before any arbitrator of any kind or before or by any other
Governmental Authority which is reasonably likely to be adversely
determined and result in a Material Adverse Effect, and there are no
strikes, slow downs, work stoppages or walkouts or other labor disputes in
progress or threatened relating to Borrower or any Subsidiary.
(j) Taxes. All federal, state, and other tax returns of Borrower and
its Consolidated Subsidiaries required by Applicable Law to be filed have
been duly filed, and all federal, state, and other taxes, assessments and
other governmental charges or levies upon Borrower and any of its
Consolidated Subsidiaries and their respective properties, income,
profits, and assets which are due and payable have been paid, except any
such nonpayment which is at the time permitted under SECTION 7.6. None of
the United States income tax returns of Borrower and its Consolidated
Subsidiaries are under audit as of the Agreement Date. All charges,
accruals, and reserves on the books of Borrower and each of its
Consolidated Subsidiaries in respect of any taxes or other governmental
charges are in accordance with GAAP.
(k) Financial Statements: No Material Adverse Change. Borrower has
furnished to each Lender copies of (i) the audited consolidated balance
sheets of Borrower and its Consolidated Subsidiaries for the fiscal year
ending December 31, 1997, and the related consolidated statements of
operations, changes in net assets, and cash flows for the fiscal year
ending on such date, with the opinion thereon of Arthur Andersen, LLP, and
(ii) the unaudited consolidated balance sheets of Borrower and its
Consolidated Subsidiaries for the three-fiscal quarter period ending
September 30, 1998, and the related consolidated statements of operations,
changes in net assets, and cash flows for the three-fiscal quarter period
ending on such date. Such balance sheets and statements (including in each
case related schedules and notes) present fairly, in accordance with GAAP
consistently applied throughout the periods involved, the consolidated
financial position of Borrower as at their respective dates and the
results of operations, changes in net assets, and cash flows for such
periods (subject, as to interim statements, to changes resulting from
normal year-end audit adjustments). Neither Borrower nor any of its
Consolidated Subsidiaries has on the Agreement Date any material
contingent liabilities, other liabilities, liabilities for taxes, unusual
or long-term commitments or unrealized or forward anticipated losses from
any unfavorable commitments, except as referred to or reflected or
provided for in said financial statements. Since September 30, 1998 there
has been no material adverse change in the consolidated financial
condition, results of operations, business or prospects of Borrower and
its Consolidated Subsidiaries taken as a whole. Each of Borrower and its
Consolidated Subsidiaries is Solvent.
(l) ERISA. Each member of the ERISA Group has fulfilled its
obligations under the minimum funding standards of ERISA and the Internal
Revenue Code with respect to each Plan and is in compliance with the
presently applicable provisions of ERISA and the Internal Revenue Code
with respect to each Plan except for noncompliances which would not,
individually or in the aggregate, cause a Default or an Event of Default
or have a Material Adverse Effect. No member of the ERISA Group has (i)
sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan or in respect of
any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could result in the imposition of a
Lien or the posting
CREDIT AGREEMENT
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of a bond or other security under ERISA or the Internal Revenue Code, or
(iii) incurred any liability under Title IV of ERISA, other than a
liability to the PBGC for premiums under Section 4007 of ERISA.
(m) Absence of Defaults. Neither Borrower nor any Material
Subsidiary is in default under its articles of incorporation, bylaws,
partnership agreement, or other similar organizational documents, and no
event has occurred, which has not been remedied, cured or waived: (i)
which constitutes a Default or an Event of Default; or (ii) which
constitutes, or which with the passage of time, the giving of notice, a
determination of materiality, the satisfaction of any condition, or any
combination of the foregoing, would constitute, a default or event of
default by Borrower or any Subsidiary under any Indebtedness, Material
Contract, any other agreement (other than this Agreement) or judgment,
decree, or order to which Borrower or any Subsidiary is a party or by
which Borrower or any Subsidiary or any of their respective properties may
be bound where such default or event of default could, individually or in
the aggregate, have a Material Adverse Effect.
(n) Environmental Laws. Borrower and its Subsidiaries have obtained
all Governmental Approvals which are required under Environmental Laws,
and are in compliance with all terms and conditions of such Governmental
Approvals, which the failure to obtain or to comply with could reasonably
be expected to have a Material Adverse Effect. Each of Borrower and its
Subsidiaries is also in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules, and timetables contained in the Environmental Laws
the failure with which to comply could have a Material Adverse Effect.
Neither Borrower nor any Subsidiary is aware of, or has received notice
of, any past, present, or future events, conditions, circumstances,
activities, practices, incidents, actions, or plans which, with respect to
Borrower or any of its Subsidiaries may interfere with or prevent
compliance or continued compliance with Environmental Laws, or may give
rise to any common-law or legal liability, or otherwise form the basis of
any claim, action, demand, suit, proceeding, hearing, study, or
investigation, based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling or
the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical, or industrial,
toxic, or other Hazardous Materials that could be reasonably expected to
have a Material Adverse Effect; and there is no civil, criminal, or
administrative action, suit, demand, claim, hearing, notice, or demand
letter, notice of violation, investigation, or proceeding pending or, to
the knowledge of Borrower or any Subsidiary, after due inquiry,
threatened, against Borrower or any of its Subsidiaries relating in any
way to Environmental Laws that could be reasonably expected to have a
Material Adverse Effect.
(o) Investment Company; Public Utility Holding Company. Borrower is
a "business development company" within the meaning of the Investment
Company Act. Neither Borrower nor any Subsidiary is (i) a "holding
company" or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding
Company Act of 1935, as amended, or (ii) except for other Subsidiaries
that are business development companies, subject to any other Applicable
Law which purports to regulate or restrict its ability to borrow money or
to consummate the transactions contemplated by this Agreement or to
perform its obligations under any Loan Document to which it is a party.
CREDIT AGREEMENT
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(p) Margin Stock. Neither Borrower nor any Subsidiary is engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose, whether immediate, incidental or
ultimate, of buying or carrying "margin stock" within the meaning of
Regulation U (as enacted by the Board of Governors of the Federal Reserve
System, as amended). "Margin Stock" (as defined in Regulation U)
constitutes less than 25% of those assets of Borrower or any Subsidiary
which are subject to any limitation on sale, pledge, or other restrictions
hereunder.
(q) Affiliate Transactions. Except as permitted by SECTION 9.8,
neither Borrower nor any Subsidiary is a party to or bound by any
agreement or arrangement (whether oral or written) to which any Affiliate
of Borrower or any Subsidiary is a party. Neither Borrower nor any
Subsidiary is a party to any agreement or arrangement which restricts or
prohibits the payment of dividends or the repayment of inter-company loans
by a Subsidiary to Borrower, except for SBA approval of dividends paid by
SBIC, which Borrower has no reason to believe will not be granted by the
SBA.
(r) Intellectual Property. Borrower and each Subsidiary owns or has
the right to use, under valid license agreements or otherwise, all
patents, licenses, franchises, trademarks, trademark rights, trade names,
trade name rights, trade secrets and copyrights (collectively,
"INTELLECTUAL PROPERTY") used in the conduct of its businesses as now
conducted and as contemplated by the Loan Documents, which the failure to
own or have the right to use could reasonably be expected to have a
Material Adverse Effect, without known conflict with any patent, license,
franchise, trademark, trade secret, trade name, copyright, or other
proprietary right of any other Person.
(s) Accuracy and Completeness of Information. All written
information, reports and other papers and data furnished to Administrative
Agent or any Lender by, on behalf of, or at the direction of, Borrower or
any Subsidiary were, at the time the same were so furnished, complete and
correct in all material respects, to the extent necessary to give the
recipient a true and accurate knowledge of the subject matter, or, in the
case of financial statements, present fairly, in accordance with GAAP
consistently applied throughout the periods involved, the financial
position of the Persons involved as at the date thereof and the results of
operations for such periods. As of the Agreement Date, no fact is known to
Borrower or any Subsidiary which has had, or may in the future have (so
far as Borrower or any Subsidiary can reasonably foresee), a Material
Adverse Effect which has not been set forth in the financial statements
referred to in SECTION 6.1(k) or in such information, reports or other
papers or data or otherwise disclosed in writing to Administrative Agent
and the Lenders prior to the Effective Date. No document furnished or
written statement made to Administrative Agent or any Lender in connection
with the negotiation, preparation of execution of this Agreement or any of
the other Loan Documents contains or will contain any untrue statement of
a fact material to the creditworthiness of Borrower or any Subsidiary or
omits or will omit to state a material fact necessary in order to make the
statements contained therein not misleading. Notwithstanding the first and
third sentences of this SECTION 6.1(s), as to projected financial
information, Borrower represents and warrants only that such information,
at the time furnished to Administrative Agent or any Lender, was prepared
in good faith based on reasonable assumptions under the circumstances.
(t) RIC Status. Each of Borrower, SBLC, and SBIC qualifies as a RIC.
(u) Not Plan Assets. The assets of Borrower or any Subsidiary do not
and will not constitute "plan assets," within the meaning of ERISA, the
Internal Revenue Code and the respective regulations promulgated
thereunder. The execution, delivery and performance of this Agreement, and
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the borrowing and repayment of amounts hereunder, do not and will not
constitute "prohibited transactions" under ERISA or the Internal Revenue
Code.
(v) Business. As of the Agreement Date, Borrower and its Subsidiaries
are substantially engaged in the businesses described in the Offering
Memorandum.
(w) Year 2000 Compliance. Borrower 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 Borrower or any of its Subsidiaries
(or its suppliers and vendors) may be unable to recognize and perform
properly date-sensitive functions 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. Borrower
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.
6.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All statements
contained in any certificate, financial statement or other instrument delivered
by or on behalf of Borrower or any Subsidiary to Administrative Agent or any
Lender pursuant to or in connection with this Agreement or any of the other Loan
Documents (including, but not limited to, any such statement made in or in
connection with any amendment thereto or any statement contained in any
certificate, financial statement, or other instrument delivered by or on behalf
of Borrower prior to the Agreement Date and delivered to Administrative Agent or
any Lender in connection with closing the transactions contemplated hereby)
shall constitute representations and warranties made by Borrower under this
Agreement. All representations and warranties made under this Agreement and the
other Loan Documents shall be deemed to be made at and as of the Agreement Date,
the Effective Date, and at and as of the date of the occurrence of any Credit
Event, 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 on and as of such earlier date) and
except for changes in factual circumstances specifically permitted hereunder.
All such representations and warranties shall survive the effectiveness of this
Agreement, the execution and delivery of the Loan Documents, and the making of
the Loans.
SECTION 7 AFFIRMATIVE COVENANTS.
For so long as this Agreement is in effect and thereafter until the
payment in full of the Obligations, unless the Requisite Lenders (or, if
required pursuant to SECTION 12.5, all of the Lenders) shall otherwise consent
in the manner provided for in SECTION 12.5, Borrower shall:
7.1 PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Except as otherwise
permitted under SECTION 9.5, preserve and maintain, and Borrower shall cause
each Material Subsidiary to preserve and maintain, its respective existence,
rights, franchises, licenses, and privileges in the jurisdiction of its
incorporation or formation and qualify and remain qualified and authorized to do
business in each jurisdiction in which the character of its properties or the
nature of its business requires such qualification and authorization and where
the failure to be so authorized and qualified could have a Material Adverse
Effect.
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7.2 COMPLIANCE WITH APPLICABLE LAW AND MATERIAL CONTRACTS. Comply, and
Borrower shall cause each Material Subsidiary to comply, with (a) all Applicable
Laws (including without limitation ERISA, Environmental Laws, and the Investment
Company Act), including the obtaining of all Governmental Approvals, the failure
with which to comply could have a Material Adverse Effect, and (b) all terms and
conditions of all Material Contracts to which it is a party.
7.3 MAINTENANCE OF PROPERTY. In addition to the requirements of any of the
other Loan Documents, (a) protect and preserve, and Borrower shall cause each
Material Subsidiary to protect and preserve, all of its material properties,
including, but not limited to, all Intellectual Property, and maintain in good
repair, working order, and condition all tangible properties, ordinary wear and
tear excepted, and (b) from time to time make or cause to be made, and Borrower
shall cause each Material Subsidiary to make, all needed and appropriate
repairs, renewals, replacements, and additions to such properties, so that the
business carried on in connection therewith may be properly and effectively
conducted at all times.
7.4 CONDUCT OF BUSINESS. Together with its Subsidiaries, at all times
carry on their business described in the Offering Memorandum.
7.5 INSURANCE. In addition to the requirements of any of the other Loan
Documents, maintain, and Borrower shall cause each Material Subsidiary to
maintain, insurance with financially sound and reputable insurance companies
against such risks and in such amounts as is customarily maintained by Persons
engaged in similar businesses or as may be required by Applicable Law.
7.6 PAYMENT OF TAXES AND CLAIMS. Pay or discharge, and Borrower shall
cause each Material Subsidiary to pay and discharge, when due (a) all taxes,
assessments, and governmental charges or levies imposed upon it or upon its
income or profits or upon any properties belonging to it, and (b) all lawful
claims of materialmen, mechanics, carriers, warehousemen, and landlords for
labor, materials, supplies, and rentals which, if unpaid, might become a Lien on
any properties of such Person; provided, however, that this Section shall not
require the payment or discharge of any such tax, assessment, charge, levy, or
claim which is being contested in good faith by appropriate proceedings which
operate to suspend the collection thereof and for which adequate reserves have
been established on the books of Borrower or such Subsidiary, as applicable, in
accordance with GAAP.
7.7 VISITS AND INSPECTIONS. Permit, and Borrower shall cause each Material
Subsidiary to permit, representatives or agents of Administrative Agent or any
Lender, from time to time, as often as may be reasonably requested and at the
expense of Administrative Agent (unless an Event of Default shall be continuing
in which case the exercise by Administrative Agent of its rights under this
Section shall be at the expense of Borrower), but only during normal business
hours, to: (a) visit and inspect all properties of Borrower and each Material
Subsidiary; (b) inspect and make extracts from their respective books and
records, including, but not limited to, management letters prepared by
independent accountants; and (c) discuss with its principal officers and its
independent accountants, its business, assets, liabilities, financial
conditions, results of operations, and business prospects. If requested by
Administrative Agent, Borrower shall execute an authorization letter addressed
to its accountants authorizing Administrative Agent or any Lender to discuss the
financial affairs of Borrower and any Material Subsidiary with its accountants.
7.8 USE OF PROCEEDS. Use the proceeds of Loans for working capital and
general corporate purposes of Borrower and its Subsidiaries. Borrower shall not,
and Borrower shall not permit any Subsidiary to, use any part of such proceeds
to purchase or carry, or to reduce or retire or refinance any credit incurred
CREDIT AGREEMENT
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to purchase or carry, any margin stock (within the meaning of Regulations T, U,
and X of the Board of Governors of the Federal Reserve System) or to extend
credit to others for the purpose of purchasing or carrying any such margin
stock.
7.9 ENVIRONMENTAL MATTERS. Comply, and Borrower shall cause all of its
Subsidiaries to comply, with all Environmental Laws, the failure with which to
comply could have a Material Adverse Effect. If Borrower or any Subsidiary shall
(a) receive notice that any violation of any Environmental Law may have been
committed or is about to be committed by such Person, (b) receive notice that
any administrative or judicial complaint or order has been filed or is about to
be filed against Borrower or any Subsidiary alleging violations of any
Environmental Law or requiring Borrower or any Subsidiary to take any action in
connection with the release of Hazardous Materials, or (c) receive any notice
from a Governmental Authority or private party alleging that Borrower or any
Subsidiary may be liable or responsible for costs associated with a response to
or cleanup of a release of a Hazardous Materials or any damages caused thereby,
and such notices, individually or in the aggregate, could have a Material
Adverse Effect, Borrower shall provide Administrative Agent with a copy of such
notice within ten days after the receipt thereof by Borrower or any of the
Subsidiaries. Borrower and the Subsidiaries shall promptly take all actions
necessary to prevent the imposition of any Liens on any of their respective
properties arising out of or related to any Environmental Laws.
7.10 BOOKS AND RECORDS. Maintain, and Borrower shall cause each of the
Subsidiaries to maintain, books and records pertaining to its business
operations in such detail, form and scope as is consistent with good business
practice in accordance with GAAP.
7.11 STATUS OF RIC AND BDC. At all times maintain, and cause SBLC and SBIC
to maintain, its status as a RIC under the Internal Revenue Code, and as a
"business development company" under the Investment Company Act.
7.12 ERISA EXEMPTIONS. Not, and Borrower shall not permit any Subsidiary
to, permit any of its respective assets to become or be deemed to be "plan
assets" within the meaning of ERISA, the Internal Revenue Code and the
respective regulations promulgated thereunder.
7.13 FURTHER ASSURANCES. At Borrower's cost and expense, upon the request
of Administrative Agent, duly execute and deliver or cause to be duly executed
and delivered, to Administrative Agent and the Lenders such further instruments,
documents, and certificates, and do and cause to be done such further acts that
may be necessary or advisable in the opinion of Administrative Agent to carry
out more effectively the provisions and purposes of this Agreement and the other
Loan Documents.
7.14 YEAR 2000 COMPLIANCE. Borrower will promptly notify Administrative
Agent in the event Borrower 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
Compliant on a timely basis, except to the extent that such failure could not
reasonably be expected to have a Material Adverse Effect.
SECTION 8 INFORMATION.
For so long as this Agreement is in effect and thereafter until payment in
full of the Obligations, unless the Requisite Lenders (or, if required pursuant
to SECTION 12.5, all of the Lenders) shall otherwise consent in
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the manner set forth in SECTION 12.5, Borrower shall furnish to each Lender (or
to Administrative Agent if so provided below) at its Lending Office:
8.1 QUARTERLY FINANCIAL STATEMENTS. As soon as available and in any event
within 45 days after the close of each of the first, second, and third fiscal
quarters of Borrower, the consolidated and consolidating balance sheets of
Borrower and its Consolidated Subsidiaries as at the end of each such period and
the related consolidated and consolidating statements of operations, changes in
net assets, and cash flows of Borrower and its Consolidated Subsidiaries for
each such period, setting forth in each case in comparative form the figures for
the corresponding periods of the previous fiscal year, all of which shall be
certified by the chief financial officer of Borrower, in his or her opinion, to
present fairly, in accordance with GAAP, the consolidated financial position of
Borrower and its Consolidated Subsidiaries as at the date thereof and the
results of operations for such period (subject to normal year-end audit
adjustments).
