<PAGE> 1
As filed with the Securities and Exchange Commission on December 11, 2000
REGISTRATION NO. 333-49506
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1 [ ] POST-EFFECTIVE AMENDMENT NO.
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
(202) 331-1112
(Name and Address of Agent for Service)
COPY TO:
<TABLE>
<S> <C>
STEVEN B. BOEHM, ESQ. SIMEON GOLD, ESQ.
CYNTHIA M. KRUS, ESQ. WEIL, GOTSHAL & MANGES LLP
SUTHERLAND ASBILL & BRENNAN LLP 767 FIFTH AVENUE
1275 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10153
WASHINGTON, DC 20004-2404 (212) 310-8000
(202) 383-0100
</TABLE>
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
------------------------
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 SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
BLC FINANCIAL SERVICES, INC.
[BLC Financial Services Logo]
645 Madison Avenue,
New York, NY 10022
Phone: (212) 751-5626
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
To the shareholders of BLC Financial Services, Inc.:
Allied Capital Corporation and BLC Financial Services, Inc. have entered
into a merger agreement where Allied Capital has agreed to acquire BLC in a
merger. BLC will become an independently managed, private Allied Capital
portfolio company named Business Loan Express, Inc., or New BLC. If the merger
is completed, BLC common shareholders will receive 0.180 shares of Allied
Capital common stock for each share they own, and they will hold 5% of Allied
Capital common stock after the merger. The value of the shares of Allied Capital
common stock will continue to fluctuate, and you will not know the value of the
Allied Capital shares that you will receive in the merger at the time you vote.
BASED ON THE CLOSING PRICE OF ALLIED CAPITAL COMMON STOCK ON DECEMBER 7, 2000,
0.180 SHARES OF ALLIED CAPITAL COMMON STOCK HAD A VALUE OF $3.668, AND THE
AGGREGATE VALUE OF THE MERGER WOULD BE $84.2 MILLION.
If the merger is completed, key BLC officers, directors and shareholders
will continue as shareholders of New BLC to ensure continuity. In addition,
Allied Capital will purchase for cash all of the outstanding shares of
Futuronics Corporation, a substantial shareholder of BLC that is controlled by
officers and directors of BLC. Allied Capital, directly and through its
ownership of Futuronics, will own 95% of New BLC, and the continuing
shareholders will own 5% of New BLC.
BLC will hold a special meeting of shareholders at 10:00 a.m. Eastern time,
on December 31, 2000 at the offices of Weil, Gotshal & Manges LLP, 767 Fifth
Avenue, 25th Floor, New York, NY 10153, to consider and vote upon the merger.
The holders of a majority of the outstanding shares of BLC common stock at the
BLC special meeting must approve the merger. In addition, the merger is subject
to various other conditions. The board of directors has considered all aspects
of the merger including any conflict of interests presented by the Futuronics
transaction and the continued 5% ownership by existing officers, directors and
shareholders. The board of directors has approved the merger and determined the
merger to be in the best interests of BLC shareholders. The board recommends
that BLC shareholders vote FOR the merger.
BLC shareholders, representing 32% of the outstanding shares of BLC common
stock as of the record date, have agreed to vote the shares of BLC common stock
owned by them in favor of the merger. The terms and conditions of the merger and
related transactions are more fully described in the proxy statement/prospectus.
Allied Capital common stock is traded on the Nasdaq National Market under
the symbol "ALLC." The closing price of Allied Capital common stock on December
7, 2000 was $20.375 per share. The closing price of BLC common stock, which
trades on the American Stock Exchange under the symbol "BCL", on December 7,
2000 was $3.438 per share.
Allied Capital is a closed-end, diversified management investment company
that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended. Allied Capital is located at 1919
Pennsylvania Avenue, NW, Washington, DC 20006 and its telephone number is (202)
331-1112. The proxy statement/prospectus sets forth concisely the information
that you should know before voting on the merger and should be retained for
future reference. Allied Capital and BLC file reports and statements with the
Securities and Exchange Commission. For more information on how to obtain these
reports, see "Where You Can Find More Information" on page 142.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take time to vote on the proposal by completing and mailing the
enclosed proxy card, or voting over the telephone or via the internet.
Sincerely,
Robert F. Tannenhauser
Chairman of the Board of Directors
SEE "THE MERGER PROPOSAL -- SPECIAL FACTORS REGARDING THE MERGER PROPOSAL "
AND "RISK FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF FACTORS THAT SHOULD
BE EVALUATED IN CONNECTION WITH THE MERGER.
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 proxy statement/prospectus. Any representation to
the contrary is a criminal offense.
The proxy statement/prospectus is dated December , 2000, and was mailed to you
on or about
December 11, 2000.
<PAGE> 3
BLC FINANCIAL SERVICES, INC.
645 MADISON AVENUE
NEW YORK, NY 10022
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
To Our Shareholders:
A special meeting of shareholders of BLC Financial Services, Inc. will be
held at 10:00 a.m., Eastern time, on December 31, 2000, at the offices of Weil,
Gotshal & Manges LLP, 767 Fifth Avenue, 25th Floor, New York, New York 10153,
for the following purposes:
1. To consider and vote upon the merger proposal to:
- approve and adopt a merger agreement with Allied Capital Corporation
providing for the merger;
- approve and adopt an amendment to BLC's certificate of incorporation
to create a new Class B common stock; and
2.To grant discretionary authority to vote in favor of an adjournment of
the meeting, if necessary.
This proposal is more fully described in the proxy statement/prospectus
that accompanies this notice, which you should read carefully.
We have fixed the close of business on December 7, 2000 as the record date
for the determination of our shareholders entitled to vote at this meeting, and
any and all adjournments or postponements thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE YOUR SHARES. YOU
MAY COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT IN THE POSTAGE-
PAID ENVELOPE OR YOU MAY VOTE OVER THE TELEPHONE OR VIA THE INTERNET. IT IS
IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE SPECIAL MEETING. YOU CAN
REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors
of BLC Financial Services, Inc.
David Redlener
Secretary
New York, New York
December 11, 2000
<PAGE> 4
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS HAPPENING?
A: You are being asked to vote on a merger proposal to permit Allied Capital to
acquire BLC in a stock for stock exchange. As part of the merger proposal, you
will be asked to approve an amendment to the BLC certificate of incorporation to
create a new Class B common stock. These new Class B shares will not be
exchanged in the merger for shares of Allied Capital common stock. The Class B
shareholders will continue to hold shares of New BLC after the merger. If the
merger agreement is approved and the merger is consummated, you would no longer
be a shareholder of BLC; instead you would be a shareholder of Allied Capital.
Q: WHY ARE ALLIED CAPITAL AND BLC PROPOSING TO MERGE?
A: Allied Capital and BLC are proposing to merge in order to provide BLC
shareholders the opportunity to own stock of a larger and more actively traded
company.
In addition, BLC approved the merger because:
- BLC will have access to a funding source with significant financial
resources;
- BLC's board of directors determined that the exchange ratio represents a
substantial premium to the market price of BLC common stock;
- BLC's shareholders will have the opportunity to receive future cash
dividends through their ownership of shares in Allied Capital following
the merger; and
- Allied Capital's greater size and diversity of its investment portfolio
will provide more diversity to BLC shareholders.
As a result, BLC will become an independently managed, private portfolio company
of Allied Capital with increased access to capital in order to grow.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 0.180 shares of Allied Capital common stock for each share
of BLC common stock that you own. Allied Capital will issue fractional shares of
its common stock pursuant to this same exchange ratio.
On October 31, 2000, the last full trading day before the public
announcement of the proposed merger, the closing price of Allied Capital common
stock on the Nasdaq National Market was $20.625 per share. On December 7, 2000,
the most recent practicable date prior to the printing of this proxy
statement/prospectus, the closing price of Allied Capital common stock was
$20.375 per share, and the closing price of BLC common stock on AMEX was $3.438
per share.
Q: ARE BLC SHAREHOLDERS ENTITLED TO APPRAISAL RIGHTS?
A: No. Shareholders of BLC will not be entitled to appraisal rights under
Delaware General Corporation Law.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER OF ALLIED CAPITAL AND BLC?
A: We are working to complete the merger by December 31, 2000. We currently
expect to complete the merger promptly following the BLC special meeting. If
necessary or desirable, Allied Capital and BLC may agree to complete the merger
at a later date.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: Allied Capital and BLC each has received an opinion from its counsel, based
on assumptions and factual representations made by Allied Capital, BLC, and
others, to the effect that the merger will qualify as a tax-free reorganization
under the Internal Revenue Code, and that, as a result, for federal income tax
purposes, neither Allied Capital nor BLC will recognize a gain or loss as a
result of the merger, and, BLC shareholders will not recognize a gain or loss to
the extent they receive shares of Allied Capital common stock in the merger. The
tax opinions are filed as exhibits to the registra-
i
<PAGE> 5
tion statement filed by Allied Capital. BLC shareholders should consult their
tax advisors for a full understanding of the tax consequences of the merger.
Q: WHO MUST APPROVE THE MERGER?
A: In addition to the approvals by the Allied Capital board of directors and
the BLC board of directors, each of which has already been obtained, the merger
must be approved by the BLC shareholders and the Small Business Administration.
Approval of the merger by the SBA has been received.
Q: WHAT SHAREHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER PROPOSAL?
A: A majority of the outstanding shares of BLC common stock entitled to vote
constitutes a quorum for the BLC special meeting. The affirmative vote of the
holders of the majority of the outstanding shares of BLC common stock is
required to approve the merger proposal.
Q: DOES THE BLC BOARD OF DIRECTORS RECOMMEND APPROVAL OF THE MERGER PROPOSAL?
A: Yes. After careful consideration, the BLC board of directors unanimously
recommends that you vote "FOR" the merger proposal on the enclosed proxy card,
or over the telephone or via the internet. For a more complete description of
the recommendation of the BLC board of directors, see the sections entitled
"BLC's Reasons for the Merger" on page 36 and "Recommendation of the BLC Board
of Directors" on page 38.
Q: HAS THE MERGER BEEN DETERMINED TO BE FAIR TO THE UNAFFILIATED BLC
SHAREHOLDERS?
A: After careful consideration, the BLC board of directors, the Allied Capital
board of directors and the Futuronics board of directors believe that the merger
and the related transactions are fair to the unaffiliated shareholders of BLC.
In addition, the continuing shareholders, including Robert Tannenhauser,
Jennifer Goldstein, Peter Blanck and Richard Blanck, believe that the merger and
related transactions are fair to the unaffiliated shareholders of BLC. Those
parties based their belief on the information provided for under "BLC's Reasons
for the Merger", "Allied Capital's Reasons for the Merger", "Futuronic's Reasons
for the Merger" and "Fairness Opinion of BLC's Financial Advisor."
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this proxy statement/prospectus, including its annexes,
carefully, and to consider how the merger proposal will affect you as a
shareholder. You also may want to review the documents referenced under "Where
You Can Find More Information" on page 142 and consult with your accounting,
legal and tax advisors.
Q: HOW DO I VOTE MY SHARES?
A: You may indicate how you want to vote on your proxy card and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the BLC special meeting. You may also vote
over the telephone or via the internet by following the instructions with your
proxy card. You may also attend the BLC special meeting in person instead of
submitting a proxy.
If you fail either to return your proxy card, or vote over the telephone or
via the internet, or to vote in person at the BLC special meeting, or if you
mark your proxy "abstain," the effect will be a vote "against" the merger
proposal. IF YOU SIGN AND SEND IN YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO
VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE FOR THE MERGER PROPOSAL UNLESS YOUR
SHARES ARE HELD IN A BROKERAGE ACCOUNT.
Q: IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: Your broker will not be able to vote your shares without instructions from
you on how to vote. Therefore, it is important that you follow the directions
provided by your broker regarding how to instruct your broker
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<PAGE> 6
to vote your shares. If you fail to provide your broker with instructions, it
will have the same effect as a vote "against" the merger proposal.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: You may change your vote at any time before the vote takes place at the BLC
special meeting. To do so, you may either complete and submit a new proxy card
or send a written notice stating that you would like to revoke your proxy. You
may also change your vote if you voted over the telephone or via the internet
simply by revoting. The last recorded vote will be what is counted at the
meeting. In addition, you may attend the BLC special meeting and vote in person.
However, if you elect to vote in person at the BLC special meeting and your
shares are held by a broker, bank or other nominee, you must bring to the BLC
special meeting a letter from the broker, bank or other nominee confirming your
beneficial ownership of the shares.
Q: WHEN AND WHERE IS THE BLC SPECIAL MEETING?
A: The BLC special meeting of shareholders will be held at 10:00 a.m., Eastern
time, on December 31, 2000 at the offices of Weil, Gotshal & Manges LLP at 767
Fifth Avenue, 25th Floor, New York, New York 10153.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the completion of the merger, Allied Capital will send you
instructions explaining how to exchange BLC common stock certificates for the
appropriate number of shares of Allied Capital common stock.
Q: WHO MAY I CONTACT WITH ANY ADDITIONAL QUESTIONS?
A: You may call Investor Relations of BLC at (212) 751-5626, or Investor
Relations of Allied Capital at (888) 818-5298.
iii
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY...................... 1
RISK FACTORS................. 20
THE BLC SPECIAL MEETING...... 24
Purpose of the BLC Special
Meeting................. 24
Voting Information......... 24
Shareholder and Board
Approvals............... 24
Beneficial Ownership of
BLC..................... 25
BLC Common Stock Purchase
Price Information....... 27
Transactions and
Arrangements Concerning
BLC Common Stock........ 29
Quorum and Adjournments.... 29
Dissenters' Rights of
Appraisal............... 30
THE MERGER PROPOSAL.......... 30
General.................... 30
The Exchange............... 32
Closing Date............... 33
Background of the Merger... 33
BLC's Reasons for the
Merger.................. 36
Recommendation of the BLC
Board of Directors...... 38
Allied Capital's Reasons
for the Merger.......... 38
Futuronics' Reasons for the
Futuronics
Transaction............. 39
Special Factors Regarding
the Merger Proposal..... 39
Fairness Opinion of BLC's
Financial Advisor....... 40
Advice of Financial
Advisors................ 49
Fairness Opinion of
Futuronics' Financial
Advisor................. 50
Interests of Certain
Persons in the Merger... 57
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Litigation Relating
to the Merger........... 60
THE MERGER AGREEMENT......... 60
Terms of the Merger........ 60
Representations and
Warranties.............. 61
Certain Covenants.......... 62
No Shopping................ 63
Expenses................... 63
Indemnification............ 63
Conditions................. 64
Termination; Fees.......... 65
Material Federal Income Tax
Consequences............ 66
Accounting Treatment....... 67
Certain Legal Matters...... 67
Federal Securities Law
Consequences............ 68
Market Listing............. 68
Delisting and
Deregistration of BLC
Common Stock............ 68
ALLIED CAPITAL BUSINESS...... 69
Private Finance............ 69
Commercial Real Estate
Finance................. 72
Allied Capital Express..... 74
Investment Advisory
Services................ 76
Loan Sourcing.............. 76
Investment Approval and
Underwriting
Procedures.............. 76
Portfolio Management....... 78
Portfolio Monitoring and
Valuation............... 78
Investment Gains and
Losses.................. 80
Employees.................. 81
Portfolio Companies........ 82
Determination of Net Asset
Value of Allied
Capital................. 88
</TABLE>
iv
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Beneficial Ownership of
Allied Capital Common
Stock................... 88
Allied Capital
Management.............. 90
Allied Capital Executive
Compensation............ 94
Allied Capital Tax
Status.................. 98
Allied Capital Government
Regulations............. 103
Allied Capital Fees and
Expenses Table.......... 106
BUSINESS OF BLC.............. 107
Business Loan Center,
Inc. ................... 107
BLC Commercial Capital
Corporation............. 110
BLC Capital Corporation.... 110
BLC Directors and
Management.............. 111
BLC Executive
Compensation............ 113
Related Party
Transactions............ 115
BLC Management's Discussion
and Analysis of
Financial Condition and
Results of Operations... 116
BLC Qualitative and
Quantitative Disclosure
About Market Risk....... 124
DESCRIPTION OF ALLIED CAPITAL
STOCK AND DISTRIBUTIONS.... 125
Common Stock............... 125
Preferred Stock............ 126
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPARISON OF RIGHTS OF
ALLIED CAPITAL AND BLC
SHAREHOLDERS............... 126
ALLIED CAPITAL'S DIVIDEND
REINVESTMENT PLAN.......... 140
LEGAL PROCEEDINGS............ 140
SHAREHOLDER PROPOSALS FOR BLC
2001 ANNUAL MEETING........ 141
OTHER MATTERS................ 141
LEGAL MATTERS................ 141
EXPERTS...................... 141
WHERE YOU CAN FIND MORE
INFORMATION................ 142
INDEX TO BLC FINANCIAL
STATEMENTS................. F-1
APPENDIX A: AGREEMENT AND
PLAN OF MERGER............. A-1
APPENDIX B: BLC CERTIFICATE
OF AMENDMENT............... B-1
APPENDIX C: OPINION OF RYAN,
BECK & CO., INC. FOR BLC... C-1
APPENDIX D: OPINION OF RYAN,
BECK & CO., INC. FOR
FUTURONICS................. D-1
</TABLE>
v
<PAGE> 9
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger proposal fully and for a more
complete description of the legal terms of the merger, you should read carefully
this entire document and the documents to which we have referred you. See "Where
You Can Find More Information" on page 142.
ALLIED CAPITAL CORPORATION (PAGE 69)
Allied Capital is a business development company and provides private
investment capital to private and undervalued public companies in a variety of
different industries throughout the United States. Allied Capital has been
investing in growing businesses for over 41 years and has financed thousands of
companies nationwide. Allied Capital's lending and investment activity is
focused in three areas: private finance, commercial real estate finance,
including the purchase of commercial mortgage-backed securities, and Allied
Capital Express, Allied Capital's small business finance group.
The investment portfolio includes long-term unsecured loans with equity
features, commercial mortgage-backed securities, commercial mortgage loans, and
small senior loans, including SBA 7(a) loans.
Allied Capital identifies loans and investments through numerous
relationships with mezzanine and private equity investors, regional and small,
specialized investment banks, and other intermediaries, including professional
services firms. In order to increase its sourcing and origination activities,
Allied Capital has regional offices throughout the United States. Allied Capital
centralizes its credit approval function and services its loans through an
experienced staff of professionals at its headquarters in Washington, DC.
Allied Capital has an advantageous tax structure, as compared to operating
companies, that allows for the "pass-through" of income to its shareholders
through dividends without the imposition of a corporate level of taxation. See
"Allied Capital Business -- Allied Capital Tax Status."
Allied Capital is an internally managed diversified closed-end management
investment company that has elected to be regulated as a business development
company or BDC under the Investment Company Act of 1940, as amended. Its
investment objective is to achieve current income and capital gains. Allied
Capital seeks to achieve its investment objective by investing in growing
businesses in a variety of industries throughout the United States. As a BDC,
Allied Capital is required to meet regulatory tests, the most significant
relating to its investments and borrowings. A BDC is required to invest at least
70% of its assets in private or thinly traded public, U.S.-based companies. A
BDC must maintain a coverage ratio of assets to senior securities of at least
200%. See "Allied Capital Business -- Allied Capital Government Regulations."
Allied Capital is quoted on the Nasdaq National Market and trades under the
symbol "ALLC".
1
<PAGE> 10
BLC FINANCIAL SERVICES, INC. (PAGE 107)
BLC is primarily engaged in the business of originating, selling and
servicing SBA 7(a) loans to small businesses under the SBA Section 7(a)
Guaranteed Loan Program sponsored by the United States Small Business
Administration. Additionally, BLC originates, sells and services loans to
businesses under the United States Department of Agriculture Rural
Business -- Cooperative Business and Industry Guaranteed Loan Program.
BLC is headquartered in New York City. BLC is listed on the American Stock
Exchange and trades under the symbol "BCL."
FUTURONICS CORPORATION
Futuronics is a New York corporation whose assets consist primarily of 9.6%
of the outstanding shares of BLC common stock. Futuronics does not conduct any
activities. Futuronics' principal business address is 3652 Forest Gate Drive,
N.E., Iowa City, Iowa 52240.
The executive officers and directors of Futuronics Corporation are also
shareholders of BLC. In addition, Peter Blanck, the President and Chief
Executive Officer of Futuronics, is a director of BLC. Information regarding
Carol Tannenhauser, Richard Blanck and Peter Blanck, the executive officers and
directors of Futuronics, is contained in "The BLC Special Meeting -- Beneficial
Ownership of BLC" and "Business of BLC -- Directors and Management".
THE MERGER PROPOSAL (PAGE 30)
Allied Capital plans to acquire BLC in a stock for stock exchange. The
effect of the merger will be to create an independently managed, privately held
portfolio company of Allied Capital, Business Loan Express, Inc. or New BLC,
which will focus exclusively on small business lending, including the
origination of SBA 7(a) loans and B&I Program loans. Following the merger,
Allied Capital also plans to merge its Allied Capital Express small business
lending operations into New BLC. The combination of New BLC with Allied Capital
Express will result in a leading small business lender with 22 offices located
nationwide and SBA Preferred Lender status in 64 markets. New BLC believes it
will be a technology leader in online small business loan origination. New BLC
will have significant online loan origination relationships as well as solid
core broker relationships in the small business community.
The merger and related transactions will be accomplished as follows:
- To ensure continuity, BLC will amend its certificate of
incorporation to create a new Class B common stock. Certain key BLC
officers, directors and shareholders will exchange their shares of
BLC common stock for Class B common stock. These continuing
shareholders will own 5% of BLC through Class B common stock.
- In a separate transaction, Allied Capital will purchase all of the
outstanding shares of Futuronics Corporation for $9.1 million in
cash. Futuronics is controlled by certain officers and directors of
BLC and their affiliated parties. Upon completion of the Futuronics
acquisition,
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<PAGE> 11
Futuronics will exchange its shares of BLC common stock for Class B
common stock. Allied Capital will own and control 9.6% of BLC through
Futuronics' ownership of BLC Class B common stock.
- Each share of BLC common stock, excluding Class B common stock, will
be exchanged for 0.180 shares of Allied Capital common stock. To
determine the exchange ratio, each share of BLC stock was given a
value of $3.50 per share. This $3.50 value was divided by an average
closing market price of Allied Capital common stock for the 20 days
prior to and including the date of the merger agreement. The average
Allied Capital share price was $19.39 per share.
- Allied Capital will have paid $9.1 million in cash to the Futuronics
shareholders to acquire 9.6% of BLC, based upon the 2.6 million
shares of BLC owned by Futuronics multiplied by $3.50 per share.
Based upon the exchange ratio of 0.180 and an estimate of the shares
of BLC common stock expected to be outstanding on December 31, 2000,
Allied Capital will issue 4.1 million shares to BLC shareholders to
acquire 85.3% of BLC. On December 7, 2000 the closing price of Allied
Capital's common stock was $20.375. Assuming the December 7, 2000
closing price, the BLC shareholders would receive $84.2 million in
Allied Capital common stock or $3.668 per share.
- Futuronics and the continuing shareholders will then exchange their
Class B common stock for New BLC common stock. Following this
exchange, Allied Capital, directly and through its ownership of
Futuronics, will own 95% of New BLC common stock, and the continuing
shareholders will own 5% of the New BLC common stock.
- As a result of the merger, New BLC will survive as an independently
managed, private Allied Capital portfolio company and will continue
its operation as a private small business lender.
Upon completion of the merger, Allied Capital intends to consolidate its
Allied Capital Express operations into New BLC. To facilitate this consolidation
transaction, prior to the consummation of the merger, Allied Capital will
establish Allied SBLC, which holds Allied Capital's SBLC license and SBA 7(a)
loans, as an independently managed private portfolio company. Allied SBLC will
establish a new board of directors and Allied Capital will transfer its
employees and operations attributed to Allied Capital Express to Allied SBLC.
Allied SBLC will thereby become a portfolio company operating independently from
Allied Capital. Allied Capital also will restructure the existing debt owed to
it by Allied SBLC to include senior and subordinated debt. Immediately following
the merger, Allied SBLC will merge with a newly formed subsidiary of New BLC in
consideration of the issuance by New BLC of preferred stock to Allied Capital.
The merger agreement is attached at the back of this proxy
statement/prospectus as Appendix A. We encourage you to read the merger
agreement, as it is the legal document that governs the merger.
3
<PAGE> 12
The following diagrams depict in summary form the structure of the merger
and the related transactions assuming the BLC shareholders approve the merger
and all other conditions are satisfied.
[CURRENT STRUCTURE FLOW CHART]
[AFTER THE MERGER AND RELATED TRANSACTIONS FLOW CHART]
4
<PAGE> 13
YOU WILL RECEIVE SHARES OF ALLIED CAPITAL IN THE MERGER (PAGE 32)
If the merger is completed, you will receive 0.180 shares of Allied Capital
common stock for each share of BLC common stock that you own. We will convert
fractional shares of BLC common stock into Allied Capital common stock in the
same proportion, and we will issue fractional shares of Allied Capital in the
merger as necessary.
The value of the Allied Capital shares to be received in the merger, based
on the exchange ratio, on the date before the merger was announced and the
record date, was:
<TABLE>
<CAPTION>
IMPLIED VALUE
ALLIED CAPITAL OF EACH
DATE CLOSING SALE PRICE BLC SHARE
---- ------------------ -------------
<S> <C> <C>
October 31, 2000....................................... $20.625 $3.713
December 7, 2000....................................... $20.375 $3.668
</TABLE>
The value of the shares of Allied Capital common stock in the merger will
continue to fluctuate and you will not know the value of the Allied Capital
shares that you will receive in the merger at the time you vote.
Please do not send in your stock certificates. You will receive written
instructions to do so after the merger.
OWNERSHIP OF ALLIED CAPITAL STOCK FOLLOWING THE MERGER (PAGE 25)
Following the merger, existing BLC shareholders on a diluted basis will own
5% of the outstanding common stock of Allied Capital based on the number of
shares of Allied Capital and BLC common stock expected to be outstanding on
December 31, 2000.
THE BLC BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER (PAGE 38)
The BLC board of directors believes that the merger is advisable and in the
best interests of BLC and its affiliated and unaffiliated shareholders. The BLC
board of directors unanimously recommends that you vote "FOR" approval of the
merger proposal.
BLC'S REASONS FOR THE MERGER (PAGE 36)
The BLC board of directors approved the merger for the following reasons:
- ACCESS TO CAPITAL -- By becoming a portfolio company of Allied Capital,
BLC will have access to a funding source with significant financial
resources.
- PURCHASE PRICE -- BLC's board of directors determined that the exchange
ratio represents a substantial premium to the market price of BLC common
stock. In making that determination, the BLC board of directors
considered that the current market price of BLC common stock was $2.19
per share on October 31, 2000. Thus, $3.50 represented a 60% premium over
the $2.19. Also, during the twenty-one months ended September 30, 2000
the highest closing market price for BLC stock was $3.125 and the lowest
closing market price was $1.50. The book value per share of BLC common
stock was $1.22 at September 30, 2000. The BLC board of directors
believed that due to the illiquid nature of BLC's assets, the liquidation
value per share of BLC's net assets may be lower than
5
<PAGE> 14
the book value per share. The BLC board of directors also considered that they
had not received any firm offers for an acquisition or merger of BLC from other
third parties.
- INCREASED LIQUIDITY -- The merger provides BLC's shareholders the
opportunity to own stock of a significantly larger and more actively
traded business enterprise.
- ALLIED CAPITAL DIVIDENDS -- BLC's shareholders will have the opportunity
to receive future cash dividends through their ownership of shares in
Allied Capital following the merger;
- ALLIED CAPITAL FINANCIAL CONDITION AND PROSPECTS -- Allied Capital's
greater size and diversity of its investment portfolio would provide more
diversity to BLC shareholders.
FAIRNESS OPINION OF BLC'S FINANCIAL ADVISOR (PAGE 40)
The BLC Board of Directors has received an opinion of BLC's financial
advisor, Ryan, Beck & Co., Inc., as to the fairness, from a financial point of
view, of the exchange ratio provided for in the merger. Ryan, Beck's opinion is
directed to the BLC board of directors and does not constitute a recommendation
to any shareholder as to how to vote with respect to matters relating to the
proposed merger. Ryan, Beck's opinion is based on analyses that contain
estimates and valuation ranges which are not necessarily indicative of actual
values or predictive of future results or values. Ryan, Beck was engaged by BLC
to conduct a due diligence review of BLC with the objective of developing a full
understanding of the business and characteristics of BLC and to perform a
current valuation analysis of BLC. Ryan, Beck was also engaged to analyze and
evaluate, with BLC's management and board of directors, any proposals received
from any potential acquirors relating to a sale or merger, conduct an
appropriate due diligence investigation of an acquiror and provide a fairness
opinion, if requested. Ryan, Beck's fees were $125,000.