8.2 YEAR-END STATEMENTS. As soon as available and in any event within 90
days after the end of each fiscal year of Borrower, the consolidated and
consolidating balance sheets of Borrower and its Consolidated Subsidiaries as at
the end of such fiscal year and the related consolidated and consolidating
statements of operations, changes in net assets, and cash flows of Borrower and
its Consolidated Subsidiaries for such fiscal year, setting forth in comparative
form the figures as at the end of and for the previous fiscal year, all of which
shall be certified by (a) the chief financial officer of Borrower, in his or her
opinion, to present fairly, in accordance with GAAP, the financial position of
Borrower and its Consolidated Subsidiaries as at the date thereof and the result
of operations for such period and (b) independent certified public accountants
of recognized national standing acceptable to the Requisite Lenders, whose
opinion shall be unqualified and in scope and substance satisfactory to the
Requisite Lenders and who shall have authorized Borrower to deliver such
financial statements and opinion thereon to Administrative Agent and the Lenders
pursuant to this Agreement.
8.3 COMPLIANCE CERTIFICATE; ASSET REPORTS.
(a) At the time the financial statements are furnished pursuant to
SECTIONS 8.1 and 8.2, a Compliance Certificate: (a) setting forth in
reasonable detail as at the end of such quarterly accounting period or
fiscal year, as the case may be, the calculations required to establish
whether or not Borrower and its Consolidated Subsidiaries were in
compliance with the covenants contained in SECTION 9.1, (b) stating that,
to the best of his or her knowledge, information, and belief, no Default
or Event of Default exists, or, if such is not the case, specifying such
Default or Event of Default and its nature, when it occurred, and whether
it is continuing and the steps being taken by Borrower with respect to
such event, condition, or failure. At the time the financial statements
are furnished pursuant to SECTION 8.2, Borrower will deliver to the
Lenders a certificate of the independent accountants performing the audit
of such financial statements acknowledging that Borrower was in compliance
with the financial covenants of SECTION 9.1, and setting forth the
procedures used to make such determination.
(b) Within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, and within 90 days after the end of the last
fiscal quarter of each fiscal year, the following reports with respect to
Investments of Borrower and its Consolidated Subsidiaries, as of the end
of such fiscal quarter, in form and scope acceptable to Administrative
Agent:
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(i) a consolidated statement of Investments as presented in
Borrower's consolidated financial statements;
(ii) a report of unrealized and realized gains (losses) (with
detail as to unrealized gains and losses by portfolio company for
mezzanine Investments and in the aggregate for Commercial Mortgage
Loans, small business loans, and other Investments); and
(iii) a delinquency report identifying loans over 120 days
past-due.
8.4 OTHER INFORMATION.
(a) Not later than 90 days prior to the last day of each fiscal year
of Borrower, pro forma projected consolidated financial statements for
Borrower and its Consolidated Subsidiaries reflecting the forecasted
financial condition and results of operations of Borrower and its
Consolidated Subsidiaries on a quarterly basis for the next succeeding
year, accompanied by calculations establishing whether or not Borrower
would be in compliance on a pro forma basis with the covenants contained
in SECTION 9.1, in each case in form and detail reasonably acceptable to
the Administrative Agent;
(b) promptly upon receipt thereof, copies of all reports, if any,
submitted to Borrower or its Board of Directors by its independent public
accountants, including, without limitation, any management report;
(c) within five Business Days of the filing thereof, copies of all
registration statements (other than the exhibits thereto and any
registration statements on Form S-8 or its equivalent), reports on Forms
10-K, 10-Q, and 8-K (or their equivalents) and all other periodic reports
which Borrower shall file with the Securities and Exchange Commission (or
any Governmental Authority substituted therefor) or any national
securities exchange;
(d) promptly upon the mailing thereof to the shareholders of
Borrower generally, copies of all financial statements, reports, and proxy
statements so mailed and promptly upon the issuance thereof copies of all
press releases issued by Borrower;
(e) if and when any member of the ERISA Group (i) gives or is
required to give notice to the PBGC of any "reportable event" (as defined
in Section 4043 of ERISA) with respect to any Plan which might constitute
grounds for a termination of such Plan under Title IV of ERISA, or knows
that the plan administrator of any Plan has given or is required to give
notice of any such reportable event, a copy of the notice of such
reportable event given or required to be given to the PBGC; (ii) receives
notice of complete or partial withdrawal liability under Title IV of ERISA
or notice that any Multiemployer Plan is in reorganization, is insolvent,
or has been terminated, a copy of such notice; (iii) receives notice from
the PBGC under Title IV of ERISA of an intent to terminate, impose
liability (other than for premiums under Section 4007 of ERISA) in respect
of, or appoint a trustee to administer, any Plan, a copy of such notice;
(iv) applies for a waiver of the minimum funding standard under Section
412 of the Internal Revenue Code, a copy of such application; (v) gives
notice of intent to terminate any Plan under Section 4041(c) of ERISA, a
copy of such notice and other information filed with the PBGC; (vi) gives
notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a
copy of such notice; or (vii) fails to make any payment or contribution to
any Plan or
CREDIT AGREEMENT
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Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which has resulted or could
result in the imposition of a Lien or the posting of a bond or other
security, a certificate of the chief financial officer of Borrower setting
forth details as to such occurrence and action, if any, which Borrower or
applicable member of the ERISA Group is required or proposes to take;
(f) to the extent Borrower or any Subsidiary is aware of the same,
prompt notice of the commencement of any proceeding or investigation by or
before any Governmental Authority and any action or proceeding in any
court or other tribunal or before any arbitrator against or in any other
way relating adversely to, or adversely affecting, Borrower or any
Subsidiary or any of their respective properties, assets, or businesses
which, if determined or resolved adversely to such Person, could have a
Material Adverse Effect; and prompt notice of the receipt of notice that
any United States income tax returns of Borrower or any of its
Subsidiaries are being audited;
(g) to the extent not previously delivered to the Lenders, a copy of
the articles of incorporation, bylaws, partnership agreement, or other
similar organizational documents of Borrower, any Material Subsidiary, and
any amendment thereto, in each case within five Business Days of the
effectiveness thereof;
(h) prompt notice of any change in the business, assets,
liabilities, financial condition, results of operations, or business
prospects of Borrower or any Subsidiary which has had or may have a
Material Adverse Effect,
(i) prompt notice of the occurrence of any Default or Event of
Default or any event which constitutes or which with the passage of time,
the giving of notice, or otherwise, would constitute a default or event of
default by Borrower or any Subsidiary under any Material Contract to which
any such Person is a party or by which any such Person or any of its
respective properties may be bound;
(j) prompt notice of any order, judgment, or decree in excess of
$5,000,000 having been entered against Borrower or any Subsidiary or any
of their respective properties or assets;
(k) prompt notice, which notice shall, in the case of a Material
Subsidiary, be delivered no later than five days following the occurrence,
of the acquisition, incorporation, or other creation of any Subsidiary,
the purpose for such Subsidiary, the nature of the assets and liabilities
thereof, and whether such Subsidiary is a Material Subsidiary;
(l) at the time the quarterly financial statements are furnished in
accordance with SECTION 8.1, a list of the Persons who are Material
Subsidiaries as of the date of the balance sheet included in such
quarterly financial statements;
(m) promptly upon entering into any Material Contract after the
Agreement Date, a copy to Administrative Agent of such Material Contract;
and
(n) from time to time and promptly upon each request, such data,
certificates, reports, statements, opinions of counsel, documents, or
further information regarding the business, assets, liabilities, financial
condition, results of operations, or business prospects of Borrower or any
of its Material Subsidiaries as Administrative Agent or any Lender may
reasonably request.
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SECTION 9 NEGATIVE COVENANTS.
For so long as this Agreement is in effect and thereafter until the
payment in full of the Obligations, unless the Requisite Lenders (or, if
required pursuant to SECTION 12.5, all of the Lenders) shall otherwise consent
in the manner set forth in SECTION 12.5, Borrower shall not, directly or
indirectly:
9.1 FINANCIAL COVENANTS. Permit:
(a) Ratio of Consolidated Debt to Consolidated Shareholders' Equity.
The ratio of Consolidated Debt to Consolidated Shareholders' Equity to
exceed 1.50 to 1.00 at the end of any fiscal quarter.
(b) Minimum Tangible Net Worth. Consolidated Shareholders' Equity to
be less than (i) $375,000,000 plus (ii) 75% of the Net Proceeds of all
Equity Issuances effected by Borrower 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 Borrower).
(c) Ratio of Adjusted EBIT to Interest Expense. The ratio of the
Adjusted EBIT to Interest Expense of Borrower and its Consolidated
Subsidiaries, determined on a consolidated basis as of the last day of
each fiscal quarter for the period of four successive fiscal quarters
ended on such day, to be less than 1.80 to 1.00 at the end of such fiscal
quarter.
(d) Priority Debt. 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 of Borrower or its Consolidated Subsidiaries
secured by Real Estate Assets in an aggregate principal amount of up to
$200,000,000 shall be excluded from Priority Debt.
(e) Asset Coverage Ratio. The Asset Coverage Ratio to be less than 2
to 1.
9.2 INTEREST RATE AGREEMENTS. Enter into, or permit any Consolidated
Subsidiary to enter into, any Interest Rate Agreement except in the ordinary
course of business pursuant to bona fide hedging transactions and not for
speculation.
9.3 LIENS; AGREEMENTS REGARDING LIENS; OTHER MATTERS.
(a) Create, assume, or incur, or permit or suffer to exist (or
permit any Consolidated Subsidiary to create, incur, assume, or permit or
suffer to exist) any Lien upon any of its assets, including, without
limitation, the equity interests of Borrower or any Subsidiary in their
respective Subsidiaries, other than:
(i) the Permitted Liens;
(ii) Liens arising in connection with purchase money
Indebtedness, conditional sale agreements, and Capitalized Lease
Obligations incurred for the acquisition of furniture, fixtures,
equipment, or leasehold improvements in the ordinary course of
business;
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(iii) Liens in existence on the Agreement Date and securing the
Indebtedness described as being secured on SCHEDULE 6.1(g);
(iv) Liens on Real Estate Assets securing Non-Recourse
Indebtedness, so long as such Non-Recourse Indebtedness is
permitted within the limitations of SECTION 9.1;
(v) Liens securing Indebtedness under Mortgage Repurchase
Facilities or Interest Rate Agreements; 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 Mortgage Repurchase
Facility, (iii) the Lien securing any Interest Rate Agreement shall
extend only to Commercial Mortgage Loans and Related Collateral,
and (iv) all Indebtedness secured by such Liens must be permitted
within the limitations of SECTION 9.1; and
(vi) Liens securing the Obligations, if any.
(b) Except for SBA consents that may be required for SBIC, create or
otherwise cause or suffer to exist or become effective, or permit any
Subsidiary to create or otherwise cause or suffer to exist or become
effective, any consensual encumbrance or restriction of any kind on the
ability of any Subsidiary to: (i) pay dividends or make any other
distribution on any of such Subsidiary's capital stock or other equity
interests owned by Borrower or any other Subsidiary of Borrower; (ii) pay
any Indebtedness owed to Borrower or any other Subsidiary; (iii) make
loans or advances to Borrower or any other Subsidiary; or (iv) transfer
any of its property or assets to Borrower or any other Subsidiary.
(c) Create, incur, assume, or permit to exist, directly or
indirectly, or permit any Consolidated Subsidiary, directly or indirectly,
to create, incur, assume, or permit to exist (upon the happening of a
contingency or otherwise) any Lien (except Liens permitted by SECTION
9.3(a)) on or with respect to any property that secures Debt of Borrower
or its Consolidated Subsidiaries, including, without limitation, Debt
outstanding under the Senior Notes or the Senior Note Agreement, unless
Borrower makes, or causes to be made, effective provision whereby the
Obligations will be equally and ratably secured with any and all other
Debt of Borrower or its Consolidated Subsidiaries thereby secured;
provided that, such security is granted pursuant to an agreement
reasonably satisfactory to the Requisite Lenders.
9.4 DISTRIBUTIONS TO SHAREHOLDERS. If an Event of Default specified in
SECTION 10.1(a) or SECTION 10.1(b) occurs and is not cured within ten Business
Days thereafter, if a Default or an Event of Default specified in SECTION
10.1(f) or SECTION 10.1(g) shall have occurred and be continuing, or if as a
result of the occurrence of any other Event of Default the Obligations have been
accelerated pursuant to SECTION 10.2(a), make (a) any dividend or other
distribution on account of any of its capital stock; (b) any acquisition for
value of any capital stock of Borrower; or (c) any payment made to retire, or to
obtain the surrender of, any outstanding warrants, options or other rights to
acquire any capital stock of Borrower.
9.5 MERGER, CONSOLIDATION AND SALES OF ASSETS.
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(a) (i) Enter into, or permit any Consolidated Subsidiary to enter
into, any transaction of merger or consolidation; (ii) liquidate, wind-up,
or dissolve itself (or suffer any liquidation or dissolution) or permit
any Consolidated Subsidiary to do any of the foregoing; (iii) convey,
sell, lease, sublease, transfer, or otherwise dispose of, in one
transaction or a series of transactions, all or any substantial part of
its business or assets, or the capital stock of or other equity interests
in any of its Consolidated Subsidiaries, in each case whether now owned or
hereafter acquired (a "SALE") or permit any Consolidated Subsidiary to do
any of the foregoing; provided, however, that, so long as no Default or
Event of Default is or would be in existence at the time of such event or
immediately after giving effect thereto:
(A) any Consolidated Subsidiary may merge or consolidate with
or into, or effect a Sale to, Borrower or any Wholly Owned
Subsidiary, so long as (1) in any merger or consolidation involving
Borrower, Borrower shall be the surviving or continuing corporation
and (2) in any merger or consolidation involving a Wholly Owned
Subsidiary (and not Borrower), a Wholly Owned Subsidiary shall be
the surviving or continuing corporation;
(B) in addition to the transactions permitted under CLAUSE (E)
below, Borrower may convey, sell, lease, sublease, transfer, or
otherwise dispose of, in one transaction or a series of
transactions, its business or assets, or the capital stock of or
other equity interests in any of its Consolidated Subsidiaries, in
each case whether now owned or hereafter acquired, to any of its
Consolidated Subsidiaries, so long as (1) the Book Value of such
assets sold (in one or a series of transactions) in a given fiscal
year does not exceed 15% of the total assets of Borrower determined
at the close of the immediately preceding fiscal year, or (2) the
operations of such assets sold generated does not exceed 15% of the
consolidated operating profit of Borrower during the immediately
preceding fiscal year;
(C) a Consolidated Subsidiary may liquidate;
(D) Borrower or any Consolidated Subsidiary may merge or
consolidate with any other corporation; provided that, Borrower or a
Wholly Owned Subsidiary shall be the continuing or surviving
corporation and;
(E) Borrower or any Consolidated Subsidiary may effect a Sale
of Investments (other than Investments in a Consolidated Subsidiary)
or Foreclosure Property to third parties, to any Special Purpose
Subsidiary, or (solely with respect to Foreclosure Property) to any
Unrestricted Subsidiary in arm's length transactions on a
non-recourse basis, so long as the purchaser of such Investment or
Foreclosure Property does not and will not have a claim against or
interest in any other assets of Borrower or any Consolidated
Subsidiary to support the value of the assets so sold or to enhance
the creditworthiness of securities or Debt secured by or evidencing
an interest in such assets or in the holder thereof; and
(F) Borrower or any Consolidated Subsidiary may effect a Sale
of capital stock or other equity interests in an Unrestricted
Subsidiary to third parties in arm's length transactions;
or (b) 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-
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dilutive to Borrower and/or any Consolidated Subsidiary; provided that,
the foregoing restrictions do not apply to issuances of Voting Stock to
Borrower or to a Wholly Owned Subsidiary or the issuance of directors'
qualifying shares.
As used in this Section, a sale of assets will be deemed a "substantial
part" of the assets of Borrower and its Consolidated Subsidiaries if (y) the
Book Value of such assets sold (in one or a series of transactions) in a given
fiscal year (except those assets transferred pursuant to CLAUSE (B), (E), or (F)
above sold in the ordinary course of business) exceeds 15% of the total assets
of Borrower and its Consolidated Subsidiaries determined at the close of the
immediately preceding fiscal year, or (z) the operations of such assets sold
(except those assets transferred pursuant to CLAUSE (B), (E), or (F) above sold
in the ordinary course of business) generated 15% or more of the consolidated
operating profit of Borrower and its Consolidated Subsidiaries during the
immediately preceding fiscal year.
9.6 FISCAL YEAR. Change its fiscal year from that in effect as of the
Agreement Date.
9.7 MODIFICATIONS TO MATERIAL CONTRACTS. Enter into, or permit any
Subsidiary to enter into, any amendment or modification to any Material Contract
which could have a Material Adverse Effect or default in the performance of any
obligations of Borrower or any Subsidiary under any Material Contract or permit
any Material Contract to be canceled or terminated prior to its stated maturity.
9.8 TRANSACTIONS WITH AFFILIATES. Permit to exist or enter into, and will
not permit any of its Subsidiaries to permit to exist or enter into, any
transaction (including the purchase, sale, lease, or exchange of any property or
the rendering of any service) with any Affiliate of Borrower or with any
director, officer, or employee of Borrower, any Subsidiary, or any other
Affiliate, except transactions involving consideration in aggregate amount for
all such transactions not in excess of $5,000,000 per fiscal year, and
transactions in the ordinary course of, and pursuant to the reasonable
requirements of the, business of Borrower or any of its Subsidiaries and upon
fair and reasonable terms which are no less favorable to Borrower or such
Subsidiary than would be obtained in a comparable arm's length transaction with
a Person that is not an Affiliate.
9.9 SUBSIDIARY SENIOR NOTE GUARANTY. Permit any Consolidated Subsidiary
to guarantee (including without limitation, any Subsidiary Senior Note
Guaranty) or assume or agree to become liable in any way, either directly or
indirectly, for any Debt of Borrower or any Consolidated Subsidiary (other than
a Consolidated Subsidiary of the guarantor provided such Debt does not
constitute Senior Debt), unless and until Borrower shall first furnish to
Administrative Agent (a) an unconditional Subsidiary Bank Guaranty, (b) an
Intercreditor Agreement, and (c) an opinion of counsel to the effect that such
Subsidiary Bank 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 Requisite Lenders may reasonably request.
9.10 PAYMENT OF OBLIGATION. Borrower shall pay the Obligations in
accordance with the terms and provisions of the Loan Documents. Borrower and its
Consolidated Subsidiaries shall not (a) if an Event of Default shall have
occurred and be continuing, make any voluntary prepayment of principal of, or
interest on, any other Debt (other than the Obligations), whether subordinate to
the Obligations or not or (b) use proceeds from the Loans to make any payment or
prepayment of principal of, or interest on, or sinking fund payment in respect
of any other Debt of Borrower or any of its Subsidiaries (other than Debt in
respect of the Amended and Restated Master Loan and Security Agreement dated as
of October 7, 1998, among Borrower, Business
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Mortgage Investors, Inc., and Morgan Stanley Capital Inc., as amended from time
to time, and any renewals, extensions, or replacements thereof).
SECTION 10 DEFAULT.
10.1 EVENTS OF DEFAULT. Each of the following shall constitute an Event
of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of Applicable Law or
pursuant to any judgment or order of any Governmental Authority:
(a) Default in Payment of Principal. Borrower shall fail to pay when
due (whether upon demand, at maturity, by reason of acceleration, or
otherwise) the principal of any of the Loans.
(b) Default in Payment of Other Amounts. Borrower shall fail to pay
when due any interest on any of the Loans or any of the other payment
Obligations (other than the principal of any Loan) owing by Borrower under
this Agreement or any other Loan Document and such failure shall continue
for a period of three Business Days after the earlier of (i) the date upon
which Borrower obtains knowledge of such failure or (ii) the date upon
which Borrower has received written notice of such failure from
Administrative Agent.
(c) Default in Performance. (i) Borrower shall fail (or, where
applicable, shall fail to cause any Subsidiary) to perform or observe any
term, covenant, condition or agreement on its part to be performed or
observed contained in SECTIONS 7.11, 7.12, or 8.4(i), or in SECTION 9 or
(ii) Borrower shall fail (or, where applicable, shall fail to cause any
Subsidiary) to perform or observe any term, covenant, condition, or
agreement contained in this Agreement or any other Loan Document to which
it is a party and not otherwise mentioned in this Section and in the case
of this CLAUSE (ii) such failure shall continue for a period of 30 days
after the earlier of (x) the date upon which Borrower obtains knowledge of
such failure or (y) the date upon which Borrower has received written
notice of such failure from Administrative Agent.
(d) Misrepresentations. Any written statement, representation, or
warranty made or deemed made by or on behalf of Borrower or any Subsidiary
under this Agreement or under any other Loan Document, or any amendment
hereto or thereto, or in any other writing or statement at any time
furnished or made or deemed made by or on behalf of Borrower or any
Subsidiary to Administrative Agent or any Lender in connection with this
Agreement or the other Loan Documents, shall at any time prove to have
been incorrect or misleading in any material respect when furnished or
made.
(e) Indebtedness Cross-Default.
(i) Borrower or any Consolidated Subsidiary shall fail to pay
when due and payable the principal of, or interest on, any
Indebtedness (other than the Loans) or any Contingent Obligations
having an aggregate outstanding principal amount of $5,000,000 or
more, or
(ii) the maturity of any Indebtedness (other than the Loans) of
Borrower or any Consolidated Subsidiary having an aggregate
outstanding principal amount of $5,000,000 or more shall have (x)
been accelerated in accordance with the provisions of any indenture,
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contract, or instrument evidencing, providing for the creation of,
or otherwise concerning such Indebtedness or (y) been required to be
prepaid prior to the stated maturity thereof; or
(iii) any other event shall have occurred and be continuing
with respect to any Indebtedness (other than the Loans) of Borrower
or any Consolidated Subsidiary having an aggregate outstanding
principal amount of $5,000,000 or more which, with or without the
passage of time, the giving of notice, or otherwise, would permit
any holder or holders of such Indebtedness, any trustee or agent
acting on behalf of such holder or holders, or any other Person to
accelerate the maturity of any such Indebtedness or require any such
Indebtedness to be prepaid prior to its stated maturity.
(f) Voluntary Bankruptcy Proceeding. Borrower, any Consolidated
Subsidiary, or any Other Relevant Subsidiary shall: (i) commence a
voluntary case under the Bankruptcy Code of 1978, as amended or other
federal bankruptcy laws (as now or hereafter in effect); (ii) file a
petition seeking to take advantage of any other Applicable Laws, domestic
or foreign, relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts; (iii) consent to, or
fail to contest in a timely and appropriate manner, any petition filed
against it in an involuntary case under such bankruptcy laws or other
Applicable Laws or consent to any proceeding or action described in the
immediately following subsection; (iv) apply for or consent to, or fail to
contest in a timely and appropriate manner, the appointment of, or the
taking of possession by, a receiver, custodian, trustee, or liquidator of
itself or of a substantial part of its property, domestic or foreign; (v)
admit in writing its inability to pay its debts as they become due; (vi)
make a general assignment for the benefit of creditors; (vii) make a
conveyance fraudulent as to creditors under any Applicable Law; or (viii)
take any corporate or similar action for the purpose of effecting any of
the foregoing.
(g) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against Borrower, any Consolidated Subsidiary or any
Other Relevant Subsidiary, in any court of competent jurisdiction seeking:
(i) relief under the Bankruptcy Code of 1978, as amended or other federal
bankruptcy laws (as now or hereafter in effect) or under any other
Applicable Laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts; or (ii)
the appointment of a trustee, receiver custodian, liquidator or the like
of such Person, or of all or any substantial part of the assets domestic
or foreign, of such Person, and such case or proceeding is not dismissed
within 60 days after it is commenced.
(h) Contest of Loan Documents. Borrower or any Subsidiary shall
disavow, revoke, or terminate any Loan Document to which it is a party or
shall otherwise challenge or contest in any action, suit, or proceeding in
any court or before any Governmental Authority the validity or
enforceability of this Agreement, any Note, or any other Loan Document.
(i) Judgment. A judgment or order for the payment of money shall be
entered against Borrower or any Consolidated Subsidiary by any court or
other tribunal which exceeds, individually or together with all other such
judgments or orders entered against Borrower and its Consolidated
Subsidiaries, $5,000,000 in amount (or which shall otherwise have a
Material Adverse Effect) and such judgment or order shall continue unpaid
for a period of 30 days without being stayed or dismissed through
appropriate appellate proceedings.
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(j) Attachment. A warrant, writ of attachment, execution, or similar
process shall be issued against any property of Borrower or any
Consolidated Subsidiary which exceeds, individually or together with all
other such warrants, writs, executions, and processes, $5,000,000 in
amount and such warrant, writ, execution, or process shall not be
discharged, vacated, stayed, or bonded for a period of 30 days; provided,
however, that if a bond has been issued in favor of the claimant or other
Person obtaining such warrant, writ, execution, or process, the issuer of
such bond shall execute a waiver or subordination agreement in form and
substance satisfactory to Administrative Agent pursuant to which the
issuer of such bond subordinates its right of reimbursement, contribution,
or subrogation to the Obligations and waives or subordinates any Lien it
may have on the assets of Borrower or any of its Consolidated
Subsidiaries.
(k) ERISA. Any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $5,000,000 which it shall
have become liable to pay under Title IV of ERISA; or notice of intent to
terminate a Material Plan shall be filed under Title IV of ERISA by any
member of the ERISA Group, any plan administrator or any combination of
the foregoing; or the PBGC shall institute proceedings under Title IV of
ERISA to terminate, to impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or to cause a trustee to be
appointed to administer any Material Plan; or a condition shall exist by
reason of which the PBGC would be entitled to obtain a decree adjudicating
that any Material Plan must be terminated; or there shall occur a complete
or partial withdrawal from, or a default, within the meaning of Section
4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans
which could cause one or more members of the ERISA Group to incur a
current payment obligation in excess of $5,000,000.
(l) Loan Documents. An Event of Default (as defined therein) shall
occur under any of the other Loan Documents.
(m) Change of Control.
(i) Any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT")) is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a Person will be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 25% of the total voting
power of the then outstanding voting stock of Borrower; or
(ii) During any twelve-month period (commencing on or after the
Agreement Date), a majority of the Board of Directors of Borrower
shall no longer be composed of individuals (A) who were members of
such Board of Directors on the first date of such period, (B) whose
election or nomination to such Board of Directors was approved by
individuals referred to in CLAUSE (A) above constituting at the
time of such election or nomination at least a majority of such
Board of Directors or (c) whose election or nomination to such
Board of Directors was approved by individuals referred to in
CLAUSES (A) and (B) above constituting at the time of such election
or nomination at least a majority of such Board of Directors.
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(n) Dissolution. Any order, judgment, or decree is entered against
Borrower, any Material Subsidiary or any Other Relevant Subsidiary
decreeing the dissolution or split up of such Person, and such order
remains undischarged or unstayed for a period in excess of 30 days.
(o) Payment of Certain Other Agreements. The payment directly or
indirectly (including, without limitation, any payment in respect of any
sinking fund, defeasance, or redemption) by Borrower or any of its
Consolidated Subsidiaries of any Debt, including without limitation, the
Senior Notes, in a manner or at a time during which such payment is not
permitted under the terms of the Loan Documents, or under any instrument
or document evidencing or creating such Debt.
10.2 REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of
Default the following provisions shall apply:
(a) Acceleration; Termination of Facilities.
(i) Automatic. Upon the occurrence of an Event of Default
specified in SECTIONS 10.1(f) or 10.1(g), (A)(i) the principal of,
and all accrued interest on, the Loans and the Notes at the time
outstanding and (ii) all of the other Obligations of Borrower,
including, but not limited to, the other amounts owed to Lenders and
Administrative Agent under this Agreement, the Notes, or any of the
other Loan Documents shall become immediately and automatically due
and payable by Borrower without presentment, demand, protest, or
other notice of any kind, all of which are expressly waived by
Borrower and (B) each of the Commitments (including the Swing Line
Commitment) and the obligation of Lenders to make Loans shall
immediately and automatically terminate;
(ii) Optional. If any other Event of Default shall have
occurred and be continuing, Administrative Agent may, and at the
direction of the Requisite Lenders shall (subject to the terms of
SECTION 11): (A) declare (1) the principal of, and accrued and
unpaid interest on, the Loans and the Notes at the time outstanding
and (2) all of the other Obligations, including, but not limited to,
the other amounts owed to the Lenders and Administrative Agent under
this Agreement, the Notes, or any of the other Loan Documents, to be
forthwith due and payable; whereupon the same shall immediately
become due and payable without presentment, demand, protest, or
other notice of any kind, all of which are expressly waived by
Borrower and (B) terminate the Commitments and the obligation of
Lenders to make Loans hereunder.
(b) Loan Documents. The Requisite Lenders may direct Administrative
Agent to, and Administrative Agent if so directed shall (subject to the
terms of SECTION 11), exercise any and all of its rights under any and all
of the other Loan Documents.
(c) Applicable Law. The Requisite Lenders may direct Administrative
Agent to, and Administrative Agent if so directed shall, exercise all
other rights and remedies it may have under any Applicable Law, including
without limitation, (i) reduce any claim to judgment; (ii) to the extent
permitted by Applicable Law, exercise (or request each Lender to, and each
Lender shall be entitled to, exercise) the rights of offset or banker's
Lien against the interest of Borrower and each Consolidated Subsidiary in
and to every account and other property of Borrower and each Consolidated
Subsidiary which are in the possession of Administrative Agent or any
Lender to the
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extent of the full amount of the Obligations (to the extent permitted by
Applicable Law, Borrower and each Consolidated Subsidiary being deemed
directly obligated to each Lender in the full amount of the Obligations
for such purposes); and (iii) exercise any and all other legal or
equitable rights afforded by the Loan Documents, the Applicable Laws of
the State of Texas, or any other applicable jurisdiction as Administrative
Agent shall deem appropriate, or otherwise, including, but not limited to,
the right to bring suit or other proceedings before any Governmental
Authority either for specific performance of any covenant or condition
contained in any of the Loan Documents or in aid of the exercise of any
right granted to Administrative Agent or any Lender in any of the Loan
Documents.
10.3 REMEDIES UPON CERTAIN DEFAULTS. Upon the occurrence of a Default
specified in SECTIONS 10.1(f) or 10.1(g), the Commitments (including the Swing
Line Commitment) shall immediately and automatically terminate.
10.4 ALLOCATION OF PROCEEDS. If an Event of Default shall have occurred
and be continuing and the maturity of the Notes has been accelerated, all
payments received by Administrative Agent under any of the Loan Documents, in
respect of any principal of or interest on the Obligations or any other amounts
payable by Borrower hereunder or thereunder, shall be applied by Administrative
Agent in the following order and priority:
(a) amounts due to Administrative Agent and the Lenders in respect
of Fees and expenses due under SECTION 12.2;
(b) payments of interest on the Revolving Loans and the Swing Line
Loans to be applied for the ratable benefit of Lenders and NationsBank (as
the Lender under the Swing Line Subfacility, and any participating Lenders
under the Swing Line Facility pursuant to SECTION 2.2(b));
(c) payments of outstanding Swing Principal Debt; provided that,
such payments shall be made solely to NationsBank, unless the Lenders have
purchased participations in the Swing Principal Debt in accordance with
SECTION 2.2(b), in which case such payment shall be allocated pro rata
among NationsBank and the participating Lenders;
(d) payments of principal outstanding under the Revolving Loans, to
be applied for the ratable benefit of the Lenders;
(e) amounts due to Administrative Agent and the Lenders pursuant to
SECTION 12.8;
(f) payments of all other amounts due under any of the Loan
Documents, if any, to be applied for the ratable benefit of the Lenders;
and
(g) any amount remaining after application as provided above, shall
be paid to Borrower or whomever else may be legally entitled thereto.
10.5 PERFORMANCE BY ADMINISTRATIVE AGENT. If Borrower shall fail to
perform any covenant, duty, or agreement contained in any of the Loan Documents,
Administrative Agent may perform or attempt to perform such covenant, duty, or
agreement on behalf of Borrower after the expiration of any cure or grace
periods set forth herein. In such event, Borrower shall, at the request of
Administrative Agent, promptly pay any amount reasonably expended by
Administrative Agent in such performance or attempted performance to
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Administrative Agent, together with interest thereon at the applicable
Post-Default Rate from the date of such expenditure until paid. Notwithstanding
the foregoing, neither Administrative Agent nor any Lender shall have any
liability or responsibility whatsoever for the performance of any obligation of
Borrower under this Agreement or any other Loan Document.
10.6 RIGHTS CUMULATIVE. The rights and remedies of Administrative Agent
and the Lenders under this Agreement and each of the other Loan Documents shall
be cumulative and not exclusive of any rights or remedies which any of them may
otherwise have under Applicable Law.
10.7 COMPANY WAIVERS. To the extent permitted by Applicable Law, Borrower
and each Subsidiary hereby waive presentment and demand for payment, protest,
notice of intention to accelerate, notice of acceleration, and notice of protest
and nonpayment, and agree that their respective liability with respect to the
Obligations (or any part thereof) shall not be affected by any renewal or
extension in the time of payment of the Obligations (or any part thereof), by
any indulgence, or by any release or change in any security for the payment of
the Obligations (or any part thereof).
10.8 DELEGATION OF DUTIES AND RIGHTS. The Lenders may perform any of
their duties or exercise any of their rights under the Loan Documents by or
through their respective representatives.
10.9 NOT IN CONTROL. Nothing in any Loan Document shall, or shall be
deemed to (a) give Administrative Agent or any Lender the right to exercise
control over the assets (including real property), affairs, or management of
Borrower or any Subsidiary, (b) preclude or interfere with compliance by
Borrower or any Subsidiary with any Applicable Law, or (c) require any act or
omission by Borrower or any Subsidiary that may be harmful to Persons or
property. Any "Material Adverse Event" or other materiality qualifier in any
representation, warranty, covenant, or other provision of any Loan Document is
included for credit documentation purposes only and shall not, and shall not be
deemed to, mean that Administrative Agent or any Lender acquiesces in any
non-compliance by Borrower or any Subsidiary with any Applicable Law or
document, or that any Agent or any Lender does not expect Borrower or any
Subsidiary to promptly, diligently, and continuously carry out all appropriate
removal, remediation, and termination activities required or appropriate in
accordance with all Environmental Laws. Administrative Agent and the Lenders
have no fiduciary relationship with or fiduciary duty to Borrower or any
Subsidiary arising out of or in connection with the Loan Documents, and the
relationship between Administrative Agent and the Lenders, on the one hand, and
Borrower and its Subsidiaries, on the other hand, in connection with the Loan
Documents is solely that of debtor and creditor. The power of Administrative
Agent and the Lenders under the Loan Documents is limited to the rights provided
in the Loan Documents, which rights exist solely to assure payment and
performance of the Obligations and may be exercised in a manner calculated by
Administrative Agent and Lenders in their respective good faith business
judgment.
10.10 COURSE OF DEALING. The acceptance by Administrative Agent or the
Lenders at any time and from time to time of partial payment on the Obligations
shall not be deemed to be a waiver of any Default then existing. No waiver by
Administrative Agent, Requisite Lenders, or the Lenders of any Default shall be
deemed to be a waiver of any other then-existing or subsequent Default. No delay
or omission by Administrative Agent, Requisite Lenders, or the Lenders in
exercising any right under the Loan Documents shall impair such right or be
construed as a waiver thereof or any acquiescence therein, nor shall any single
or partial exercise of any such right preclude other or further exercise
thereof, or the exercise of any other right under the Loan Documents or
otherwise.
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10.11 CUMULATIVE RIGHTS. All rights available to Administrative Agent and
the Lenders under the Loan Documents are cumulative of and in addition to all
other rights granted to Administrative Agent and the Lenders at law or in
equity, whether or not the Obligations are due and payable and whether or not
Administrative Agent or the Lenders have instituted any suit for collection,
foreclosure, or other action in connection with the Loan Documents.
SECTION 11 AGREEMENT AMONG LENDERS.