ADVICE OF FINANCIAL ADVISORS (PAGE 49)
In addition to the advice of Ryan, Beck, BLC engaged Josephthal & Co., Inc.
to advise BLC about the structure and terms of the merger. Josephthal assembled
publicly available information regarding Allied Capital. Josephthal performed
financial analyses to further strategic negotiations with a view towards
maximizing consideration to be received by BLC shareholders. As compensation for
its services, BLC agreed to pay Josephthal $1.3 million based upon the closing
price of Allied Capital stock on December 7, 2000. Futuronics will pay a fee of
$0.1 million to Josephthal for similar services rendered. Robert W. Wien, a
director of BLC, is a Senior Managing Director of Josephthal.
Allied Capital engaged Jolson Merchant Partners as its financial advisor
for the transaction. Jolson Merchant Partners performed a variety of advisory
and investment banking services to Allied Capital in connection with the BLC
transaction. Jolson Merchant Partners assisted Allied Capital in analyzing the
business plan and financial structure of BLC, helped to analyze financial
projections for BLC and consulted with Allied Capital with respect to the
financial aspects of the transaction. Jolson assisted Allied Capital in the
preparation of its analysis of the transaction, and did not independently
prepare any report, opinion or other material. Jolson assisted in the
negotiation for the transaction. Jolson did not provide a fairness opinion on
6
<PAGE> 15
the merger or any related transactions. As compensation for its services, Allied
Capital agreed to pay Jolson a fee of $1.5 million based upon the closing price
of Allied Capital stock on December 7, 2000.
FINANCIAL INTERESTS OF BLC'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE 57)
When considering the recommendation by the BLC board of directors to vote
"for" the merger proposal, you should be aware that, as described below,
specific officers, directors and shareholders of BLC have interests in the
merger that are different from, and may conflict with, your interests. The
continuing shareholders will not exchange all of their shares of BLC common
stock, and will continue as officers, directors and shareholders of New BLC and
may benefit from such continued ownership. In addition, senior officers of BLC
will benefit from compensation and employment arrangements in the ordinary
course of business. Also, as described below, specific officers and directors of
BLC are also shareholders of Futuronics and will receive cash for their shares
of Futuronics. If the merger is completed, Allied Capital will continue
indemnification arrangements for officers and directors of BLC. The BLC board of
directors was aware of these interests and considered them in approving the
merger.
More specifically, these interests include the following:
- After the merger, Robert Tannenhauser, a director and the Chairman of the
Board and President of BLC, will own 3.7% of New BLC; Jennifer Goldstein,
the Chief Financial Officer of BLC, will own 0.4% of New BLC; Peter D.
Blanck, a director of BLC and the brother-in-law of Robert Tannenhauser,
will own 0.5% of New BLC; and Richard Blanck, also a brother-in-law of
Robert Tannenhauser, will own 0.5% of New BLC.
- Mr. Tannenhauser will have a new four-year employment agreement with New
BLC under which he will receive the following amounts: $350,000 in annual
base salary, a performance bonus to be determined by the board of
directors, an annual $865,000 integration bonus payable over four years,
and a $1,095,000 special retention award to be paid at the end of the
four-year term of the agreement. Ms. Goldstein will have a new four-year
employment agreement with New BLC under which she will receive the
following amounts: $200,000 in annual base salary, a performance bonus to
be determined by the board of directors, a retention award of $100,000 per
year for the first two years of the agreement, an annual $135,000
integration bonus payable over four years, and a $197,000 special
retention award to be paid at the end of the four-year term of the
agreement.
- In the Futuronics transaction, members of Mr. Tannenhauser's family will
receive an aggregate of $2.4 million in cash in exchange for their
Futuronics shares, Peter D. Blanck will receive $2.4 million in cash in
exchange for his Futuronics shares, and Richard Blanck will receive $2.4
million in cash in exchange for his Futuronics shares.
- Upon the merger, the BLC stock option plan will be cancelled, and all
unvested options will be surrendered. To compensate employees, primarily
officers of BLC, for this surrender, New BLC will compute the difference
between $3.50 per share and the exercise price of the unvested options.
This
7
<PAGE> 16
amount, the transition award, will be contributed to New BLC's deferred
compensation plan and funded by Allied Capital. The transition award will vest
over the same period as the unvested options would have vested. The aggregate
transition amount is estimated to be $2.6 million.
- In connection with the merger, D'Loren Levien & Company LLC agreed to
forfeit warrants to purchase 600,000 shares of BLC common stock in
exchange for a reduction in the exercise price, from $1.86 per share to a
total of $10.00, for warrants to purchase 200,000 shares of BLC common
stock; Robert D'Loren, a director of BLC, is a member of D'Loren, Levien &
Company LLC. The net economic value of this forfeiture and reduction of
exercise price is negligible.
- As compensation for services in connection with the merger, BLC will pay
to Josephthal & Co., Inc. a fee of $1.3 million based on the closing price
of Allied Capital's common stock on December 7, 2000. Futuronics will pay
a fee of $0.1 million to Josephthal for similar services rendered. Robert
Wien, a director of BLC, is a Senior Managing Director of Josephthal.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 66)
Allied Capital and BLC each has received an opinion from its counsel, based
on certain assumptions and factual representations made by Allied Capital, BLC
and others, to the effect that the merger will qualify as a tax-free
reorganization under the Internal Revenue Code and that, as a result, neither
BLC nor its shareholders will recognize a gain or loss for U.S. federal income
tax purposes as a result of the merger. It is a condition to the merger that
each of BLC and Allied Capital will receive a legal opinion from its counsel
that the merger will qualify as a reorganization under the Internal Revenue
Code. Tax matters are complicated, and the tax consequences of the merger to you
will depend on the facts of your own situation. We urge you to contact your own
tax advisor to understand fully how the merger will affect you, including how
any state, local, or foreign tax laws may apply to you.
DIVIDENDS AND DISTRIBUTIONS (PAGE 126)
Under Allied Capital's present policy, it distributes to its shareholders
at least 90% of its annual investment company taxable income in quarterly cash
dividends. Allied Capital has adopted an "opt-out" dividend reinvestment plan
for shareholders. Under the DRIP plan, dividends on shares of Allied Capital
common stock registered in a shareholder's own name are automatically reinvested
into additional shares of Allied Capital common stock, unless a shareholder
"opts out" of the DRIP plan.
As an operating company, BLC is not required to distribute to its
shareholders any annual income, and has not paid dividends.
DISSENTERS' RIGHTS OF APPRAISAL (PAGE 30)
BLC shareholders will not be entitled to appraisal rights under Delaware
General Corporation Law.
8
<PAGE> 17
THE BLC SPECIAL MEETING (PAGE 24)
A special meeting of shareholders of BLC will be held at 10:00 a.m.,
Eastern time, on December 31, 2000, at the offices of Weil, Gotshal & Manges
LLP, 767 Fifth Avenue, 25th Floor, New York, New York 10153, to consider and
vote upon the merger proposal to:
- approve and adopt a merger agreement with Allied Capital providing for
the merger; and
- approve and adopt an amendment to BLC's certificate of incorporation to
create a new Class B common stock.
The shareholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the meeting,
if necessary.
You can vote at the BLC special meeting only if you owned shares of BLC
common stock at the close of business on December 7, 2000, which is the record
date.
Allied Capital and BLC hope to complete the merger promptly after the BLC
special meeting, if regulatory approvals and other required matters are
completed by that time. It is expected that the merger will be completed by
December 31, 2000.
VOTE REQUIRED TO APPROVE THE MERGER
The merger proposal requires the approval of the holders of the majority of
the outstanding shares of BLC common stock. If you do not return your proxy,
vote over the telephone or via the internet, or vote in person, it will have the
effect of a vote "against" the merger proposal. Brokers who hold your shares of
BLC common stock as nominees cannot vote those shares unless you instruct them
to, following the procedure they give you.
Allied Capital shareholders do not need to vote to approve the merger
proposal.
VOTING POWER; VOTING BY MANAGEMENT (PAGE 25)
On the record date, 26,386,093 shares of BLC common stock were outstanding,
of which 7,392,581 shares, or 28% of the shares were owned by directors and
executive officers of BLC. Each share of BLC common stock entitles the holder to
one vote.
BLC officers, directors and shareholders, who collectively owned 8.4
million shares, or 32%, of BLC's outstanding shares as of the record date, have
executed voting agreements in which they have agreed to vote the BLC common
stock owned by them in favor of the merger proposal. In addition, these
officers, directors and shareholders have agreed not to trade the shares of
Allied Capital common stock received in the merger for a period of 90 days
following the closing of the merger.
REVOKING PROXIES (PAGE 24)
You can revoke a proxy previously given by you by giving written notice to
the Secretary of BLC at the address on the proxy card, by filing another proxy,
by
9
<PAGE> 18
revoting your shares over the telephone or via the internet, or by attending the
BLC special meeting and voting in person.
REGULATORY APPROVALS REQUIRED TO COMPLETE THE MERGER (PAGE 64)
Allied Capital and BLC must obtain certain approvals, including approval by
the SBA, before they can complete the merger. The approval of the merger by the
SBA has been received.
A prediction cannot be made as to whether all required regulatory approvals
for the merger will be obtained, or whether any approvals will include
conditions that may be detrimental to Allied Capital or BLC.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 64)
The merger will be completed only if specific conditions, including, among
other things, the following, are met or waived:
- the SBA approves the merger without adverse conditions;
- the BLC shareholders approve the merger;
- the Nasdaq National Market approves the listing of the Allied Capital
common stock being issued in the merger agreement.
- no court orders prevent the merger or impose material limitations on the
ownership or operation of New BLC after the merger, and no governmental
proceedings are pending or threatened that would prevent the merger;
- BLC and Allied Capital each receive an opinion from its tax counsel that
the merger will qualify as a reorganization under section 368(a) of the
Code;
- the Futuronics transaction and the recapitalization of Class B common
stock of BLC are approved and consummated;
- the registration statement, including this proxy statement/prospectus, is
declared effective;
- all vested stock options and common stock warrants of BLC shall have been
fully exercised for the purchase of BLC common stock;
- all unvested options of BLC have been surrendered or canceled;
- not more than $250,000 in aggregate principal amount of BLC convertible
debentures are outstanding immediately prior to the effective time of the
merger;
- from the date of the merger agreement through the closing date, there
shall not have occurred any change, individually or together with other
changes, that has had, or would reasonably be expected to have, a
material adverse effect on the financial condition, business, results of
operations or prospects of BLC and its subsidiaries, taken as a whole or
on Allied Capital and its subsidiaries taken as a whole; and
10
<PAGE> 19
- the representations and warranties made by Allied Capital and BLC
continue to be accurate except for inaccuracies that would not have a
material adverse effect and covenants of the parties shall have been
performed in all material respects.
TERMINATION OF THE MERGER AGREEMENT (PAGE 65)
Even if the BLC shareholders approve the merger, Allied Capital and BLC can
agree at any time to terminate the merger agreement without completing the
merger. The merger agreement can also be terminated if, among other things, any
of the following occurs:
- the merger is not completed by April 30, 2001;
- a court or other governmental authority prohibits the merger; or
- the BLC shareholders do not approve the merger.
BLC can also terminate the merger agreement if, prior to shareholder
approval of the merger, BLC's board of directors authorizes the acceptance of a
more favorable acquisition proposal.
BLC CANNOT SOLICIT OTHER OFFERS (PAGE 63)
BLC has agreed not to encourage, solicit, discuss, or negotiate with anyone
other than Allied Capital, regarding a merger or sale, unless BLC receives an
unsolicited acquisition proposal and BLC's board of directors determines that it
is consistent with its fiduciary obligations to the BLC shareholders under
applicable law to pursue such proposal and, in the case of any such discussions
or negotiations, BLC's board of directors determine that such proposal is
superior to the merger.
If the merger agreement is terminated as a result of BLC's acceptance of a
superior acquisition proposal, BLC will pay Allied Capital a termination fee of
$2,750,000. The termination fee is intended to compensate Allied Capital for the
loss of opportunities, and for its efforts and expenses incurred to structure
the merger if BLC accepts a superior acquisition proposal.
COMPARATIVE PRICES OF ALLIED CAPITAL AND BLC COMMON STOCK (PAGE 19)
Allied Capital common stock is listed on the Nasdaq National Market and BLC
common stock is traded on the American Stock Exchange. On October 31, 2000, the
last trading day before the public announcement of the proposed merger, Allied
Capital common stock closed at $20.625 and BLC common stock closed at $2.188. On
December 7, 2000, Allied Capital common stock closed at $20.375 and BLC common
stock closed at $3.438.
Following the merger, BLC common stock will be delisted and will no longer
trade on the American Stock Exchange or any other exchange. BLC common stock
will become eligible and intends to terminate its registration pursuant to
Section 12(g)(4) of the Securities Exchange Act of 1934.
11
<PAGE> 20
FLUCTUATIONS IN MARKET PRICE
The value of the Allied Capital common stock that BLC shareholders will
receive in the merger will depend on the market value of Allied Capital common
stock at the time the merger is consummated. The market value of Allied Capital
common stock is likely to change, both before and after the BLC special meeting
and the merger. No one can accurately predict what the market value will be at
any particular time.
LISTING OF ALLIED CAPITAL COMMON STOCK
Allied Capital will list the shares of its common stock to be issued in the
merger on the Nasdaq National Market.
ALLIED CAPITAL RISK FACTORS (PAGE 20)
Shareholders of BLC common stock, in voting on the merger, should consider,
among other things the following risks associated with ownership of Allied
Capital common stock: investing in private companies; leverage; changing
interest rates; investing in non-investment grade commercial mortgage-backed
securities; accessing additional capital; and fluctuating quarterly results.
In addition, as a result of the merger and the consolidation transaction,
Allied Capital's investment in New BLC will be substantially larger than Allied
Capital's other portfolio investments.
DIFFERENCES IN RIGHTS OF ALLIED CAPITAL'S AND BLC'S SHAREHOLDERS (PAGE 126)
The rights of BLC shareholders currently are governed by Delaware law,
BLC's certificate of incorporation and BLC's bylaws. When the merger is
completed, shareholders of BLC will become shareholders of Allied Capital, a
Maryland corporation, and their rights as shareholders of Allied Capital will be
governed by Maryland law, Allied Capital's articles of incorporation and Allied
Capital's bylaws. The rights of BLC shareholders and the rights of Allied
Capital shareholders differ in certain respects.
FORWARD-LOOKING STATEMENTS
This document and documents to which we refer you in this document includes
various forward-looking statements about Allied Capital, BLC and New BLC that
are subject to risks and uncertainties. Forward-looking statements include
information concerning future results of operations of Allied Capital, BLC and
New BLC. Also, statements that use the words "anticipate," "believe," "could,"
"estimate," "expect," "forecast," "intend," "may," "plan," "possible,"
"project," "should," "will," or similar expressions are forward-looking
statements. Many factors, some of which are discussed elsewhere in this document
and in documents to which we have referred you, could affect the future
financial results of Allied Capital, BLC and New BLC. These factors could cause
actual results to differ materially from those expressed in forward-looking
statements contained in this document or related documents. These factors
include adverse changes in economic conditions and in the markets served by
Allied Capital and BLC and a significant delay in the completion of the merger.
12
<PAGE> 21
ALLIED CAPITAL SUMMARY HISTORICAL SELECTED CONSOLIDATED FINANCIAL INFORMATION
You should read the consolidated financial information below with Allied
Capital's consolidated financial statements and notes thereto incorporated by
reference in this proxy statement/ prospectus. See "Where You Can Find More
Information" on page 142. Financial information for the years ended December 31,
1999, 1998, 1997, 1996 and 1995 has been derived from audited financial
statements. Allied Capital's selected financial data reflects its operations
with all periods restated as if, as a result of its 1997 merger, its predecessor
companies had merged as of the beginning of the earliest period presented.
Quarterly financial information is derived from unaudited financial data, but in
the opinion of Allied Capital's management, reflects all adjustments (consisting
only of normal recurring adjustments) which are necessary to present fairly the
results for such interim periods. Interim results at and for the nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
(IN THOUSANDS, -------- ------- -------- ------- ------- ------- -------
EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and related portfolio
income:
Interest.................... $129,768 $84,419 $119,772 $79,921 $86,882 $77,541 $61,550
Premiums from loan
dispositions.............. 10,752 9,032 14,284 5,949 7,277 4,241 2,796
Post-merger gain on
securitization of
commercial mortgage
loans..................... -- -- -- 14,812 -- -- --
Investment advisory fees and
other income.............. 9,334 5,411 7,084 6,056 3,246 3,155 4,471
-------- ------- -------- ------- ------- ------- -------
Total interest and
related portfolio
income............... 149,854 98,862 141,140 106,738 97,405 84,937 68,817
-------- ------- -------- ------- ------- ------- -------
Expenses:
Interest.................... 41,645 24,173 34,860 20,694 26,952 20,298 12,355
Employee.................... 14,709 11,303 16,136 11,829 10,258 8,774 8,031
Administrative.............. 10,711 8,476 12,350 11,921 8,970 8,289 6,888
Merger...................... -- -- -- -- 5,159 -- --
-------- ------- -------- ------- ------- ------- -------
Total operating
expenses............. 67,065 43,952 63,346 44,444 51,339 37,361 27,274
Formula and cut-off
awards(1)................. 4,797 5,188 6,753 7,049 -- -- --
-------- ------- -------- ------- ------- ------- -------
Portfolio income before net
realized and unrealized
gains..................... 77,992 49,722 71,041 55,245 46,066 47,576 41,543
-------- ------- -------- ------- ------- ------- -------
Net realized and unrealized
gains:
Net realized gains.......... 23,095 16,448 25,391 22,541 10,704 19,155 12,000
Net unrealized gains
(losses).................. (267) 1,475 2,138 1,079 7,209 (7,412) 9,266
-------- ------- -------- ------- ------- ------- -------
Total net realized and
unrealized gains..... 22,828 17,923 27,529 23,620 17,913 11,743 21,266
-------- ------- -------- ------- ------- ------- -------
Income before minority interests
and income taxes.............. 100,820 67,645 98,570 78,865 63,979 59,319 62,809
Minority interests.............. -- -- -- -- 1,231 2,427 546
Income tax expense.............. -- -- -- 787 1,444 1,945 1,784
-------- ------- -------- ------- ------- ------- -------
Net increase in net assets
resulting from operations..... $100,820 $67,645 $ 98,570 $78,078 $61,304 $54,947 $60,479
======== ======= ======== ======= ======= ======= =======
PER SHARE:
Basic earnings per common
share......................... $ 1.43 $ 1.14 $ 1.64 $ 1.50 $ 1.24 $ 1.19 $ 1.38
Diluted earnings per common
share......................... $ 1.42 $ 1.14 $ 1.64 $ 1.50 $ 1.24 $ 1.17 $ 1.37
Dividends per common share(2)... $ 1.36 $ 1.20 $ 1.60 $ 1.43 $ 1.71 $ 1.23 $ 1.09
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
(IN THOUSANDS, 2000 1999 1999 1998 1997 1996 1995
EXCEPT PER SHARE DATA) -------- ------- -------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding - basic(3)........ 70,604 59,077 59,877 51,941 49,218 46,172 43,697
Weighted average common shares
outstanding - diluted(3)...... 70,777 59,239 60,044 51,974 49,251 46,733 44,010
</TABLE>
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------- ---------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Portfolio at value....... $1,638,207 $1,228,497 $807,119 $703,331 $612,411 $532,311
Portfolio at cost........ $1,632,598 $1,222,901 $803,479 $697,030 $618,319 $530,807
Total assets............. $1,731,773 $1,290,038 $856,079 $807,775 $713,360 $605,434
Total debt outstanding... $ 762,150 $ 592,850 $334,350 $347,663 $274,997 $200,339
Preferred stock issued to
SBA.................... $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Shareholders' equity..... $ 933,329 $ 667,513 $491,358 $420,060 $402,134 $367,192
Shareholders' equity per
common share (NAV)..... $ 11.56 $ 10.20 $ 8.79 $ 8.07 $ 8.34 $ 8.26
Common shares outstanding
at period end(3)....... 80,754 65,414 55,919 52,047 48,238 44,479
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
New portfolio
investments......... $ 640,196 $ 534,017 $ 751,871 $ 524,530 $364,942 $283,295 $216,175
Loan repayments....... $ 117,939 $ 120,563 $ 145,706 $ 138,081 $233,005 $179,292 $111,731
Loan sales(4)......... $ 151,833 $ 120,871 $ 198,368 $ 81,013 $ 53,912 $ 27,715 $ 29,726
Total assets managed
at period end(5).... $2,053,652 $1,435,036 $1,577,296 $1,143,548 $935,720 $822,450 $702,567
Realized gains........ $ 24,664 $ 21,606 $ 31,536 $ 25,757 $ 15,804 $ 30,417 $ 16,679
Realized losses....... $ (1,569) $ (5,158) $ (6,145) $ (3,216) $ (5,100) $(11,262) $ (4,679)
</TABLE>
-------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Comparison of Nine Months Ended
September 30, 2000 and 1999 and Fiscal Years Ended December 31, 1999, 1998,
and 1997" contained in Allied Capital's 1999 Form 10-K and September 30,
2000 Form 10-Q, incorporated by reference herein.
(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 1997 merger.
The distribution resulted in a partial return of capital. Also in
conjunction with the 1997 merger, Allied Capital distributed $0.17 per
common share representing the undistributed earnings of the predecessor
companies at December 31, 1997.
(3) Excludes 259,983 common shares and 516,779 common shares held in Allied
Capital's deferred compensation trust at or for the nine months ended
September 30, 2000 and 1999, respectively, and 516,779 common shares and
810,456 common shares held in the Allied Capital's deferred compensation
trust at or for the year ended December 31, 1999 and 1998, respectively.
(4) 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, 1999, 1998, and 1997" contained in Allied Capital's 1999 Form
10-K, incorporated by reference herein.
(5) Total assets managed includes Allied Capital's assets and assets managed on
behalf of others.
14
<PAGE> 23
<TABLE>
<CAPTION>
2000 1999
--------------------------- -------------------------------------
(IN THOUSANDS, QTR 3 QTR 2 QTR 1 QTR 4 QTR 3 QTR 2 QTR 1
EXCEPT PER SHARE DATA) ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA
(UNAUDITED):
Total interest and
related portfolio
income............. $55,992 $49,965 $43,897 $42,278 $37,998 $33,186 $27,678
Portfolio income
before net realized
and unrealized
gains............... $30,719 $24,700 $22,573 $21,319 $19,273 $16,619 $13,830
Net increase in net
assets resulting from
operations.......... $36,449 $34,790 $29,581 $30,925 $26,944 $22,121 $18,580
Basic earnings per
common share........ $ 0.48 $ 0.50 $ 0.45 $ 0.49 $ 0.44 $ 0.38 $ 0.33
Diluted earnings per
common share........ $ 0.48 $ 0.50 $ 0.45 $ 0.49 $ 0.44 $ 0.38 $ 0.33
Net asset value per
common share(1)..... $ 11.56 $ 10.96 $ 10.44 $ 10.20 $ 9.66 $ 9.17 $ 9.00
Dividends declared per
common share........ $ 0.46 $ 0.45 $ 0.45 $ 0.40 $ 0.40 $ 0.40 $ 0.40
<CAPTION>
1998
-------------------------------------
(IN THOUSANDS, QTR 4 QTR 3 QTR 2 QTR 1
EXCEPT PER SHARE DATA) ------- ------- ------- -------
<S> <C> <C> <C> <C>
QUARTERLY DATA
(UNAUDITED):
Total interest and
related portfolio
income............. $25,974 $22,546 $21,321 $36,897
Portfolio income
before net realized
and unrealized
gains............... $11,776 $ 9,401 $ 9,148 $24,920
Net increase in net
assets resulting from
operations.......... $16,631 $14,906 $14,476 $32,065
Basic earnings per
common share........ $ 0.31 $ 0.29 $ 0.28 $ 0.62(2)
Diluted earnings per
common share........ $ 0.31 $ 0.29 $ 0.28 $ 0.61(2)
Net asset value per
common share(1)..... $ 8.79 $ 8.22 $ 8.21 $ 8.26
Dividends declared per
common share........ $ 0.38 $ 0.35 $ 0.35 $ 0.35
</TABLE>
-------------------------
(1) Allied Capital determines 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 shares held in Allied
Capital's deferred compensation trust.
(2) During the first quarter of 1998, Allied Capital recorded a gain from a
post-merger securitization transaction of $14.8 million, or $0.28 per common
share.
15
<PAGE> 24
BLC SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The summary statement of operations and balance sheet data as of and for
each of the years ended June 30 set forth below are derived from BLC's audited
financial statements, and should be read in conjunction with "Business of
BLC--BLC Management's Discussion and Analysis of Financial Condition and Results
of Operations" and BLC's financial statements, including the notes thereto, and
other financial information included in this proxy statement/prospectus. BLC's
audited historical financial statements were audited by Richard A. Eisner and
Company, LLP, independent auditors. Quarterly financial information is derived
from unaudited financial data, but in the opinion of BLC's management reflects
all adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. Interim
results at and for the three months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2001.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30 FISCAL YEAR ENDED JUNE 30,
------------------- --------------------------------------------------
(IN THOUSANDS, 2000 1999 2000 1999 1998 1997 1996
EXCEPT PER SHARE DATA) -------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues.................. $ 5,500 $ 4,513 $ 26,366 $ 19,422 $ 15,729 $ 7,168 $ 4,997
Income before extraordinary
items......................... $ 752 $ 472 $ 5,282 $ 3,103 $ 3,226 $ 1,702 $ 553
Extraordinary item.............. $ -- $ -- $ -- $ -- $ -- $ 245 $ 91
Net Income...................... $ 752 $ 472 $ 5,282 $ 3,103 $ 3,226 $ 1,947 $ 644
PER SHARE:
Income per share (basic) before
extraordinary item............ $ 0.04 $ 0.02 $ 0.26 $ 0.16 $ 0.18 $ 0.10 $ 0.04
Income per share (basic) from
extraordinary item............ -- -- -- -- -- $ 0.01 $ 0.01
Net income per share (basic).... $ 0.04 $ 0.02 $ 0.26 $ 0.16 $ 0.18 $ 0.11 $ 0.05
Net income per share
(diluted)..................... $ 0.03 $ 0.02 $ 0.22 $ 0.14 $ 0.15 $ 0.11 $ 0.04
Weighted average common shares
outstanding -- basic.......... 20,739 20,289 20,299 20,017 18,287 17,317 14,241
Weighted average common shares
outstanding -- diluted........ 24,745 24,188 25,118 24,378 21,424 18,233 14,361
</TABLE>
<TABLE>
<CAPTION>
AT AT JUNE 30,
SEPTEMBER 30, --------------------------------------------------------
2000 2000 1999 1998 1997 1996
------------- ---------- ---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $ 76,063 $ 85,896 $ 68,037 $ 53,281 $ 20,086 $ 10,983
Total liabilities....... $ 49,856 $ 60,805 $ 48,890 $ 39,012 $ 12,896 $ 5,657
Shareholders' equity.... $ 26,207 $ 25,091 $ 19,147 $ 14,269 $ 7,190 $ 4,601
Shareholders' equity per
share................. $ 1.22 $ 1.23 $ 0.94 $ 0.72 $ 0.41 $ 0.27
Common shares
outstanding at period
end................... 21,547 20,468 20,289 19,778 17,341 16,882
</TABLE>
16
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30 FISCAL YEAR ENDED JUNE 30,
------------------- --------------------------------------------------
1999 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
New loans....................... $ 27,495 $ 34,267 $163,568 $112,142 $ 93,854 $42,335 $18,455
Loan sales...................... $ 29,712 $ 22,683 $160,174 $103,557 $ 85,357 $37,014 $20,220
Total serviced portfolio at
period end.................... $388,000 $273,921 $376,007 $248,544 $175,889 $98,017 $67,021
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
2001 FISCAL YEAR 2000 FISCAL YEAR 1999
----------- --------------------------------- ---------------------------------
QTR 1 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> <C>
QUARTERLY DATA (UNAUDITED):
Revenues.......................... $5,500 $7,280 $6,247 $8,326 $4,513 $3,498 $4,430 $6,868 $4,626
Expenses.......................... $4,248 $5,167 $4,567 $4,763 $3,731 $3,237 $3,423 $3,959 $3,649
Provision for income taxes........ $ 500 $ 445 $ 691 $1,410 $ 310 $ 99 $ 398 $1,144 $ 410
Net income........................ $ 752 $1,668 $ 989 $2,153 $ 472 $ 162 $ 609 $1,765 $ 567
Earnings Per Share:
BASIC:.......................... $ 0.04 $ 0.08 $ 0.05 $ 0.11 $ 0.02 $ 0.01 $ 0.03 $ 0.09 $ 0.03
DILUTED:........................ $ 0.03 $ 0.07 $ 0.04 $ 0.09 $ 0.02 $ 0.01 $ 0.03 $ 0.07 $ 0.03
</TABLE>
17
<PAGE> 26
EQUIVALENT PER SHARE DATA
The following table sets forth certain data concerning the historical book
value per share, cash dividends declared per share and income per share from
continuing operations for Allied Capital and BLC, respectively.