11.1 APPOINTMENT, POWERS, AND IMMUNITIES. Each Lender hereby irrevocably
appoints and authorizes Administrative Agent to act as its agent under this
Agreement and the other Loan Documents with such powers and discretion as are
specifically delegated to Administrative Agent by the terms of this Agreement
and the other Loan Documents, together with such other powers as are reasonably
incidental thereto. Administrative Agent (which term as used in this sentence
and in SECTION 11.5 and the first sentence of SECTION 11.6 hereof shall include
its Affiliates and its own and its Affiliates' officers, directors, employees,
and agents): (a) shall not have any duties or responsibilities except those
expressly set forth in this Agreement and shall not be a trustee or fiduciary
for any Lender; (b) shall not be responsible to the Lenders for any recital,
statement, representation, or warranty (whether written or oral) made in or in
connection with any Loan Document or any certificate or other document referred
to or provided for in, or received by any of them under, any Loan Document, or
for the value, validity, effectiveness, genuineness, enforceability, or
sufficiency of any Loan Document, or any other document referred to or provided
for therein or for any failure by any party hereto or any other Person to
perform any of its obligations thereunder; (c) shall not be responsible for or
have any duty to ascertain, inquire into, or verify the performance or
observance of any covenants or agreements by the parties hereto or the
satisfaction of any condition or to inspect the property (including the books
and records) of Borrower or its Subsidiaries or Affiliates; (d) shall not be
required to initiate or conduct any litigation or collection proceedings under
any Loan Document; and (e) shall not be responsible for any action taken or
omitted to be taken by it under or in connection with any Loan Document, except
for its own gross negligence or willful misconduct. Administrative Agent may
employ agents and attorneys-in-fact and shall not be responsible for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care.
11.2 RELIANCE BY ADMINISTRATIVE AGENT. Administrative Agent shall be
entitled to rely upon any certification, notice, instrument, writing, or other
communication (including, without limitation, any thereof by telephone or
telecopy) believed by it to be genuine and correct and to have been signed,
sent, or made by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel for the parties hereto),
independent accountants, and other experts selected by Administrative Agent.
Administrative Agent may deem and treat the payee of any Note as the holder
thereof for all purposes hereof unless and until Administrative Agent receives
and accepts an Assignment and Acceptance executed in accordance with SECTION
12.4. As to any matters not expressly provided for by this Agreement,
Administrative Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Requisite Lenders, and such instructions shall be binding on all of the
Lenders; provided, however, that Administrative Agent shall not be required to
take any action that exposes Administrative Agent to personal liability or that
is contrary to any Loan Document or Applicable Law or unless it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking any such action.
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11.3 DEFAULTS. Administrative Agent shall not be deemed to have knowledge
or notice of the occurrence of a Default or Event of Default unless
Administrative Agent has received written notice from a Lender or Borrower
specifying such Default or Event of Default and stating that such notice is a
"NOTICE OF DEFAULT". In the event that Administrative Agent receives such a
notice of the occurrence of a Default or Event of Default, Administrative Agent
shall give prompt notice thereof to the Lenders. Administrative Agent shall
(subject to SECTION 11.2 hereof) take such action with respect to such Default
or Event of Default as shall reasonably be directed by the Requisite Lenders;
provided that, unless and until Administrative Agent shall have received such
directions, Administrative Agent may (but shall not be obligated to) take such
action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interest of the Lenders.
11.4 RIGHTS AS LENDER. With respect to its Commitment and the Loans made
by it, NationsBank (and any successor acting as Administrative Agent), in its
capacity as a Lender hereunder shall have the same rights and powers hereunder
as any other Lender and may exercise the same as though it were not acting as
Administrative Agent, and the term "LENDER" or "LENDERS" shall, unless the
context otherwise indicates, include Administrative Agent in its individual
capacity. NationsBank (and any successor acting as Administrative Agent) and its
Affiliates may (without having to account therefor to any Lender) accept
deposits from, lend money to, make investments in, provide services to, and
generally engage in any kind of lending, trust, or other business with any party
hereto or any of its Subsidiaries or Affiliates as if it were not acting as
Administrative Agent (collectively, "other activities"), and NationsBank (and
any successor acting as Administrative Agent) and its Affiliates may accept fees
and other consideration from any party hereto or any of its Subsidiaries or
Affiliates for services in connection with this Agreement or otherwise without
having to account for the same to the Lenders. Without limiting the rights of
the Lenders specifically set forth in the Loan Documents, Administrative Agent
and its Affiliates shall not be responsible to account to Lenders for such other
activities, and no Lender shall have any interest in any other activities, any
present or future guaranties by or for the account of Borrower which are not
contemplated or included in the Loan Documents, any present or future offset
exercised by Administrative Agent and its Affiliates in respect of such other
activities, any present or future property taken as security for any such other
activities, or any property now or hereafter in the possession or control of
Administrative Agent or its Affiliates which may be or become security for the
obligations of Borrower arising under the Loan Documents by reason of the
general description of indebtedness secured or of property contained in any
other agreements, documents or instruments related to any such other activities;
provided that, if any payments in respect of such guaranties or such property or
the proceeds thereof shall be applied to reduction of the obligations of
Borrower arising under the Loan Documents, then each Lender shall be entitled to
share in such application ratably.
11.5 INDEMNIFICATION. The Lenders agree to indemnify Administrative Agent
(to the extent not reimbursed under SECTION12.2 or SECTION 12.8, but without
limiting the obligations of Borrower under such Section) ratably in accordance
with their respective Commitments, for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including attorneys' fees), or disbursements of any kind and nature whatsoever
that may be imposed on, incurred by or asserted against Administrative Agent
(including by any Lender) in any way relating to or arising out of any Loan
Document or the transactions contemplated thereby or any action taken or omitted
by Administrative Agent under any Loan Document; provided that no Lender shall
be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of Administrative Agent. Without limitation of
the foregoing, each Lender agrees to reimburse Administrative Agent promptly
upon demand for its ratable share of any costs or expenses payable by Borrower
under SECTION 12.2, to the extent that Administrative Agent is not promptly
reimbursed
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for such costs and expenses by Borrower. The agreements contained in this
Section shall survive payment in full of the Obligations.
11.6 NON-RELIANCE ON ADMINISTRATIVE AGENT AND OTHER LENDERS. Each Lender
agrees that it has, independently and without reliance on Administrative Agent
or any other Lender, and based on such documents and information as it has
deemed appropriate, made its own credit analysis of the parties hereto and their
Subsidiaries and decision to enter into this Agreement and that it will,
independently and without reliance upon Administrative Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under the Loan Documents. Except for notices, reports, and other
documents and information expressly required to be furnished to the Lenders by
Administrative Agent hereunder, Administrative Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition, or business of any party hereto or
any of its Subsidiaries or Affiliates that may come into the possession of
Administrative Agent or any of its Affiliates.
11.7 RESIGNATION OF ADMINISTRATIVE AGENT. Administrative Agent may resign
at any time by giving notice thereof to the Lenders and Borrower. Upon any such
resignation, the Requisite Lenders shall have the right to appoint a successor
Administrative Agent. If no successor Administrative Agent shall have been so
appointed by the Requisite Lenders and shall have accepted such appointment
within 30 days after the retiring Administrative Agent's giving of notice of
resignation, then the retiring Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent which shall be a commercial
bank organized under the laws of the United States of America having combined
capital and surplus of at least $100,000,000. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor, such successor
shall thereupon succeed to and become vested with all the rights, powers,
discretion, privileges, and duties of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. After any retiring Administrative Agent's resignation
hereunder as Administrative Agent, the provisions of this SECTION 11 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as Administrative Agent.
11.8 RELATIONSHIP OF LENDERS. Nothing herein shall be construed as
creating a partnership or joint venture among Administrative Agent and the
Lenders.
11.9 BENEFITS OF AGREEMENT. None of the provisions of this SECTION 11
shall inure to the benefit of Borrower or any Subsidiary of Borrower or any
other Person other than the Lenders; consequently, either Borrower or any
Subsidiary or any other Person shall be entitled to rely upon, or to raise as a
defense, in any manner whatsoever, the failure of Administrative Agent or any
Lender to comply with such provisions.
11.10 OBLIGATIONS SEVERAL. The obligations of the Lenders hereunder are
several, and each Lender hereunder shall not be responsible for the obligations
of the other Lenders hereunder, nor will the failure of one Lender to perform
any of its obligations hereunder relieve the other Lenders from the performance
of their respective obligations hereunder.
11.11 AGENTS. None of the Lenders identified in this Agreement as
"Syndication Agent," "Documentation Agent," "Managing Agent," or "Co-Agents"
shall have any rights, powers, obligations, liabilities, responsibilities, or
duties under this Agreement other than those applicable to all Lenders as such.
Without limiting the foregoing, none of the Lenders so identified as a
"Syndication Agent," "Documentation
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Agent," "Managing Agent," or "Co-Agent" shall have or be deemed to have any
fiduciary relationship with any Lender.
SECTION 12 MISCELLANEOUS.
12.1 NOTICES. Unless otherwise provided herein, communications provided
for hereunder shall be in writing and shall be mailed, telecopied or delivered
as follows:
If to Borrower:
Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
3rd Floor
Washington, DC 20006
Attention: Joan M. Sweeney, Managing Director
Telecopy: (202) 973-6351
Telephone: (202) 973-6381
If to Administrative Agent:
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Shelly K. Harper
Telecopy: (214) 508-0604
Telephone: (214) 508-0567
If to a Lender:
To such Lender's address or telecopy number, as applicable, set
forth on SCHEDULE 2 hereto or in the applicable Assignment and
Acceptance Agreement.
or, as to each party at such other address as shall be designated by such party
in a written notice to the other parties delivered in compliance with this
SECTION 12.1. All such notices and other communications shall be effective (i)
if mailed, when received; (ii) if telecopied, when transmitted; or (iii) if hand
delivered, when delivered. Notwithstanding the immediately preceding sentence,
all notices or communications to Administrative Agent or any Lender under
SECTION 2 shall be effective only when actually received. Neither Administrative
Agent nor any Lender shall incur any liability to Borrower (nor shall
Administrative Agent incur any liability to the Lenders) for acting upon any
telephonic notice referred to in this Agreement which Administrative Agent or
such Lender, as the case may be, believes in good faith to have been given by a
Person authorized to deliver such notice or for otherwise acting in good faith
under hereunder, except in the case of gross negligence or willful misconduct.
12.2 EXPENSES. Borrower agrees to pay on demand all costs and expenses of
Administrative Agent in connection with the syndication, preparation, execution,
delivery, administration, modification, and amendment of this Agreement, the
other Loan Documents, and the other documents to be delivered hereunder,
including, without limitation, the reasonable fees and expenses of counsel for
Administrative Agent (including
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the cost of internal counsel) with respect thereto and with respect to advising
Administrative Agent as to its rights and responsibilities under the Loan
Documents. Borrower further agrees to pay on demand all costs and expenses of
Administrative Agent and the Lenders, if any (including, without limitation,
reasonable attorneys' fees and expenses and the cost of internal counsel), in
connection with the enforcement (whether through negotiations, legal
proceedings, or otherwise) of the Loan Documents and the other documents to be
delivered hereunder. All costs and expenses of Administrative Lender and Lenders
described in this SECTION 12.2 are part of the Obligations and, if Borrower
shall not have paid such costs and expenses on or before the 60th day from the
date an invoice is presented to Borrower, Administrative Agent is hereby
irrevocably authorized to fund such obligation as a Swing Line Loan to the
extent of availability under the Swing Line Subfacility.
12.3 JURISDICTION; CONSENT TO SERVICE OF PROCESS; WAIVER OF JURY TRIAL.
(a) BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR
ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK
STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN
NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF
THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL
CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY
LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL
JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER
MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT
THAT ANY AGENT OR ANY LENDER MAY OTHERWISE HAVE TO BRING ANY ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS AGAINST
BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(b) BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE
FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS IN ANY NEW YORK STATE OR FEDERAL COURT. EACH OF THE PARTIES
HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR
PROCEEDING IN ANY SUCH COURT.
(c) BORROWER AND EACH OTHER PARTY HERETO CONSENTS TO SERVICE OF
PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 12.1. NOTHING IN
THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
(d) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH
PARTY HERETO (1) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
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ENFORCE THE FOREGOING WAIVER AND (2) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION.
12.4 SUCCESSORS AND ASSIGNS.
(a) Each Lender may assign to one or more Eligible Assignees all or
a portion of its rights, obligations, or rights and obligations under this
Agreement (including, without limitation, all or a portion of its
Commitment or its Revolving Loans); provided, however, that
(i) each such assignment shall be to an Eligible Assignee;
(ii) except in the case of an assignment to another Lender or
an assignment of all of a Lender's rights and obligations under this
Agreement, any such partial assignment shall be in an amount at
least equal to $10,000,000 or an integral multiple of $1,000,000 in
excess thereof;
(iii) each such assignment by a Lender shall be of a constant,
and not varying, percentage of all of its rights and obligations
under this Agreement and each Note; and
(iv) the parties to such assignment shall execute and deliver
to Administrative Agent for its acceptance an Assignment and
Acceptance in the form of EXHIBIT A hereto, together with any Note
subject to such assignment and a processing fee of $3,500.
Upon execution, delivery, and acceptance of such Assignment and
Acceptance, the assignee thereunder shall be a party hereto and, to the
extent of such assignment, have the obligations, rights, and benefits of a
Lender hereunder and the assigning Lender shall, to the extent of such
assignment, relinquish its rights and be released from its obligations
under this Agreement. Upon the consummation of any assignment pursuant to
this Section, the assignor, Administrative Agent and Borrower shall make
appropriate arrangements so that, if required, new Notes are issued to the
assignor and the assignee. If the assignee is not incorporated under the
laws of the United States of America or a state thereof, it shall deliver
to Borrower and Administrative Agent certification as to exemption from
deduction or withholding of Taxes in accordance with SECTION 4.6.
(b) Administrative Agent shall maintain at its address referred to
in SECTION 12.1 a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and
addresses of the Lenders and the Commitment of, and principal amount of
the Revolving Loans owing to, each Lender from time to time (the
"REGISTER"). The entries in the Register shall be conclusive and binding
for all purposes, absent manifest error, and Borrower, Administrative
Agent and the Lenders may treat each Person whose name is recorded in the
Register as a Lender hereunder for all purposes of this Agreement. The
Register shall be available for inspection by Borrower or any Lender at
any reasonable time and from time to time upon reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance executed by the
parties thereto, together with any Note subject to such assignment and
payment of the processing fee, Administrative Agent shall, if such
Assignment and Acceptance has been completed and is in substantially the
form
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of EXHIBIT A hereto, (i) accept such Assignment and Acceptance, (ii)
record the information contained therein in the Register, and (iii) give
prompt notice thereof to the parties thereto and Borrower.
(d) Each Lender may sell participations to one or more Persons (each
a "PARTICIPANT") in all or a portion of its rights, obligations or rights
and obligations under this Agreement (including all or a portion of its
Commitment or its Loans); provided, however, that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender
shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) the Participant shall be entitled
to the benefit of the yield protection provisions contained in SECTION 5
and the right of set-off contained in SECTION 3.4 (provided that Borrower
shall not be obligated to pay any amount in excess of the amount that
would be due to such Lender from whom such participation was purchased
under such Sections as though no participation had been sold), and (iv)
Borrower shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement,
and such Lender shall retain the sole right to enforce the obligations of
Borrower relating to its Loans and its Note and to approve any amendment,
modification, or waiver of any provision of this Agreement (other than
amendments, modifications, or waivers decreasing the amount of principal
of or the rate at which interest is payable on such Loans or Note,
extending any scheduled principal payment date or date fixed for the
payment of interest on such Loans or Note, or extending its Commitment).
(e) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time assign and pledge all or any portion of its
Loans and its Notes to any Federal Reserve Bank as collateral security
pursuant to Regulation A of the Board of Governors of the Federal Reserve
System and any "operating circular" issued by such Federal Reserve Bank.
No such assignment shall release the assigning Lender from its obligations
hereunder.
(f) Any Lender may furnish any information concerning Borrower or
any of its Subsidiaries in the possession of such Lender from time to time
to Eligible Assignees and Participants (including prospective assignees
and participants), subject, however, to the provisions of SECTION 12.7.
12.5 AMENDMENTS. Any provision of this Agreement or any other Loan
Document may be amended or waived if, but only if, such amendment or waiver is
in writing and is:
(a) Executed by Borrower, Administrative Agent, and the particular
existing or new Lender if it purports (subject to SECTION 2.12) to
increase that Lender's Commitment or add such new Lender as a new Lender
pursuant to SECTION 2.12.
(b) Executed by Borrower, Administrative Agent, and executed or
approved in writing by all Lenders if action of all Lenders is
specifically provided in any Loan Document or if it purports to (i)
increase the Commitments of the Lenders (except increases in accordance
with SECTION 2.12), (ii) reduce the principal of or rate of interest on
any Revolving Loan or any fees or other amounts payable hereunder, (iii)
postpone any date fixed for the payment of any scheduled installment of
principal of or interest on any Revolving Loan or any fees or other
amounts payable hereunder or for termination of any Commitment, or (iv)
change the percentage of the Commitments or of the unpaid principal amount
of the Notes, or the number of Lenders, which shall be required for the
Lenders or any of them to take any action under this Section or any other
provision of this Agreement.
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(c) Otherwise (i) for this Agreement, executed by Borrower,
Administrative Agent, and Requisite Lenders, (ii) for other Loan Documents
(other than Interest Rate Agreements), approved in writing by Requisite
Lenders and executed by Borrower, Administrative Agent, and any other
party to that Loan Document, or (iii) for Interest Rate Agreements,
executed by the parties to such agreement.
12.6 NONLIABILITY OF AGENT AND LENDERS. The relationship between Borrower
and the Lenders and Administrative Agent shall be solely that of borrower and
lender. Neither Administrative Agent nor any Lender shall have any fiduciary
responsibilities to Borrower and no provision in this Agreement or in any of the
other Loan Documents, and no course of dealing between or among any of the
parties hereto, shall be deemed to create any fiduciary duty owing by
Administrative Agent or any Lender to any Lender, Borrower or any Subsidiary.
Neither Administrative Agent nor any Lender undertakes any responsibility to
Borrower to review or inform Borrower of any matter in connection with any phase
of Borrower's business or operations.
12.7 CONFIDENTIALITY. Administrative Agent and each Lender (each, a
"LENDING PARTY") agrees to keep confidential any information furnished or made
available to it by Borrower pursuant to this Agreement that is marked
confidential; provided that nothing herein shall prevent any Lending Party from
disclosing such information (a) to any other Lending Party or any affiliate of
any Lending Party, or any officer, director, employee, agent, or advisor of any
Lending Party or affiliate of any Lending Party, (b) to any other Person if
reasonably incidental to the administration of the credit facility provided
herein, (c) as required by any law, rule, or regulation, (d) upon the order of
any court or administrative agency, (e) upon the request or demand of any
regulatory agency or authority, (f) that is or becomes available to the public
or that is or becomes available to any Lending Party other than as a result of a
disclosure by any Lending Party prohibited by this Agreement, (g) in connection
with any litigation to which such Lending Party or any of its affiliates may be
a party, (h) to the extent necessary in connection with the exercise of any
remedy under this Agreement or any other Loan Document, and (i) subject to
provisions substantially similar to those contained in this Section, to any
actual or proposed participant or assignee.
12.8 INDEMNIFICATION.
(A) BORROWER AGREES TO INDEMNIFY AND HOLD HARMLESS ADMINISTRATIVE
AGENT AND EACH LENDER AND EACH OF THEIR AFFILIATES AND THEIR RESPECTIVE
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS, AND ADVISORS (EACH, AN
"INDEMNIFIED PARTY") FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LOSSES,
LIABILITIES, COSTS, AND EXPENSES (INCLUDING, WITHOUT LIMITATION,
REASONABLE ATTORNEYS' FEES) THAT MAY BE INCURRED BY OR ASSERTED OR AWARDED
AGAINST ANY INDEMNIFIED PARTY, IN EACH CASE ARISING OUT OF OR IN
CONNECTION WITH OR BY REASON OF (INCLUDING, WITHOUT LIMITATION, IN
CONNECTION WITH ANY INVESTIGATION, LITIGATION, OR PROCEEDING OR
PREPARATION OF DEFENSE IN CONNECTION THEREWITH) THE LOAN DOCUMENTS, ANY OF
THE TRANSACTIONS CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE
PROCEEDS OF THE LOANS, EXCEPT TO THE EXTENT SUCH CLAIM, DAMAGE, LOSS,
LIABILITY, COST, OR EXPENSE IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT
BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH
INDEMNIFIED PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. IN THE CASE OF
AN INVESTIGATION, LITIGATION OR OTHER PROCEEDING TO WHICH THE INDEMNITY IN
THIS SECTION 12.8 APPLIES, SUCH INDEMNITY SHALL BE EFFECTIVE WHETHER OR
NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING IS BROUGHT BY BORROWER,
ITS DIRECTORS, SHAREHOLDERS OR CREDITORS OR AN INDEMNIFIED PARTY OR ANY
OTHER PERSON
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OR ANY INDEMNIFIED PARTY IS OTHERWISE A PARTY THERETO AND WHETHER OR NOT
THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED. BORROWER AGREES NOT
TO ASSERT ANY CLAIM AGAINST ADMINISTRATIVE AGENT, ANY LENDER, ANY OF THEIR
AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES,
ATTORNEYS, AGENTS, AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL,
INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE
RELATING TO THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED
HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE LOANS.
(B) WITHOUT PREJUDICE TO THE SURVIVAL OF ANY OTHER AGREEMENT OF
BORROWER HEREUNDER, THE AGREEMENTS AND OBLIGATIONS OF BORROWER CONTAINED
IN THIS SECTION 12.8 SHALL SURVIVE THE PAYMENT IN FULL OF THE LOANS AND
ALL OTHER AMOUNTS PAYABLE UNDER THIS AGREEMENT.
12.9 TERMINATION; SURVIVAL. At such time as (a) all of the Commitments
have been terminated, (b) none of the Lenders is obligated any longer under this
Agreement to make any Loans and (c) all Obligations (other than obligations
which survive as provided in the following sentence) have been paid and
satisfied in full, this Agreement shall terminate. Notwithstanding any
termination of this Agreement, or of the other Loan Documents, the indemnities
to which Administrative Agent and the Lenders are entitled under the provisions
of SECTIONS 11.5, 12.2, and 12.8 and any other provision of this Agreement and
the other Loan Documents, and the waivers of jury trial and submission to
jurisdiction contained in SECTION 12.3, shall continue in full force and effect
and shall protect Administrative Agent and the Lenders against events arising
after such termination as well as before.
12.10 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating the remainder of such provision or the remaining provisions
or affecting the validity or enforceability of such provision in any other
jurisdiction.
12.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE.
12.12 COUNTERPARTS. This Agreement and any amendments, waivers, consents
or supplements may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all of which counterparts together
shall constitute but one and the same instrument.
12.13 ENTIRETY. THE RIGHTS AND OBLIGATIONS OF BORROWER AND ITS
SUBSIDIARIES, LENDERS, AND ADMINISTRATIVE AGENT SHALL BE DETERMINED SOLELY FROM
WRITTEN AGREEMENTS, DOCUMENTS, AND INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS
BETWEEN SUCH PARTIES ARE SUPERSEDED BY AND MERGED INTO SUCH WRITINGS. THIS
AGREEMENT (AS AMENDED IN WRITING FROM TIME TO TIME) AND THE OTHER WRITTEN LOAN
DOCUMENTS EXECUTED BY BORROWER OR ANY OF ITS SUBSIDIARIES, ANY LENDER, AND/OR
ADMINISTRATIVE AGENT, (TOGETHER WITH ALL COMMITMENT LETTERS AND FEE LETTERS ONLY
AS THEY RELATE TO THE PAYMENT OF FEES AFTER THE CLOSING DATE) REPRESENT THE
FINAL AGREEMENT BETWEEN BORROWER AND ITS SUBSIDIARIES, LENDERS, AND
ADMINISTRATIVE AGENT, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
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CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY SUCH PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN SUCH PARTIES.
12.14 CONSTRUCTION. Administrative Agent, Borrower, and each Lender
acknowledge that each of them has had the benefit of legal counsel of its own
choice and has been afforded an opportunity to review this Agreement and the
other Loan Documents with its legal counsel and that this Agreement and the
other Loan Documents shall be construed as if jointly drafted by the Agents,
Borrower, and each Lender.
12.15 DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN
CIRCUMSTANCES. The obligations of Borrower and each Subsidiary under the Loan
Documents shall remain in full force and effect until termination of the
Commitments and payment in full of the Loans and of all interest, fees, and
other amounts of the Obligations then due and owing, except that SECTIONS 4, 11,
and 12, and any other provisions under the Loan Documents expressly intended to
survive by the terms hereof or by the terms of the applicable Loan Documents,
shall survive such termination. If at any time any payment of the principal of
or interest on any Note or any other amount payable by Borrower or its
Subsidiaries under any Loan Document is rescinded or must be otherwise restored
or returned upon the insolvency, bankruptcy, or reorganization of such entity or
otherwise, the obligations of such entity under the Loan Documents with respect
to such payment shall be reinstated as though such payment had been due but not
made at such time.
12.16 EXISTING CREDIT AGREEMENT. Upon payment in full of the "OBLIGATIONS"
(as defined in the Existing Credit Agreement, the "EXISTING OBLIGATIONS") as
required by SECTION 5.1(d) as a condition precedent to the first Credit Event,
Borrower and those Lenders who are party to the Existing Credit Agreement (the
"EXISTING LENDERS") agree as follows: (a) the Existing Obligations arising under
the Existing Credit Agreement and the related "Loan Documents" (as defined in
the Existing Credit Agreement, the "EXISTING LOAN DOCUMENTS"), other than any
indebtedness and obligations described in the proviso to CLAUSE (b) below, shall
be terminated and satisfied in full and the Existing Lenders shall release and
discharge Borrower from the Existing Obligations arising under the Existing Loan
Agreement, the Existing Loan Documents, and any and all other claims, demands,
causes of action of every kind and character (known or unknown) at law or in
equity, arising out of or in any way related to the foregoing; and (b) Borrower
hereby confirms that the Existing Credit Agreement and Existing Lenders'
obligations to make advances and to fund the loan thereunder are terminated as
of the Effective Date; provided that, any provisions of the Existing Credit
Agreement or the Existing Loan Documents expressly intended to survive
termination, shall survive repayment of the Existing Obligations and termination
of the Existing Credit Agreement. Upon satisfaction of the Existing Obligations,
Borrower shall release and discharge Existing Lenders from the Existing Credit
Agreement and the Existing Loan Documents and any and all claims, demands,
causes of action of every kind and character (known or unknown) at law or in
equity, arising out of or in any way related to the foregoing. Nothing in this
SECTION 12.16 shall be deemed to release, discharge, or modify the Obligation or
Commitments under this Agreement and the related Loan Documents.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.
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Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
ALLIED CAPITAL CORPORATION
By /s/ KELLY A. ANDERSON
--------------------------------
Name: KELLY A. ANDERSON
--------------------------
Title: PRINCIPAL and TREASURER
--------------------------
CREDIT AGREEMENT
<PAGE> 72
Signature Page to that certain Credit Agreement dated as of March 9, 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 as a Lender
By /s/ SHELLY K. HARPER
--------------------------------
Name: SHELLY K. HARPER
--------------------------
Title: VICE PRESIDENT
--------------------------
CREDIT AGREEMENT
<PAGE> 73
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
BANKBOSTON, N.A., as a Lender
By /s/ DEIRDRE M. HOLLAND
--------------------------------
Name: DEIRDRE M. HOLLAND
--------------------------
Title: VICE PRESIDENT
--------------------------
CREDIT AGREEMENT
<PAGE> 74
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
RIGGS BANK N.A., as a Lender
By /s/ DAVID H. OLSON
--------------------------------
Name: DAVID H. OLSON
--------------------------
Title: VICE PRESIDENT
--------------------------
CREDIT AGREEMENT
<PAGE> 75
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
FIRST UNION NATIONAL BANK, as a Lender
By /s/ JANE W. WORKMAN
--------------------------------
Name: JANE W. WORKMAN
--------------------------
Title: SENIOR VICE PRESIDENT
--------------------------
CREDIT AGREEMENT
<PAGE> 76
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
CHEVY CHASE BANK, F.S.B., as a Lender
By /s/ WILLIAM W. PALMER, III
--------------------------------
Name: WILLIAM W. PALMER, III
--------------------------
Title: VICE PRESIDENT
--------------------------
CREDIT AGREEMENT
<PAGE> 77
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
CREDIT LYONNAIS NEW YORK BRANCH, as a
Lender
By /s/ W. JAY BUCKLEY
--------------------------------
Name: W. JAY BUCKLEY
--------------------------
Title: VICE PRESIDENT
-------------------------
CREDIT AGREEMENT
<PAGE> 78
Signature Page to that certain Credit Agreement dated as of March 9, 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 Lender
By /s/ CORY BOYTE
--------------------------------
Name: CORY BOYTE
--------------------------
Title: VICE PRESIDENT
-------------------------
CREDIT AGREEMENT
<PAGE> 79
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
FIRSTRUST BANK, as a Lender
By /s/ EDWARD D'ANCONA
--------------------------------
Name: EDWARD D'ANCONA
--------------------------
Title: EXECUTIVE VICE PRESIDENT
-------------------------
CREDIT AGREEMENT
<PAGE> 80
Signature Page to that certain Credit Agreement dated as of March 9, 1999,
among Allied Capital Corporation, as Borrower, NationsBank, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
LASALLE NATIONAL BANK, as a Lender
By /s/ DAVID H. SHERER
--------------------------------
Name: DAVID H. SHERER
--------------------------
Title: VICE PRESIDENT
-------------------------
CREDIT AGREEMENT
<PAGE> 81
SCHEDULE 2
LENDERS AND COMMITMENTS
<TABLE>
<CAPTION>
==========================================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
===========================================================================================================================
<S> <C> <C> <C>
NationsBank, N.A. $ 52,500,000.00 16.666667% $131,250.00
Financial Services
901 Main Street, 66th Floor
Dallas, Texas 75202-3748
Attn: Shelly K. Harper
Tel: 214-508-0567
Fax: 214-508-0604
Email: [email protected]
- ---------------------------------------------------------------------------------------------------------------------------
BankBoston, N.A. $ 50,000,000.00 15.873016% $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 15.873016% $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 15.873016% $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]
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CREDIT AGREEMENT - SCHEDULE 2
<PAGE> 82
<TABLE>
<CAPTION>
===========================================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
===========================================================================================================================
<S> <C> <C> <C>
Chevy Chase Bank, F.S.B. $ 30,000,000.00 9.523810% $ 60,000.00
8401 Connecticut Avenue
9th Floor
Chevy Chase, MD 20815
Attn: William Palmer
Tel: 301-986-7452
Fax: 301-986-7038
Email: [email protected]
- ---------------------------------------------------------------------------------------------------------------------------
Credit Lyonnais New York Branch $ 30,000,000.00 9.523810% $ 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. $ 25,000,000.00 7.936508% $ 37,500.00
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 6.349206% $ 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]
- ---------------------------------------------------------------------------------------------------------------------------
Firstrust Bank $ 7,500,000.00 2.380952% $ 9,375.00
15 E. Ridge Pike
Conshohocken, PA 19428
Attn: Marissa Mignogna
Tel: 610-238-5029
Fax: 610-238-5066
Email: [email protected]
===========================================================================================================================
Totals $ 315,000,000.00 100.00% $ 703,125.00
===========================================================================================================================
</TABLE>
2 CREDIT AGREEMENT - SCHEDULE 2
<PAGE> 83
3 CREDIT AGREEMENT - SCHEDULE 2
<PAGE> 84
SCHEDULE 6.1(a)
QUALIFICATION
No representations or warranties are made under SECTION 6.1(a) as to the
following Subsidiary:
Allied Capital Beteiligungsberatung GmgH
CREDIT AGREEMENT - SCHEDULE 6.1(a)
<PAGE> 85
SCHEDULE 6.1(b)
OWNERSHIP STRUCTURE
1. CONSOLIDATED SUBSIDIARIES.
<TABLE>
<CAPTION>
=====================================================================================================================
NAME OF SUBSIDIARY JURISDICTION PERCENTAGE OF VOTING
OF INCORPORATION STOCK OWNED BY
BORROWER 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-15 East Frontage Road, Delaware 100%
Longmont, CO 80504 LLC
- ---------------------------------------------------------------------------------------------------------------------
8930 Stanford Boulevard LLC Delaware 100%
- ---------------------------------------------------------------------------------------------------------------------
Allied Capital Beteiligungs Republic of Germany 100%
Beratung GmbH
- ---------------------------------------------------------------------------------------------------------------------
Allied Capital CMT Inc. Delaware 100%
- ---------------------------------------------------------------------------------------------------------------------
Allied Capital Commercial Delaware 100%
Mortgage Trust 1998-1
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CREDIT AGREEMENT - SCHEDULE 6.1(b)
<PAGE> 86
2. UNCONSOLIDATED SUBSIDIARIES.
<TABLE>
<CAPTION>
====================================================================================================
NAME OF SUBSIDIAR JURISDICTION PERCENTAGE OF VOTING
OF INCORPORATION STOCK OWNED BY
BORROWER AND EACH
OTHER SUBSIDIARY
====================================================================================================
<S> <C> <C>
Allied Capital CMT, Inc. Delaware 100%
- ----------------------------------------------------------------------------------------------------
Allied Capital Commercial Delaware 100%
Mortgage Trust 1998-1
- ----------------------------------------------------------------------------------------------------
Allied Capital Germany Fund LLC Delaware 100%
====================================================================================================
</TABLE>
2 CREDIT AGREEMENT - SCHEDULE 6.1(b)
<PAGE> 87
SCHEDULE 6.1(g)
INDEBTEDNESS
1. Allied Capital Corporation, TIAA, Lincoln, Hancock, Sun America, Mass
Mutual, American General, Allstate, Nationwide and GE Financial - Note
Agreement dated April 30, 1998, in the outstanding principal amount of
$180,000,000.
2. Allied Capital Corporation and Overseas Private Investment Corporation -
Loan Agreement dated April 10, 1995, as amended, in an aggregate
principal amount up to $20,000,000.
3. Debentures issued by Allied Investment Corporation, and held by the U.S.
Small Business Administration, in the outstanding principal amount of
$47,650,000.
4. Redeemable preferred stock issued by Allied Investment Corporation, and
held by the U.S. Small Business Administration, in the outstanding
principal amount of $7,000,000.
5. Allied Capital Corporation, Business Mortgage Investors, Inc., and Morgan
Stanley Capital, Inc. - Master Loan & Security Agreement dated as of
October 7, 1998, as amended, in an aggregate principal amount up to
$250,000,000 (collateralized by Liens on multifamily and commercial
mortgage loans and the documents related thereto including, without
limitation, promissory notes, servicing agreements, mortgage guaranties
and insurance, loan files, documents, and instruments, as well as all
general intangibles and replacements, substitutions, distributions on or
proceeds from any of the foregoing).
6. Allied Investment Corporation (as successor to Allied Investment
Corporation II) - Demand Note Payable to Allied Capital Corporation (as
successor to Allied Capital Corporation II) in an aggregate principal
amount up to $25,000,000.
7. Allied Capital SBLC Corporation Demand Note Payable to Allied Capital
Corporation in an aggregate principal amount up to $75,000,000.
8. Allied Capital Equity, LLC Demand Note Payable to Allied Capital
Corporation in an aggregate principal amount up to $1,000,000.
CREDIT AGREEMENT - SCHEDULE 6.1(g)
<PAGE> 88
SCHEDULE 6.1(h)
MATERIAL CONTRACTS
Borrower has no Material Contracts other than agreements and instruments
relating to Indebtedness of Borrower or its Subsidiaries set forth on Schedule
6.1(g).
CREDIT AGREEMENT - SCHEDULE 6.1(h)
<PAGE> 89
EXHIBIT A
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
Reference is made to the Credit Agreement dated as of March 9, 1999 (as
amended, restated, supplemented, or otherwise modified from time to time, the
"CREDIT AGREEMENT") among ALLIED CAPITAL CORPORATION, a Maryland corporation
(the "BORROWER"), certain Agents and other lenders named therein (the
"LENDERS"), and NATIONSBANK, N.A., as administrative agent for the Lenders (the
"ADMINISTRATIVE AGENT"). Terms defined in the Credit Agreement are used herein
with the same meaning, except that all references to "Loan Documents" shall
expressly exclude Interest Rate Agreements entered into by Assignor, Assignee,
or their Affiliates.
The "ASSIGNOR" and the "ASSIGNEE" referred to on SCHEDULE 1 agree as
follows:
1. The Assignor hereby sells and assigns to the Assignee, without
recourse and without representation or warranty except as expressly set forth
herein, and the Assignee hereby purchases and assumes from the Assignor, an
interest in and to the Assignor's rights and obligations under the Credit
Agreement and the other Loan Documents as of the date hereof equal to the
percentage interest specified on SCHEDULE 1 of all outstanding rights and
obligations under the Credit Agreement and the other Loan Documents. After
giving effect to such sale and assignment, the Assignee's Commitment and the
amount of the Revolving Loans owing to the Assignee will be as set forth on
SCHEDULE 1.