<TABLE>
<CAPTION>
AS OF AND FOR
THE NINE
MONTHS FISCAL
ENDED YEAR
SEPTEMBER 30, ENDED
------------- --------
2000(2) 1999(1)
------------- --------
<S> <C> <C>
BOOK VALUE PER SHARE
Allied Capital...................................... $11.56 $10.20
BLC................................................. $ 1.22 $ 1.23
Pro forma(4, 5)..................................... $11.94 $10.20
CASH DIVIDENDS DECLARED PER SHARE
Allied Capital...................................... $ 1.36 $ 1.60
BLC(3).............................................. -- --
Pro forma(5)........................................ $ 1.36 $ 1.60
INCOME PER SHARE--DILUTED
Allied Capital...................................... $ 1.42 $ 1.64
BLC................................................. $ 0.14 $ 0.22
Pro forma(5)........................................ $ 1.42 $ 1.64
</TABLE>
-------------------------
(1) Allied Capital's and BLC's fiscal years end on December 31 and June 30,
respectively. The per share data presented is for each respective company's
fiscal year, with BLC's per share data for fiscal year 2000 presented under
the fiscal year ended 1999.
(2) Information provided is as of and for the nine months ended September 30,
2000 for Allied Capital and BLC. BLC's income per share has been determined
by combining the quarterly results for the period presented.
(3) BLC has not paid any dividends to its shareholders during the periods
presented.
(4) Allied Capital will issue approximately 4,179,000 shares of common stock as
consideration for the purchase of BLC common stock as a part of the merger.
On a pro forma basis, Allied Capital's book value per share will increase as
of September 30, 2000, as a result of the issuance of Allied Capital shares
to BLC shareholders. Pro forma per share data for fiscal year 1999 is equal
to Allied Capital's actual results as described in note (5) below.
(5) Since the merger will result in New BLC becoming an independently managed,
private portfolio investment of Allied Capital, pro forma per share data is
equal to Allied Capital's actual results for the periods presented. This
merger does not have a pro forma effect on these per share amounts because
Allied Capital would have earned a current investment return on the Allied
Capital shares issued during the periods presented such that the per share
results would be unchanged. Concurrent with the merger, Allied Capital
anticipates earning a current return from New BLC through interest,
dividends and fee income. Interest and dividends will be earned from Allied
Capital's investment in debt, preferred and common stock.
18
<PAGE> 27
COMPARATIVE PER SHARE PRICES
Allied Capital's 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 Allied Capital common stock. The stock quotations are interdealer
quotations and do not include markups, markdowns or commissions. On December 7,
2000, the last reported closing sale price of the common stock was $20.375 per
share. The public announcement of the merger agreement occurred on November 1,
2000.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
------------------
HIGH LOW
------- -------
<S> <C> <C>
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 ENDED DECEMBER 31, 1999
First Quarter............................................. $20.250 $16.500
Second Quarter............................................ 24.000 17.000
Third Quarter............................................. 23.813 20.250
Fourth Quarter............................................ 23.125 16.750
YEAR ENDING DECEMBER 31, 2000
First Quarter............................................. $19.688 $16.063
Second Quarter............................................ 18.688 16.563
Third Quarter............................................. 21.125 17.438
Fourth Quarter (through December 7, 2000)................. 20.875 18.500
</TABLE>
Allied Capital common stock continues to trade in excess of net asset
value. There can be no assurance, however, that it will maintain a premium to
net asset value.
On April 30, 1998, BLC common stock began trading on the American Stock
Exchange. Before April 30, 1998, BLC's common stock was listed for trading on
the over-the-counter market through the OTC Electronic Bulletin Board. During
fiscal year 1999, the AMEX and Nasdaq merged and became the Nasdaq AMEX. The
following table lists the high and low sales prices, as reported by the AMEX
from April 30, 1998 through June 30, 2000, and before that, the range of high
and low sale prices as reported by the National Quotation Bureau from January 1,
1998 through April 30, 1998. Quotations represent prices between dealers and do
not include retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. On December 7, 2000, the last reported closing
sale price of BLC common stock was $3.438.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
---------------------
HIGH LOW
--------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $3.063 $1.375
Second Quarter............................................ 5.250 3.063
Third Quarter............................................. 3.750 2.188
Fourth Quarter............................................ 2.875 1.813
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $2.935 $2.000
Second Quarter............................................ 2.188 1.750
Third Quarter............................................. 2.500 1.813
Fourth Quarter............................................ 2.125 1.500
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $3.250 $1.625
Second Quarter............................................ 2.313 1.625
Third Quarter............................................. 2.125 1.500
Fourth Quarter (through December 7, 2000)................. 3.563 1.563
</TABLE>
19
<PAGE> 28
RISK FACTORS
In addition to the other information contained in this proxy
statement/prospectus, holders of BLC common stock should carefully consider the
following risk factors.
This proxy statement/prospectus contains forward-looking statements which
involve risks and uncertainties. Allied Capital's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Allied
Capital's portfolio consists primarily of long-term loans to and investments in
private companies. Investments in private businesses involve a high degree of
business and financial risk, which can result in substantial losses and
accordingly should be considered speculative. There is generally no publicly
available information about the companies in which we invest, and Allied Capital
relies significantly on the diligence of its employees and agents to obtain
information in connection with Allied Capital's investment decisions. In
addition, some smaller businesses have narrower product lines and market shares
than their competition, and may be more vulnerable to customer preferences,
market conditions or economic downturns, which may adversely affect the return
on, or the recovery of, our investment in such businesses.
ALLIED CAPITAL'S FINANCIAL RESULTS COULD BE NEGATIVELY IMPACTED IF NEW BLC
FAILS TO PERFORM AS EXPECTED. If the merger is consummated, New BLC will be
Allied Capital's largest portfolio investment. Allied Capital's financial
results could be negatively impacted if New BLC, as a portfolio company, fails
to perform as expected.
BORROWERS MAY DEFAULT ON THEIR PAYMENTS. Allied Capital makes unsecured,
subordinated loans and invests in equity securities, which may involve a higher
degree of repayment risk. Allied Capital invests in and lends to companies that
may have limited financial resources and that may be unable to obtain financing
from traditional sources. 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. Deterioration in a borrower's
financial condition and prospects may be accompanied by deterioration in the
collateral for the loan.
PORTFOLIO OF INVESTMENTS IS ILLIQUID. Allied Capital acquires most of its
investments directly from private companies. The majority of the investments in
its portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of the portfolio may
adversely affect Allied Capital's ability to dispose of loans and securities at
times when it may be advantageous to liquidate such investments.
INVESTMENTS IN NON-INVESTMENT GRADE COMMERCIAL MORTGAGE-BACKED SECURITIES
MAY BE ILLIQUID AND MAY HAVE A HIGHER RISK OF DEFAULT. The commercial
mortgage-backed securities ("CMBS") in which Allied Capital invests are non-
investment grade, which means that nationally recognized statistical rating
organizations rate them below the top four investment-grade rating categories
(i.e., "AAA" through "BBB"), and are sometimes referred to as "junk bonds." The
non-investment grade CMBS tend to be less liquid, may have a higher risk of
default and may be more difficult to value. Non-investment grade securities
usually provide a higher yield than do investment-grade bonds, but with the
higher return comes greater risk.
20
<PAGE> 29
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.
ALLIED CAPITAL'S PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS
DETERMINED BY THE BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC
MARKET VALUES. Pursuant to the requirements of the 1940 Act, Allied Capital's
board of directors is required to value each asset quarterly, and Allied Capital
is required to carry the portfolio at fair value as determined by the board of
directors. Since there is typically no public market for the loans and equity
securities of the companies in which Allied Capital makes investments, the board
of directors estimates the fair value of these loans and equity securities
pursuant to a written valuation policy and a consistently applied valuation
process. Unlike banks, Allied Capital is not permitted to provide a general
reserve for anticipated loan losses; instead, Allied Capital is required by the
1940 Act to specifically value each individual investment and record an
unrealized loss for an asset that it believes has become impaired. Without a
readily ascertainable market value, the estimated value of the portfolio of
loans and equity securities may differ significantly from the values that would
be placed on the portfolio if there existed a ready market for the loans and
equity securities. Allied Capital adjusts quarterly the valuation of the
portfolio to reflect the board of directors' estimate of the current realizable
value of each investment in Allied Capital's portfolio. Any changes in estimated
value are recorded in Allied Capital's statement of operations as "Net
unrealized gains (losses)."
ALLIED CAPITAL BORROWS MONEY WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS
ON AMOUNTS INVESTED AND MAY INCREASE THE RISK OF INVESTING IN ALLIED
CAPITAL. Allied Capital borrows from, and issues senior debt securities to,
banks, insurance companies and other lenders. Lenders of these senior securities
have fixed dollar claims on its consolidated assets that are superior to the
claims of its common shareholders. Borrowings, also known as leverage, magnify
the potential for gain or loss on amounts invested and, therefore, increase the
risks associated with investing in the securities. If the value of Allied
Capital's consolidated assets increases, then leveraging would cause the net
asset value attributable to Allied Capital common stock to increase more sharply
than it would have had it not leveraged. Conversely, if the value of the
consolidated assets decreases, leveraging would cause net asset value to decline
more sharply than it otherwise would have had it not leveraged. Similarly, any
increase in the consolidated income in excess of consolidated interest payable
on the borrowed funds would cause net income to increase more than it would
without the leverage, while any decrease in consolidated income would cause net
income to decline more sharply than it would have had it not borrowed. Such a
decline could negatively affect Allied Capital's ability to make common stock
dividend payments. Leverage is generally considered a speculative investment
technique.
At September 30, 2000, Allied Capital had $762.2 million of outstanding
indebtedness, bearing a weighted annual interest cost of 8.1%. In order for
Allied Capital to cover these annual interest payments on indebtedness, it must
achieve annual returns on its September 30, 2000 portfolio of at least 3.6%.
ALLIED CAPITAL MAY NOT BORROW MONEY UNLESS IT MAINTAINS ASSET COVERAGE FOR
INDEBTEDNESS OF AT LEAST 200% WHICH MAY IMPACT RETURNS TO SHAREHOLDERS. Allied
Capital must maintain asset coverage for a class of senior security representing
indebtedness of at least 200%. Allied Capital's ability to achieve its
investment
21
<PAGE> 30
objective may depend in part on its continued ability to maintain a leveraged
capital structure by borrowing from banks or other lenders on favorable terms.
There can be no assurance that it will be able to maintain such leverage. If
asset coverage declines to less than 200%, Allied Capital may be required to
sell a portion of its investments when it is disadvantageous to do so. As of
September 30, 2000, Allied Capital's asset coverage for indebtedness was 236%.
Illustration. The following table illustrates the effect of leverage on
returns from an investment in Allied Capital common stock assuming various
annual returns, net of expenses. The calculations in the table below are
hypothetical and actual returns may be higher or lower than those appearing
below.
ASSUMED RETURN ON THE ALLIED CAPITAL'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)...................... -43.8% -25.2% -15.9% -6.6% 2.6% 11.9% 30.5%
</TABLE>
-------------------------
(1) The calculation assumes (i) $1,731.8 million in total assets, (ii) an
average cost of funds of 8.1%, (iii) $762.2 million in debt outstanding and
(iv) $933.3 million of shareholders' equity.
CHANGES IN INTEREST RATES MAY AFFECT ALLIED CAPITAL'S COST OF CAPITAL AND
PORTFOLIO INCOME. Because Allied Capital borrows money to make investments, its
income is dependent upon the difference between the rate at which it borrows
funds and the rate at which it invests these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on Allied Capital's portfolio income. In periods of
sharply rising interest rates, Allied Capital's cost of funds would increase,
which would reduce portfolio income before net realized and unrealized gains.
However, there would be no effect on the return, if any, that could be generated
from its equity interests. Allied Capital uses a combination of long-term and
short-term borrowings and equity capital to finance its investing activities.
Investments originated for sale generally carry variable rates and are financed
with short-term variable rate debt. Long-term fixed-rate investments are
financed with long-term fixed-rate debt and equity. Allied Capital may or may
not use interest rate risk management techniques in an effort to limit its
exposure to interest rate fluctuations. Such techniques may include various
interest rate hedging activities to the extent permitted by the 1940 Act.
BECAUSE ALLIED CAPITAL MUST DISTRIBUTE INCOME, IT WILL CONTINUE TO NEED
ADDITIONAL CAPITAL TO GROW. Allied Capital will continue to need capital to
fund incremental growth in investments. Historically, Allied Capital has
borrowed from financial institutions and has issued equity securities. A
reduction in the availability of funds from financial institutions could limit
its ability to grow. Allied Capital must distribute at least 90% of its taxable
net operating income excluding net realized long-term capital gains to
stockholders to maintain its regulated investment company status. As a result,
such earnings will not be available to fund investment originations. Allied
Capital expects to continue to borrow from financial institutions and sell
additional equity securities. If Allied Capital fails to obtain funds from such
sources or from other sources to fund its investments, it could limit its
ability to grow, which could have a material adverse effect on the value of
Allied Capital common stock. In addition, as a BDC, Allied Capital is generally
required to maintain
22
<PAGE> 31
a ratio of at least 200% of total assets to total borrowings, which may restrict
its ability to borrow in certain circumstances.
ALLIED CAPITAL'S PRIVATE FINANCE INVESTMENTS MAY NOT PRODUCE CAPITAL GAINS.
Private finance investments 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, private finance investments
generate interest income from the time they are made, and may also produce a
realized gain from an accompanying equity feature. Allied Capital cannot be sure
that its 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. Allied Capital has operated so as to
qualify to be taxed as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. If it meets source of income,
diversification and distribution requirements, Allied Capital qualifies for
pass-through tax treatment. If Allied Capital fails to qualify as a regulated
investment company, it would become subject to federal income tax as if it were
an ordinary corporation, which would substantially reduce its net assets and the
amount of income available for distribution to its shareholders. Allied Capital
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. Allied Capital also could be subject to a 4% excise tax, and/or
corporate level income tax, if it fails to make required distributions.
ALLIED CAPITAL OPERATES IN A COMPETITIVE MARKET FOR INVESTMENT
OPPORTUNITIES. Allied Capital competes for investments with many other
companies and individuals, some of whom have greater resources than does Allied
Capital. Increased competition would make it more difficult to purchase or
originate investments at attractive prices. As a result of this competition,
sometimes it may be precluded from making otherwise attractive investments.
CHANGES IN THE LAW OR REGULATIONS THAT GOVERN ALLIED CAPITAL COULD HAVE A
MATERIAL IMPACT ON ALLIED CAPITAL OR ITS OPERATIONS. Allied Capital is
regulated by the Commission and the SBA. In addition, changes in the laws or
regulations that govern BDCs, regulated investment companies, real estate
investment trusts, SBICs and SBLCs may significantly affect its business. Any
change in the law or regulations that govern its business could have a material
impact on Allied Capital or its operations. Laws and regulations may be changed
from time to time, and the interpretations of the relevant laws and regulations
also are subject to change.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. Allied Capital's quarterly operating results could
fluctuate, and therefore, you should not rely on quarterly results to be
indicative of Allied Capital's performance in future quarters. Factors that
could cause quarterly operating results to fluctuate include, among others,
variations in the investment origination volume, variation in timing of
prepayments, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which Allied Capital encounters
competition in its markets and general economic conditions.
23
<PAGE> 32
THE BLC SPECIAL MEETING
PURPOSE OF THE BLC SPECIAL MEETING
At the BLC special meeting, holders of BLC common stock will consider and
vote upon the merger proposal to approve and adopt the merger agreement and the
merger with Allied Capital. As part of the merger proposal, BLC shareholders
will be asked to approve and adopt an amendment to the certificate of
incorporation of BLC to create a new Class B common stock.
The BLC Board of Directors has unanimously approved the merger agreement,
the merger and the certificate amendment and recommends a vote "for" approval
and adoption of the merger proposal.
VOTING INFORMATION
This proxy statement/prospectus is being furnished in connection with the
solicitation of proxies by the BLC board of directors for the BLC special
meeting. The cost of the solicitation of proxies will be borne by BLC. BLC will
pay brokers, nominees, fiduciaries, or other custodians their reasonable
expenses for sending proxy material to, and obtaining information from, persons
for whom they hold stock of BLC. BLC expects the solicitation of proxies will be
primarily by mail, but directors, officers and other employees of BLC may also
solicit in person, by telephone, or by mail. BLC has engaged a proxy
solicitation firm to solicit proxies from shareholders and has agreed to pay
such firm a fee of approximately $5,000 plus expenses for its services.
Only shareholders of record at the close of business on December 7, 2000
will be entitled to vote at the BLC special meeting. The total number of shares
of stock outstanding and entitled to vote at the meeting as of the record date
was 26,386,093 shares of BLC common stock. Each share of BLC common stock is
entitled to one vote.
If the accompanying proxy is executed and returned in time for the BLC
special meeting, your shares will be voted in accordance with the instructions.
Any proxy may be revoked at any time before it is voted by written notice,
mailed or delivered to the Secretary of BLC, by a submission of a new vote over
the telephone or via the Internet, or by revocation of a written proxy by
request in person at the BLC special meeting; but if not so revoked, the shares
represented by such proxy will be voted in the manner directed by the
shareholder. If no direction is made, proxies received from shareholders will be
voted "for" the merger proposal set forth in the notice of the special meeting.
SHAREHOLDER AND BOARD APPROVALS
The merger proposal is being submitted at the BLC special meeting for
approval by the shareholders of BLC. The approval of a majority of the
outstanding shares of BLC is required for the approval of the merger proposal.
Abstentions will have the same effect as casting a vote "against" the merger
proposal. The vote of the shareholders of Allied Capital is not being solicited
because their approval or consent is not required for the merger to be
consummated.
Pursuant to a voting agreement, specific officers, directors and
shareholders of BLC have agreed to vote their shares of BLC common stock held as
of the record
24
<PAGE> 33
date in favor of the merger proposal. A total of 8.4 million shares of BLC
common stock, representing 32% of the outstanding BLC common stock, is
represented by the voting agreement. In addition, certain officers, directors
and shareholders of BLC have agreed, pursuant to resale agreements, not to trade
the shares of Allied Capital common stock received in the merger for a period of
90 days following the closing of the merger.
BENEFICIAL OWNERSHIP OF BLC
On December 7, 2000, the name, address, and share ownership of persons who
beneficially owned 5% or more of the outstanding BLC common stock, BLC's
executive officers and the members of the BLC board of directors, and the
percentage of shares of Allied Capital common stock, and the percentage of New
BLC common stock that would be owned by such persons upon consummation of the
merger based upon their holdings and outstanding shares at December 7, 2000, are
as follows:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE PERCENTAGE
BENEFICIAL OWNERSHIP OF OWNERSHIP OF OWNERSHIP OF
NAME AND ADDRESS OF OWNERSHIP BLC BEFORE ALLIED CAPITAL NEW BLC
BENEFICIAL OWNER OF BLC(17) MERGER AFTER MERGER AFTER MERGER
------------------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Carol Tannenhauser................ 5,979,938(2)(11)(16)(20) 22.6% 1.3% --
210 East 68th Street
New York, NY 10021
Futuronics Corporation............ 2,595,224(1)(16) 9.8% * 9.6%(18)
3652 Forest Gate Drive, N.E.
Iowa City, IA 52240
Richard Blanck.................... 3,211,391(2)(4)(16)(21) 12.2% 0.7% 0.5%
9 Hickory Road
Manhasset Hills, NY 11040
Diane Rosenfeld................... 1,098,529(9)(16)(22) 4.2% * --
RR #1 Box 427 D
County Road #86
Amenia, NY 12501
DIRECTORS
---------
Robert F. Tannenhauser............ 5,979,938(11)(16) 22.6% 1.3% 3.7%
210 East 68th Street
New York, NY 10021
Peter D. Blanck................... 3,431,390(2)(3)(16) 13.0% 0.7% 0.5%
University of Iowa,
College of Law
Iowa City, IA 52241
Jerome B. Alenick................. 342,801(12) 1.3% * --
26 Columbia Turnpike
Florham Park, NJ 07932
Robert W. D'Loren................. 238,189(5) * * --
72 Woodland Drive
Oyster Bay Cove, NY 11771
Robert W. Wien.................... 159,500(13) * * --
24 James Road
Mount Kisco, NY 10549
Kenneth S. Schwartz............... 48,755(10) * * --
284 Guard Hill Road
Bedford, NY 10506
Irwin E. Redlener................. 90,000(8) * * --
11 Alfred Lane
New Rochelle, NY 10804
</TABLE>
25
<PAGE> 34
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE PERCENTAGE
BENEFICIAL OWNERSHIP OF OWNERSHIP OF OWNERSHIP OF
NAME AND ADDRESS OF OWNERSHIP BLC BEFORE ALLIED CAPITAL NEW BLC
BENEFICIAL OWNER OF BLC(17) MERGER AFTER MERGER AFTER MERGER
------------------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
OFFICERS
--------
Jennifer M. Goldstein............. 307,275(6)(16) 1.2% 0.1% 0.4%
50 West 72nd Street
New York, NY 10023
Leonard Rudolph................... 74,925(14) * * --
3 Pelham Place
East Brunswick, NJ 08816
David I. Redlener................. 14,940(7) * * --
155 Henry Street
Brooklyn, NY 11201
All directors and officers as a
group........................... 7,915,659(15) 29.4% 1.4% 4.6%(19)
</TABLE>
-------------------------
* Owns less than 1% of the outstanding shares of common stock.
(1) Carol Tannenhauser, Richard Blanck, and Peter D. Blanck are each officers
and directors of Futuronics.
(2) Carol Tannenhauser, Richard Blanck, and Peter D. Blanck are siblings. Each
disclaims beneficial ownership of the shares owned by the others.
(3) Includes (a) 330,737 shares owned directly, (b) 328,599 shares deemed owned
by Peter D. Blanck as custodian for his four children, (c) 176,830 shares
owned by trust created under the will of Albert Blanck under which Peter D.
Blanck is a trustee and beneficiary, and (d) 2,595,224 shares owned by
Futuronics.
(4) Includes (a) 298,834 shares owned directly, (b) 140,503 shares deemed owned
by Richard Blanck as custodian for his two children, (c) 176,830 shares
owned by trust created under the will of Albert Blanck under which Richard
Blanck is a trustee and beneficiary, and (d) 2,595,224 shares owned by
Futuronics.
(5) Includes (a) 38,189 shares owned directly, and (b) 200,000 shares that may
be acquired upon the exercise of warrants held by D'Loren Levien & Company
L.L.C., of which Robert D'Loren is a member.
(6) Includes (a) 287,275 shares owned directly and (b) 20,000 shares underlying
options.
(7) Includes 14,940 shares owned directly.
(8) Includes 90,000 shares underlying options.
(9) Includes 1,098,529 shares owned directly or jointly with her spouse.
(10) Includes 48,755 shares owned directly or jointly with his spouse.
(11) Includes (a) 1,142,379 shares owned directly, (b) 1,379,909 shares owned
directly by Carol Tannenhauser, his spouse, (c) 2,595,224 owned by
Futuronics, of which Carol Tannenhauser is an officer and director, (d)
176,830 shares owned by trust created under the will of Albert Blanck,
under which his spouse is a trustee and beneficiary, (e) 270,667 shares
owned by his son, (f) 270,665 shares owned by his daughter, (g) 22,132
shares held in trust for his son, (h) 22,132 shares held in trust for his
daughter and (i) 100,000 shares underlying options.
(12) Includes 342,801 shares owned directly or jointly with his spouse.
(13) Includes (a) 46,422 shares owned directly, (b) 90,000 shares that may be
acquired upon the exercise of options and (c) 23,078 shares that may be
acquired upon the exercise of warrants.
(14) Includes 74,925 shares owned directly.
(15) Represents shares beneficially owned pursuant to Rule 13d-3 by Mr.
Tannenhauser, a director and President of BLC; Ms. Goldstein, Treasurer and
Chief Financial Officer of BLC; Mr. Leonard Rudolph, Executive Vice
President of BLC; Mr. D. Redlener, Secretary of BLC; Messrs. D'Loren, Peter
Blanck, Wien, Alenick and Drs. Redlener and Schwartz, directors of BLC. The
shares deemed beneficially owned by Robert F. Tannenhauser and Peter D.
Blanck through Futuronics and the trust created under the will of Albert
Blanck have been added only once to the total shares owned by officers and
directors as a group.
(16) Shares subject to voting and support agreement and resale agreements.
(17) Includes options or warrants exercisable within 60 days of December 7,
2000.
(18) Shares controlled by Allied Capital. See "The Merger Proposal -- Interests
of Certain Persons in the Merger -- Futuronics Transaction".
(19) Represents shares beneficially owned by Robert Tannenhauser, Jennifer
Goldstein and Peter Blanck.
(20) Ms. Tannenhauser is the wife of Robert F. Tannenhauser and is a freelance
writer.
(21) Dr. Blanck is the brother of Carol Tannenhauser and is in private practice.
(22) Ms. Rosenfeld is the spouse of Eric Rosenfeld, who was a former officer and
director of BLC.
26
<PAGE> 35
BLC COMMON STOCK PURCHASE PRICE INFORMATION
The following tables set forth information regarding acquisitions of BLC
common stock by affiliates of BLC, showing the number of shares of BLC common
stock purchased by each affiliate, the range of prices paid for those shares and
the average price paid per quarter for the past two years. Allied Capital and
its executive officers and directors have not purchased any shares of BLC common
stock in the past two years. Transactions made on behalf of participants in the
BLC 401(k) plan are included in their respective beneficial ownership. See
"Beneficial Ownership of BLC."
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
9/30/98 12/31/98
----------------------------------------- -----------------------------------------
RANGE OF AVERAGE PRICE NUMBER OF RANGE OF AVERAGE PRICE NUMBER OF
PRICES PAID PAID SHARES PRICES PAID PAID SHARES
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BLC Financial Services, Inc.......... -- -- -- -- -- --
Robert F. and Carol Tannenhauser..... -- -- -- $2.90 $2.90 375,000
Peter D. Blanck...................... -- -- -- -- -- --
Richard Blanck....................... -- -- -- -- -- --
Diane Rosenfeld...................... -- -- -- -- -- --
Jerome B. Alenick.................... -- -- -- -- -- --
Robert W. D'Loren.................... -- -- -- -- -- --
Irwin E. Redlener.................... -- -- -- -- -- --
Kenneth S. Schwartz.................. -- -- -- -- -- --
Robert W. Wien....................... -- -- -- -- -- --
Leonard Rudolph...................... -- -- -- $1.87-2.24 $2.08 2,835
Jennifer M. Goldstein................ -- -- -- $2.04-2.24 $2.14 315
David I. Redlener.................... -- -- -- $2.09-2.25 $2.17 91
Futuronics Corporation............... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
3/31/99 6/30/99 9/30/99
-------------------------------- ------------------------------ ------------------------------
RANGE OF AVERAGE RANGE OF AVERAGE RANGE OF AVERAGE
PRICES PRICE NUMBER PRICES PRICE NUMBER PRICES PRICE NUMBER
PAID PAID OF SHARES PAID PAID OF SHARES PAID PAID OF SHARES
---------- ------- --------- -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BLC Financial Services,
Inc.................... -- -- -- -- -- -- -- -- --
Robert F. and Carol
Tannenhauser........... $0.65-2.58 $1.84 108,576 -- -- -- $2.00 $2.00 6,251
Peter D. Blanck.......... $ 0.65 $0.65 83,334 -- -- -- -- -- --
Richard Blanck........... $ 0.65 $0.65 83,334 -- -- -- -- -- --
Diane Rosenfeld.......... -- -- -- -- -- -- -- -- --
Jerome B. Alenick........ -- -- -- -- -- -- -- -- --
Robert W. D'Loren........ -- -- -- -- -- -- -- -- --
Irwin E. Redlener........ -- -- -- -- -- -- -- -- --
Kenneth S. Schwartz...... -- -- -- -- -- -- -- -- --
Robert W. Wien........... $ 2.25 $2.25 5,000 $2.13 $2.13 10,000 -- -- --
Leonard Rudolph.......... $2.18-2.31 $2.26 5,142 -- -- -- -- -- --
Jennifer M. Goldstein.... $2.30-2.58 $2.44 6,658 -- -- -- -- -- --
David I. Redlener........ -- -- -- -- -- -- -- -- --
Futuronics Corporation... -- -- -- -- -- -- -- -- --
<CAPTION>
QUARTER ENDED
------------------------------
12/31/99
------------------------------
RANGE OF AVERAGE
PRICES PRICE NUMBER
PAID PAID OF SHARES
-------- ------- ---------
<S> <C> <C> <C>
BLC Financial Services,
Inc.................... -- -- --
Robert F. and Carol
Tannenhauser........... -- -- --
Peter D. Blanck.......... -- -- --
Richard Blanck........... -- -- --
Diane Rosenfeld.......... -- -- --
Jerome B. Alenick........ -- -- --
Robert W. D'Loren........ -- -- --
Irwin E. Redlener........ -- -- --
Kenneth S. Schwartz...... -- -- --
Robert W. Wien........... -- -- --
Leonard Rudolph.......... -- -- --
Jennifer M. Goldstein.... -- -- --
David I. Redlener........ -- -- --
Futuronics Corporation... -- -- --
</TABLE>
27
<PAGE> 36
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------------
3/31/00 6/30/00 9/30/00
------------------------------ ------------------------------ ------------------------------
RANGE OF AVERAGE RANGE OF AVERAGE RANGE OF AVERAGE
PRICES PRICE NUMBER PRICES PRICE NUMBER PRICES PRICE NUMBER
PAID PAID OF SHARES PAID PAID OF SHARES PAID PAID OF SHARES
-------- ------- --------- -------- ------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BLC Financial
Services, Inc...... -- -- -- -- -- -- -- -- --
Robert F. and Carol
Tannenhauser....... -- -- -- -- -- -- $0.60 $0.60 427,500
Peter D. Blanck...... -- -- -- -- -- -- $0.60 $0.60 75,000
Richard Blanck....... -- -- -- -- -- -- -- -- --
Diane Rosenfeld...... -- -- -- -- -- -- -- -- --
Jerome B. Alenick.... -- -- -- -- -- -- -- -- --
Robert W. D'Loren.... -- -- -- -- -- -- -- -- --
Irwin E. Redlener.... -- -- -- -- -- -- -- -- --
Kenneth S. Schwartz.. -- -- -- -- -- -- -- -- --
Robert W. Wien....... -- -- -- -- -- -- $1.10 $1.10 11,422
Leonard Rudolph...... -- -- -- -- -- -- -- -- --
Jennifer M.