2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Documents
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Loan Documents or any other instrument or document furnished
pursuant thereto; (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of any party to the
Credit Agreement or the performance or observance by any party to the Credit
Agreement of any of its obligations under the Loan Documents or any other
instrument or document furnished pursuant thereto; and (iv) attaches the Note
held by the Assignor and requests that the Administrative Agent exchange such
Note for new Notes payable to the order of the Assignee in an amount equal to
the Commitment assumed by the Assignee pursuant hereto and to the Assignor in an
amount equal to the Commitment retained by the Assignor, if any, as specified on
SCHEDULE 1.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the most recent annual and quarterly
financial statements referred to in ARTICLE 8 thereof and such other documents
and information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance; (ii) agrees that it will,
independently and without reliance upon the Administrative Agent, the Assignor
or any other 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; (iii) confirms that it is an
Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take
such action as agent on its behalf and to exercise such powers and discretion
under the Credit Agreement as are delegated to the Administrative Agent by the
terms thereof, together with such powers and discretion as are reasonably
incidental thereto; (v) 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
CREDIT AGREEMENT - EXHIBIT A
<PAGE> 90
by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service or other
forms required under SECTION 4.6.
4. Following the execution of this Assignment and Acceptance, it will be
delivered to the Administrative Agent for acceptance and recording by the
Administrative Agent. The effective date for this Assignment and Acceptance (the
"EFFECTIVE DATE") shall be the date of acceptance hereof by the Administrative
Agent, unless otherwise specified on SCHEDULE 1.
5. Upon such acceptance and recording by the Administrative Agent, as of
the Effective Date, (i) the Assignee shall be a party to the Credit Agreement
and, to the extent provided in this Assignment and Acceptance, have the rights
and obligations of a Lender thereunder and (ii) the Assignor shall, to the
extent provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Administrative Agent, from
and after the Effective Date, the Administrative Agent shall make all payments
under the Credit Agreement and the Notes in respect of the interest assigned
hereby (including, without limitation, all payments of principal, interest and
commitment fees with respect thereto) to the Assignee. The Assignor and Assignee
shall make all appropriate adjustments in payments under the Credit Agreement
and the Notes for periods prior to the Effective Date directly between
themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of New York.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of SCHEDULE 1 to this Assignment and Acceptance by telecopier shall
be effective as delivery of a manually executed counterpart of this Assignment
and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused SCHEDULE 1
to this Assignment and Acceptance to be executed by their officers thereunto
duly authorized as of the date specified thereon.
2 CREDIT AGREEMENT - EXHIBIT A
<PAGE> 91
SCHEDULE 1
TO
ASSIGNMENT AND ACCEPTANCE AGREEMENT
(Page 1 of 2)
<TABLE>
<S> <C>
1. Assigned Interest:
(a) Assignor's Commitment prior to giving effect to the Assignment
to Assignee $
------------
(b) Aggregate Loans owed to Assignor (inclusive of participations in
Swing Line Loans, if any), immediately prior to giving
effect to the assignment to Assignee $
------------
(c) Aggregate Revolving Loans owed to Assignor immediately
prior to giving effect to the assignment to Assignee $
------------
(d) Percentage Interest in Commitment and Loans being assigned
to Assignee by Assignor %
-----------
2. Adjustments after giving effect to Assignment between Assignor and Assignee:
(a) Assignor's Commitment $
------------
(b) Assignee's Commitment acquired from Assignor pursuant to
this Assignment $
------------
(c) Assignor's aggregate Loans (inclusive of participations
in Swing Line Loans, if any) $
------------
(d) Assignee's Loans (inclusive of participations in Swing Line Loans,
if any) acquired from Assignor pursuant to this Assignment $
------------
(e) Assignor's aggregate Revolving Loans $
------------
(f) Assignee's Revolving Loans acquired from Assignor
pursuant to the Assignment $
------------
3. Effective Date (if other than date of acceptance by Administrative
Agent): *
-------------- ---,-----
</TABLE>
- --------------------
* This date should be no earlier than five Business Days after the
delivery of this Assignment and Acceptance to the Administrative Agent.
3 CREDIT AGREEMENT - EXHIBIT A
<PAGE> 92
SCHEDULE 1
TO
ASSIGNMENT AND ACCEPTANCE AGREEMENT
(Page 2 of 2)
[NAME OF ASSIGNOR], as Assignor
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
Dated:____________________, 19__
[NAME OF ASSIGNEE], as Assignee
By:
--------------------------------------
Name:
--------------------------------
Title:
--------------------------------
Dated:____________________, 19__
Domestic Lending Office:
Eurodollar Lending Office:
4 CREDIT AGREEMENT - EXHIBIT A
<PAGE> 93
If SECTION 12.4(a) and CLAUSE (iii) of the definition of "ELIGIBLE ASSIGNEE" of
the Agreement so require, Borrower and Administrative Agent consent to this
Assignment and Acceptance.
ALLIED CAPITAL CORPORATION, as Borrower
By:
----------------------------------------
Name:
----------------------------------
Title:
----------------------------------
Dated:___________________, 19__
NATIONSBANK, N.A., as Administrative Agent
By:
---------------------------------------
Name:
---------------------------------
Title:
---------------------------------
Dated:___________________, 19__
5 CREDIT AGREEMENT - EXHIBIT A
<PAGE> 94
EXHIBIT B
FORM OF NOTICE OF BORROWING
------------------, -----
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Shelly K. Harper
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of March 9,
1999 (as amended, restated, supplemented, or otherwise modified from time to
time, the "CREDIT AGREEMENT"), by and among Allied Capital Corporation (the
"BORROWER"), certain Agents and other lenders named therein (the "LENDERS"), and
NationsBank, N.A., as administrative agent for the Lenders (the "ADMINISTRATIVE
AGENT"). Capitalized terms used herein, and not otherwise defined herein, have
their respective meanings given them in the Credit Agreement.
The undersigned hereby gives you notice pursuant to the Credit Agreement
that it requests a Loan (other than a Swing Line Loan) under the Credit
Agreement, and in that connection sets forth below the terms on which such Loan
is requested to be made:
<TABLE>
<S> <C>
(A) Date of Loan* (A)
----------
(B) Amount of Loan** (B)
----------
(C) Type of Loan*** (C)
----------
(D) For a Eurodollar Loan, the Interest Period**** (D)
----------
</TABLE>
On the date the rate is set, please confirm the interest rate below and
return by facsimile transmission to _________________________.
The proceeds of this borrowing of Loans will be used for the following
purpose:
The Borrower requests that the proceeds of this borrowing of Loans be
made available by: _________________________.
The Borrower hereby certifies to Administrative Agent and the Lenders
that as of the date hereof and as of the date of the making of the requested
Loans and after giving effect thereto, (a) no Default or Event of Default has or
shall have occurred and be continuing, and (b) the representations and
warranties made or deemed made by the Borrower and its Subsidiaries in the Loan
Documents to which any of them is a party, are and shall be true and correct,
except to the extent that such representations and warranties expressly relate
solely to an earlier date (in which case such representations and warranties
were true and accurate on and as
CREDIT AGREEMENT - EXHIBIT B
<PAGE> 95
of such earlier date) and except for changes in factual circumstances
specifically and expressly permitted under the Credit Agreement. In addition,
the Borrower certifies to the Administrative Agent and the Lenders that all
conditions to the making of the requested Loans contained in Article 5 of the
Credit Agreement will have been satisfied at the time such Loans are made.
If notice of the requested borrowing of Loans was previously given by
telephone, this notice is to be considered the written confirmation of such
telephone notice required by Section 2.3(a) of the Credit Agreement.
ALLIED CAPITAL CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
-------------------------------
* Must be a Business Day occurring prior to the Termination Date and
otherwise consistent with SECTION 2.3(a) of the Credit Agreement.
** Not less than $1,000,000 or a greater integral multiple of $1,000,000.
*** Eurodollar Loan or Base Rate Loan.
**** Eurodollar Loan -- 1, 2, 3, or 6 months.
In no event may the Interest Period end after the Termination Date.
2 CREDIT AGREEMENT - EXHIBIT B
<PAGE> 96
EXHIBIT C
FORM OF NOTICE OF CONTINUATION
- -----------------, -----
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Shelly K. Harper
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of March 9,
1999 (as amended, restated, supplemented, or otherwise modified from time to
time, the "CREDIT AGREEMENT"), by and among Allied Capital Corporation (the
"BORROWER"), certain Agents and other lenders named therein (the "LENDERS"), and
NationsBank, N.A., as administrative agent for the Lenders (the "ADMINISTRATIVE
AGENT"). Capitalized terms used herein, and not otherwise defined herein, have
their respective meanings given them in the Credit Agreement.
Pursuant to Section 2.8 of the Credit Agreement, the Company hereby
requests a Continuation of a borrowing of Eurodollar Loans under the Credit
Agreement, and in that connection sets forth below the information relating to
such Continuation as required by such Section of the Credit Agreement:
1. The proposed date of such Continuation is _________________, ____.
2. The aggregate principal amount of Eurodollar Loans subject to the
requested Continuation is $_______________ and was originally
borrowed by the Company on ________________.
3. The portion of such principal amount subject to such Continuation is
$________________.
4. The current Interest Period for each of the Eurodollar Loans subject
to such Continuation ends on _________________, ____.
5. The duration of the new Interest Period for each of such Eurodollar
Loans or portion thereof subject to such Continuation is:
[CHECK ONE BOX ONLY] [ ] one month
[ ] two months
[ ] three months
[ ] six months
The Company hereby certifies to Administrative Agent and the Lenders that
as of the date hereof, as of the proposed date of the requested Continuation,
and after giving effect to such Continuation, no Default or Event of Default has
or shall have occurred and be continuing.
CREDIT AGREEMENT - EXHIBIT C
<PAGE> 97
If notice of the requested Continuation was given previously by
telephone, this notice is to be considered the written confirmation of such
telephone notice required by Section 2.8 of the Credit Agreement.
ALLIED CAPITAL CORPORATION
By:
-------------------------------------
Name:
-------------------------------
Title:
-------------------------------
2 CREDIT AGREEMENT - EXHIBIT C
<PAGE> 98
EXHIBIT D
FORM OF NOTICE OF CONVERSION
-----------------, -----
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Shelly K. Harper
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of March 9,
1999 (as amended, restated, supplemented, or otherwise modified from time to
time, the "CREDIT AGREEMENT"), by and among Allied Capital Corporation (the
"BORROWER"), certain Agents and other lenders named therein (the "LENDERS"), and
NationsBank, N.A., as administrative agent for the Lenders (the "ADMINISTRATIVE
AGENT"). Capitalized terms used herein, and not otherwise defined herein, have
their respective meanings given them in the Credit Agreement.
Pursuant to Section 2.9 of the Credit Agreement, the Company hereby
requests a Conversion of a borrowing of Loans of one Type into Loans of another
Type under the Credit Agreement, and in that connection sets forth below the
information relating to such Conversion as required by such Section of the
Credit Agreement:
l. The proposed date of such Conversion is _________________, _____.
2. The Loans to be Converted pursuant hereto are currently:
[CHECK ONE BOX ONLY]
[ ] Base Rate Loans
[ ] Eurodollar Loans
3. The aggregate principal amount of Loans subject to the requested
Conversion is $____________ and was originally borrowed by the
Company on ____________, _____.
4. The portion of such principal amount subject to such Conversion is
$_________________.
5. The amount of such Loans to be so Converted is to be converted into
Loans of the following Type:
[CHECK ONE BOX ONLY]
[ ] Base Rate Loans
[ ] Eurodollar Loans
CREDIT AGREEMENT - EXHIBIT D
<PAGE> 99
[CHECK ONE BOX ONLY]
[ ] one month
[ ] two months
[ ] three months
[ ] six months
The Company hereby certifies to Administrative Agent and the Lenders that
as of the date hereof and as of the date of the requested Conversion and after
giving effect thereto, (a) no Default or Event of Default has or shall have
occurred and be continuing, and (b) the representations and warranties made or
deemed made by the Company and its Subsidiaries in the Loan Documents to which
any of them is a party, are and shall be true and correct, except to the extent
that such representations and warranties expressly relate solely to an earlier
date (in which case such representations and warranties were true and accurate
on and as of such earlier date) and except for changes in factual circumstances
specifically and expressly permitted under the Credit Agreement.
If notice of the requested Conversion was given previously by telephone,
this notice is to be considered the written confirmation of such telephone
notice required by Section 2.9 of the Credit Agreement.
ALLIED CAPITAL CORPORATION
By:
------------------------------------
Name:
------------------------------
Title:
------------------------------
2 CREDIT AGREEMENT - EXHIBIT D
<PAGE> 100
EXHIBIT E-1
FORM OF REVOLVING NOTE
$_____________________ March 9, 1999
FOR VALUE RECEIVED, the undersigned, ALLIED CAPITAL CORPORATION, a
Maryland corporation (the "BORROWER), hereby promises to pay to the order of
___________________________ (the "LENDER"), in care of NationsBank, N.A., as
Administrative Agent (the "ADMINISTRATIVE AGENT") at___________________________
______________________, or at such other address as may be specified by the
Administrative Agent to Borrower, the principal sum of _______________________
AND ___/100 DOLLARS (or such lesser amount as shall equal the aggregate unpaid
principal amount of Loans made by the Lender to Borrower under the Credit
Agreement), on the dates and in the principal amounts provided in the Credit
Agreement, and to pay interest on the unpaid principal amount owing hereunder,
at the rates and on the dates provided in the Credit Agreement.
The date, amount of each Loan made by the Lender to Borrower, and each
payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedule attached hereto or any continuation thereof, provided
that, the failure of the Lender to made any such recordation or endorsement
shall not affect the obligations of Borrower to make a payment when due of any
amount owing under the Credit Agreement or hereunder in respect of such Loans
made by the Lender.
This Note is one of the "Notes" referred to in the Credit Agreement dated
as of March 9, 1999 (as amended, restated, supplemented or otherwise modified
from time to time, the "CREDIT AGREEMENT"), by and among Borrower,
Administrative Agent, certain other Agents, Lender, and the other lenders party
thereto. Terms used but not otherwise defined in this Note have the respective
meanings assigned to them in the Credit Agreement. Reference is made to the
Credit Agreement for provisions affecting this note regarding applicable
interest rates, principal and interest payment dates, final maturity, voluntary
and mandatory prepayments, acceleration of maturity, exercise of rights, payment
of attorneys' fees, court costs and other costs of collection, certain waivers
by Borrower and others now or hereafter obligated for payment of any sums due
hereunder and security for the payment hereof.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
Except as permitted by Section 12.4 of the Credit Agreement, this Note
may not be assigned by the Lender to any other Person.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY
PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES
OR PROVISIONS.
Borrower hereby waives presentment for payment, demand, notice of demand,
notice of non-payment, protest, notice of protest and all other similar notices.
CREDIT AGREEMENT - EXHIBIT E-1
<PAGE> 101
Time is of the essence for this Note.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note
under seal as of the date first written above.
ALLIED CAPITAL CORPORATION
By:
---------------------------------
Name:
---------------------------
Title:
---------------------------
ATTEST:
By:
---------------------------------
Name:
---------------------------
Title:
---------------------------
[CORPORATE SEAL]
2 CREDIT AGREEMENT - EXHIBIT E-1
<PAGE> 102
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Credit
Agreement to Borrower, on the dates and in the principal amounts set forth
below, subject to the payments and prepayments of principal set forth below:
<TABLE>
<S> <C> <C> <C> <C>
PRINCIPAL AMOUNT PAID UNPAID PRINCIPAL NOTATION
--------- ----------- ---------------- --------
DATE OF LOAN AMOUNT OF LOAN OR PREPAID AMOUNT MADE BY
------------ -------------- ---------- ------ -------
</TABLE>
3 CREDIT AGREEMENT - EXHIBIT E-1
<PAGE> 103
EXHIBIT E-2
FORM OF SWING LINE NOTE
$25,000,000 March 9, 1999
FOR VALUE RECEIVED, the undersigned, ALLIED CAPITAL CORPORATION, a
Maryland corporation (the "BORROWER"), hereby promises to pay to the order of
NATIONSBANK, N.A. (the "LENDER"), on the Termination Date, the lesser of (i)
TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000) and (ii) the aggregate
principal amount of Loans under the Swing Line Subfacility disbursed by the
Lender to Borrower and outstanding and unpaid on the Termination Date (together
with accrued and unpaid interest thereon)
This Note is one of the "Notes" referred to in the Credit Agreement dated
as of March 9, 1999 (as amended, restated, supplemented or otherwise modified
from time to time, the "CREDIT AGREEMENT"), by and among Borrower, NationsBank,
N.A., as Administrative Agent, certain other Agents, Lender, and the other
lenders party thereto. Terms used but not otherwise defined in this Note have
the respective meanings assigned to them in the Credit Agreement. Reference is
made to the Credit Agreement for provisions affecting this note regarding
applicable interest rates, terms, and conditions of Swing Line Loans, principal
and interest payment dates, final maturity, voluntary and mandatory prepayments,
acceleration of maturity, exercise of rights, payment of attorneys' fees, court
costs, and other costs of collection, certain waivers by Borrower and others now
or hereafter obligated for payment of any sums due hereunder and security for
the payment hereof.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
Except as permitted by Section 12.4 of the Credit Agreement, this Note
may not be assigned by the Lender to any other Person.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY
PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES
OR PROVISIONS.
Borrower hereby waives presentment for payment, demand, notice of demand,
notice of non-payment, protest, notice of protest and all other similar notices.
Time is of the essence for this Note.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note
under seal as of the date first written above.
ALLIED CAPITAL CORPORATION ATTEST:
By: By:
---------------------------- -----------------------------
Name: Name:
---------------------- -----------------------
Title: Title:
---------------------- -----------------------
[CORPORATE SEAL]
CREDIT AGREEMENT - EXHIBIT E-2
<PAGE> 104
EXHIBIT F
FORM OF OPINION OF COUNSEL
March 10, 1999
NationsBank, N.A., as Administrative Agent
Each Lender named in SCHEDULE 2 to the Credit Agreement referred to below
RE: CREDIT AGREEMENT FOR ALLIED CAPITAL CORPORATION
Ladies and Gentlemen:
We have acted as counsel to Allied Capital Corporation ("BORROWER") in
connection with the execution and delivery of the Credit Agreement, dated as of
March 9, 1999 (the "CREDIT AGREEMENT"), between Borrower, NationsBank, N.A., as
Administrative Agent, and the lenders named therein ("Lenders"). This opinion
letter is being delivered to you pursuant to SECTION 5.1 (a)(iv) of the Credit
Agreement. Capitalized terms used herein have the same meanings as are ascribed
to them in the Credit Agreement unless otherwise defined herein.
1. EXAMINATION. We have examined the documents listed below in this
PARAGRAPH 1 and such other documents, records and matters of law as we have
deemed necessary for purposes of this opinion letter:
1.1 the Credit Agreement;
1.2 the Notes;
1.3 the Charter and By-Laws of Borrower;
1.4 a Certificate of Existence and Good Standing with respect to
Borrower issued by the Maryland State Department of Assessments
and Taxation on March 5, 1999;
2. OPINIONS. Based upon our examination described in PARAGRAPH 1 above,
but subject to the assumptions, limitations, and qualifications set forth in
PARAGRAPH 4 below, we are of the opinion that:
2.1 Borrower is a corporation duly incorporated under the laws of the
State of Maryland, is in good standing and has a legal corporate existence in
the State of Maryland and has the corporate power and authority to execute and
deliver, and to perform its obligations under, the Credit Agreement and the
Notes.
2.2 The execution and delivery by Borrower of the Credit Agreement and
the Notes and the performance by Borrower of its obligations thereunder (a) have
been duly authorized by all necessary corporate action on the part of Borrower,
(b) do not violate (i) any provision of Borrower's Charter or By-Laws, (ii) the
General Corporation Law of the State of Maryland, (iii) any applicable statute
or regulation of the State of New York that a lawyer in such state exercising
customary professional diligence would reasonably recognize as being directly
applicable, (iv) to our knowledge, any order or ruling of any court or other
governmental body of the United States or the State of Maryland applicable to
Borrower, or (v) to our knowledge, any written agreement to which Borrower is a
party, (c) to our knowledge, do not result in the creation of any Lien on any
asset of Borrower, and (d) do not require any Governmental Approvals, or, to our
knowledge, approvals of any other Person, other than such as have been obtained
and are in full force and effect.
2 EXHIBIT F
<PAGE> 105
2.3 The Credit Agreement and the Notes constitute the valid and
binding obligations of Borrower, enforceable against Borrower in accordance with
their respective terms.
2.4 Borrower has elected to be regulated as a business development
company under the Investment Company Act of 1940, as amended, and to our
knowledge has not withdrawn that election.
3. CONFIRMATION REGARDING LITIGATION. Although we are not the sole
outside counsel engaged by Borrower, we have been engaged by Borrower on various
matters, including securities law disclosure matters of Borrower. We hereby
confirm to you that, to the best of our knowledge and without any independent
investigation, there are no actions or proceedings pending against Borrower by
or before any court which we have advised Borrower should be disclosed in any
report required to be filed by Borrower with the Securities and Exchange
Commission.
4. ASSUMPTIONS. LIMITATIONS QUALIFICATIONS. Our opinions herein are
rendered upon the assumptions and are subject to the limitations and
qualifications set forth below in this PARAGRAPH 4:
4.1 As to factual matters relating to our opinions herein, we have
relied upon statements, certificates, and other assurances of public officials
and of officers and other representatives of Borrower, upon such other
certificates as we deemed appropriate and upon the representations, warranties,
and covenants of Borrower set forth in the Credit Agreement, which factual
matters have not been independently established or verified by us.
4.2 We have assumed (a) the genuineness of all signatures (other than
those of Borrower) on all documents submitted to us for examination, (b) the
truthfulness of all facts stated in such documents, (c) the legal capacity of
all natural persons, (d) the authenticity of all documents submitted to us as
originals, (e) the conformity to original documents of all documents submitted
to us as copies and the authenticity of the originals of such copied documents,
and (f) that all certificates issued by public officials have been properly
issued.
4.3 We have assumed, without independent check or verification, that
each Lender has all requisite power and authority to execute, deliver, and
perform its obligations under the Credit Agreement, and that the Credit
Agreement has been duly authorized by all necessary action on the part of such
Lender, has been duly executed and delivered by such Lender and constitutes the
legal, valid, and binding obligation of such Lender, enforceable against such
Lender in accordance with its terms.
4.4 Our opinions herein are subject to the effect of (a) laws relating
to bankruptcy, reorganization, insolvency, receivership, moratorium, fraudulent
conveyance, or other similar laws now or hereafter in effect relating to or
limiting creditors' rights generally, (b) the application of general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law), and (c) the exercise of judicial discretion.
The use of the term "enforceable" in this opinion letter does not imply any
opinion as to the availability of equitable remedies.
4.5 We express no opinion as to (i) the effect of the law of any
jurisdiction, other than the State of New York, in which any Lender is located,
including, but not limited to, any law which limits the rate of interest that
such Lender may charge or collect, (ii) whether the Lenders may exercise their
remedies under SECTION 10.2 of the Credit Agreement in respect of any Event of
Default that is not material, (iii) whether any determination to be made
conclusively by any Lender or Administrative Agent would be enforceable unless
made reasonably and in good faith, or (iv) the effect of SECTION 3.3 of the
Credit Agreement.
4.6 In basing the opinions and other matters set forth herein on "our
knowledge", the words "our knowledge" signify that, in the course of our
representation of Borrower in matters with respect
3 EXHIBIT F
<PAGE> 106
to which we have been engaged by Borrower as counsel, no information has come to
our attention that would give us actual existing knowledge or actual existing
notice that any such opinions or other matters are not accurate or that any of
the documents, certificates, reports, and information on which we have relied
are not accurate and complete. We have undertaken no independent investigation
or verification of such matters. The words "our knowledge" and similar language
used herein are intended to be limited to the knowledge of the lawyers within
our firm having, in connection with our special representation in this matter,
detailed knowledge of the transaction evidenced by the Credit Agreement and the
Notes and the substance of this opinion.
4.7 We express no opinion as to the enforceability of any provisions
in the Credit Agreement which purport to (a) indemnify any party, to the extent
that such indemnification is prohibited by public policy considerations
(although we are not aware of any public policy consideration imposing such a
prohibition), or indemnify a party against its own negligence or willful
misconduct, or (b) provide that any provision of the Credit Agreement may be
waived only in writing, to the extent that an oral agreement or an implied
agreement by trade practice or course of conduct has been created that modifies
any provision of the Credit Agreement.
4.8 We render no opinion as to matters involving the laws of any
jurisdiction other than the laws of the State of New York, the General
Corporation Laws of the State of Maryland, and the federal laws of the United
States of America. Although the lawyers of this firm responsible for the
preparation and review of this opinion letter, as well as other lawyers of this
firm, are admitted to practice in other jurisdictions, we have neither examined
nor considered the laws of any other jurisdiction in connection with this
opinion letter.
4.9 The opinions expressed in this opinion letter are limited to the
matters set forth in this opinion letter as of the date hereof, and no other
opinions should be inferred beyond the matters expressly stated. We assume no
obligation to supplement this opinion letter if any applicable laws change after
the date hereof or if we become aware of any facts that might change the
opinions expressed herein after the date hereof.
4.10 Our opinions expressed herein are rendered solely for the use of
the Lenders, the Administrative Agent, any Eligible Assignees of the Lenders,
and Haynes and Boone, LLP, as counsel to the Administrative Agent, and these
opinions may not be relied on by any other persons without our prior written
approval.
Very truly yours,
Sutherland, Asbill & Brennan LLP
By:
----------------------------------
James D. Darrow
4 EXHIBIT F
<PAGE> 107
EXHIBIT G
FORM OF COMPLIANCE CERTIFICATE
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Shelly K. Harper
Each of the Lenders Party to the Credit
Agreement referred to below
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of March 9,
1999 (as amended, restated, supplemented, or restated from time to time, the
"CREDIT AGREEMENT"), by and among Allied Capital Corporation (the "BORROWER"),
certain other Agents and the lenders named therein (the "LENDERS"), and
NationsBank, N.A., as administrative agent for the Lenders (the "ADMINISTRATIVE
AGENT"). Capitalized terms used herein, and not otherwise defined herein, have
their respective meanings given them in the Credit Agreement.
Pursuant to Section 8.3 of the Credit Agreement, the undersigned hereby
certifies to the Lender as follows:
(l) The undersigned is the chief financial officer of Borrower.
(2) The undersigned has examined the books and records of Borrower and
has conducted such other examinations and investigations as are reasonably
necessary to provide this Compliance Certificate.
(3) To the best of the undersigned's knowledge, information and belief,
no Default or Event of Default exists [if such is not the case, specify such
Default or Event of Default and its nature, when if occurred and whether it is
continuing and the steps being taken by Borrower with respect to such event,
condition, or failure.]
(4) To the best of the undersigned's knowledge, information, and belief,
the representations and warranties made or deemed made by Borrower and its
Subsidiaries in the Loan Documents to which any of them is a party, are true and
correct on and as of 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
on and as of such earlier date) and except for changes in factual circumstances
specifically and expressly permitted under the Credit Agreement.
(5) Attached hereto as SCHEDULE 1 are the calculations required to
establish whether or not Borrower and its Subsidiaries, were in compliance with
the covenants contained in SECTIONS 9.1.
CREDIT AGREEMENT - EXHIBIT G
<PAGE> 108
IN WITNESS WHEREOF, the undersigned has executed this certificate as of
the date first above written.
------------------------------------------
Name:
-----------------------------
Title:
-----------------------------
2 CREDIT AGREEMENT - EXHIBIT G
<PAGE> 1
EXHIBIT EX-99.2h.1
FORM OF UNDERWRITING AGREEMENT
- --------------------------------------------------------------------------------
______________ SHARES
ALLIED CAPITAL CORPORATION
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
dated ________, 1999
-------------------------------------
<PAGE> 2
___________ SHARES
ALLIED CAPITAL CORPORATION
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
_______, 1999
- ------------------------------
- ------------------------------
- ------------------------------
Ladies and Gentlemen:
Allied Capital Corporation, a Maryland corporation (the
"COMPANY"), proposes to issue and sell to __________________________ (the
"UNDERWRITER") an aggregate of _____________ shares of its common stock,
$0.0001 par value per share (the "FIRM SHARES").
The Company also proposes to issue and sell to the Underwriter
not more than an additional _____________ shares of its common stock, $0.0001
par value per share (the "ADDITIONAL SHARES"), if and to the extent that the
Underwriter shall have determined to exercise the right to purchase such shares
of common stock granted in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "SHARES." The shares of
common stock, $0.0001 par value per share, of the Company to be outstanding
after giving effect to the sales contemplated hereby, are hereinafter referred
to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement relating to the Shares.
The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 497 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus (as described in
Rule 497 under the Securities Act) in the form first used to confirm sales of
Shares is hereinafter referred to as the "DISTRIBUTED PROSPECTUS"; the
prospectus included in the Registration Statement at the time of its
effectiveness (including the information, if any, deemed to be a part of the
Registration Statement at the time of effectiveness pursuant to Rule 497 under
the Securities Act) is hereinafter referred to as the "FILED PROSPECTUS"; and
the Distributed Prospectus and the Filed Prospectus, together with the
Statement of Additional Information incorporated by reference therein, are
hereinafter referred to collectively as the "PROSPECTUS."
1. REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to and agrees with the Underwriter that:
(a) The Registration Statement has become effective;
no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose
are pending before or threatened by the Commission.
<PAGE> 3
(b) (i) The Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus
and any amendment or supplement thereto will comply in all
material respects with the Securities Act and with the
provisions of the Investment Company Act of 1940, as amended
(the "Investment Company Act") applicable to business
development companies and with the applicable rules and
regulations of the Commission thereunder, respectively and
(iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading,
except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus or any amendment or
supplement thereto based upon information relating to the
Underwriter furnished to the Company in writing by the
Underwriter expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business
as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly
incorporated or formed, is validly existing as a corporation
or a limited liability company, as applicable, is in good
standing under the laws of the jurisdiction of its
incorporation or formation, as applicable, has the power and
authority to own its property and to conduct its business, in
each case as described in the Prospectus, and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be
in good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole; all of the
issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly by the
Company, free and clear of all liens, encumbrances, equities
or claims, except with respect to the employee-owned shares of
preferred stock of Allied Capital REIT, Inc. and the Preferred
Stock of Allied Investment Corporation owned by the U.S. Small
Business Administration (the "SBA");
(e) This Agreement has been duly authorized, executed
and delivered by the Company.
(f) The authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are
validly issued, fully paid and non-assessable.
2
<PAGE> 4
(h) The Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights.
(i) The Common Stock is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), and is listed on the Nasdaq
National Market, and the Company has taken no action designed
to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or
delisting the Common Stock from the Nasdaq National Market,
nor has the Company received any notification that the
Commission or the National Association of Securities Dealers,
Inc. is contemplating terminating such registration or
listing.
(j) The execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law
or the certificate of incorporation or by-laws of the Company
or any agreement or other instrument binding upon the Company
or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
(k) There has not occurred any material adverse
change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or
in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement).
(l) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of
the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(m) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 497 under the
Securities Act, complied when so filed in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(n) The operations of the Company and its
subsidiaries are in compliance in all material respects with
the provisions of the Investment Company Act applicable to
business development companies and the rules and regulations
of the Commission thereunder.
(o) To the best of its knowledge, the Company and its
subsidiaries (i) are in compliance with any and all applicable
foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the
environment or hazardous or toxic
3
<PAGE> 5
substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any
such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses
or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) There are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Securities Act with respect
to any securities of the Company (except for sales of Common
Stock aggregating less than 100,000 shares) or to require the
Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(q) The Company has elected to be regulated as a
business development company under the Investment Company Act
and has not withdrawn that election, and the Commission has
not ordered that such election be withdrawn. All required
action has or will have been taken by the Company under the
Securities Act, the Investment Company Act, and the rules and
regulations of the Commission thereunder, respectively, to
make the public offering and consummate the sale of the Shares
as provided in this Agreement.
(r) The Company owns or possesses or has obtained all
governmental licenses, permits, consents, orders, approvals
and other authorizations, whether international or domestic,
necessary to carry on its business as contemplated, except to
the extent that the failure to own or possess or have obtained
such authorizations would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(s) There are no material restrictions, limitations
or regulations with respect to the ability of the Company or
its subsidiaries to invest its assets as described in the
Prospectus, other than as described therein.
(t) The Company is organized and operated in
conformance with the requirements of the Investment Company
Act and the requirements to be taxed as a Regulated Investment
Company (Sections 851 et seq. of the Internal Revenue Code of
1986, as amended (the "CODE")). The Company's method of
operation will permit it to continue to meet the requirements
for qualification as a business development company under the
Investment Company Act and taxation as a Regulated Investment
Company under the Code.
(u) The only significant subsidiaries for purposes of
Rule 405 under the Securities Act are Allied Investment
Corporation and Allied Capital REIT, Inc.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell
to the Underwriter, and the Underwriter, upon the basis of the representations
and warranties herein contained, but subject to the conditions hereinafter
stated, agrees to purchase from the Company the number of Firm Shares set forth
in Schedules I hereto opposite its name at $_____ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
sell to the Underwriter the Additional Shares, and the Underwriter shall have a
one-time right to purchase up to __________ Additional Shares at the Purchase
4
<PAGE> 6
Price. If the Underwriter elects to exercise such option, the Underwriter
shall so notify the Company in writing not later than 30 days after the date of
this Agreement, which notice shall specify the number of Additional Shares to
be purchased by the Underwriter and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in
Section 4 hereof solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares.
The Company hereby agrees that, without the prior written
consent of the Underwriter, it will not, during the period ending 90 days after
the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the sale by the
Underwriter of any share of Common Stock pursuant to the Underwriting
Agreement, (B) any issuance of shares of Common Stock, options, or other
securities or rights pursuant to any employee or director compensation, option,
savings, benefit or other plan of the Company existing as of the date of the
Underwriting Agreement, (C) any issuances upon exercise, conversion or exchange
of any securities or obligations outstanding on the date of the Underwriting
Agreement, and (D) an additional issuance of equity securities aggregating not
more than $__________.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriter proposes to make a public offering of Shares as soon after
the Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares
are to be offered to the public initially at $_____ a share (the "PUBLIC
OFFERING PRICE") and to certain dealers selected by you at a price that
represents a concession not in excess of $____ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $____ a share, to certain brokers and
dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall
be made to the Company by the wire transfer of immediately available funds to
the order of the Company against delivery of such Firm Shares for the account
of the Underwriter at ____ a.m., _________ time, on ____________, 1998, or at
such other time on the same or such other date, not later than 10:30 a.m.,
____________ time, on _________, 1998, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"CLOSING DATE."
Payment for any Additional Shares shall be made to the
Company in by the wire transfer of immediately available funds to the order of
the Company against delivery of such Additional Shares for the account of the
Underwriter at _____ a.m., __________ time, on the date specified in the notice
described in Section 2 or at such other time on the same or on such other date,
in any event not later than 10:30 a.m., ___________ time, on _______, 1998, as
shall be designated in writing by the Underwriter. The time and date of such
payment are hereinafter referred to as the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares
shall be in definitive form and registered in such names and in such
denominations as you shall request in writing not later than one full business
day prior to the Closing Date or the Option Closing Date, as the case may be.
The certificates evidencing the Firm Shares and Additional Shares shall be
delivered to you on the Closing Date or the
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Option Closing Date, as the case may be, for the account of the Underwriter,
with any transfer taxes payable in connection with the transfer of the Shares
to the Underwriter duly paid, against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITER'S OBLIGATIONS. The
obligations of the Company to sell the Shares to the Underwriter and the
obligation of the Underwriter to purchase and pay for the Shares on the Closing
Date are subject to the condition that the Registration Statement shall have
become effective not later than _______ (New York City time) on the date
hereof. The obligations of the Underwriter are subject to the following further
conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, there shall not have
occurred any change, or any development involving a
prospective change, in the condition, financial or otherwise,
or in the earnings, business or operations of the Company and
its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(b) The Underwriter shall have received on the
Closing Date a certificate, dated the Closing Date and signed
by an executive officer of the Company, to the effect set
forth in Section 5(a) above and to the effect that the
representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and
that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate
may rely upon the best of his or her knowledge as to proceedings
threatened.