Goldstein.......... -- -- -- $0.50 $0.50 75,000(1) -- -- --
David I. Redlener.... -- -- -- -- -- -- -- -- --
Futuronics
Corporation........ -- -- -- -- -- -- -- -- --
<CAPTION>
QUARTER ENDED
--------------------------------
9/30/00 TO 12/07/00
--------------------------------
RANGE OF AVERAGE
PRICES PRICE NUMBER
PAID PAID OF SHARES
---------- ------- ---------
<S> <C> <C> <C>
BLC Financial
Services, Inc...... -- -- --
Robert F. and Carol
Tannenhauser....... $0.82-3.31 $1.99 561,334
Peter D. Blanck...... $2.00-3.31 $2.19 203,332
Richard Blanck....... $ 2.00 $2.00 58,332
Diane Rosenfeld...... $0.60-1.85 $1.23 213,545
Jerome B. Alenick.... $2.00-3.31 $2.50 23,426
Robert W. D'Loren.... $0.90-3.31 $2.10 38,189
Irwin E. Redlener.... -- -- --
Kenneth S. Schwartz.. $0.90-3.31 $2.10 37,230
Robert W. Wien....... -- -- --
Leonard Rudolph...... $1.99-2.90 $2.34 49,000
Jennifer M.
Goldstein.......... $0.82-2.90 $1.90 90,000
David I. Redlener.... $0.82-2.90 $1.86 13,000
Futuronics
Corporation........ -- -- --
</TABLE>
-------------------------
(1) Ms. Goldstein received a full recourse loan from BLC in the aggregate of
$37,500 to exercise these options.
The following table shows all transactions by affiliates in BLC common
stock during the 60 days prior to the filing of this proxy statement/prospectus.
<TABLE>
<CAPTION>
NATURE OF TRANSACTION
NAME OF BENEFICIAL OWNER DATE OF TRANSACTION NUMBER OF SECURITIES PRICE PER SHARE (PURCHASE, SALE, EXERCISE)
-------------------------------------- ------------------- -------------------- --------------- --------------------------
<S> <C> <C> <C> <C>
Robert F. Tannenhauser................ 10/15/00 10,000(1) $3.31 Option Exercise
10/16/00 25,000(1) $2.00 Option Exercise
10/16/00 35,000(1) $2.20 Option Exercise
10/16/00 150,000(1) $2.90 Option Exercise
10/16/00 40,000(1) $1.99 Option Exercise
11/22/00 101,334 $2.00 Debenture Conversion
12/5/00 200,000 $0.82 Option Exercise
Peter Blanck.......................... 11/22/00 133,332 $2.00 Debenture Conversion
12/5/00 10,000 $3.31 Option Exercise
12/5/00 25,000 $2.00 Option Exercise
12/5/00 35,000 $2.20 Option Exercise
Richard Blanck........................ 11/22/00 58,332 $2.00 Debenture Conversion
Diane Rosenfeld....................... 10/16/00 202,000 $0.60 Option Exercise
11/7/00 11,545 $1.85 Warrant Exercise
Jerome B. Alenick..................... 11/30/00 371 $3.31 Option Exercise
11/30/00 10,455 $2.00 Option Exercise
11/30/00 12,600 $2.20 Option Exercise
Robert W. D'Loren..................... 11/15/00 14,764 $0.90 Option Exercise
11/15/00 371 $3.31 Option Exercise
11/15/00 10,455 $2.00 Option Exercise
11/15/00 12,600 $2.20 Option Exercise
Kenneth S. Schwartz................... 11/7/00 14,667 $0.90 Option Exercise
11/7/00 193 $3.31 Option Exercise
11/7/00 10,185 $2.00 Option Exercise
11/7/00 12,185 $2.20 Option Exercise
Leonard Rudolph....................... 12/5/00 35,000 $2.13 Option Exercise
12/5/00 10,000 $2.90 Option Exercise
12/5/00 4,000 $1.99 Option Exercise
Jennifer M. Goldstein................. 12/5/00 30,000 $2.90 Option Exercise
12/5/00 20,000 $1.99 Option Exercise
12/5/00 40,000 $0.82 Option Exercise
David I. Redlener..................... 12/5/00 9,000 $0.82 Option Exercise
12/5/00 4,000 $2.90 Option Exercise
</TABLE>
-------------------------
(1) Mr. Tannenhauser received full recourse loans from BLC in the aggregate of
$674,700 to exercise these options.
28
<PAGE> 37
TRANSACTIONS AND ARRANGEMENTS CONCERNING BLC COMMON STOCK
To BLC's knowledge, no transactions in BLC's common stock other than (i)
ordinary purchases under BLC's 401(k) plan or (ii) those transactions disclosed
in "BLC Common Stock Purchase Price Information", have been effected during the
past 60 days by BLC or its executive officers, directors, affiliates or
subsidiaries, by Allied Capital or its executive officers, directors, affiliates
or subsidiaries or by Futuronics or its executive officers, directors,
affiliates or subsidiaries or by Robert Tannenhauser, Jennifer Goldstein,
Richard Blanck, or Peter Blanck.
In the past two fiscal years, no purchases of BLC common stock were made by
BLC, Allied Capital, or Futuronics (except as disclosed in periodic reports
filed by BLC with the SEC) other than as set forth in this proxy
statement/prospectus.
Except as set forth in this proxy statement/prospectus, neither BLC, Allied
Capital, Futuronics or any of their affiliates, executive officers or directors
or any person controlling BLC, Allied Capital or Futuronics is a party to any
contract, arrangement or understanding or relationship with any other person
relating directly, or indirectly, to, or in connection with respect to any
securities of BLC (including, without limitation, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any such
securities, joint ventures, loan or option arrangement, puts or calls,
guarantees of loans, guarantees against loss or the giving of withholding of
proxies, consents or authorizations). Except as described in this proxy
statement/prospectus, in the past two fiscal years, no contracts or negotiations
concerning a merger, consolidation, or acquisition, a tender offer for or other
acquisition of any securities of BLC, an election of directors to the BLC board,
or a sale or other transfer of a material amount of assets of BLC, has been
entered into or has occurred between any affiliates of BLC or between BLC or any
of its affiliates and any unaffiliated person or between Robert Tannenhauser,
Jennifer Goldstein, Richard Blanck, or Peter Blanck, and BLC and its affiliates,
or between Allied Capital or its executive officers, directors, affiliates or
subsidiaries and BLC and its affiliates, or between Futuronics or its executive
officers, directors, affiliates or subsidiaries and BLC and its affiliates.
Except as described in this proxy statement/prospectus, in the past three years,
BLC has not made any underwritten public offering of its stock that was (i)
registered under the Securities Act of 1933, (ii) exempt from registration under
the Securities Act of 1933 pursuant to Regulation A.
None of the executive officers and directors of Allied Capital, BLC,
Futuronics, Robert Tannenhauser, Jennifer Goldstein, Richard Blanck, or Peter
Blanck or Allied Capital, BLC or Futuronics have been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
QUORUM AND ADJOURNMENTS
Under Delaware law, a quorum is constituted by the presence in person or by
proxy of the holders of a majority of the outstanding shares of BLC common
stock. Votes cast by proxy or in person at the BLC special meeting will be
tabulated by the inspector of election appointed for the meeting who will
determine whether or not a quorum is present. Proxies properly executed and
marked with a negative vote or an abstention, or broker non-votes, will be
considered to be present at the BLC special
29
<PAGE> 38
meeting for the purposes of determining the existence of a quorum for the
transaction of business. Broker non-votes exist where a broker proxy indicates
that the broker is not authorized to vote on a particular proposal.
The shareholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the meeting,
if necessary.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the meeting. BLC does not currently intend
to seek an adjournment of the meeting. Abstentions and broker non-votes will be
treated for purposes of the adjournment as votes "against" the adjournment.
DISSENTERS' RIGHTS OF APPRAISAL
Shareholders of BLC will not be entitled to appraisal rights under Section
262 of the Delaware General Corporation Law.
THE MERGER PROPOSAL
This section of the proxy statement/prospectus describes the proposed
merger and related transactions. While this section summarizes the material
terms of the merger and related transactions, this summary may not contain all
of the information that is important to each shareholder. Shareholders should
carefully read this entire document and the merger agreement attached as
Appendix A for a more complete understanding of the merger.
GENERAL
Allied Capital plans to acquire BLC in a stock for stock exchange, where
Allied Capital created an acquisition subsidiary that will merge with and into
BLC to create New BLC. At the BLC special meeting, you will be asked to vote to
approve and adopt the merger agreement and the merger with Allied Capital. As
part of the merger proposal, BLC shareholders will be asked to approve and adopt
the certificate amendment to create new Class B common stock. The merger
agreement provides that the merger will be completed if approved by the BLC
shareholders and all other conditions of the merger agreement are satisfied or
waived.
The effect of the merger is to create an independently managed, private
portfolio company of Allied Capital, New BLC, that will focus exclusively on
small business lending, including the origination of SBA 7(a) loans and B&I
Program loans. Upon completion of the Merger, Allied Capital also plans to merge
its Allied Capital Express small business lending operations into New BLC. The
combination of New BLC with Allied Capital Express will result in a leading
small business lender with 22 offices located nationwide and SBA Preferred
Lender status in 64 markets. New BLC believes it will be a technology leader in
online small business loan origination. New BLC will have significant online
loan origination relationships as well as solid core broker relationships in the
small business community.
To ensure continuity, Allied Capital and BLC agreed that certain officers,
directors and shareholders of BLC would continue as owners of New BLC. In
30
<PAGE> 39
addition, Allied Capital, in a separate transaction, intends to acquire
Futuronics, which owns 9.6% of BLC common stock on a diluted basis, and Allied
Capital plans to continue such Futuronics ownership of BLC shares. To provide a
mechanism for the continued ownership of New BLC by the continuing shareholders
and Futuronics, BLC will create a new Class B common stock that will not be
exchanged in the merger. In accordance with the certificate of incorporation and
the bylaws of BLC, the rights, preferences and privileges of existing BLC common
stock shall be identical to the rights, preferences and privileges of Class B
common stock. Each share of existing BLC common stock and Class B common stock
shall be entitled to one vote per share.
Assuming shareholder approval and all other required approvals are received
and all other conditions are met or waived, the merger and related transactions
will be accomplished as follows:
- BLC will create a new Class B common stock. The continuing shareholders
will exchange their shares of BLC common stock for Class B common stock.
The continuing shareholders will own 5% of BLC through Class B common
stock.
- In a separate transaction, Allied Capital will purchase all of the
outstanding shares of Futuronics for $9.1 million in cash. Futuronics is
a non-reporting holding company that is inactive but owns 9.6% of BLC
common stock on a diluted basis. Officers and directors of BLC and
affiliated parties own 80% of Futuronics on a diluted basis. Upon
completion of the Futuronics acquisition, Futuronics will exchange its
shares of BLC common stock for Class B common stock. Allied Capital will
own and control 9.6% of BLC through Futuronics' ownership of BLC Class B
common stock.
- Allied Capital created an acquisition subsidiary, the Merger Sub, that
will merge with and into BLC, and each share of BLC common stock,
excluding Class B common stock, will be exchanged for 0.180 shares of
Allied Capital common stock. The Class B common shareholders will not
exchange their shares in the Merger, but will continue as owners of New
BLC. To determine the exchange ratio, each share of BLC stock was given a
value of $3.50 per share. This $3.50 value was divided by an average
closing market price of Allied Capital common stock for the 20 days prior
to and including the date of the merger agreement. The average Allied
Capital share price was $19.39 per share.
- Allied Capital will have paid $9.1 million in cash to the Futuronics
shareholders to acquire 9.6% of BLC, based upon the 2.6 million shares of
BLC owned by Futuronics multiplied by $3.50 per share. Based upon the
exchange ratio of 0.180 and an estimate of the shares of BLC common stock
outstanding, Allied Capital will issue 4.1 million shares to BLC
shareholders to acquire 85.3% of BLC. On December 7, 2000 the closing
price of Allied Capital's common stock was $20.375. Assuming the December
7, 2000 closing price, the BLC shareholders would receive $84.2 million in
Allied Capital common stock or $3.668 per share.
- Futuronics and the continuing shareholders will then exchange their Class
B common stock for New BLC common stock. Following this exchange, Allied
Capital, directly and through its ownership of Futuronics, will own 95%
of New
31
<PAGE> 40
BLC common stock, and the continuing shareholders will own 5% of the New
BLC common stock.
As a result of the merger, New BLC will survive as an independently
managed, private Allied Capital portfolio company and will continue its
operations as a private small business lender.
Upon completion of the merger, Allied Capital intends to consolidate its
Allied Capital Express operations into New BLC. To facilitate this consolidation
transaction, prior to the consummation of the merger, Allied Capital will
establish Allied SBLC, which holds Allied Capital's SBLC license and SBA 7(a)
loans, as an independently managed portfolio company. Allied SBLC will establish
a new board of directors and Allied Capital will transfer its employees and
operations attributed to Allied Capital Express to Allied SBLC. Allied SBLC will
thereby become a portfolio company operating independently from Allied Capital.
Allied Capital will also restructure the existing debt owed to it by Allied SBLC
to include senior and subordinated debt. Immediately following the merger,
Allied SBLC will merge with a newly formed subsidiary of New BLC, in
consideration of the issuance by New BLC of preferred stock to Allied Capital.
THE EXCHANGE
If the merger is completed, you will receive 0.180 shares of Allied Capital
common stock for each share of BLC common stock that you own. Fractional shares
of BLC common stock will be exchanged into Allied Capital common stock pursuant
to the same exchange ratio as described above. Fractional shares of Allied
Capital common stock will be issued in the merger as necessary, rounded to the
nearest one-thousandth of a share, and no cash will be paid to stockholders of
BLC by reason of the merger.
Based upon the capitalization of BLC and Allied Capital as of the BLC
record date, the shareholders of BLC on a diluted basis will own in the
aggregate 5% of the outstanding Allied Capital common stock following
consummation of the merger.
As soon as practicable after the effective time of the merger, American
Stock Transfer & Trust Company, as the exchange agent for the Merger, will mail
to each holder of record of BLC common stock as of the effective time a
transmittal letter to be used in forwarding such shareholder's certificates
representing such shares for surrender to AST. Upon such surrender, AST will
forward such holder a confirmation of ownership of Allied Capital common stock
that such stockholder received as a result of the merger.
BLC SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO AST UNTIL THEY
HAVE RECEIVED TRANSMITTAL LETTERS, NOR SHOULD THEY RETURN STOCK CERTIFICATES
WITH THE ENCLOSED PROXY.
Until surrendered to AST, outstanding stock certificates previously issued
by BLC will, by virtue of the merger, represent shares of Allied Capital common
stock, on an exchange ratio-adjusted basis. All dividends and distributions
payable by Allied Capital to holders of such Allied Capital common stock who
have not yet surrendered their BLC certificates will be paid to AST and will be
held in escrow in a non-interest bearing account until such time as such
certificates are surrendered. Dividends held in the escrow account will not be
eligible for dividend reinvestment. Dividends will be taxable to shareholders in
the year in which they were declared by
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Allied Capital, regardless of whether a shareholder has actually received such
dividends. Therefore, in order to receive cash and other dividends declared by
Allied Capital, BLC shareholders should surrender all outstanding certificates
previously issued by BLC as soon as possible after the merger is consummated.
When such certificates are surrendered, any unpaid dividends will be distributed
by AST to the shareholder without interest, and the shareholder will receive a
confirmation as to the Allied Capital common stock issued.
SHARES OF ALLIED CAPITAL COMMON STOCK WILL BE ISSUED IN BOOK ENTRY (I.E.,
UNCERTIFICATED) FORM ONLY; NO PHYSICAL CERTIFICATES WILL BE ISSUED IN CONNECTION
WITH THE MERGER.
In lieu of physical certificates, AST will send to each person who has
surrendered certificates representing BLC common stock, together with a properly
completed transmittal letter, a confirmation containing the information required
under Maryland law regarding Allied Capital common stock issued to such person,
including the name of the issuer, Allied Capital, and the number of shares of
Allied Capital common stock issued. Thereafter, anyone holding Allied Capital
common stock in uncertificated form will have the opportunity at any time to
receive certificates representing their Allied Capital common stock. Dividends
paid on such Allied Capital common stock will be paid to such holders, without
any action on the part of such holders.
CLOSING DATE
The closing date of the merger will occur upon the filing of a certificate
of merger with the Secretary of State of the State of Delaware or at such later
date as is specified on such certificate. The filing of the certificate of
merger will occur as soon as practicable after the satisfaction of the
conditions set forth in the merger agreement. The merger agreement may be
terminated by either party if the merger has not been consummated on or before
April 30, 2001 and under certain other conditions. See "The Merger
Agreement -- Conditions" and "-- Termination; Fees."
BACKGROUND OF THE MERGER
During 2000, it became apparent to BLC management and the BLC board of
directors that BLC would require additional long-term capital in order to
continue to grow and to meet its earnings objectives. BLC saw significant
opportunities for expansion in small business lending but was capital
constrained. Due to the relatively small size of BLC in terms of its public
market capitalization and total equity base, BLC believed it would be difficult
to raise additional debt or equity capital on an independent basis on acceptable
terms.
On its own initiative, in August 2000, Josephthal contacted Allied Capital
to inquire about its interest in providing long-term capital to BLC. Robert
Wien, a director of BLC, is a Senior Managing Director of Josephthal.
Representatives of Josephthal knew that Allied Capital was a recognized leader
in providing unsecured expansion capital to growing businesses. Upon review of
certain publicly available information, representatives from Allied Capital
agreed to meet with Josephthal and representatives from BLC to discuss BLC's
financing needs. See "--Advice of Financial Advisors."
During the initial meeting, Allied Capital and BLC preliminarily discussed
financing opportunities, including a transaction in which Allied Capital would
merge
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its small business lending activities into BLC and establish a portfolio
company. Both BLC and Allied Capital representatives immediately recognized the
opportunity presented by a combination of the two companies' small business
lending operations. Both parties agreed to study the possibility of a
combination transaction whereby Allied Capital would provide financing to
establish a small business lending portfolio company. Subsequent to the initial
meeting, on August 17, 2000 BLC agreed in principle to retain Josephthal to
advise BLC regarding any potential transaction that may result with Allied
Capital.
During the first week of September, Joan Sweeney, Managing Director and
Chief Operating Officer of Allied Capital, indicated to Robert Tannenhauser,
Chairman and Chief Executive Officer of BLC, that based upon review of BLC
publicly available information, Allied Capital would be interested in purchasing
100% of BLC at a price of $3.00 per share in a stock for stock exchange. After
discussing the Allied Capital indication of price with certain BLC board
members, Mr. Tannenhauser communicated to Ms. Sweeney that BLC would not be
interested in selling the company at Allied Capital's indicated price. BLC had
not approached or been approached by any other third parties with a firm offer
for an acquisition or merger of BLC. Both Mr. Tannenhauser and Ms. Sweeney
agreed that BLC would provide to Allied Capital additional information regarding
its loan portfolio in an attempt to persuade Allied Capital to reconsider its
valuation of the company. Throughout September 2000, representatives of Allied
Capital and BLC continued discussions regarding an appropriate structure and
other terms that would be necessary to complete a merger transaction.
Given the access to additional information and continued analysis, Allied
Capital determined that it would increase its indication of value of BLC to
$3.50 per share only if Allied Capital was assured that the incumbent management
team of BLC was committed to the company on a going-forward basis. Specifically,
Allied Capital determined that it would require that Mr. Tannenhauser remain as
CEO of BLC upon the acquisition, that Mr. Tannenhauser would retain a
significant continuing ownership in BLC, and that BLC would provide that the
owners of at least 5% of BLC's outstanding shares (including Mr. Tannenhauser)
continue their ownership in BLC, so that Allied Capital could be assured of
their commitment to the continued success of BLC. Allied Capital engaged Jolson
Merchant Partners as its financial advisor, and together with Josephthal, they
began discussions regarding the structure of the transaction and terms that
would be necessary to achieve Allied Capital's objectives.
On October 6, 2000, Allied Capital presented preliminary terms to BLC,
wherein Allied Capital offered to purchase 95% of BLC in a stock for stock
merger. Allied Capital proposed an exchange ratio to be based upon a share price
for BLC common stock of $3.50 per share, and a share price for Allied Capital
stock to be based upon a 20-day average market price. The 20-day period would
encompass the 20 business days preceding and including the date of the merger
agreement. The proposed exchange ratio would be fixed upon signing a definitive
merger agreement and would not be subject to any ceiling or floor on the number
of shares exchanged due to market fluctuations. Allied Capital also conditioned
its offer on certain key terms, specifically: Mr. Tannenhauser would enter into
an employment contract to remain as CEO; Jennifer Goldstein would enter into an
employment contract to remain as CFO; and BLC would assure the continued
ownership of 5% of BLC by certain
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shareholders, with Mr. Tannenhauser and Ms. Goldstein retaining a majority of
the 5%.
Management of Allied Capital and BLC continued to discuss the terms of an
acquisition throughout October. Allied Capital considered the individual
shareholders that it would accept as continued owners in BLC, so that Allied
Capital would satisfy its need to assure that current shareholders of BLC and
key management had significant financial risk in the continued success of BLC,
given that BLC's common stock, following the merger, would be illiquid. Allied
Capital accepted the following continuing shareholders: Mr. Tannenhauser would
own 72.2% of the 5%, Ms. Goldstein would own 7.2% of the 5%; Peter D. Blanck (a
BLC director and brother-in-law of Mr. Tannenhauser) would own 10.3% of the 5%,
and Richard Blanck (a brother-in-law of Mr. Tannenhauser) would own 10.3% of the
5%. In addition, Allied Capital and Mr. Tannenhauser and Ms. Goldstein agreed
that Mr. Tannenhauser and Ms. Goldstein would enter into four-year employment
agreements to further assure Allied Capital of their commitment to the continued
success of BLC. Allied Capital insisted that Mr. Tannenhauser's and Ms.
Goldstein's entering into an employment contract would be a condition to closing
any proposed merger transaction.
On October 17, 2000, the BLC board of directors met with its legal and
financial advisors to discuss the possibility of a merger transaction with
Allied Capital. Management made a presentation regarding the proposed terms of
the transaction. The BLC board of directors authorized BLC management to
continue discussions with Allied Capital and conduct further due diligence.
The BLC board of directors met on October 27, 2000 to consider further the
transaction with Allied Capital under the proposed terms. Ryan, Beck, Josephthal
and BLC's legal advisors attended the meeting. The BLC board of directors
considered the status of the negotiations with Allied Capital, including a
summary of the due diligence findings of BLC's management. Representatives of
Josephthal and Ryan, Beck presented their financial due diligence findings about
Allied Capital. Ryan, Beck presented an oral analysis of the fairness, from a
financial point of view, of the exchange ratio to shareholders of BLC common
stock. The exchange ratio would apply only to those shareholders who would not
receive Class B common stock. The BLC board of directors considered the
advantages and disadvantages of the proposed transaction and determined that BLC
management should continue its negotiations.
On October 31, 2000, the BLC Board of Directors met again with its legal
and financial advisors to review a definitive merger agreement with Allied
Capital. At the meeting, Ryan, Beck issued its fairness opinion regarding the
transaction. Following deliberations, directors who are not employees of BLC
(Messrs. Alenick, Redlener, D'Loren and Schwartz) and who represent a majority
of the entire BLC board of directors voted separately for, and subsequently the
full BLC board of directors authorized and approved, the execution of the merger
agreement, the certificate amendment and the related transactions as discussed
under the "The Merger Proposal" in this proxy statement/prospectus.
During the course of its negotiations with Allied Capital, BLC did not
solicit offers from any third party nor was it approached by any third party
with respect to a sale of BLC.
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The parties agreed to enter into a definitive agreement and plan of merger
as of October 31, 2000 subject to finalizing the transaction documents. The
merger agreement was executed by the parties on November 1, 2000.
BLC'S REASONS FOR THE MERGER
BLC's board of directors approved the merger after determining that it was
in the best interests of BLC's affiliated and unaffiliated shareholders and that
the merger is fair to such affiliated and unaffiliated shareholders. In reaching
its conclusion to approve the merger, the board of directors considered the
following information and factors:
- ACCESS TO CAPITAL. The BLC board of directors considered that on a
stand-alone basis, BLC would be unable to access sufficient capital to
adequately fund its growth opportunities. The BLC board of directors
considered that by becoming a portfolio company of Allied Capital, BLC
would have access to a funding source with significant financial
resources;
- PURCHASE PRICE. The BLC board of directors determined, with the advice
of its financial advisor, that the implied $3.50 per share which was used
to compute the exchange ratio represents a substantial premium to the
market price of BLC common stock. In making that determination, the BLC
board of directors considered that the market price of BLC common stock
was $2.19 per share on October 31, 2000. Thus, $3.50 represented a 60%
premium over the $2.19. Also, during the twenty-one months ended
September 30, 2000 the highest closing market price for BLC stock was
$3.125 and the lowest closing market price was $1.50. The book value per
share of BLC common stock was $1.22 at September 30, 2000. The BLC board
of directors believed that due to the illiquid nature of BLC's assets,
the liquidation value per share of BLC's net assets may be lower than the
book value per share. The BLC board of directors also considered that
they had not received any firm offers for an acquisition or merger of BLC
from other third parties.
- INCREASED LIQUIDITY. The BLC board of directors believed that the merger
offered BLC's shareholders the opportunity to own stock of a
significantly larger and more actively traded business enterprise, and
that BLC's shareholders would have the opportunity to participate in the
potential growth of a larger company after the closing of the merger;
- ALLIED CAPITAL DIVIDENDS. The BLC board of directors reviewed Allied
Capital's dividend payment history and current dividend yield. The BLC
board of directors considered the opportunity for BLC's shareholders to
receive future cash dividends through their ownership in Allied Capital
upon the merger;
- ALLIED CAPITAL FINANCIAL CONDITION AND PROSPECTS. The BLC board of
directors reviewed information with respect to Allied Capital's financial
condition, results of operations and business prospects, including the
due diligence review by BLC's management, financial advisors and legal
advisors. The BLC board of directors considered that Allied Capital's
greater size and diversity of its investment portfolio would provide more
diversity to BLC shareholders;
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- TAX-FREE REORGANIZATION. The merger is intended to qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. See "The Merger Agreement -- Material Federal Income Tax
Consequences";
- FAIRNESS OPINION. The opinion of Ryan, Beck states that as of its date,
and based on and subject to the matters described in the opinion, the
exchange ratio provided for in the merger was fair, from a financial
point of view, to BLC shareholders, including unaffiliated shareholders,
and describes the related financial analyses performed by Ryan, Beck in
connection with its opinion. The exchange ratio applies only to those
shareholders who will not receive Class B common stock. See "-- Fairness
Opinion of BLC's Financial Advisor"; and
- CONSUMMATION OF MERGER. The BLC board of directors considered the
likelihood of consummation of the merger, including the terms and
conditions of the merger agreement and the limited conditions to the
consummation of the merger.
The BLC board of directors also considered certain potentially negative
factors in its deliberations concerning the merger, including, without
limitation, the following:
- the possibility that the merger would not be consummated following the
execution of the merger agreement;
- the fact that the merger included a fixed exchange ratio, and as a
result, the value of consideration to be received by BLC shareholders
will fluctuate as the market value of Allied Capital stock fluctuates.
- the possible disruption of BLC's business operations pending completion
of the merger; and
- the structure and amount of the termination fee and its effect on the
financial condition of BLC. See "The Merger Agreement -- Termination;
Fees."
The BLC board of directors considered that specified BLC officers,
directors and shareholders would continue as officers, directors and
shareholders of New BLC, and as a result would benefit from compensation and
employment arrangements in the ordinary course of business, as well as any
benefits that may arise from continued ownership of New BLC. In addition, the
BLC board of directors considered that Allied Capital would acquire the shares
of Futuronics prior to the merger, and that the majority shareholders of
Futuronics are affiliated with BLC. Upon review of these related transactions,
directors who are not employees of BLC (Messrs. Alenick, Redlener, D'Loren and
Schwartz) and who represent a majority of BLC's entire Board of Directors,
voting separately, and subsequently the full BLC board of directors determined
that the terms of the transactions were reasonable, as well as appropriate in
connection with the merger.
BLC's board of directors did not consider alternative transactions as there
were no firm offers for an acquisition or merger of BLC for the past two years.
BLC's board of directors chose not to approach additional third parties or
pursue alternative transactions, business combinations, ventures or financing
because the board with full knowledge of the other lenders in the SBA market,
recognized that there were significant synergies and benefits to this particular
combination that would not be available from other suitors. Specifically, both
Allied Capital's and BLC's businesses were geographically complementary with no
significant overlap. Additionally, the
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credit criteria, procedures and processes of the two companies were
substantially similar. Furthermore, the internet and technology platforms
developed by Allied Capital would substantially enhance BLC's ability to market
its loan products through BLC's existing loan origination network. The board of
directors also recognized the benefit of the favorable tax treatment of the
transaction to the BLC shareholders and the increased liquidity through
ownership of Allied Capital stock as well as the significant dividend available
to holders of Allied Capital. The BLC board of directors also determined that
the Allied Capital offer represented a substantial premium over the market,
book, or liquidation value of BLC.
The BLC board of directors concluded that the benefits of the transaction
to BLC and its shareholders outweighed the risks associated with the foregoing
factors.
In its deliberations, the BLC board of directors considered that the
Futuronics transaction would not have any impact on its determination of the
fairness of the merger to the affiliated and unaffiliated shareholders of BLC.
The BLC board of directors was aware of the fact that Futuronics had cash
and other assets in addition to the BLC common stock with no liabilities, and
that based upon the fixed price of $3.50 per BLC share owned by Futuronics to be
paid to Futuronics shareholders, that the Futuronics shareholders were getting
paid less per share for their BLC common stock than the BLC shareholders. The
BLC board of directors also recognized that the Futuronics stock transaction was
a taxable event and that the BLC transaction was not. For these reasons the BLC
board of directors felt that the Futuronics transaction had no impact on the
board of director's fairness determination.
The above discussion of the information and factors considered by the BLC
board of directors is not all-inclusive but is believed to include all material
factors considered by the BLC board of directors. In view of the variety of
factors considered by the BLC board of directors, the BLC board of directors did
not find it practicable to quantify or otherwise attempt to assign relative
weights to the specific factors considered in making its determination. In
addition, individual members of the BLC board of directors may have given
different weights to different factors. Consequently, the BLC board of directors
did not quantify the assumptions and results of its analysis in reaching its
determination that the merger proposal is fair to, and in the best interests of,
BLC and its shareholders.
RECOMMENDATION OF THE BLC BOARD OF DIRECTORS
The BLC board of directors believes that the terms of the merger proposal
are fair to, and in the best interests of, BLC and the affiliated and
unaffiliated shareholders of BLC and has unanimously approved the merger
agreement, the merger and the certificate amendment.
THE BLC BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF BLC
COMMON STOCK VOTE "FOR" THE MERGER PROPOSAL.
ALLIED CAPITAL'S REASONS FOR THE MERGER
Allied Capital's board of directors believes its investment in New BLC will
enhance Allied Capital's investment portfolio, both with respect to current
investment return and potential future capital gain. Allied Capital intends to
merge its small business lending activities into New BLC to create a business
enterprise
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positioned to be a leading small business lender. Allied Capital's investment in
New BLC is expected to include debt and preferred and common stock. Allied
Capital will control directly and indirectly 95% of the voting common stock of
New BLC. In addition to a current return through interest, dividends and fee
income, Allied Capital believes there is opportunity to add value to New BLC and
to position its investment for future capital gain. Allied Capital expects that
New BLC will continue to build on Allied Capital Express' proprietary online
rules-based underwriting technology.
Allied Capital believes that the merger is the most appropriate means of
acquiring New BLC as a portfolio company. The Allied Capital board of directors
believes that the expected investment return from its investment in New BLC is
consistent with Allied Capital's overall portfolio return objectives, and that
the expected total return will not be dilutive to Allied Capital's earnings
after accounting for the Allied Capital common stock issued in the merger.
Allied Capital expects to receive interest, dividend and fee income from New BLC
such that the income received from the new portfolio company will be sufficient
to provide no dilution in per share earnings. Allied Capital will also position
the new portfolio company for future capital gain, and should such future gain
be realized, the transaction would add incremental per share earnings.
FUTURONICS' REASONS FOR THE FUTURONICS TRANSACTION
The acquisition of the outstanding capital stock of Futuronics by Allied
Capital will permit the Futuronics shareholders to obtain the value of their
indirect interest in shares of BLC common stock while incurring only a single
level of tax.
SPECIAL FACTORS REGARDING THE MERGER PROPOSAL
The BLC board of directors, the Allied Capital board of directors and the
Futuronics board of directors believe that the merger and the related
transactions are fair, including from a financial and procedural perspective, to
the unaffiliated shareholders of BLC. In addition, the continuing shareholders,
including Robert Tannenhauser, Jennifer Goldstein, Peter Blanck and Richard
Blanck, believe that the merger and related transactions are fair, including
from a financial and procedural perspective, to the unaffiliated shareholders of
BLC. Those parties adopted the analysis presented under "-- BLC's Reasons for
the Merger", "-- Allied Capital's Reasons for the Merger", "-- Futuronic's
Reasons for the Merger" "-- Fairness Opinion of BLC's Financial Advisor" and
"-- Fairness Opinion of Futuronics' Financial Advisor".
Although the BLC board of directors did not establish a special committee
to represent the unaffiliated shareholders of BLC or retain a separate financial
advisor or separate legal counsel for the unaffiliated shareholders of BLC, the
merger was separately approved by directors who are not employees of BLC that
represent a majority of the entire BLC board of directors. The opinion issued by
Ryan, Beck addresses the fairness, from a financial point of view, of the
exchange ratio to both affiliated and unaffiliated shareholders of BLC. The
affiliated and unaffiliated shareholders of BLC also will exchange their shares
of BLC common stock pursuant to the same exchange ratio in the merger.
Furthermore, Ryan, Beck has opined that the merger exchange ratio is fair, from
a financial point of view, to the unaffiliated shareholders of BLC.
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The merger requires the approval of a majority of the outstanding shares of
BLC. As of December 7, 2000, affiliated shareholders held 32% of BLC's common
stock. However, the transaction is not structured to require the approval of a
majority of the unaffiliated BLC shares.
FAIRNESS OPINION OF BLC'S FINANCIAL ADVISOR
BLC retained Ryan, Beck to assist the BLC board of directors in its
examination of the fairness, from a financial point of view, of the exchange
ratio to BLC shareholders. Ryan, Beck was approached by BLC on October 16, 2000,
initiated its work on October 17, 2000 and was formally retained on October 25,
2000. Ryan, Beck was engaged by BLC to conduct a due diligence review of BLC
with the objective of developing a full understanding of the business and
characteristics of BLC and to perform a current valuation analysis of BLC. Ryan,
Beck was also engaged to analyze and evaluate, with BLC's management and board
of directors, any proposals received from any potential acquirors relating to a
sale or merger, conduct an appropriate due diligence investigation of an
acquiror and provide a fairness opinion, if requested. As part of its investment
banking business, Ryan, Beck is continually engaged in the valuation of
financial institutions in connection with mergers, acquisitions and other
securities-related transactions. Ryan, Beck was selected by BLC because of Ryan,
Beck's knowledge of, experience with, and reputation in the financial services
industry.
Ryan, Beck did not act as BLC's financial advisor in connection with the
consideration of the merger or in connection with the negotiation of the merger
agreement. At BLC's request, representatives of Ryan, Beck presented their
preliminary analysis at the October 27, 2000 meeting of the BLC board of
directors. Representatives of Ryan, Beck attended the October 31, 2000 meeting
of the BLC board of directors at which the merger agreement was considered and
approved. At the meeting, Ryan, Beck rendered its oral opinion to the BLC board
of directors, subsequently confirmed by a formal written opinion as of the same
date, that based on and subject to the assumptions, factors, and limitations as
set forth in the opinion and as described below, the exchange ratio in the
merger as provided and described in the merger agreement is fair to
shareholders, including unaffiliated shareholders, of BLC common stock from a
financial point of view. The exchange ratio applies only to those shareholders
who will not receive Class B common stock in the BLC recapitalization. Ryan,
Beck reissued its opinion as of the date of this proxy statement/prospectus. No
limitations were imposed by the BLC board of directors upon Ryan, Beck with
respect to the investigations made or procedures followed by it in arriving at
its opinion.
THE FULL TEXT OF RYAN, BECK'S OPINION, DATED THE DATE OF THIS PROXY
STATEMENT/ PROSPECTUS, SETS FORTH ASSUMPTIONS MADE AND MATTERS CONSIDERED, IS
ATTACHED AS APPENDIX C, TO THIS PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF BLC
ARE URGED TO READ RYAN, BECK'S OPINION IN ITS ENTIRETY. RYAN, BECK'S OPINION WAS
DIRECTED TO THE BLC BOARD OF DIRECTORS AND WAS PROVIDED TO THE BLC BOARD OF
DIRECTORS FOR ITS INFORMATION IN CONSIDERING THE MERGER. RYAN, BECK'S OPINION IS
DIRECTED ONLY TO THE FINANCIAL FAIRNESS OF THE EXCHANGE RATIO AND IS NOT A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW A BLC SHAREHOLDER SHOULD VOTE AT THE
BLC SPECIAL MEETING. THE SUMMARY OF THE RYAN, BECK OPINION SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION. IN RENDERING ITS OPINION, RYAN, BECK DOES NOT ADMIT THAT IT
IS AN
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EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED WITHIN THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR
THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION
11 OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER.
In connection with its opinion, Ryan, Beck reviewed the following items:
- The merger agreement and related documents;
- The Futuronics merger agreement and related documents pursuant to which
Futuronics, the holder of 2,595,224 shares of BLC common stock, will be
paid $9,083,284 in cash;
- This document, but only in connection with Ryan, Beck's updated opinion;
- Allied Capital's annual report to shareholders and annual report on Form
10-K for the years ended December 31, 1999, 1998, and 1997;
- Allied Capital's quarterly reports on Form 10-Q for the periods ended
September 30, 2000, June 30, 2000 and March 31, 2000;
- BLC's annual reports to shareholders on Form 10-K for the fiscal years
ended June 30, 2000, 1999 and 1998;
- BLC's quarterly reports on Form 10-Q for the periods ended September 30,
2000, March 31, 2000, December 31, 1999, and September 30, 1999;
- Allied Capital's proxy statement dated October 5, 2000;
- BLC's proxy statement dated February 23, 2000;
- The historical stock prices and trading volume of Allied Capital common
stock;
- The historical stock prices and trading volume of BLC common stock;
- Certain operating and financial information provided to Ryan, Beck by the
management of BLC and Allied Capital relating to its business and
prospects including but not limited to minutes of the board of directors
of both Allied Capital and BLC, detailed internal financial statements of
BLC, reports detailing BLC's asset quality and reports detailing BLC's
historical loan origination volumes;
- The publicly available financial data of specialty finance companies
which Ryan, Beck deemed generally comparable to BLC;
- The terms of recent acquisitions of specialty finance companies which
Ryan, Beck deemed generally comparable in whole or in part to Allied
Capital's acquisition of BLC; and
- The current market environment in general and the specialty finance
company market in particular.
Additionally, Ryan, Beck:
- Conducted such other studies, analyses, inquiries and examinations as
Ryan, Beck deemed appropriate; and
- Met with members of Allied Capital's and BLC's senior management to
discuss Allied Capital's and BLC's past and current business operations,
regulatory
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standing, financial condition, strategic plan and possible future
performance, including any possible operating efficiencies and synergies
which may arise from the merger.
In connection with its review, Ryan, Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding Allied Capital, BLC and their subsidiaries provided
to Ryan, Beck by Allied Capital and BLC and its representatives. Ryan, Beck is
not an expert in the evaluation of loan and lease portfolios for purposes of
assessing the adequacy of the allowances for losses. Therefore, Ryan, Beck has
not assumed any responsibility for making an independent evaluation of the
adequacy of the allowance for loan losses set forth in the balance sheet of BLC
at September 30, 2000; and Ryan, Beck assumed such allowances were adequate and
complied fully with applicable law, regulatory policy, and the policies of the
Commission as of the date of such financial statements. With respect to Allied
Capital, Ryan, Beck is not an expert in the valuation of its private debt and
equity investments. Therefore, Ryan, Beck has not assumed any responsibility for
making an independent valuation or appraisal of the carrying value of such
investments. Ryan, Beck has reviewed certain historical financial data provided
by Allied Capital and BLC. Ryan, Beck also discussed future prospects and
performance with the managements of Allied Capital and BLC. Ryan, Beck assumed
that these discussions reflected the best currently available information and
judgments of the respective managements. Ryan, Beck was not retained to nor did
it make any independent evaluation or appraisal of the assets or liabilities of
Allied Capital, BLC or their respective subsidiaries. Ryan, Beck also assumed
that the merger in all respects is, and will be, consummated in compliance with
all laws and regulations applicable to Allied Capital and BLC.
The preparation of a fairness opinion on the merger involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, Ryan, Beck's opinion is not readily susceptible to summary
description. In arriving at its opinion, Ryan, Beck performed a variety of
financial analyses. Ryan, Beck believes that its analyses must be considered as
a whole and that the consideration of portions of such analyses and the factors
considered therein, or any one method of analysis, without considering all
factors and analyses, could create an incomplete view of the analyses and the
process underlying Ryan, Beck's opinion. No one method of analysis was assigned
greater significance than any other. All material analyses prepared by Ryan,
Beck are described hereunder.
In its analyses, Ryan, Beck made numerous assumptions with respect to
industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of Allied Capital or BLC. Any
estimates contained in Ryan, Beck's analyses are not necessarily indicative of
future results or values, which may be significantly more or less favorable than
such estimates. The only material assumption made by Ryan, Beck not otherwise
mentioned in this section was that federal funding of the Small Business
Administration's loan programs are not discontinued or materially reduced.
Estimates of values of companies do not purport to be appraisals nor do they
necessarily reflect prices at which companies or their securities may actually
be sold. The earnings estimates furnished to Ryan, Beck were prepared by the
senior management of Allied Capital and BLC. These estimates, as well as other
information provided by BLC and Allied Capital relating to their business and
prospects were prepared by the senior management of BLC and Allied
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<PAGE> 51
Capital for internal purposes only and not with a view towards public
disclosure. Those earnings estimates, as well as the other estimates relied upon
by Ryan, Beck in their analyses, were based on numerous variables and
assumptions which are inherently uncertain and, accordingly, actual results
could vary materially to those set forth in such information. Ryan, Beck
expressed no opinion as to any financial prospects or the assumptions on which
they were based.
In evaluating the merger, Ryan, Beck, BLC's financial advisor, had oral
discussions with Allied Capital's management regarding the future performance of
Allied Capital for the years ending December 31, 2001 and 2002. Allied Capital's
estimates in these discussions were based on assumptions which Allied Capital's
management believed reasonable at the time relating to the interest rate
environment and to Allied Capital's portfolio and asset growth. Allied Capital
management's belief as to the reasonableness of its assumptions was based on
Allied Capital's history of operations. Allied Capital's management indicated to
Ryan, Beck that, before giving effect to the merger, it believed and continues
to believe that Allied Capital's net income per share in 2001 would be
approximately 15% higher than it would be in 2000, and that the growth in 2002
net income over 2001 would be between 15% and 20%. Allied Capital's management
believed that the effect of the merger would not change their estimations of
future 2001 and 2002 net income growth. Ryan, Beck relied on these estimates
without independent verification.
The expectations as to future operations are forward-looking statements.
There can be no assurance that the expectations will be realized. The
expectations are inherently subject to significant economic and competitive risk
and uncertainties many of which are beyond the company's control. These risks
and uncertainties could cause actual results or performance to differ materially
from expectations as to future performance. Some of the risks and uncertainties
that could materially impact Allied Capital's business and its expectations as
to future performance have been described under the heading "Forward-Looking
Statements."
The following is a brief summary of the analyses and procedures performed
by Ryan, Beck in arriving at its opinion and presented at the October 27, 2000
and October 31, 2000 meetings of the BLC board of directors. The only material
difference between such presentations was that stock prices were updated where
appropriate. The financial data provided for all companies is derived from
financial data published by SNL Securities LC and publicly available sources.
Analysis of Selected Publicly Traded Companies.
Ryan, Beck compared certain of BLC's financial data as of June 30, 2000 and
market data as of October 27, 2000 to a peer group of fourteen selected
specialty finance companies that Ryan, Beck considered generally comparable to
BLC. These fourteen companies are located in the United States, had market
capitalization of between $20 million and $200 million and had available public
trading and pricing information. Ryan, Beck noted that none of the peer group
companies were identical to BLC and that any analysis of the peer companies
necessarily involved complex considerations and judgments concerning differences
in financial and operating
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<PAGE> 52
characteristics and other factors that would necessarily affect the relative
trading values.
<TABLE>
<CAPTION>
PEER GROUP PEER GROUP
BLC AVERAGE MEDIAN
($000S) ------- ---------- ----------
<S> <C> <C> <C>
Market Capitalization.............................. $43,070 $ 84,565 $ 70,620
Price to Earnings.................................. 9.68x 11.96x 10.40x
Price to Book Value................................ 1.73x 0.89x 0.71x
Dividend Yield..................................... 0.00% 2.65% 0.73%
Total Assets....................................... $85,896 $422,534 $411,013
Total Equity....................................... $25,091 $101,930 $ 76,797
Equity/Assets...................................... 29% 30% 24%
Return on Average Assets........................... 6.86% 3.30% 2.55%
Return on Average Equity........................... 23.88% 10.83% 11.13%
</TABLE>
Ryan, Beck noted that BLC was smaller, in terms of market capitalization,
than the peer group average and median. Ryan, Beck also noted that BLC was
smaller in terms of assets and equity as compared to the average and median of
the peer group. The peer group's dividend yield was higher than BLC, which
historically has not paid a dividend. Ryan, Beck further noted that BLC's ratio
of equity to assets of 29% was slightly lower than the peer group average of 30%
but above the peer group median of 24%. Ryan, Beck noted that the performance of
BLC as measured by return on average assets and return on average equity was
superior to the peer group. Finally, Ryan, Beck noted that BLC was trading at a
lower multiple to earnings when compared to the peer group but significantly
more than the peer group on a price to book value basis.
Analysis of Selected Transactions.
Ryan, Beck compared BLC's financial data as of June 30, 2000 with that of a
group of eighteen specialty finance companies being acquired in transactions
announced since January 1, 1998 and for which pricing data pertaining to the
transactions was publicly available. The criteria for this group were specialty
finance companies in the United States where the transaction value was between
$50 million and $250 million. The following table compares selected statistics
of BLC with the average and median ratios for the eighteen acquired companies in
these transactions:
<TABLE>
<CAPTION>
PEER GROUP PEER GROUP
BLC AVERAGE MEDIAN
($000S) ------- ---------- ----------
<S> <C> <C> <C>
Total Assets............................... $85,896 $ 246,482 $104,277
Gross Loans................................ 31,486 288,414 59,559
Equity..................................... 25,091 94,882 66,662
Managed Receivables........................ 376,007 2,815,455 529,198
Revenue.................................... 26,366 113,217 104,962
Net Income................................. 5,282 14,710 9,617
</TABLE>
Assuming a transaction value of $3.50 per share, determined by multiplying
the exchange ratio by Allied Capital's average closing stock price for the past
twenty trading days ended October 27, 2000, Ryan, Beck calculated the
transaction value as a
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multiple of book value, last 12 months diluted earnings, revenue and assets as
follows:
<TABLE>
<S> <C>
Percentage of stated book value............................. 285%
Multiple of last twelve months diluted earnings............. 15.9x
Multiple of revenue......................................... 3.47x
Percent of assets........................................... 106%
</TABLE>
The mean and median pricing ratios for the comparable transactions are
illustrated in the chart below:
<TABLE>
<CAPTION>
PRICE/BOOK PRICE/LTM
PEER GROUP VALUE EARNINGS PRICE/REVENUE PRICE/ASSETS
---------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Mean........................ 186% 15.4x 2.50x 83%
Median...................... 194% 14.6x 1.41x 62%
Allied Capital/BLC.......... 285% 15.9x 3.47x 106%
</TABLE>
The imputed per share value of BLC, based upon the mean and median
acquisition multiples, as shown in the table directly above, when applied to
BLC's book value, diluted earnings per share, revenue and assets for the twelve
months ended or as of June 30, 2000 results in acquisition values of BLC shown
in the chart below:
<TABLE>
<CAPTION>
PRICE/BOOK PRICE/LTM
VALUE EARNINGS PRICE/REVENUE PRICE/ASSETS
---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Mean........................ $2.29 $3.38 $3.22 $3.50
Median...................... $2.38 $3.21 $1.82 $2.61
</TABLE>
No company or transaction used in the analysis of selected transactions is
identical to Allied Capital, BLC or the merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies involved and other factors that could affect
the trading values of the securities of the company or companies to which they
are being compared. This analysis was used to compare BLC to other publicly
traded specialty finance companies and was not used to estimate a range of
implied equity values for BLC.
Discounted Dividend Analysis.
Using a discounted dividend analysis, Ryan, Beck estimated the present
value of the future dividend stream that BLC could produce in perpetuity.
Projection ranges for BLC's five year balance sheet and income statement were
estimated using assumed growth rates. These projections are by their nature,
forward-looking and may differ materially from the actual future values or
actual future results. The actual future values or results may be significantly
more or less favorable than suggested by such projections. In producing a range
of per share BLC values, Ryan, Beck utilized the following assumptions: (1)
discount rates ranging from 12.0% to 16.0%; (2) terminal price/earnings
multiples range from 12.0x to 14.0x, which, when applied to terminal year
estimated earnings, produces a value which approximates the net present value of
the dividends in perpetuity, given certain assumptions regarding growth rates
and discount rates; and (3) estimated transaction and restructuring charges
incurred by an acquiror. The discount rates selected were deemed by Ryan, Beck
to reflect its current views on the long-term return requirements for investors
in
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<PAGE> 54
specialty lenders comparable to BLC. The terminal value multiples were deemed by
Ryan, Beck to reflect long-term price earnings multiples for specialty lenders
comparable to BLC. The discounted dividend analysis produced the range of net
present values per share of BLC common stock illustrated in the chart below:
<TABLE>
<CAPTION>
TERMINAL YEAR DISCOUNT RATE
MULTIPLE OF ----------------------
EARNINGS 12.00% 14.00% 16.00%
------------- ------ ------ ------
<S> <C> <C> <C>
12.00x $3.29 $3.02 $2.77
13.00x $3.54 $3.24 $2.97
14.00x $3.78 $3.46 $3.18
</TABLE>
These analyses do not purport to be indicative of actual values or expected
values or an appraisal range of the shares of BLC common stock. The discounted
dividend analysis is a widely used valuation methodology, but Ryan, Beck noted
that it relies on numerous assumptions, including expense savings levels,
dividend payout rates, terminal values and discount rates, the future values of
which may be significantly more or less than such assumptions. Any variation
from these assumptions would likely produce different results.
Break-Even Analysis.
Using a break-even analysis, Ryan, Beck estimated the earnings per share
growth rate necessary for the present value of BLC's future stock price to equal
the implied $3.50 acquisition price per share. In producing the earnings growth
rate, Ryan, Beck utilized the following assumptions: 2001 EPS estimate of $0.27
per share, discount rates ranging from 14% to 17%, and price/earnings multiples
ranging from 10.0x to 16.0x. The break-even analysis produced the range of five
year earnings growth rates illustrated in the chart below:
<TABLE>
<CAPTION>
TERMINAL YEAR DISCOUNT RATE
MULTIPLE OF --------------------------------------------
EARNINGS: 14.0% 15.0% 16.0% 17.0%
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Market 10.0x 25.5% 26.9%
Multiple 12.0x 20.0% 21.6%
Acquisition 14.0x 18.4% 19.5%
Multiple 16.0x 14.2% 15.5%
</TABLE>
Ryan, Beck noted that, using discount rates of 14.0% and 15.0% BLC would
have to achieve annual earnings growth 20.0% and 25.5%, respectively, over the
next five years and have its common stock trade at a price to earnings ratio of
10.0x and 12.0x, respectively, in order to achieve a stock price equivalent to
the price offered by Allied Capital. Ryan, Beck further noted that BLC stock
price as of October 30, 2000 represented a multiple of 9.9 times BLC's diluted
earnings per share for the fiscal year ended June 30, 2000.
These analyses do not purport to be indicative of actual values or expected
values or an appraisal range of the shares of BLC common stock. The break-even
analysis is a widely used valuation methodology, but Ryan, Beck noted that it
relies on numerous assumptions, including projected earnings, price/earnings
multiples, discount rates, and Allied Capital's offer per share to BLC
shareholders, the future values of which may be significantly more or less than
such assumptions. Any variation from these assumptions would likely produce
different results.
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<PAGE> 55
Impact Analysis.
Ryan, Beck reviewed the analysis prepared by Allied Capital of the impact
of the merger on Allied Capital's projected 2001 and 2002 earnings per share
based on Allied Capital's projected 2001 and 2002 earnings which were provided
by the management of Allied Capital. This analysis showed that the merger would
not increase or decrease Allied Capital's projected 2001 and 2002 earnings per
share. Ryan, Beck analyzed the impact of the merger on BLC's values per Allied
Capital share based on the exchange ratio of 0.180 shares of Allied Capital
common stock for each share of BLC's common stock using pro forma projected 2001
and 2002 earnings per share. That analysis found that, based on such exchange
ratio, BLC's equivalent projected 2001 earnings per share would increase by
approximately 48% and projected 2002 earnings per share would increase by
approximately 36%. Additionally, based on Allied Capital's current quarterly
dividend ($0.46 per share declared October 18, 2000), BLC's shareholders would
receive equivalent annual dividends of $0.33 per BLC share compared with no
dividends at the present time. These forward looking projections may be effected
by many factors beyond the control of Allied Capital or BLC, including the
future direction of interest rates, economic conditions in the companies' market
place and nationally, the actual amount and timing of synergies achieved through
the merger, the actual level of revenue enhancements brought about through the
merger, future regulatory changes and various other factors. The actual results
achieved may vary from the projected results and the variations may be material.
In connection with the confirmation of its opinion for this proxy
statement/ prospectus, Ryan, Beck confirmed the appropriateness of its reliance
on the analyses used to render its October 31, 2000 opinion by performing
procedures to update such analyses and by reviewing the assumptions and
conclusions contained in the October 31, 2000 opinion.
Ryan, Beck's opinion was based solely upon the information available to it
and the economic, market and other circumstances as they existed as of the date
of the opinion. Ryan, Beck did not and does not express any opinion as to the
price or range of prices at which Allied Capital common stock may trade
subsequent to the merger. Ryan, Beck was not requested to, and did not, solicit
third party indications of interest in acquiring BLC or in engaging in a
business combination or any other strategic transaction with BLC. Further, Ryan,
Beck understands that BLC retained another financial advisor who assisted in the
structuring of this transaction and who also was not requested to and did not
solicit third party indications of interest in acquiring BLC. Events occurring
after such date could materially affect the assumptions and conclusions
contained in Ryan, Beck's opinion. Ryan, Beck has not undertaken to reaffirm or
revise its opinion or otherwise comment upon any events occurring after the date
of its opinion.
The summary set forth above does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by
Ryan, Beck in arriving at its opinion. No single analysis or item described
above, when viewed in the context of all of the factors which Ryan, Beck
considered in arriving at its opinion, did not support the opinion rendered by
Ryan, Beck.
As compensation for its services in rendering a fairness opinion to BLC in
connection with the merger, BLC agreed to pay Ryan, Beck a fee of $125,000, of
which $62,500 was payable upon retaining Ryan, Beck and the remainder of which
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<PAGE> 56
was payable upon delivering this opinion. The agreed upon fee was determined
through negotiation between Ryan, Beck and BLC. No portion of the fee paid to
Ryan, Beck was contingent upon the conclusion reached in its opinions. In
addition, BLC has agreed to reimburse Ryan, Beck for its reasonable
out-of-pocket expenses, including the fees and expense of its legal counsel, and
to indemnify Ryan, Beck against certain liabilities, including liabilities under
federal securities laws, relating to, arising out of or in connection with its
engagement.
Prior to this engagement, Ryan, Beck has had an investment banking
relationship with BLC. Ryan, Beck was retained by BLC to pursue a private
placement of debt securities. As a result of market conditions, such private
placement was not consummated. Ryan, Beck did not receive any compensation with
respect to this engagement. Ryan, Beck's research department does not provide
published investment analysis on BLC.
Ryan, Beck has not had an investment banking relationship with Allied
Capital. Ryan, Beck's research department does not provide published investment
analysis on Allied Capital. Ryan, Beck is not a market maker in Allied Capital
common stock.