(c) The Underwriter shall have received on the
Closing Date an opinion of Sutherland Asbill & Brennan LLP,
outside counsel for the Company, dated the Closing Date, to
the effect that:
(i) the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business, in each case as
described in the Prospectus, and is duly qualified to transact
business and is in good standing in the District of Colombia
and the States of Illinois, Michigan and California;
(ii) each of Allied Investment
Corporation and Allied Capital REIT, Inc. (collectively, the
"SUBSIDIARIES") of the Company has been duly incorporated,
is validly existing as a corporation, is in good standing
under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its property and to
conduct its business, in each case as described in the
Prospectus, and Allied Investment is duly qualified to
transact business and is in good standing in the District of
Columbia and the State of California, as applicable;
(iii) the authorized capital stock of the
Company conforms as to legal matters to the description
thereof contained in the Prospectus;
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(iv) the shares of Common Stock
outstanding immediately prior to the issuance of the Shares
have been duly authorized and are validly issued, fully paid
and non-assessable;
(v) all of the issued shares of capital
stock of each Subsidiary are owned of record directly by the
Company, and to such counsel's knowledge, are free and clear
of all liens, encumbrances, equities or claims, except with
respect to the employee-owned shares of preferred stock of
Allied Capital REIT, Inc. and the Preferred Stock of Allied
Investment Corporation owned by the SBA.
(vi) the Shares have been duly authorized
and, when issued and delivered against payment therefor in
accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar
rights under provisions of applicable law or the certificate
of incorporation or bylaws of the Company or, to the best of
such counsel's knowledge, any agreement or other instrument
binding upon the Company or any of its Subsidiaries;
(vii) this Agreement has been duly
authorized, executed and delivered by the Company;
(viii) the execution and delivery by the
Company of, and the performance by the Company of its
obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of
incorporation or by-laws of the Company or, to the best of
such counsel's knowledge, any agreement or other instrument
binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary,
and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is
required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the
National Association of Securities Dealers, Inc. or the
securities or Blue Sky laws of the various states or of any
foreign jurisdiction in connection with the offer and sale of
the Shares by the Underwriter;
(ix) the statements (A) in the Prospectus
under the captions "Certain Government Regulations,"
"Description of Capital Stock," "Taxation" and "Underwriting,"
(B) in the Statement of Additional Information under the
caption "Tax Status" and (C) in the Registration Statement in
Item 29, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein;
(x) to such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is a party or
to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so
described and to such counsel's knowledge, there are no
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xi) the Company has elected to be
regulated as a business development company under the
provisions of the Investment Company Act applicable to
business
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<PAGE> 9
development companies and the Commission has not ordered that
such election be withdrawn, and all action under the
Securities Act necessary to make the public offering and
consummate the sale of the Shares as provided in this
Agreement has been taken by the Company; and
(xii) such counsel (A) is of the opinion
that the Registration Statement and the Prospectus (except for
financial statements and schedules and other financial and
statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (B) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading, (C) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Prospectus contains
any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading and (D) is of the opinion that the
Distributed Prospectus is not materially different from the
Filed Prospectus.
(d) The Underwriter shall have received on the
Closing Date an opinion of counsel for the Underwriter, dated
the Closing Date, covering the matters referred to in Sections
5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements
in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 5(c)(xii) above. With respect to Section
5(c)(xii) above, Sutherland Asbill & Brennan LLP and counsel
to the Underwriter may state that their opinion and belief are
based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or
supplements thereto and review and discussion of the contents
thereof, but are without independent check or verification,
except as specified. The opinion of Sutherland, Asbill &
Brennan LLP described in Section 5(c) above shall be rendered
to the Underwriter at the request of the Company and shall so
state therein.
(e) The Underwriter shall have received, on each of
the date hereof and the Closing Date, a letter dated he date
hereof or the Closing Date, as the case may be, in form and
substance satisfactory to the Underwriter, from Arthur
Anderson LLP, independent public accountants, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information
contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall
use a "cut-off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in
the form of Exhibit A hereto, between you and the Company and
certain of its executive officers relating to sales and
certain other dispositions of shares of Common Stock or
certain other securities, delivered to you on or before the
date hereof, shall be in full force and effect on the Closing
Date.
(g) The obligation of the Underwriter to purchase
Additional Shares hereunder is
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subject to the delivery to the Underwriter on the Option
Closing Date of such documents as it may reasonably request
with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriter herein contained, the Company covenants with the
Underwriter as follows:
(a) To furnish to you, without charge, three signed
copies of the Registration Statement (including exhibits
thereto) and to furnish to you in __________, without charge,
prior to 11:00 a.m. _____________ time on the business day
next succeeding the date of this Agreement, or as soon as
practicable, and during the period mentioned in Section 6(c)
below, as many copies of the Distributed Prospectus, the
Statement of Additional Information and any supplements and
amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the
Registration Statement or the Prospectus, to furnish to you a
copy of each such proposed amendment or supplement and not to
file any such proposed amendment or supplement to which you
reasonably object, and to file with the Commission within the
applicable period specified in Rule 497 under the Securities
Act any prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of
the public offering of the Shares as in the opinion of counsel
for the Underwriter the Prospectus is required by law to be
delivered in connection with sales by an Underwriter or
dealer, any event shall occur or condition exist as a result
of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if, in the opinion of counsel for the
Underwriter, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own
expense, to the Underwriter and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares
may have been sold by you on behalf of the Underwriter and to
any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to
a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and
sale under the securities or Blue Sky laws of such
jurisdictions as you shall reasonably request.
(e) To make generally available to the Company's
security holders and to you as soon as practicable an earning
statement covering the twelve-month period ending ___________
__1999 that satisfies the provisions of Section 11(a) of the
Securities Act and the rules and regulations of the
Commission thereunder.
(f) To use its best efforts to maintain its
qualification as a regulated investment company under
Subchapter M of the Code.
(g) Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is
terminated, to pay or cause to be paid all expenses
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<PAGE> 11
incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses
of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares
under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including
all printing costs associated therewith, and the mailing and
delivering of copies thereof to the Underwriter and dealers,
in the quantities hereinabove specified, (ii) all costs and
expenses related to the transfer and delivery of the Shares to
the Underwriter, including any transfer or other taxes payable
thereon, if applicable, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state
securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state
securities laws as provided in Section 6(d) hereof, including
filing fees and the reasonable fees and disbursements of
counsel for the Underwriter in connection with such
qualification and in connection with the Blue Sky or Legal
Investment memorandum, (iv) all filing fees and the reasonable
fees and disbursements of counsel to the Underwriter incurred
in connection with the review and qualification of the
offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all costs and expenses incident
to listing the Shares on the Nasdaq National Market, (vi) the
cost of printing certificates representing the Shares, (vii)
the costs and charges of any transfer agent, registrar or
depository, (viii) the costs and expenses of the Company
relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of
the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives
and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for
which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section,
Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 9 below, the Underwriter will pay all of
their costs and expenses, including fees and disbursements of
their counsel, stock transfer taxes payable on resale of any
of the Shares by them and any advertising expenses connected
with any offers they may make.
7. INDEMNIFICATION.
(a) Indemnification of the Underwriter. The Company
agrees to indemnify and hold harmless the Underwriter, its
officers and employees, and each person, if any, who controls
the Underwriter within the meaning of the Securities Act and
the Exchange Act against any loss, claim, damage, liability or
expense, as incurred, to which the Underwriter or such
controlling person may become subject, under the Securities
Act, the Exchange Act or other federal or state statutory law
or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected
with the written consent of the Company), insofar as such
loss, claim, damage, liability or expense (or actions in
respect thereof as contemplated below) arises out of or is
based (i) upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission
therefrom
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of a material fact required to be stated therein or necessary
to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or
(iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained
herein; or (iv) in whole or in part upon any failure of the
Company to perform its obligations hereunder or under law; or
(v) any act or failure to act or any alleged act or failure to
act by the Underwriter in connection with, or relating in any
manner to, the Common Stock or the offering contemplated
hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or
based upon any matter covered by clause (i) or (ii) above,
provided that the Company shall not be liable under this
clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that
such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or
omitted to be taken by the Underwriter through its gross
negligence or willful misconduct; and to reimburse the
Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel
chosen by the Underwriter) as such expenses are reasonably
incurred by the Underwriter or such controlling person in
connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to
the extent, arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written
information furnished to the Company by the Underwriter
expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect
to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of the Underwriter
from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person
controlling the Underwriter, if copies of the Prospectus were
timely delivered to the Underwriter pursuant to Section 2 and
a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of the
Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale
of the Common Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 7(a) shall be in
addition to any liabilities that the Company may otherwise
have.
(b) Indemnification of the Company, its Directors and
Officers. The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its
officers who signed the Registration Statement and each
person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, against any loss,
claim, damage, liability or expense, as incurred, to which the
Company, or any such director, officer or controlling person
may become subject, under the Securities Act, the Exchange
Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written
consent of the Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon
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any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company
by the Underwriter expressly for use therein; and to reimburse
the Company, or any such director, officer or controlling
person for any legal and other expense reasonably incurred by
the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage,
liability, expense or action. The Company hereby acknowledges
that the only information that the Underwriter has furnished
to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) are the statements set
forth (A) as the last [two] paragraphs on the inside front
cover page of the Prospectus concerning stabilization [and
passive market making] by the Underwriter and (B) in the table
in the first paragraph and as the second paragraph [second and
[___] paragraphs] under the caption "Underwriting" in the
Prospectus; and the Underwriter confirms that such statements
are correct. The indemnity agreement set forth in this
Section 7(b) shall be in addition to any liabilities that the
Underwriter may otherwise have.
(c) Notifications and Other Indemnification
Procedures. Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any
action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this
Section 7, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the
indemnifying party will not relieve it from any liability
which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this
Section 7 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks
or intends to seek indemnity from an indemnifying party, the
indemnifying party will be entitled to participate in, and, to
the extent that it shall elect, jointly with all other
indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume
the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants
in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the
positions of the indemnifying party and the indemnified party
in conducting the defense of any such action or that there may
be legal defenses available to it and/or other indemnified
parties which are different from or additional to those
available to the indemnifying party, the indemnified party or
parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party
to such indemnified party of such indemnifying party's
election so to assume the defense of such action and approval
by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the
defense thereof unless (i) the
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indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it
being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate
counsel (together with local counsel), approved by the
indemnifying party (the Underwriter in the case of Section
7(b) and Section 8), representing the indemnified parties who
are parties to such action) or (ii) the indemnifying party
shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be
at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this
Section 7 shall not be liable for any settlement of any
proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability
or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of
counsel as contemplated by Section 7(c) hereof, the
indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such
request prior to the date of such settlement. No indemnifying
party shall, without the prior written consent of the
indemnified party, effect any settlement, compromise or
consent to the entry of judgment in any pending or threatened
action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity was or could
have been sought hereunder by such indemnified party, unless
such settlement, compromise or consent includes an
unconditional release of such indemnified party from all
liability on claims that are the subject matter of such
action, suit or proceeding.
8. CONTRIBUTION.
If the indemnification provided for in Section 7 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriter, on the
other hand, from the offering of the Common Shares pursuant to this Agreement
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company, on the one hand, and the Underwriter, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one
hand, and the Underwriter, on the other hand, in connection with the offering
of the Common Shares pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
Common Shares pursuant to this Agreement (before deducting expenses) received
by the Company, and the total underwriting discount received by the
Underwriter, in each case as set forth on the front cover page of the
Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding
location on the Term Sheet) bear to the aggregate initial public offering price
of the Common Shares as set
13
<PAGE> 15
forth on such cover. The relative fault of the Company, on the one hand, and
the Underwriter, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriter, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 7(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth
in Section 7(c) with respect to notice of commencement of any action shall
apply if a claim for contribution is to be made under this Section 8; provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under Section 7(c) for purposes of
indemnification.
The Company and the Underwriter agree that it would not be
just and equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in this Section 8.
Notwithstanding the provisions of this Section 8, the
Underwriter shall not be required to contribute any amount in excess of the
underwriting commissions received by the Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this Section
8, each officer and employee of the Underwriter and each person, if any, who
controls the Underwriter within the meaning of the Securities Act and the
Exchange Act shall have the same rights to contribution as the Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company with
the meaning of the Securities Act and the Exchange Act shall have the same
rights to contribution as the Company.
9. TERMINATION. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 8(a)(i) through 8(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
10. EFFECTIVENESS. This Agreement shall become effective upon
the execution and delivery hereof by the parties hereto.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
14
<PAGE> 16
12. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
13. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
ALLIED CAPITAL CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Accepted as of the date hereof
- ----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
15
<PAGE> 17
SCHEDULE I
UNDERWRITER
Aggregate Principal
Underwriter Amount of Securities to be
Purchased
- -------------------------------------------------- ---------------------------
- ----------------------------......................
Total Firm Shares........................
===========================
<PAGE> 18
EXHIBIT A
_____________, 1999
- ------------------------------
- ------------------------------
- ------------------------------
Ladies and Gentlemen:
The undersigned understands that______________________________
(the "UNDERWRITER") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Allied Capital Corporation, a Maryland
corporation (the "COMPANY") providing for the public offering (the "PUBLIC
OFFERING") by the Underwriter of _____________ shares (the "SHARES") of the
common stock, $0.0001 par value per share, of the Company (the "COMMON STOCK").
To induce the Underwriter to continue its efforts in
connection with the Public Offering, the undersigned hereby agrees that,
without the prior written consent of the Underwriter, it will not, during the
period commencing on the date hereof and ending 90 days after the date of the
final prospectus relating to the Public Offering (the "PROSPECTUS"), (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (a) the sale of any Shares to the Underwriter pursuant to
the Underwriting Agreement or (b) transactions relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Public Offering.
Whether or not the Public Offering actually occurs depends on
a number of factors, including market conditions. Any Public Offering will
only be made pursuant to an Underwriting Agreement, the terms of which are
subject to negotiation between the Company and the Underwriter.
Very truly yours,
----------------------------------------
Name
----------------------------------------
<PAGE> 1
EXHIBIT EX-99.2L
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
March 26, 1999
STEVEN B. BOEHM
DIRECT LINE: (202) 383-0176
Internet: [email protected]
Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
3rd Floor
Washington, D.C. 20006
Ladies and Gentlemen:
We have acted as counsel to Allied Capital Corporation, a Maryland
corporation (the "Company") in connection with the offering from time to time
by the Company of up to 6,000,000 shares of the Company's common stock, par
value $0.0001 per share (the "Shares"), which offering is the subject of a
registration statement on Form N-2 (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "Act") being filed by the Company. The
Registration Statement provides that the shares may be offered in amounts, at
prices, and on terms to be set forth in one or more supplements (each a
"Prospectus Supplement") to the final prospectus (the "Prospectus").
We have participated in the preparation of the Registration Statement
and have examined originals or copies, certified or otherwise identified to our
satisfaction by public officials or officers of the Company as authentic copies
of originals, of (i) the Company's charter (the "Charter") and its bylaws, (ii)
resolutions of the board of directors of the Company relating to the
authorization of the preparation and filing of the Registration Statement and
approving the offer and the issuance of the Shares, and (iii) such other
documents as in our judgment were necessary to enable us to render the opinions
expressed below. In our review and examination of all such documents, we have
assumed the legal capacity of all natural persons, the genuineness of all
signatures, the authenticity of all documents and records submitted to us as
originals, and the conformity with authentic originals of all documents and
records submitted to us as copies. To the extent we have deemed appropriate,
we have relied upon certificates of public officials and certificates and
statements of corporate officers of the Company as to certain factual matters.
We assume that prior to the issuance of any Shares there will exist,
under the Charter of the Company, the requisite number of authorized but
unissued shares of common stock of the Company. In addition, we assume that
underwriting agreements for the offerings of the Shares (an "Underwriting
Agreement") will be valid and legally binding agreements that conform to the
description thereof set forth in the applicable Prospectus Supplement.
<PAGE> 2
Allied Capital Corporation
March 26, 1999
Page 2
We assume that the issuance, sale and amount of the Shares to be
offered from time to time will be authorized and determined by proper action of
the Board of Directors of the Company in accordance with the parameters
described in the Registration Statement (each, a "Board Action") and in
accordance with the Company's Charter and Bylaws and with applicable Maryland
law.
This opinion is limited to the laws of the State of Maryland, and we
express no opinion with respect to the laws of any other jurisdiction. The
opinions expressed in this letter are based on our review of the General
Corporate Law of Maryland.
Based upon and subject to the foregoing and our investigation of such
matters of law as we have considered advisable, we are of the opinion that:
1. The Company is a corporation duly incorporated and existing under
the laws of the State of Maryland.
2. Upon due authorization by Board Action of the issuance of the
Shares, and upon the consummation of sale of Shares and the
payment of the consideration therefor in accordance with the
terms and provisions of such Board Action, the Registration
Statement (as declared effective under the Act), the Prospectus or
the applicable Prospectus Supplement and, if applicable, an
Underwriting Agreement, the Shares will be duly authorized,
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the "Legal Matters"
section of the prospectus included in the Registration Statement. We do not
admit by giving this consent that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
Sutherland Asbill & Brennan LLP
By: /s/ Steven B. Boehm
---------------------
Steven B. Boehm
SSB/gth
<PAGE> 1
EXHIBIT EX-99.2n.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 18, 1999, and to all references to our firm included in this
registration statement.
/s/ Arthur Andersen
Vienna, VA
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM N-2.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 796,389
<INVESTMENTS-AT-VALUE> 800,274
<RECEIVABLES> 0
<ASSETS-OTHER> 30,730
<OTHER-ITEMS-ASSETS> 25,075
<TOTAL-ASSETS> 856,079
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 239,350
<OTHER-ITEMS-LIABILITIES> 124,612
<TOTAL-LIABILITIES> 363,962
<SENIOR-EQUITY> 6
<PAID-IN-CAPITAL-COMMON> 526,824
<SHARES-COMMON-STOCK> 55,919
<SHARES-COMMON-PRIOR> 52,047
<ACCUMULATED-NII-CURRENT> (927)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,380
<NET-ASSETS> 485,117
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 79,921
<OTHER-INCOME> 26,817
<EXPENSES-NET> 51,493
<NET-INVESTMENT-INCOME> 55,245
<REALIZED-GAINS-CURRENT> 22,541
<APPREC-INCREASE-CURRENT> 1,079
<NET-CHANGE-FROM-OPS> 78,078
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 49,627
<DISTRIBUTIONS-OF-GAINS> 25,690
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,374
<NUMBER-OF-SHARES-REDEEMED> 810
<SHARES-REINVESTED> 241
<NET-CHANGE-IN-ASSETS> 65,057
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2,679
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,123
<INTEREST-EXPENSE> 20,694
<GROSS-EXPENSE> 51,493
<AVERAGE-NET-ASSETS> 452,588
<PER-SHARE-NAV-BEGIN> 8.07
<PER-SHARE-NII> 1.06
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> 1.43
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.68
<EXPENSE-RATIO> 0.11
<AVG-DEBT-OUTSTANDING> 372,388
<AVG-DEBT-PER-SHARE> 7.16
</TABLE>