Ryan, Beck has been retained by Futuronics, in the separate but related
acquisition of Futuronics by Allied Capital, to opine on the consideration to be
received by Futuronics shareholders. Futuronics agreed to pay Ryan, Beck a fee
of $75,000, of which $37,500 was payable upon retaining Ryan, Beck and the
remainder of which was payable upon delivering its opinion. No portion of the
fee paid to Ryan, Beck was contingent upon the conclusion reached in its
opinions. In addition, Futuronics has agreed to reimburse Ryan, Beck for its
reasonable out-of-pocket expenses, including the fees and expense of its legal
counsel, and to indemnify Ryan, Beck against certain liabilities, including
liabilities under federal securities laws, relating to, arising out of or in
connection with its engagement. Ryan, Beck has not had a prior investment
banking relationship with Futuronics.
Ryan, Beck recognized that BLC shareholders are receiving shares of Allied
Capital common stock in a tax-free transaction and that Futuronics shareholders
are receiving cash in a taxable transaction. Ryan, Beck concluded that the
$9,083,284 of aggregate consideration would be equal to approximately $3.50 in
cash for each BLC share held by Futuronics given that the expected remaining
other net assets of Futuronics have an insignificant aggregate value. The
difference in consideration type was negotiated by the parties. Ryan, Beck noted
that the exchange ratio to be received by BLC shareholders was determined based
upon the 20 day average closing price of Allied Capital's common stock and that
based on the 20 day period ending October 31, 2000 BLC shareholders would have
received approximately $3.51 of value per share. Ryan, Beck further noted that
based on Allied Capital's closing share price as of December 7, 2000, BLC
shareholders would have received approximately $3.67 of value per share. Ryan,
Beck noted that at closing of the transaction the consideration received by BLC
shareholders may be more or less than $3.50 per share depending upon the stock
price of Allied Capital common stock.
In the ordinary course of its business, Ryan, Beck actively trades equity
securities for its own account and the account of its customers. Accordingly,
Ryan, Beck may at any time hold a long or short position in either BLC or Allied
Capital.
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<PAGE> 57
ADVICE OF FINANCIAL ADVISORS
Josephthal & Co., Inc.
In addition to the advice of Ryan, Beck, BLC engaged Josephthal to advise
BLC about the structure and terms of the merger. Josephthal assembled publicly
available information regarding Allied Capital. Josephthal performed financial
analyses to further strategic negotiations with a view towards maximizing
consideration to be received by BLC shareholders. As compensation for its
services, BLC agreed to pay Josephthal $1.3 million based upon the closing price
of Allied Capital common stock on December 7, 2000. Futuronics agreed to pay
Josephthal $0.1 million in conjunction with similar services rendered to
Futuronics. In addition, BLC has agreed to reimburse Josephthal for its
reasonable out-of-pocket expenses, including the fees and expense of its legal
counsel, and to indemnify Josephthal against certain liabilities, including
liabilities under federal securities laws, relating to, arising out of or in
connection with its engagement. Robert W. Wien, a director of BLC, is a Senior
Managing Director of Josephthal. As part of its investment banking business,
Josephthal is continually engaged as a financial advisor in connection with
mergers, acquisitions and other securities-related transactions. Josephthal was
selected by BLC because of its qualification as financial advisor and its prior
investment banking relationship with BLC.
On October 27, 2000, Josephthal made a presentation to the BLC board of
directors outlining the transaction and providing a summary of publicly
available information regarding Allied Capital. In particular, Josephthal used
summary bullet points to provide a brief overview of the transaction structure,
including information regarding the percentage ownership that Allied Capital
would hold in BLC as well as the percentage ownership retained by current BLC
shareholders and management. The summary also included the approximate share
price of $3.50 to be paid for each BLC share purchased by Allied Capital.
Josephthal then presented a series of overhead slides providing publicly
available information regarding Allied Capital. The majority of information
provided in this section was derived directly from publicly available
information and diligence of Allied Capital. Data provided included, but was not
limited to, information regarding earnings, growth, dividend distribution,
portfolio size and composition, recent transactions and sponsors. Josephthal
also provided financial data consisting of historical balance sheet information,
earnings information, dividend information and trends of various financial
measurements. Public data also included a summary of EPS estimates as provided
by First Call as well as a breakdown of estimates and target share prices as
reported by the analysts covering the Allied Capital stock.
After providing information regarding Allied Capital, Josephthal, along
with BLC management provided an overview of the Allied Capital Express business
and organization.
Josephthal ended its presentation with an overview of the highlights of the
transaction that included the premium being paid over BLC's current per share
price, the increase in liquidity and the strength of the Allied Capital stock as
a viable purchasing security.
Jolson Merchant Partners
Allied Capital engaged Jolson Merchant Partners as its financial advisor
for the transaction. Jolson Merchant Partners performed a variety of advisory
and investment banking services to Allied Capital in connection with the BLC
transaction. Jolson
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Merchant Partners assisted Allied Capital in analyzing the business plan and
financial structure of BLC, helped to analyze financial projections for BLC and
consulted with Allied Capital with respect to the financial aspects of the
transaction. Jolson assisted Allied Capital in the preparation of its analysis
of the transaction, and did not independently prepare any report, opinion or
other material. Jolson assisted in the negotiations for the transaction. Jolson
did not provide a fairness opinion on the merger or any related transactions. As
compensation for its services, Allied Capital agreed to pay Jolson a fee of $1.5
million based upon the closing price of Allied Capital common stock on December
7, 2000.
FAIRNESS OPINION OF FUTURONICS' FINANCIAL ADVISOR
On October 30, 2000, Futuronics formally retained Ryan, Beck to assist the
Futuronics board of directors in its examination of the fairness, from a
financial point of view, of the aggregate consideration of $9,083,284 in cash to
be received by Futuronics and in the merger between Futuronics and an
acquisition subsidiary of Allied Capital. Ryan, Beck was engaged by Futuronics
to conduct due diligence of Futuronics with the objective of developing a full
understanding of the business and characteristics of Futuronics and to perform a
current valuation of Futuronics. Ryan, Beck was also engaged to analyze and
evaluate, with Futuronics management and board of directors any proposals
received from any potential acquirors relating to a sale or merger, conduct an
appropriate due diligence investigation of an acquiror and provide a fairness
opinion, if requested. As part of its investment banking business, Ryan, Beck is
continually engaged in the valuation of financial institutions in connection
with mergers, acquisitions and other securities-related transactions. Ryan, Beck
was selected by Futuronics because of Ryan, Beck's knowledge of, experience
with, and reputation in the financial services industry.
Ryan, Beck rendered its oral opinion to the Futuronics board of directors
on October 31, 2000 subsequently confirmed by a formal written opinion as of the
same date, that based on and subject to the assumptions, factors, and
limitations as set forth in the opinion and as described below, the aggregate
consideration in the Futuronics transaction as provided and described in the
Futuronics merger agreement is fair to stockholders of Futuronics common stock
from a financial point of view. Ryan, Beck reissued its opinion as of the date
of this document (a copy of which is attached as Appendix D). No limitations
were imposed by the Futuronics board of directors upon Ryan, Beck with respect
to the investigations made or procedures followed by it in arriving at its
opinion.
The full text of Ryan, Beck's opinion which sets forth assumptions made and
matters considered, is attached as Appendix D to this document. The summary of
the Ryan, Beck opinion set forth in this document is qualified in its entirety
by reference to the full text of the opinion. In rendering its opinion, Ryan,
Beck does not admit that it is an expert within the meaning of the term "expert"
as used within the Securities Act of 1933, and the rules and regulations
promulgated thereunder, or that its opinion constitutes a report or valuation
within the meaning of Section 11 of the Securities Act of 1933, and the rules
and regulations promulgated thereunder.
In connection with its opinion, Ryan, Beck reviewed the following
documents:
- The BLC merger agreement and related documents;
- The Futuronics merger agreement and related documents pursuant to which
Futuronics, the holder of 2,595,224 shares of BLC common stock, will be
paid $9,083,284 in cash;
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- This document, but only in connection with Ryan, Beck's updated opinion;
- Allied Capital's annual report to shareholders and annual report on Form
10-K for the years ended December 31, 1999, 1998, and 1997;
- Allied Capital's quarterly reports on Form 10-Q for the periods ended
September 30, 2000, June 30, 2000 and March 31, 2000;
- Futuronics unaudited balance sheets as of February 29, 2000 and October
30, 2000 and unaudited income statement for the eight months ended October
30, 2000;
- Futuronics U.S. corporate income tax returns for the fiscal years ended
February 28, 1997, February 28, 1998, February 28, 1999;
- BLC's annual reports to shareholders on Form 10-K for the fiscal years
ended June 30, 2000, 1999 and 1998;
- BLC's quarterly reports on Form 10-Q for the periods ended September 30,
2000, March 31, 2000, December 31, 1999 and September 30, 1999;
- Allied Capital's proxy statement dated October 5, 2000;
- BLC's proxy statement dated February 23, 2000;
- The historical stock prices and trading volume of BLC's common stock;
- Certain operating and financial information provided to Ryan, Beck by the
management of BLC and Allied Capital relating to its business and
prospects including but not limited to minutes of the board of directors
of both Allied Capital and BLC, detailed internal financial statements of
BLC, reports detailing BLC's asset quality and reports detailing BLC's
historical loan origination volume; and
- The publicly available financial data of specialty finance companies
which Ryan, Beck deemed generally comparable to BLC;
- The terms of recent acquisitions of specialty finance companies which
Ryan, Beck deemed generally comparable in whole or in part to the Allied
Capital acquisition of BLC.
Additionally, Ryan, Beck:
- Conducted such other studies, analyses, inquiries and examinations as
Ryan, Beck deemed appropriate;
- Met with certain members of Allied Capital's and BLC's senior management
to discuss Allied Capital's and BLC's past and current business
operations, regulatory standing, financial condition, strategic plan, and
possible future performance, including any possible operating efficiencies
and synergies which may arise from the merger; and
- Held discussions with the President of Futuronics to discuss Futuronics'
past and current business operations, regulatory standing, financial
condition.
In connection with its review, Ryan, Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding Futuronics, Allied Capital, BLC and their
subsidiaries provided to Ryan, Beck by Futuronics, Allied Capital, BLC and its
representatives. Ryan, Beck is not an expert in the evaluation of loan and lease
portfolios for purposes of assessing the adequacy of the allowances for losses.
Therefore, Ryan, Beck has not assumed any responsibility for making an
independent evaluation of the adequacy of
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the allowance for loan losses set forth in the balance sheets of BLC at
September 30, 2000, and Ryan, Beck assumed such allowances were adequate and
complied fully with applicable law, regulatory policy, and the policies of the
Commission as of the date of such financial statements. With respect to Allied
Capital, Ryan, Beck is not an expert in the valuation of its private debt and
equity investments. Therefore, Ryan, Beck has not assumed any responsibility for
making an independent valuation or appraisal of the carrying value of such
investments. Ryan, Beck has reviewed certain historical financial data provided
by Futuronics, Allied Capital and BLC. Ryan, Beck also discussed future
prospects and performance with the managements of Futuronics, Allied Capital and
BLC. Ryan, Beck assumed that these discussions reflected the best currently
available information and judgments of the respective managements. Ryan, Beck
was not retained to nor did it make any independent evaluation or appraisal of
the assets or liabilities of Futuronics, Allied Capital, BLC or their respective
subsidiaries.
The preparation of a fairness opinion on the merger involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
Therefore, Ryan, Beck's opinion is not readily susceptible to summary
description. In arriving at its opinion, Ryan, Beck performed a variety of
financial analyses. Ryan, Beck believes that its analyses must be considered as
a whole and that the consideration of portions of such analyses and the factors
considered therein, or any one method of analysis, without considering all
factors and analyses, could create an incomplete view of the analyses and the
process underlying Ryan, Beck's opinion. No one method of analysis was assigned
greater significance than any other. All material analyses prepared by Ryan,
Beck are described hereunder.
In its analysis, Ryan, Beck made numerous assumptions with respect to
industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of Futuronics, Allied Capital or
BLC. Any estimates contained in Ryan, Beck's analysis are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. The only material assumption made by Ryan, Beck
not otherwise mentioned in this section was that federal funding of the Small
Business Administration's loan programs are not discontinued or materially
reduced. Estimates of values of companies do not purport to be appraisals nor do
they necessarily reflect prices at which companies or their securities may
actually be sold. The earnings estimates furnished to Ryan, Beck were prepared
by the senior management of Allied Capital and BLC. These estimates and
information provided by BLC and Allied Capital relating to their business and
prospects were prepared by the senior management of BLC and Allied Capital for
internal purposes only and not with a view towards public disclosure. Those
earnings estimates relied upon by Ryan, Beck in their analyses, were based on
numerous variables and assumptions which are inherently uncertain and,
accordingly, actual results could vary materially to those set forth in such
information. Ryan, Beck expressed no opinion as to such financial prospects or
the assumptions on which they were based.
The following is a brief summary of the analyses and procedures performed
by Ryan, Beck in arriving at its opinion. The financial data provided for all
companies is derived from financial data published by SNL Securities, LC and
publicly available sources.
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<PAGE> 61
Analysis of Futuronics.
Ryan, Beck noted that Futuronics has limited operations and that the
primary asset of Futuronics is its investment in BLC. Accordingly, Ryan, Beck
concentrated its analysis on the valuation of the 2,595,224 shares of BLC common
stock owned by Futuronics. Ryan, Beck noted that in addition to its investment
in BLC common stock Futuronics held cash and cash equivalents of $418,390, a
mortgage receivable of $106,000 and other assets of $9,985. Futuronics' balance
sheet did not reflect any liabilities as of October 30, 2000. Based on
discussions with Futuronics, Ryan, Beck estimated Futuronics would incur
expenses of approximately $400,000 in connection with the sale to Allied
Capital. Based on the closing price of BLC common stock on October 30, 2000 of
$2.3125 per share, the BLC shares held by Futuronics had a market value of
approximately $6,001,456.
Analysis of Selected Publicly Traded Companies.
Ryan, Beck compared certain of BLC's financial data as of June 30, 2000 and
market data as of October 27, 2000 to a peer group of fourteen selected
specialty finance companies that Ryan, Beck considered generally comparable to
BLC. These fourteen companies are located in the United States, had market
capitalization of between $20 million and $200 million and had available public
trading and pricing information. Ryan, Beck noted that none of the peer group
companies were identical to BLC and that any analysis of the peer companies
necessarily involved complex considerations and judgments concerning differences
in financial and operating characteristics and other factors that would
necessarily affect the relative trading values.
<TABLE>
<CAPTION>
PEER GROUP PEER GROUP
BLC AVERAGE MEDIAN
($000S) ------- ---------- ----------
<S> <C> <C> <C>
Market Capitalization.............................. $43,070 $ 84,565 $ 70,620
Price to Earnings.................................. 9.68x 11.96x 10.40x
Price to Book Value................................ 1.73x 0.89x 0.71x
Dividend Yield..................................... 0.00% 2.65% 0.73%
Total Assets....................................... $85,896 $422,534 $411,013
Total Equity....................................... $25,091 $101,930 $ 76,797
Equity/Assets...................................... 29% 30% 24%
Return on Average Assets........................... 6.86% 3.30% 2.55%
Return on Average Equity........................... 23.88% 10.83% 11.13%
</TABLE>
Ryan, Beck noted that BLC was smaller, in terms of market capitalization,
than the peer group average and median. Ryan, Beck also noted that BLC was
smaller in terms of assets and equity as compared to the average and median of
the peer group. The peer group's dividend yield was higher than BLC, which has
historically not paid a dividend. Ryan, Beck further noted that BLC's ratio of
equity to assets of 29% was slightly lower than the peer group average of 30%
but above the peer group median of 24%. Ryan, Beck noted that the performance of
BLC as measured by return on average assets and return on average equity was
superior to the peer group. Finally, Ryan, Beck noted that BLC was trading at a
lower multiple to earnings when compared to the peer group but significantly
more than the peer group on a price to book value basis.
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<PAGE> 62
Analysis of Selected Transactions.
Ryan, Beck compared BLC's financial data as of June 30, 2000 with that of a
group of eighteen specialty finance companies being acquired in transactions
announced since January 1, 1998 and for which certain pricing data pertaining to
the transactions was publicly available. The criteria for this group were
specialty finance companies in the United States where the transaction value was
between $50 million and $250 million. The following table compares selected
statistics of BLC with the average and median ratios for the eighteen acquired
companies in these transactions:
<TABLE>
<CAPTION>
PEER GROUP PEER GROUP
($000S) BLC AVERAGE MEDIAN
------- ------- ---------- ----------
<S> <C> <C> <C>
Total Assets............................... $85,896 $ 246,482 $104,277
Gross Loans................................ 31,486 288,414 59,559
Equity..................................... 25,091 94,882 66,662
Managed Receivables........................ 376,007 2,815,455 529,198
Revenue.................................... 26,366 113,217 104,962
Net Income................................. 5,282 14,710 9,617
</TABLE>
Assuming a transaction value of $3.50 per share of BLC common stock,
determined by dividing the aggregate consideration by the number of BLC shares
held by Futuronics, Ryan, Beck calculated the transaction value as a multiple of
book value, last 12 months diluted earnings, revenue and assets as follows:
<TABLE>
<S> <C>
Percentage of stated book value............................. 285%
Multiple of last twelve months diluted earnings............. 15.9x
Multiple of revenue......................................... 3.47x
Percent of assets........................................... 106%
</TABLE>
The mean and median pricing ratios for the comparable transactions are
illustrated in the chart below:
<TABLE>
<CAPTION>
PRICE/BOOK PRICE/LTM
VALUE EARNINGS PRICE/REVENUE PRICE/ASSETS
---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Peer Group
Mean........................ 186% 15.4x 2.50x 83%
Median...................... 194% 14.6x 1.41x 62%
Allied Capital/BLC.......... 285% 15.9x 3.47x 106%
</TABLE>
The imputed per share value of BLC, based upon the mean and median
acquisition multiples, as shown in the table directly above, when applied to
BLC's book value, diluted earnings per share, revenue and assets for the twelve
months ended or as of June 30, 2000 results in acquisition values between $1.82
and $3.50 per share. The range of values determined by the analysis are shown in
the chart below:
<TABLE>
<CAPTION>
PRICE/BOOK PRICE/LTM
VALUE EARNINGS PRICE/REVENUE PRICE/ASSETS
---------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Mean........................ $2.29 $3.38 $3.22 $3.50
Median...................... $2.38 $3.21 $1.82 $2.61
</TABLE>
Applying these values to the 2,595,224 shares of BLC common stock held by
Futuronics results in a value of approximately $4,723,308 to $9,083,284.
No company or transaction used in the Analysis of Selected Transactions is
identical to Allied Capital, BLC or the merger. Accordingly, an analysis of the
results
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<PAGE> 63
of the foregoing is not mathematical; rather it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies involved and other factors that could affect the trading values
of the securities of the company or companies to which they are being compared.
This analysis was used to compare BLC to other publicly traded specialty finance
companies and was not used to estimate a range of implied equity values for BLC.
Discounted Dividend Analysis.
Using a discounted dividend analysis, Ryan, Beck estimated the present
value of the future dividend stream that BLC could produce in perpetuity.
Projection ranges for BLC's five year balance sheet and income statement were
estimated using certain assumed growth rates. These projections are by their
nature, forward-looking and may differ materially from the actual future values
or actual future results. The actual future values or results may be
significantly more or less favorable than suggested by such projections. In
producing a range of per share BLC values, Ryan, Beck utilized the following
assumptions: (1) discount rates ranging from 12.0% to 16.0%; (2) terminal
price/earnings multiples range from 12.0x to 14.0x, which, when applied to
terminal year estimated earnings, produces a value which approximates the net
present value of the dividends in perpetuity, given certain assumptions
regarding growth rates and discount rates; and (3) estimated transaction and
restructuring charges incurred by an acquiror. The discount rates selected were
deemed by Ryan, Beck to reflect its current views on the long-term return
requirements for investors in specialty lenders comparable to BLC. The terminal
value multiples were deemed by Ryan, Beck to reflect long-term price to earnings
multiples for specialty lenders comparable to BLC. The discounted dividend
analysis produced the range of net present values of $2.77 to $3.78. The range
of values for each discount rate and terminal value are illustrated in the chart
below:
<TABLE>
<CAPTION>
DISCOUNT RATE 12.00% 14.00% 16.00%
------------- ------ ------ ------
<S> <C> <C> <C> <C>
Terminal Year................................ 12.00x $3.29 $3.02 $2.77
Multiple of.................................. 13.00x $3.54 $3.24 $2.97
Earnings..................................... 14.00x $3.78 $3.46 $3.18
</TABLE>
Applying these values to the 2,595,224 shares of BLC common stock held by
Futuronics results in a value of approximately $7,188,770 to $9,809,947.
These analyses do not purport to be indicative of actual values or expected
values or an appraisal range of the shares of BLC common stock. The discounted
dividend analysis is a widely used valuation methodology, but Ryan, Beck noted
that it relies on numerous assumptions, including expense savings levels,
dividend payout rates, terminal values and discount rates, the future values of
which may be significantly more or less than such assumptions. Any variation
from these assumptions would likely produce different results.
Break-Even Analysis.
Using a break-even analysis, Ryan, Beck estimated the earnings per share
growth rate necessary for the present value of BLC's future stock price to equal
the implied $3.50 price per share of BLC common stock owned by Futuronics. In
producing the earnings growth rate, Ryan, Beck utilized the following
assumptions: 2001 EPS estimate of $0.27 per share, discount rates ranging from
14% to 17%, and
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<PAGE> 64
price/earnings multiples ranging from 10.0x to 16.0x. The break-even analysis
produced the range of five year earnings growth rates illustrated in the chart
below:
<TABLE>
<CAPTION>
TERMINAL
YEAR DISCOUNT RATES
MULTIPLE OF -----------------------------
EARNINGS: 14.0% 15.0% 16.0% 17.0%
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Market............................ 10.0x 25.5% 26.9%
Multiple.......................... 12.0x 20.0% 21.6%
Acquisition....................... 14.0x 18.4% 19.5%
Multiple.......................... 16.0x 14.2% 15.5%
</TABLE>
Ryan, Beck noted that, using discount rates of 14.0% and 15.0% BLC would
have to achieve annual earnings growth 20.0% and 25.5%, respectively, over the
next five years and have its common stock trade at a price to earnings ratio of
10.0x and 12.0x, respectively, in order to achieve a stock price equivalent to
the implied price offered by Allied Capital. Ryan, Beck further noted that BLC
stock price as of October 30, 2000 represented a multiple of 9.9x BLC's diluted
earnings per share for the fiscal year ended June 30, 2000.
These analyses do not purport to be indicative of actual values or expected
values or an appraisal range of the shares of BLC common stock. The break-even
analysis is a widely used valuation methodology, but Ryan, Beck noted that it
relies on numerous assumptions, including projected earnings, price/earnings
multiples, discount rates, and Allied Capital's offer per share to BLC
shareholders, the future values of which may be significantly more or less than
such assumptions. Any variation from these assumptions would likely produce
different results.
In connection with its opinion, Ryan, Beck confirmed the appropriateness of
its reliance on the analyses used to render its October 31, 2000 opinion by
performing procedures to update certain of such analyses and by reviewing the
assumptions and conclusions contained in the October 31, 2000 opinion.
Ryan, Beck's opinion was based solely upon the information available to it
and the economic, market and other circumstances, as they existed as of the date
of the opinion. Ryan, Beck was not requested to, and did not, solicit third
party indications of interest in acquiring Futuronics or in engaging in a
business combination or any other strategic transaction with Futuronics.
Further, Ryan, Beck understands that Futuronics retained another financial
advisor who assisted in the structuring of this transaction and who also was not
requested to and did not solicit third party indications of interest in
acquiring Futuronics. Events occurring after such date could materially affect
the assumptions and conclusions contained in Ryan, Beck's opinion. Ryan, Beck
has not undertaken to reaffirm or revise its opinion or otherwise comment upon
any events occurring after the date of its opinion.
The summary set forth above does not purport to be a complete description,
but is a brief summary of the material analyses and procedures performed by
Ryan, Beck in arriving at its opinion. No single analysis or item described
above, when viewed in the context of all of the factors which Ryan, Beck
considered in arriving at its opinion, did not support the opinion rendered by
Ryan, Beck.
As compensation for its services in rendering a fairness opinion to
Futuronics in connection with the Futuronics transaction, Futuronics agreed to
pay Ryan, Beck a fee of $75,000, of which $37,500 was paid upon retaining Ryan,
Beck and the remainder of which was paid upon delivering its opinion. No portion
of the fee paid to Ryan,
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<PAGE> 65
Beck was contingent upon the conclusion reached in its opinions. In addition,
Futuronics has agreed to reimburse Ryan, Beck for its reasonable out-of-pocket
expenses, including the fees and expense of its legal counsel, and to indemnify
Ryan, Beck against certain liabilities, including liabilities under federal
securities laws, relating to, arising out of or in connection with its
engagement. Ryan, Beck has not had a prior investment banking relationship with
Futuronics.
Ryan, Beck has not had an investment banking relationship with Allied
Capital. Ryan, Beck's research department does not provide published investment
analysis on Allied Capital. Ryan, Beck is not a market maker in Allied Capital
common stock.
Ryan, Beck has been retained by BLC, in the separate but related
acquisition of BLC by Allied Capital, to opine on the exchange ratio to be
received by BLC shareholders. BLC agreed to pay Ryan, Beck a fee of $125,000, of
which $62,500 was payable upon retaining Ryan, Beck and the remainder of which
was payable upon delivering its opinion. No portion of the fee paid to Ryan,
Beck was contingent upon the conclusion reached in its opinions. In addition,
BLC has agreed to reimburse Ryan, Beck for its reasonable out-of-pocket
expenses, including the fees and expense of its legal counsel, and to indemnify
Ryan, Beck against certain liabilities, including liabilities under federal
securities laws, relating to, arising out of or in connection with its
engagement.
Prior to this engagement, Ryan, Beck has had an investment banking
relationship with BLC. Ryan, Beck was retained by BLC to pursue a private
placement of debt securities. As a result of market conditions, such private
placement was not consummated. Ryan, Beck did not receive any compensation with
respect to this engagement. Ryan, Beck's research department does not provide
published investment analysis on BLC.
In the ordinary course of Ryan, Beck's business, it actively trades equity
securities for its own account and the account of its customers. Accordingly,
Ryan, Beck may at any time hold a long or short position in either BLC or Allied
Capital.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the BLC board of directors with
respect to the merger, BLC shareholders should be aware that certain members of
BLC's management, some of whom are or were members of the BLC board of directors
have certain interests in the merger, in addition to those of the shareholders
generally. The members of the BLC board of directors were aware of these
interests when they considered and approved the merger agreement. See "Business
of BLC -- Related Party Transactions" and "The BLC Special Meeting -- Beneficial
Ownership of BLC."
Management of New BLC
Upon consummation of the merger, Robert F. Tannenhauser will be appointed
President and Chief Executive Officer of New BLC. Jennifer M. Goldstein will be
appointed Chief Financial Officer and Treasurer of New BLC.
The New BLC board of directors will be composed of six members. Allied
Capital intends to appoint William L. Walton as Chairman of the Board, and will
also appoint Joan M. Sweeney, Christina L. DelDonnna, and Alton M. Bathrick to
the New BLC board of directors. Pursuant to the merger agreement, Mr.
Tannenhauser
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<PAGE> 66
will also be appointed, and will have the right to appoint one additional
member, who will be Irwin E. Redlener.
Continuing Ownership in New BLC
As described above in "Background of the Merger," Allied Capital
conditioned its offer for BLC on the continued ownership by the continuing
shareholders. Robert F. Tannenhauser, Peter D. Blanck, Richard Blanck, and
Jennifer M. Goldstein, the continuing shareholders, will continue to own
collectively 5% of New BLC common stock after the merger. Allied Capital wanted
to assure that the key members of New BLC's management team had continuing
ownership and continued financial risk, and wanted the added assurance that two
related shareholders including a director of BLC would continue ownership and
continued financial risk in New BLC. See "The BLC Special Meeting -- Beneficial
Ownership of BLC."
Employment Agreements
It is a condition of the merger that, New BLC enter into new employment
agreements with Robert F. Tannenhauser, BLC's Chairman and CEO, and Jennifer
Goldstein, BLC's Chief Financial Officer and Treasurer. These employment
agreements have not yet been fully negotiated, but Allied Capital entered into a
letter of intent dated November 1, 2000 for the employment of Mr. Tannenhauser.
Each of the agreements will provide for a four-year term, with annual renewals
thereafter, and specify each executive's compensation during the term of the
agreement, in accordance with the achievement of established performance
standards.
As has been presently negotiated, the annual base salary on the effective
date for Mr. Tannenhauser and Ms. Goldstein will be $350,000 and $200,000,
respectively. The board of directors has the right to increase the base salary
during the term of the proposed employment agreement. In addition, the New BLC
board of directors may provide, at their sole discretion, an annual incentive
cash bonus. This bonus will be determined with reference to each executive's
performance in accordance with performance criteria to be determined by the New
BLC board of directors in its sole discretion. In addition, the proposed
agreements provide for an integration bonus, which vests and is payable in
substantially equal installments over a four-year period. Mr. Tannenhauser's
proposed employment agreement provides for an annual integration bonus payment
of $865,000; Ms. Goldstein's proposed employment agreement provides for an
annual integration bonus payment of $135,000. Ms. Goldstein's proposed
employment agreement provides for a retention award of $200,000, which vests
over a two-year period and is payable annually. Finally, each proposed
employment agreement provides for a special retention award to be paid four
years from the signing of the employment agreement. Mr. Tannenhauser will
receive a special retention award of $1,095,000 and Ms. Goldstein will receive a
special retention award of $197,000. The integration bonus and special retention
award will not be payable in certain termination of employment events.
In addition, in the event of a change of control of New BLC, termination
without cause, or resignation for good reason, as defined in the proposed
employment agreements, each executive will receive an amount equal to two times
base compensation (at the rate in effect on the termination date), and an amount
equal to two times the last bonus paid.
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The executive has the right to voluntarily terminate employment at any time
with 30 days' notice. Among other things, the proposed employment agreements
prohibit the solicitation of employees from BLC in the event of an executive's
departure for a period of two years.
For the term of Mr. Tannenhauser's proposed employment agreement, he will
be appointed to the New BLC board of directors, and will have the right to
appoint one additional board member. See "Business of BLC -- BLC Executive
Compensation."
Stock Options of BLC
Pursuant to the merger agreement, BLC will use all reasonable efforts to
cause all outstanding vested stock options to be exercised prior to the
consummation of the merger. BLC intends to assist employees in the exercise of
options by arranging for third-party financing or extending credit pursuant to a
full recourse loan with BLC.
Upon the merger, the BLC stock option plan will be canceled, and all
unvested options will be surrendered. To compensate employees who will lose the
benefit of any unvested stock options, New BLC will compute the difference
between $3.50 per share and the exercise price of the unvested options. This
amount, known as the transition award, will be contributed to New BLC's deferred
compensation plan and funded by Allied Capital. The transition award is
estimated to be $2.6 million in the aggregate. The transition award will vest
over the same period as the unvested options would have vested.
Futuronics Transaction
To facilitate the merger, Allied Capital will purchase, in a separate
transaction, all of the shares of Futuronics for $9.1 million in cash. Carol
Tannenhauser, Peter Blanck and Richard Blanck each beneficially own 26.8% of
Futuronics on a diluted basis. Futuronics is a New York corporation and is a
non-reporting holding company whose primary asset is BLC common stock and is
inactive. The BLC board of directors reviewed the Futuronics transaction and the
consideration to be paid for Futuronics as part of its review of the merger
proposal. In addition, Ryan, Beck issued a fairness opinion that the
consideration to be paid in the Futuronics merger was fair from a financial
point of view. See "The Merger Proposal -- BLC's Reasons for the Merger."
Voting and Support Agreement
Allied Capital has entered into a voting and support agreement with Robert
F. Tannenhauser, Carol Tannenhauser, David Tannenhauser, Emily Tannenhauser,
Peter Blanck, Richard Blanck, Jennifer Goldstein, Diane Rosenfeld, and
Futuronics, each of whom is a shareholder of BLC. The parties to the voting and
support agreement represent 32% of the outstanding shares of BLC. Pursuant to
this agreement, the shareholders of BLC listed above agree to vote for the
merger proposal and for matters designed to facilitate the merger and against
any action that would cause a breach of the merger agreement or otherwise hinder
the completion and consummation of the merger. Should the BLC board of directors
have a fiduciary duty to accept a superior acquisition proposal (as described
below) and as a result the merger agreement is terminated, obligations under the
voting and support agreement will be terminated.
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<PAGE> 68
Pursuant to resale agreements, the shareholders named above who will become
Allied Capital shareholders as a result of the merger have also agreed to
restrict their trading of Allied Capital common stock. For a period of 90 days
after the closing date of the merger, parties to the resale agreements may not
sell, transfer or otherwise dispose of any shares of Allied Capital or enter
into any arrangement to transfer any of the economic rights of Allied Capital
common stock received in connection with the merger. The number of shares of
Allied Capital common stock owned by such shareholders that are subject to the
resale agreements totals 1,174,862.
CERTAIN LITIGATION RELATING TO THE MERGER
On November 3, 2000, a purported class action complaint (C.A. No. 18483)
was filed in the Delaware Court of Chancery on behalf of the BLC shareholders by
Rebekah Benison, a purported shareholder of BLC. On November 9, 2000, a
substantially identical purported class action complaint (C.A. No. 18492) was
filed in the Delaware Court of Chancery on behalf of the BLC shareholders by
Florence Difabio, a purported shareholder of BLC. Each such complaint is filed
against Robert F. Tannenhauser, Peter D. Blanck, Jerome B. Alenick, Robert W.
D'Loren, Irwin E. Redlener, Kenneth S. Schwartz, Robert W. Wien, BLC and Allied
Capital. The plaintiffs allege that the members of the BLC board of directors
have breached their fiduciary duties to BLC shareholders in approving the merger
and related transactions. Allied Capital is alleged to have aided and abetted
this breach by agreeing to the transaction. The plaintiffs principally allege
that the benefits of the merger are greater for Robert Tannenhauser, Peter
Blanck and Richard Blanck and their families than for BLC's public shareholders
because Robert Tannenhauser and his wife and Peter and Richard Blanck will
receive cash for the sale of their Futuronics shares and because they will
retain an equity interest in the surviving company. The plaintiffs seek various
remedies, including an injunction to prevent the consummation of the merger and
compensatory damages in unspecified amounts. By agreement with the plaintiffs,
the time for the defendants to respond to the complaints has not yet occurred.
Allied Capital and BLC believe that these suits are without merit.
THE MERGER AGREEMENT
TERMS OF THE MERGER
At the closing date:
(i) each share of BLC common stock issued and outstanding as of the
closing date, other than Class B common stock, will be converted into 0.180
fully paid and nonassessable shares of Allied Capital common stock. Allied
Capital will issue fractional shares pursuant to the same exchange ratio.
At the effective time of the merger, outstanding shares of BLC common stock
will cease to exist and each certificate representing such shares will
represent the shares of Allied Capital common stock into which such shares
have been converted;
(ii) each share of BLC Class B common stock issued and outstanding as
of the closing date will be converted into one fully paid and nonassessable
share of BLC common stock; and
(iii) all shares of BLC common stock held in the treasury of BLC will
be canceled and will cease to exist.
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As of the closing date, present holders of BLC common stock will cease to
have any rights as holders of such shares, but will have the rights of holders
of Allied Capital common stock.
Each share of common stock of the merger subsidiary, created by Allied
Capital to facilitate the merger known as Merger Sub, issued and outstanding as
of the closing date will be converted into that number of fully paid and
nonassessable shares of BLC common stock that will result in the sum of (i) the
aggregate number of shares of BLC common stock issued to Allied Capital upon
such conversion plus (ii) the aggregate number of shares of BLC common stock
issued to Futuronics pursuant to the conversion described in subparagraph (ii)
above being equal to 94.9% of the total number of shares of BLC common stock
outstanding after the merger.
The shares of Allied Capital common stock issued in the merger will be in
uncertificated form, and each person receiving such shares shall receive a
confirmation as required by Maryland law.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties
relating to, among other things:
- the due organization, power and standing of BLC and Allied Capital and
similar corporate matters;
- the authorization, execution, delivery and enforceability of the merger
agreement;
- the absence of conflicts under charters or bylaws, the absence of
violations of any instruments or law, and required consents or approvals;
- the capital structure of BLC and Allied Capital;
- outstanding options and other stock rights of BLC and Allied Capital;
- subsidiaries of BLC;
- BLC's corporate records;
- certain documents filed by each of BLC and Allied Capital with the
Commission and the accuracy of financial and other information contained
therein;
- BLC's and Allied Capital's loan portfolios;
- BLC's real property;
- BLC's intellectual property;
- title to BLC's assets and any liens on such assets;
- litigation;
- retirement and other employee benefit plans of BLC;
- employee matters involving BLC;
- status of certain employment agreements of BLC;
- BLC's insurance coverage;
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- corporate action approving the merger agreement;
- transactions with directors, officers, consultants and affiliates of BLC;
- conduct of business by BLC since July 1, 2000;
- brokers' and finders' fees with respect to the merger;
- compliance with applicable laws;
- governmental permits;
- material liabilities;
- taxes and tax returns of BLC;
- BLC's compliance with environmental laws;
- material agreements and contracts of BLC;
- opinion of financial advisor to BLC;
- cancellation of certain agreements by BLC; and
- absence of material adverse changes.
CERTAIN COVENANTS
BLC has agreed, among other things, prior to the consummation of the
merger, unless Allied Capital agrees in writing or as otherwise required or
permitted by the merger agreement, to conduct its operations according to its
usual, regular and ordinary course in substantially the same manner as
theretofore conducted. In addition, BLC has agreed that, among other things,
prior to the consummation of the merger, unless Allied Capital agrees in writing
or as otherwise required or permitted by the merger agreement, it shall not (and
shall cause its subsidiaries not to):
- amend its certificate of incorporation or bylaws;
- issue or purchase any shares of capital stock or any of its indebtedness,
effect any stock split or otherwise change its capitalization;
- issue any option or other right to acquire shares of its capital stock;
- increase any compensation of any of its officers, directors or employees
in excess of $10,000 per individual;
- change its accounting practices except as required by law or generally
accepted accounting principles;
- enter into any lease or grant any lien except in the ordinary course of
business consistent with past practice;
- make any loan or advance to any shareholder, officer, director, or
employee of BLC or, except in the ordinary course of business, make any
other loan or advance;
- adopt any new employee benefit plan or amend any existing employee
benefit plan;
- terminate or fail to renew any material contract or agreement;
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- enter into any contract obligating BLC to pay more than $50,000 unless
such contract is terminable by BLC within 30 days;
- make any dividend or other payment on its capital stock except in the
ordinary course of business consistent with past practice; or
- acquire or dispose of any assets, subject to certain exceptions.
Each of BLC, Allied Capital and Merger Sub has agreed that, among other
things, it shall not take or omit to take any action, whether before or after
the closing date, which would disqualify the merger as a reorganization under
Section 368(a) of the Internal Revenue Code.
In addition, BLC and Allied Capital have agreed to operate their respective
businesses so that the representations and warranties of each company shall
continue to be true up to and including the closing date.
NO SHOPPING
BLC has agreed that it will not, directly or indirectly, initiate, solicit
or encourage inquiries or submission of proposals or offers from any person
relating to any merger, reorganization, share exchange, consolidation or similar
transaction or any sale of all or more than ten percent (10%) of the assets or
any equity securities of BLC (each, an "Acquisition Proposal"). BLC has further
agreed not to, directly or indirectly, knowingly engage in negotiations
concerning, or provide confidential information to or have discussions with any
person relating to, an Acquisition Proposal. Notwithstanding the foregoing, the
BLC board of directors may furnish information to, or enter into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
Acquisition Proposal or recommend such an Acquisition Proposal to the BLC
shareholders, if, and only to the extent that, (i) the BLC board of directors
determines in good faith after consultation with outside legal counsel that such
action is consistent with its fiduciary duties under applicable law and (ii) in
the case of engaging in negotiations or discussions with any person or
recommending an Acquisition Proposal to shareholders, the BLC board of directors
determines in good faith (after consultation with its financial advisor) that
the Acquisition Proposal in question would, if consummated, result in a
transaction more favorable to the BLC shareholders from a financial point of
view than the merger (a "Superior Acquisition Proposal"). BLC has agreed to
promptly notify Allied Capital if any such inquiries or proposals are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with BLC, such notice to
include the material terms of any such proposal.
EXPENSES
Allied Capital, Merger Sub and BLC shall bear their respective expenses
incurred in connection with the merger, including fees of investment bankers,
agents, representatives, counsel and accountants. Expenses of the transaction
are estimated to be approximately $5 million.
INDEMNIFICATION
As provided in the merger agreement, Allied Capital has agreed that all
rights to indemnification existing in favor of the directors, officers or
employees of BLC as provided in BLC's certificate of incorporation or bylaws
shall survive the merger and
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continue in full force and effect for a period of not less than six years from
the closing date. Further, Allied Capital has agreed for six years after the
closing date to maintain the current level of directors' and officers' insurance
and indemnification policies.
CONDITIONS
The respective obligations of BLC and Allied Capital to consummate the
merger are subject to the fulfillment of the following conditions, among others:
- the merger agreement and the transactions contemplated thereby will have
been approved and adopted by the requisite vote of the holders of the
issued and outstanding shares of capital stock of BLC entitled to vote
thereon;
- all applicable waiting periods with respect to filings made under the
Hart-Scott-Rodino Act in connection with the merger and related
transactions shall have passed, or early termination of such waiting
periods shall have been granted;
- the SBA shall have approved the merger and the merger agreement;
provided, that any conditions to the SBA approval shall be acceptable to
Allied Capital and shall not prevent the continued operation of BLC;
- the registration statement of which this proxy statement/prospectus is a
part will have become effective under the Securities Act of 1933 and no
stop order with respect thereto will be in effect;
- no court order or other legal or regulatory restraint shall have been
issued preventing the merger or restricting the operation of BLC's
business after the merger, and no proceedings by any governmental entity
are pending or threatened to prevent or modify the merger;
- the Futuronics transaction and the recapitalization of Class B common
stock of BLC shall have been approved and consummated; and
- the Allied Capital common stock to be issued to BLC shareholders in
connection with the merger shall have been approved for listing on the
Nasdaq National Market.
The obligations of Allied Capital to effect the merger are also subject to
the satisfaction or waiver prior to the closing date of the following
conditions, among others:
- BLC and the holders of BLC common stock who are parties to the voting
agreements shall have performed in all material respects all obligations
required to be performed by it or them, respectively, under the merger
agreement and the voting agreements, and the representations and
warranties of BLC set forth in the merger agreement shall be true as of
the closing date except for failures to be true that would not have, and
could not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on BLC and its subsidiaries, taken
as a whole;
- all vested stock options and common stock warrants of BLC shall have been
fully exercised for the purchase of BLC common stock;
- all unvested stock options of BLC shall have been surrendered or
canceled;
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- not more than $250,000 in aggregate principal amount of BLC convertible
debentures shall be outstanding immediately prior to the effective time
of the merger;
- Allied Capital shall have received the opinion of Sutherland Asbill &
Brennan LLP that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code;
- Allied Capital shall have received executed originals of Employment
Agreements with Mr. Tannenhauser and Ms. Goldstein; and
- from the date of the merger agreement through the closing date, there
shall not have occurred any change or event that has caused, or would
reasonably be expected to cause, a material adverse effect on BLC and its
subsidiaries, taken as a whole.
The obligations of BLC to effect the merger are also subject to the
satisfaction or waiver prior to the closing date of the following conditions,
among others:
- Allied Capital and Merger Sub shall have performed in all material
respects all obligations required to be performed by them under the
merger agreement, and the representations and warranties of Allied
Capital and Merger Sub set forth in the merger agreement shall be true as
of the closing date, except for failures to be true that would not have,
and could not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on Allied Capital and its
subsidiaries, taken as a whole;
- BLC shall have received the opinion of Weil, Gotshal & Manges LLP that
the Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code, which condition will not be waived unless we
resolicit your vote to approve and adopt the merger agreement; and
- from the date of the merger agreement through the closing date, there
shall not have occurred any change or event that has caused, or would
reasonably be expected to cause, a material adverse effect on Allied
Capital and its subsidiaries, taken as a whole.
TERMINATION; FEES
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing date, before or after the approval by the
shareholders of BLC:
- by the mutual consent of BLC and Allied Capital;
- by action of either BLC or Allied Capital if the merger shall not have
been consummated by April 30, 2001;
- by action of the BLC board of directors if (i) at any time prior to
approval of the Merger by the BLC shareholders, the BLC board of
directors determines in good faith, on the basis of advice of its
financial advisors and outside counsel, that an Acquisition Proposal made
in compliance with the requirements described under "No Shopping" above
is a Superior Acquisition Proposal, if and only if BLC enters into a
definitive agreement containing the terms of the Superior Acquisition
Proposal, provided that BLC may not exercise such termination right until
five business days after notifying Allied Capital of such
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Superior Acquisition Proposal and BLC's intention (subject to any action
Allied Capital may take) to accept it; (ii) there has been a breach by
Allied Capital or Merger Sub of any covenant or agreement contained in
the merger agreement in any material respect and such breach continues
for a period of ten days after receipt of notice of such breach from BLC;
or (iii) if any of the conditions precedent to BLC's obligations under
the merger agreement have not been met or waived by BLC at such time as
any such condition is no longer capable of satisfaction; and
- by action of the Allied Capital board of directors if (i) BLC or holders
of BLC common stock who are parties to the voting agreement shall have
breached any of their respective covenants or agreements under the merger
agreement or obligations under the voting agreement in any material
respect and such breach continues for a period of ten days after the
receipt of notice of such breach from Allied Capital or (ii) any of the
conditions precedent to Allied Capital's obligations under the merger
agreement have not been met or waived by Allied Capital at such time as
any such condition is no longer capable of satisfaction.
In the event that the merger agreement is terminated as a result of BLC's
acceptance of another Acquisition Proposal, then BLC will pay Allied Capital a
termination fee of $2,750,000.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the merger and the exchange of BLC common stock for shares of
Allied Capital common stock, and summarizes the opinions of Weil, Gotshal &
Manges LLP, counsel to BLC, and Sutherland Asbill & Brennan LLP, counsel to
Allied Capital, with respect to such matters. This discussion does not address
all aspects of taxation that may be relevant to particular shareholders in light
of their personal investment or tax circumstances; to certain types of
shareholders subject to special treatment under the federal income tax laws
(including insurance companies, financial institutions, broker-dealers,
tax-exempt organizations, foreign corporations and persons who are not citizens
or residents of the United States); or to shareholders who acquired their shares
of BLC common stock upon the exercise of options or otherwise as compensation;
nor does it discuss any state, local or foreign tax considerations.
EACH BLC SHAREHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR AS
TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER AS A RESULT OF
SUCH HOLDER'S OWN PARTICULAR STATUS AND CIRCUMSTANCES, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
Neither Allied Capital nor BLC has requested or will receive an advance
ruling from the Internal Revenue Service as to the federal income tax
consequences of the merger. BLC has received from its counsel, Weil, Gotshal &
Manges LLP, and Allied Capital has received from its counsel, Sutherland Asbill
& Brennan LLP, the opinions concerning the federal income tax consequences of
the merger that are described in the next paragraph. It is a condition of the
merger that Allied Capital and BLC will each receive an opinion of its legal
counsel that the merger will qualify as a reorganization pursuant to Section
368(a) of the Code, and BLC will not waive its condition without resoliciting
your vote to approve and adopt the merger agreement.
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The opinions that have been rendered by counsel are, and the opinions that will
be rendered by counsel at the time of the merger will be, based upon assumptions
described therein, and upon customary factual representations provided by Allied
Capital, BLC and others. Counsels' opinions are and will be based upon the Code,
the Treasury Regulations thereunder, administrative rulings of the IRS, and
judicial authority, in each case existing at the time such opinions are
delivered. Any change in applicable law or pertinent facts could affect the
continuing validity of such opinions and this discussion. In addition, an
opinion of counsel is not binding upon the IRS, and there can be no assurance
that the IRS will not take a position contrary to one or more positions
reflected in counsels' opinions, or that such opinions would be upheld by the
courts if challenged by the IRS. However, Allied Capital and BLC have agreed in
the merger agreement not to take any action which would disqualify the merger as
a reorganization pursuant to Section 368(a) of the Code. If it were determined
that the merger did not qualify as a reorganization, each BLC shareholder would
be required to recognize gain or loss equal to the difference between such
shareholder's tax basis in the BLC common stock and the fair market value of the
Allied Capital common stock received in the merger.
BLC has received an opinion from its counsel, Weil, Gotshal & Manges LLP,
and Allied Capital has received an opinion from its counsel, Sutherland Asbill &
Brennan LLP, that the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code, and that, for federal income tax
purposes:
(i) no gain or loss will be recognized by Allied Capital, Merger Sub
or BLC as a result of the merger;
(ii) no gain or loss will be recognized by a BLC shareholder who
receives solely shares of Allied Capital common stock in exchange for BLC
common stock;
(iii) the tax basis of the shares of Allied Capital common stock,
including fractional shares, received by a BLC shareholder will be equal to
the tax basis of the BLC common stock exchanged therefor; and
(iv) the holding period of the shares of Allied Capital common stock,
including fractional shares, received by a BLC shareholder will include the
holding period of the BLC common stock exchanged therefor, provided that
such BLC common stock was held as a capital asset by such shareholder
within the meaning of Section 1221 of the Code at the effective time of the
merger.
ACCOUNTING TREATMENT
New BLC will be an independently managed, private portfolio company of
Allied Capital. Allied Capital intends to include its investment in New BLC in
its portfolio of private finance investments, and intends to earn current
interest and dividend income from its investment.
CERTAIN LEGAL MATTERS
Certain federal or state regulatory requirements or approvals (in addition
to those that arise in connection with the registration of Allied Capital common
stock to be issued in the merger and the effectiveness of this proxy
statement/prospectus), including approval of the SBA, must be complied with or
obtained in connection with the merger.
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FEDERAL SECURITIES LAW CONSEQUENCES
Generally, all Allied Capital common stock issued in connection with the
merger will be freely transferable, except that any Allied Capital common stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act of 1933, as amended) of BLC or Allied Capital prior to
the merger may be sold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act with respect to affiliates of
BLC, or Rule 144 under the Securities Act with respect to persons who are or
become affiliates of Allied Capital, or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of BLC or Allied
Capital generally include individuals or entities that control, are controlled
by, or are under common control with, such party and may include certain
officers and directors of such party as well as principal shareholders of such
party. In addition certain shareholders have entered into a voting agreement as
discussed above.
Affiliates may not sell their shares of Allied Capital common stock
acquired in connection with the merger, except pursuant to an effective
registration under the Securities Act covering such shares or in compliance with
Rule 145 (or Rule 144 under the Securities Act in the case of persons who become
affiliates of Allied Capital) or another applicable exemption from the
registration requirements of the Securities Act. In general, under Rule 145, for
one year following the closing date an affiliate, together with certain related
persons, would be entitled to sell shares of Allied Capital common stock
acquired in connection with the merger only through unsolicited "broker
transactions" or in transactions directly with a "market maker," as such terms
are defined in Rule 144. Additionally, the number of shares to be sold by an
affiliate (together with certain related persons and certain persons acting in
concert) within any three-month period for purposes of Rule 145 may not exceed
the greater of 1% of the outstanding shares of Allied Capital common stock or
the average weekly trading volume of such stock during the four calendar weeks
preceding such sale. Rule 145 would only remain available, however, to
affiliates if Allied Capital remained current with its informational filings
with the Commission under the Exchange Act. Beginning one year after the closing
date, an affiliate would be able to sell such Allied Capital common stock
without such manner of sale or volume limitations provided that Allied Capital
was current with its Exchange Act informational filings and such affiliate was
not then an affiliate of Allied Capital. Two years after the closing date, an
affiliate would be able to sell such shares of Allied Capital common stock
without any restrictions so long as such affiliate had not been an affiliate of
Allied Capital for at least three months prior thereto. See "The Merger
Agreement -- Certain Covenants."
MARKET LISTING
It is a condition to the merger that the shares of Allied Capital common
stock to be issued in the merger be authorized for listing on the Nasdaq
National Market.
DELISTING AND DEREGISTRATION OF BLC COMMON STOCK
Following the consummation of the merger, BLC common stock will be delisted
from the AMEX and will become eligible for termination of registration pursuant
to Section 12(g)(4) of the Exchange Act. BLC intends to terminate the
registration of BLC common stock under the Exchange Act as soon as practicable
following the
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consummation of the merger. Upon termination of registration, BLC will cease to
be a reporting company.
ALLIED CAPITAL BUSINESS
As a business development company, Allied Capital provides private
investment capital to private companies and undervalued public companies in a
variety of different industries and in diverse geographic locations throughout
the United States. Allied Capital has been investing in growing businesses for
over 41 years and has financed thousands of private companies nationwide. Allied
Capital's investment activity is focused in three areas:
- Private finance
- Commercial real estate finance, including the purchase of commercial
mortgage-
backed securities, and
- Allied Capital Express -- small business and commercial real estate loans
of up to $3 million originated for sale.
Allied Capital's investment portfolio consists primarily of long-term
unsecured loans with equity features, commercial mortgage-backed securities
("CMBS"), commercial mortgage loans, and small senior loans, including SBA 7(a)
guaranteed loans. At September 30, 2000, Allied Capital's investment portfolio
totaled $1.6 billion. Allied Capital's investment objective is to achieve
current income and capital gains.
PRIVATE FINANCE
Allied Capital provides long-term debt and equity financing to private
companies nationwide. Its private finance activities target a market niche
between the senior debt financing provided by traditional lenders, such as
banks, commercial finance companies and insurance companies, and the equity
capital provided by private equity investors.
Allied Capital's private financing is generally used to fund growth,
buyouts, note purchases, acquisitions, recapitalizations, and bridge financings.
Allied Capital generally invests in private companies though, from time to time,
it may invest in undervalued public companies that lack access to public capital
and whose securities may not be marginable. Allied Capital targets two types of
companies when seeking new investments. The first type of company sought is a
market leader in a stable industry that has demonstrated over many years of
operations that it can successfully achieve its business plan and thereby
achieve Allied Capital's investment objective. The second type of company is an
emerging company in a growing industry that is positioned for significant
growth. Allied Capital has spent over 41 years refining its highly selective
investment discipline, which is founded on seeking portfolio companies having
key characteristics and targeting specific industries.
Allied Capital originates investments generally ranging in size from $5
million to $30 million, and for the nine months ended September 30, 2000 and the
year ended December 31, 1999 the average investment size was $14.0 million and
$12.4 million, respectively. Its private finance investments are generally
structured as an unsecured, subordinated loan that carries a relatively high
fixed interest rate (generally 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. Approximately
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98% of the investments in the private finance portfolio have fixed rates of
interest. The private finance investments typically include equity features,
such as warrants or options to buy a minority interest in the portfolio company.
Allied Capital also makes preferred and common equity investments, particularly
when there are unique opportunities to profit from the growth of an emerging
company. At September 30, 2000, 84% of the private finance portfolio consisted
of debt securities, and 16% consisted of equity securities. The private finance
portfolio is geographically diverse, and includes investments in a wide variety
of industries, including business services, consumer products,
telecommunications, industrial products and broadcasting.
Capital providers for the finance of private companies can be generally
categorized as shown in the diagram below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL PROVIDER Banks Commercial Insurance Allied Private Private
Finance Companies/ Capital Mezzanine Equity
Companies High Yield Funds Funds
Market
-----------------------------------------------------------------------------------------------------
PRIMARY Senior, Asset-based Large Unsecured Unsecured Equity
BUSINESS short-term lending >$30 million long-term long-term
FOCUS debt credits debt with debt with
equity equity
upside upside
Preferred Preferred
and common and common
equity equity
-----------------------------------------------------------------------------------------------------
TYPICAL PRICING LIBOR+ [graphic of arrow stretching between 'LIBOR+' and 30%+
SPECTRUM* '30%+']
</TABLE>
---------------
* Based on market experience of our marketing and investment professionals.
Banks are primarily focused on providing senior secured and unsecured
short-term debt. They typically do not provide meaningful long-term unsecured
loans. Commercial finance companies are primarily focused on providing senior
secured long-term debt. The private insurance company and high-yield debt
markets are focused primarily on very large financing transactions, typically in
excess of the financings Allied Capital does. Allied Capital generally does not
compete with banks, commercial finance companies, or the insurance company/high
yield market. Instead, Allied Capital competes directly with the private
mezzanine sector of the private equity market. Private mezzanine funds are also
focused on providing unsecured long-term debt to private companies for the types
of transactions discussed above. Allied Capital believes that it has key
structural and operational advantages when compared to private mezzanine funds.
Allied Capital's scale of operations, equity capital base, and successful
track record as a private finance investor has enabled it to borrow long-term
capital to leverage its returns on common equity. Therefore, Allied Capital's
access to debt capital reduces its total cost of capital. In many cases, a
private mezzanine fund is unable to access the debt capital markets, and
therefore must achieve an unleveraged equity return for their investors. Allied
Capital's lower cost of capital gives it a pricing advantage when competing for
new investments. In addition, the perpetual nature of Allied Capital's corporate
structure enables it to be a better long-term partner for its portfolio
companies than a traditional mezzanine fund, which typically has a finite life.
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Allied Capital estimates that it funds approximately 2% of all the private
finance investments that it reviews. When assessing a prospective investment,
Allied Capital looks for a company that has achieved, or has the potential to
achieve, market leadership in a niche, critical mass, and a sustainable cash
flow. Allied Capital also looks for companies that, because of their industry
and business plan, can demonstrate minimal vulnerability to changes in economic
cycles. Since Allied Capital's debt securities are primarily unsecured in
nature, it looks for companies in industries that are non-cyclical, cash flow
intensive, and can demonstrate a high return on their invested capital. Allied
Capital generally does not target companies in industries where businesses tend
to be vulnerable to changes in economic cycles, are capital intensive, and have
low returns on their invested capital. Allied Capital generally targets and does
not target the following industries, though investments in any industry will be
considered if the prospective company demonstrates unique characteristics that
make it an attractive investment opportunity:
INDUSTRIES TARGETED
NON-CYCLICAL/CASH FLOW INTENSIVE/
HIGH RETURN ON CAPITAL
---------------------------------------
Business services
Education
Consumer products
Light industrial products
Broadcasting
INDUSTRIES NOT TARGETED
CYCLICAL/CAPITAL INTENSIVE/
LOW RETURN ON CAPITAL
---------------------------------------
Heavy equipment
Natural resources
Most retail
Low value-add distribution
Agriculture
Transportation
Construction
Another critical element of the investment discipline is to invest in
companies with a significant equity capital base, and a strong private equity
sponsor. For example, in 1999, 77% of Allied Capital's private financings were
completed in conjunction with private equity firms, which provided capital that
is junior to that of Allied Capital. Allied Capital believes strong equity
sponsorship significantly strengthens its position as a long-term lender. A
strong equity sponsor provides not only strong equity capital beneath Allied
Capital's investment, but also provides a reliable source of additional equity
capital if the portfolio company requires additional financing. Private equity
sponsors also help Allied Capital confirm its own due diligence findings when
assessing a new investment opportunity, and they provide assistance and
leadership to the portfolio company's management team throughout the investment
period.
Allied Capital targets a total return of 25% for the private finance
investments. The typical private finance structure focuses, first and foremost,
on the protection of investment principal. Debt instruments generally provide
for a contractual interest rate ranging from 12% to 18%, which provides current
interest income. The debt instruments also have restrictive covenants that
protect Allied Capital's interests in the transaction. The warrants that are
provided with the debt securities generally require only a minimal cost to
exercise, and thus as the portfolio company appreciates in value, Allied Capital
achieves additional investment return from this equity interest. Allied Capital
seeks to achieve additional investment returns of 2% to 10% from the
appreciation and sale of the warrants.
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Generally, the warrants expire five years after the related debt is repaid.
The warrants typically include registration rights, which allows Allied Capital
to sell the securities if the portfolio company completes a public offering. In
most cases, the warrants also have a put option that requires that the borrower
repurchase the equity position after a specified period of time at a formula
price or at its fair market value. Most of the gains that are realized from the
warrant portfolio arise as a result of the sale of the portfolio company to
another business, or through a recapitalization. Historically, Allied Capital
has not been dependent on the public equity markets for the sale of its warrant
positions. With respect to preferred or common equity investments, Allied
Capital targets an investment return of 25% to 40%.
Allied Capital holds a portion of its private finance investments in a
wholly owned subsidiary, Allied Investment Corporation. Allied Investment is a
BDC and is licensed and regulated by the SBA to operate as a SBIC. See "Allied
Capital Government Regulations" below for further information about SBIC
regulation.
In addition to funding private finance investments as described above,
during the second quarter of 2000, Allied Capital made commitments to invest in
select technology-oriented private equity funds. In addition to the return that
is expected to be achieved from these investments, Allied Capital believes it
can achieve substantial strategic benefits from these funds, including
technology expertise from private finance portfolio companies, co-investment
opportunities and increased dealflow. Allied Capital may make additional
commitments to other such funds, but expect the total investment in this area to
remain a small percentage of the total portfolio.
COMMERCIAL REAL ESTATE FINANCE
COMMERCIAL MORTGAGE LOANS. Allied Capital has been a commercial real
estate lender for many years, and maintains a small whole commercial mortgage
loan portfolio. During 1998, Allied Capital significantly reduced its
middle-market commercial real estate lending activities, because it believed
that the market was under-pricing commercial real estate loans, and that the
returns on senior commercial real estate loans were below a level that would
result in a fair return on equity for shareholders. However, Allied Capital
continues to see a strong demand for small commercial mortgage loans that can be
attractively priced for sale to banks and other financial institutions. As a
result of this market demand, the small real estate lending business was
combined with Allied Capital's SBA lending activity to form Allied Capital
Express, which is discussed below.
Since 1999, Allied Capital has been liquidating a significant portion of
its whole commercial mortgage loan portfolio. Allied Capital believes that it
can redeploy the proceeds into higher yielding investments. Allied Capital
continues to derive income from the interest charged on the whole commercial
mortgage loan portfolio through contractual interest and amortization of
discounts.
COMMERCIAL MORTGAGE-BACKED SECURITIES. The same pricing pressures that
caused Allied Capital to reduce its origination of commercial mortgage loans in
1998 created significant liquidity problems for many other real estate lenders
who had remained active lenders as pricing declined throughout 1998. In the
fourth quarter of 1998, many of these lenders experienced severe liquidity
constraints that caused them to exit the commercial mortgage-backed securities
market. This liquidity turmoil in the real estate capital markets created a
unique opportunity for Allied Capital to acquire newly issued, non-investment
grade commercial mortgage-backed securities
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("Purchased CMBS") at significant discounts from the face amount of the bonds
and at attractive yields.
As an investor, Allied Capital believes that Purchased CMBS has attractive
risk/return characteristics. The Purchased CMBS in which Allied Capital invests
are non-investment grade, which means that nationally recognized statistical
rating organizations rate them below the top four investment-grade rating
categories (i.e., "AAA" through "BBB"), and are sometimes referred to as "junk
bonds." Unlike most "junk bonds," which are typically unsecured debt
instruments, the non-investment grade Purchased CMBS in which Allied Capital
invests are secured by mortgage loans with real estate collateral. Allied
Capital's Purchased CMBS are fully collateralized by senior mortgage loans on
commercial real estate properties where the loans are, on average, supported by
a 30% equity investment. Allied Capital acquires its Purchased CMBS on the
initial issuance of the CMBS bond offering, and is able to underwrite and
negotiate to purchase the securities at a significant discount from their face
amount, generally resulting in an estimated yield to maturity ranging from 13%
to 16%. The negotiated discount and estimated yield to maturity assumes a 1%
loss rate on the entire underlying commercial mortgage loan collateral pool,
which takes into consideration certain business and economic uncertainties and
contingencies. Allied Capital finds the yields for Purchased CMBS very
attractive given their collateral protection.
Allied Capital believes this risk/return dynamic exists in this market
today because there are significant barriers to entry for a non-investment grade
CMBS investor. First, non-investment grade CMBS are long-term investments and
require long-term investment capital. Allied Capital's capital structure, which
is in excess of 50% equity capital, is well suited for this asset class. Second,
when it purchases CMBS in an initial issuance, every mortgage loan in the
underlying collateral pool is reunderwritten, and Allied Capital meets with the
issuer to discuss the nature and type of loans that will be accepted into the
pool. Allied Capital has significant commercial mortgage loan underwriting
expertise, both in terms of the number of professionals employed and the depth
of their commercial real estate experience. Access to this type of expertise is
another barrier to entry into this market.
As a non-investment grade CMBS investor, Allied Capital recognizes that
non-investment grade securities have a higher degree of risk than do investment
grade bonds. 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 be less liquid, may have a higher risk
of default, and may be more difficult to value. Allied Capital invests in
non-investment grade CMBS represented by the "BB" to non-rated tranches of a
CMBS issuance. Due to the underlying structure of the CMBS issuances, its CMBS
tranches receive principal payments only after the securities that are senior to
its securities are repaid. Thus, if losses are incurred in the underlying
mortgage loan collateral pool, Allied Capital would experience these losses.
To mitigate this risk, Allied Capital performs extensive due diligence
prior to an investment in Purchased CMBS. In evaluating a CMBS investment,
Allied Capital uses the same underwriting procedures and criteria for the
mortgage loans in the collateral pool as is used for all of the loans
originated. These underwriting procedures and criteria are described in detail
below. Allied Capital will only invest in CMBS when it is believed, as a result
of their underwriting procedures, that the
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<PAGE> 82
underlying mortgage pool adequately secures Allied Capital's position. The
portfolio of CMBS is secured by approximately 2,600 commercial real estate
properties located in diverse geographic locations across the United States in a
wide variety of property types, including retail, multi-family housing, office,
and hospitality.
Allied Capital's Purchased CMBS activity complements the private finance
activity because it provides a steady stream of recurring interest income. In
order to maintain a balanced investment portfolio, Allied Capital expects to
limit its Purchased CMBS activity to approximately 20% to 25% of total assets.
ALLIED CAPITAL EXPRESS
Allied Capital originates small business and commercial real estate loans,
primarily for sale, under the brand name "Allied Capital Express." The loans
originated in this program are generally for financings of up to $3 million in
size, and may be composed of an SBA 7(a) guaranteed loan and a conventional
commercial mortgage loan. These loans are co-originated or sold to banks and
other financial institutions for premiums ranging from 5% to 10% of the loan
amount. Allied Capital also may sell these loans for a retained servicing spread
that can range from 1% to 5% of the outstanding loan balance for the period that
the loan remains outstanding. Allied Capital began using a separate brand name
for these smaller loans in the second quarter of 1999, to distinguish this
program from our its private finance activity and avoid confusion in the market
place. Allied Capital Express provides a steady stream of premium income to
Allied Capital with minimal capital employed, and thus complements its other
portfolio activities.
Many of the loans originated under the Allied Capital Express brand name
are through Allied Capital's participation in the SBA's 7(a) Guaranteed Loan
Program through its wholly owned subsidiary, Allied Capital SBLC Corporation
("Allied SBLC"). The SBA 7(a) program is estimated to provide approximately $10
billion to small businesses on an annual basis. Allied SBLC is licensed by the
SBA as a Small Business Lending Company ("SBLC") and is one of only fourteen
non-bank SBLCs operating in the United States. Under the SBA 7(a) Loan Program,
Allied SBLC extends senior secured loans that are partially guaranteed by the
SBA. Allied SBLC's 7(a) loans are provided to small businesses for the purposes
of acquiring a business or 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. Allied SBLC focuses its 7(a)
loan origination activity on loans secured by commercial real estate assets.
Allied SBLC is a Preferred Lender and operates in 27 SBA-designated markets
throughout the United States. There are Allied Capital Express offices in nine
locations in the U.S.
In 1999, Allied Capital began an initiative to increase the growth and
profitability of Allied Capital Express. Allied Capital developed technology to
streamline the closing process and reduce cycle times for transactions. Allied
Capital strengthened its sales force and increased its loan sale network. Allied
Capital also began a process to migrate the application process to the Internet
to increase loan origination activity. Allied Capital has continued with all
aspects of this initiative during 2000, and has also established strategic
relationships with 27 online loan intermediaries and small business portals.
During the third quarter of 2000, Allied Capital released the next phase of its
online loan application, which pre-qualifies borrowers from a credit
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<PAGE> 83
perspective using digitized rules-based underwriting. Allied Capital believes it
is emerging as a technology leader in online small business loan origination,
and the enhanced online application is expected to increase access to qualified
borrowers nationwide.
Allied Capital Express 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.
Allied Capital Express generally prices its 7(a) loans with variable
interest rates typically ranging from 1.75% to 2.75% over the prime rate,
adjusted monthly. Approximately 98% of this portfolio has variable interest
rates. 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. Allied Capital Express routinely sells the guaranteed
portion of its 7(a) loans in the well-established secondary market of banks and
other institutional buyers, and earns a premium, net of origination costs, on
the sale of the guaranteed portion of our 7(a) loans, which typically range from
4% to 7.5% of the face amount of each loan sold. Allied Capital Express also may
sell these loans for a retained servicing spread that generally ranges from 1%
to 5% of the loan balance for the period that the loan remains outstanding. In
1999, Allied Capital Express entered into an agreement with a commercial paper
conduit to sell up to 90% of the unguaranteed interests in its 7(a) loans.
Allied Capital Express retains a servicing spread of approximately 3.75% on the
unguaranteed interests sold. Allied Capital Express continues to service 100% of
each 7(a) loan originated.
In addition to 7(a) loans, Allied Capital Express co-originates or sells
small commercial real estate loans to banks and other institutional buyers.
These loans are often originated in conjunction with 7(a) loans. The small
commercial real estate loans generally are priced and structured such that
Allied Capital Express can receive premiums on the sale or co-origination of
these loans to banks and other financial institutions. The net premium on these
loan sales is generally up to 10% of the loan balance sold.
If the merger is completed, Allied Capital intends to consolidate its
Allied Capital Express activities into New BLC. To facilitate this consolidation
transaction, prior to the consummation of the merger, Allied Capital will
establish Allied SBLC as an independently managed private portfolio company.
Allied SBLC will establish a new board of directors and Allied Capital will
transfer its employees and operations attributed to Allied Capital Express to
Allied SBLC.
After the merger is effected, Allied SBLC will merge with a newly formed
subsidiary of New BLC, in consideration of the issuance by New BLC of new
preferred stock to Allied Capital.
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<PAGE> 84
INVESTMENT ADVISORY SERVICES
Allied Capital is a registered investment adviser, pursuant to the
Investment Advisers Act of 1940, and has certain investment advisory agreements
to manage private investment funds. The revenue generated from these agreements
is not material to Allied Capital's operations.
LOAN SOURCING
Over the last two years, Allied Capital has significantly increased the
scope of its sales and marketing activity by opening new regional offices and
increasing its sales and marketing staff. To source new investment
opportunities, Allied Capital works with thousands of intermediaries including:
- private mezzanine and equity investors;
- regional and small, specialized investment banks;
- business and mortgage brokers;
- national retail financial services companies; and
- banks, law firms and accountants.
Allied Capital believes that its experience and reputation provide a
competitive advantage in originating new investments. Allied Capital has
established an extensive network of investment referral relationships over its
41-year history. Allied Capital is recognized as a pioneer in the private
finance industry, and has developed a reputation in the commercial real estate
finance market for its ability to finance complex transactions.
Allied Capital Express continues to build its network of Internet
relationships to direct traffic to its web site, AlliedCapitalExpress.com, which
it believes will increase its business opportunities. Allied Capital Express has
entered into strategic relationships with 27 online mortgage loan brokers and
small business portals and plans to enter into similar relationships with other
online intermediaries in the future.
INVESTMENT APPROVAL AND UNDERWRITING PROCEDURES
In assessing new investment opportunities, Allied Capital maintains
conservative credit standards based on its underwriting guidelines, a thorough
due diligence process, and a centralized credit approval process requiring
committee review, all of which are described below. The combination of
conservative underwriting standards and Allied Capital's credit-oriented culture
has resulted in a record of minimal realized losses.
PRIVATE FINANCE. Allied Capital generally requires that the companies in
which it invests demonstrate strong market position, sales growth, positive cash
flow, and profitability, as discussed above. Allied Capital emphasizes the
quality of management, and seeks experienced entrepreneurs with a management
track record, relevant industry experience and a significant equity stake in the
business. In a typical private financing, the business plan and operations of
the potential portfolio company are thoroughly reviewed, analyzed and
substantiated through due diligence. Allied Capital performs financial due
diligence, often with assistance of an accounting firm; performs operational due
diligence, often with the assistance of an industry consultant; studies the
industry and competitive landscape; and conducts numerous reference checks with
current and former employees, customers, suppliers and
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<PAGE> 85
competitors. The typical private finance transaction requires two to three
months of diligence and structuring before funding occurs.
Private finance transactions are approved by an investment committee
consisting of Allied Capital's most senior private finance professionals and
chaired by the Chairman and Chief Executive Officer. The private finance
approval process benefits from the experience of the investment committee
members and from the experience of the other investment professionals who have
significant investment experience. For every transaction of $10 million or
greater, approval from the Executive Committee of the Board of Directors is
required in addition to the investment committee approval. 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 portfolio
company.
PURCHASED CMBS. Allied Capital receives extensive packages of information
regarding the mortgage loans comprising a CMBS pool. Allied Capital works with
the issuer, the investment bank, and the rating agencies in performing due
diligence on a CMBS purchase. The typical CMBS purchase takes between two to
three months to complete because of the breadth and depth of the diligence
procedures. Allied Capital re-underwrites all of the underlying commercial
mortgage loans securing the CMBS. The estimate of underwriteable cash flow and
necessary carve-outs, such as replacement reserves are challenged, and the
trends of the industry and geographic location of each property are studied to
independently assess an estimate of the anticipated cash flow over the period of
the loan. Allied Capital's loan officers physically inspect most of the
collateral properties, and assess appraised values based on Allied Capital's
opinion of comparable market values.
Based on the findings of the diligence procedures, certain mortgage loans
may be rejected from inclusion in the pool. Allied Capital then formulates its
negotiated purchase price and discount to achieve an effective yield on its
investment over a ten-year period to approximate 13% to 16%. In computing this
estimated yield, a 1% loss rate is assumed on the entire underlying mortgage
pool.
CMBS transactions are approved by an investment committee and, because of
their size, every CMBS transaction is reviewed and approved by the Executive
Committee of the Allied Capital Board of Directors. The investment committee for
CMBS transactions consists of the most senior commercial real estate
professionals and is chaired by the Chairman and Chief Executive Officer.
COMMERCIAL REAL ESTATE FINANCE. When Allied Capital evaluates commercial
mortgage loans, generally an initial package of information that typically
includes underwriting information developed by the borrower is provided. Typical
underwriting information that is required 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. Allied Capital's underwriting process includes
assessing the borrower's estimated earnings and 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, the financial strength of the significant tenants, and any other
collateral. Allied Capital also studies trends in the borrower's industry and in
real estate values in the borrower's geographic region. Loan officers
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<PAGE> 86
inspect the property during the due diligence process, and value the property
using internally developed valuation analyses.
Commercial mortgage loans are approved by an investment committee, which is
composed of the most senior commercial real estate finance investment
professionals. For loans of $10 million or greater, the Executive Committee of
the board of directors must also approve the transaction, as described above.
ALLIED CAPITAL EXPRESS. Loans made to small businesses are generally
secured by real estate and other liens on the assets of the borrower and,
frequently, by the assets of principals. The entrepreneur must personally
guarantee the payment of interest and principal on the loans. Allied Capital
Express generally follows the same underwriting procedures and criteria for 7(a)
loans as is followed for commercial real estate loans, however, in addition to
those underwriting standards, the SBA has established certain financial ratios
and guidelines that generally govern 7(a) loans. Factors to be considered
include the debt service coverage ratio, value of the collateral, and the net
worth of the borrower.
Allied Capital Express loans require the review and approval of three
senior small business lending professionals prior to funding. The small business
investment committee periodically ratifies each new investment.
PORTFOLIO MANAGEMENT
PORTFOLIO DIVERSITY. Allied Capital monitors the portfolio to maintain
both industry and geographic diversity. Allied Capital currently does 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 the portfolio is
not concentrated. Allied Capital may or may not concentrate in any industry or
group of industries in the future.
LOAN SERVICING. Allied Capital's loan servicing staff is responsible for
routine loan servicing, which includes:
- delinquency monitoring;
- payment processing;
- borrower inquiries;
- escrow analysis and processing;
- third-party reporting; and
- insurance and tax administration.
In addition, the servicing staff is responsible for special servicing
activities including delinquency monitoring and collection, workout
administration and management of foreclosed assets.
PORTFOLIO MONITORING AND VALUATION
Allied Capital uses a grading system in order to help monitor the credit
quality of the portfolio and the potential for capital gains. The grading system
assigns grades
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to investments from 1 to 5, and the portfolio was graded at September 30, 2000
as follows:
<TABLE>
<CAPTION>
PERCENTAGE
PORTFOLIO AT OF TOTAL
GRADE DESCRIPTION VALUE PORTFOLIO
----- ----------- ------------- ----------
(IN MILLIONS)
<C> <S> <C> <C>
1 Probable capital gain $ 155.9 9.5%
2 Performing security 1,362.7 83.2%
Close monitoring -- no loss of principal or interest
3 expected 40.0 2.4%
4 Workout -- Some loss of interest expected 54.2 3.3%
5 Workout -- Some loss of principal expected 25.4 1.6%
-------- ------
$1,638.2 100.0%
======== ======
</TABLE>
The 1940 Act requires that the board of directors value each asset in the
portfolio on a quarterly basis. Allied Capital is not permitted to have a
general loan loss reserve, but instead must value each specific investment.
Allied Capital has a written valuation policy that governs the valuation of the
assets, and a consistent valuation process is followed quarterly. In valuing
each individual investment, Allied Capital considers the financial performance
of each portfolio company, loan payment histories, indications of potential
equity realization events, current collateral values and determines 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 Allied Capital board
of directors for review and approval.
As a general rule, Allied Capital does not value its loans above principal
balance, 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
investments 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 the
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 Allied Capital's
investment, restrictions on trading or market liquidity concerns.
Allied Capital monitors loan delinquencies in order to assess the
appropriate course of action and overall portfolio quality. With respect to the
private finance portfolio, investment professionals closely monitor the status
and performance of each individual investment throughout each quarter. Through
the process, investments that may require closer monitoring are generally
detected early, and for each such investment, an appropriate course of action is
determined. For the private finance portfolio, loan delinquencies or payment
default is not necessarily an indication of credit quality or the need to pursue
active workout of a portfolio investment. Because Allied Capital provides
long-term privately negotiated investment capital, it is not atypical to defer
payment of principal or interest from time to time. As a result, the amount of
the Allied Capital private finance portfolio that is delinquent may vary. The
terms of private finance agreements often provide an
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opportunity for portfolio companies to restructure their debt and equity
capital. During such restructuring, Allied Capital may not receive or accrue
interest or dividend payments. Allied Capital's senior investment professionals
actively work with the portfolio company in these instances to negotiate an
appropriate course of action.
Allied Capital prices transactions in the private finance investment
portfolio to provide adequate current returns for shareholders assuming that a
portion of the portfolio at any time may not be accruing interest currently.
Allied Capital also prices investments for a total return including current
interest or dividends plus capital gains from the sale of equity securities.
Therefore, the amount of loans that are delinquent is not necessarily an
indication of future principal loss or loss of anticipated investment return.
Allied Capital's portfolio grading system is used as a means to assess loss of
investment return (Grade 4 assets) or loss of investment principal (Grade 5
assets).
With respect to the real estate secured portfolio and SBA 7(a) portfolio,
the following outlines the treatment of each delinquency category:
30 Days Past Due Loan servicing staff monitors loans and contacts
borrowers for collection.
60 Days Past Due Loans are generally transferred to professionals
responsible for special servicing activity for
monitoring, collection and development of a workout
plan, if necessary.
90 Days Past Due Accounting department reviews loans in conjunction
with the professional responsible for special
servicing to determine whether the loans should be
placed on a non-accrual status or whether a valuation
adjustment is required.
120 Days Past Due Generally, such loans are placed on non-accrual
status and the loan is an active workout.
INVESTMENT GAINS AND LOSSES
As an investor focused primarily on debt investments, Allied Capital's
investment decisions are based on credit dynamics. Allied Capital's underwriting
focuses on the preservation of principal, and it will pursue the available means
to recover the capital investment. As a result of this investment discipline and
credit culture, Allied Capital has a history of low levels of loan losses, and
has a demonstrated track record of successfully resolving troubled credit
situations with minimal losses. Allied
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Capital's realized gains from the sale of its equity interests have historically
exceeded losses, as is reflected in the chart below.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Realized gains....... $ 24,664 $ 21,606 $ 31,536 $ 25,757 $ 15,804 $ 30,417 $ 16,679
Realized losses...... $ (1,569) $ (5,158) $ (6,145) $ (3,216) $ (5,100) $(11,262) $ (4,679)
Net realized gains... $ 23,095 $ 16,448 $ 25,391 $ 22,541 $ 10,704 $ 19,155 $ 12,000
Total assets......... $1,731,773 $1,169,531 $1,290,038 $856,079 $807,775 $713,360 $605,434
Realized losses/
Total assets....... 0.09% 0.4% 0.5% 0.4% 0.6% 1.6% 0.8%
</TABLE>
EMPLOYEES
At September 30, 2000, Allied Capital employed 136 individuals including
investment and portfolio management professionals, operations professionals and
administrative staff. The majority of these individuals are located in the
Washington, DC office. Allied Capital believes that relations with its employees
are excellent.
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PORTFOLIO COMPANIES
The following is a listing of Allied Capital's portfolio companies in which
Allied Capital had an equity investment at September 30, 2000. Allied Capital
makes available significant managerial assistance to its portfolio companies.
For information relating to the amount and general terms of our loans to
portfolio companies, see Allied Capital's quarterly report filed on Form 10-Q
for the period ended September 30, 2000.
<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 Limited Partnership 1.8%
1336 Basswood, Suite F Interests
Schaumburg, IL 60173
Allied Office Products.................. Office Products Warrants to Purchase 4.9%
75 Route 17 South Retailer Common Stock
Hasbrouck Heights, NJ 07604
American Barbecue & Grill, Inc. ........ Restaurant Chain Warrants to Purchase 17.3%
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
Aurora Communications, LLC.............. Radio Stations Redeemable Preferred 3.2%
3 Stamford Landing, Suite 210 Equity Interest
46 Southfield Avenue
Stamford, CT 06902
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
Border Foods, Inc. ..................... Mexican Ingredient & Series A Convertible 9.4%
J Street Deming Food Product Preferred Stock
Industrial Park Manufacturer Warrants to Purchase 6.2%
Deming, NM 88030 Common Stock
Cahill-Warnock Strategic Partners Fund
II, L.P............................... Private Equity Fund Limited Partnership 4.2%
One South Street Interest
Suite 2150
Baltimore, MD 21202
CampGroup, LLC.......................... Recreational Camp Warrants to Purchase 2.6%
4 New King Street Operator Common Stock
White Plains, NY 10604
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
Colibri Holding Corporation............. Outdoor Living Product Common Stock 3.4%
2201 S. Walbash Street Retailer Warrants to Purchase 2.0%
Denver, CO 80231 Common Stock
Component Hardware Group................ Designer & Developer Preferred Stock 9.1%
1890 Swarthmore Ave. of Hardware Common Stock 8.2%
P.O. Box 2020 Components
Lakewood, NJ 08701
Convenience Corporation of America...... Convenience Store Chain Series A Preferred Stock 10.0%
711 N. 108th Court Warrants to Purchase 4.0%
Omaha, NE 68154 Senior Preferred Stock
</TABLE>
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<PAGE> 91
<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>
Cooper Natural Resources, Inc. ......... Sodium Sulfate Producer Warrants to Purchase 25.2%
P.O. Box 1477 Common Stock
Seagraves, TX 79360
CorrFlex Graphics, LLC.................. Packaging Manufacturer Warrants to Purchase 4.8%
P.O. Box 1337 Common Stock
Monroe, NC 28110 Options to Purchase 1.0%
Common Stock
Cosmetic Manufacturing.................. Cosmetic Manufacturer Options to Purchase 22.5%
Resources, LLC Shares
11312 Penrose Street
Sun Valley, CA 91352
Coverall North America, Inc............. Commercial Cleaning Warrants to Purchase 15.0%
500 West Cypress Creek Rd. Service Common Stock
Ste. 580
Ft. Lauderdale, FL 33309
Csabai Canning Factory Rt. ............. Food Processing Hungarian Quotas 9.2%
5600 Bekescasba
Bekis: vt 52-54 Hungary
CyberRep.Com (formerly Unitel, Inc.).... Operator of Call Service Warrants to Purchase 22.5%
8300 Greensboro Drive, Centers
6th Floor Common Stock
McLean, VA 22102
DeVlieg-Bullard, Inc. .................. Tool Manufacturer Warrants to Purchase 1.7%
One Gorham Island Common Stock
Westport, CT 06680
Directory Investment Corporation........ Telephone Directories Common Stock 50.0%
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Directory Lending Corporation........... Telephone Directories Common Stock 50.0%
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Drilltec Patents & Technologies Company,
Inc................................... Drill Pipe Packager Warrants to Purchase 15.0%
10875 Kempwood Drive, Suite 2 Common Stock
Houston, TX 77043
eCentury Capital Partners, L.P. ........ Private Equity Fund Limited Partnership 44.8%
1101 Connecticut Ave, NW Interest
7th Floor
Washington, DC 20036
EDM Consulting, LLC..................... Environmental Common Stock 25.0%
14 Macopin Avenue Consulting
Montclair, NJ 07043
Esquire Communications Ltd. ............ Court Reporting Warrants to Purchase 3.0%
216 E. 45th Street, 8th floor Services Common Stock
New York, NY 10017
E-Talk Corporation (formerly
Teknekron Infoswitch
Corporation).......................... Telecommunications Warrants to Purchase 5.5%
4425 Cambridge Road Software Provider Common Stock
Fort Worth, TX 76155-2692
ExTerra Credit Recovery, Inc. .......... Consumer Finance Preferred Stock 0.9%
35 Lennon Lane, Suite 200 Common Stock 0.7%
Walnut Creek, CA 94598 Warrants to Purchase 0.7%
Common Stock
Executive Greetings, Inc. .............. Personalized Business Warrants to Purchase 1.5%
120 Industrial Park Access Road Products Common Stock
New Hartford, CT 06057
F.A. Television Holdings, LLC........... Cable Television Preferred Units 60.0%
1919 Pennsylvania Ave N.W.
Washington, DC 20006
</TABLE>
83
<PAGE> 92
<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>
Fairchild Industrial Products Company... Industrial Controls Warrants to Purchase 20.0%
3920 Westpoint Boulevard Manufacturer Common Stock
Winston-Salem, NC 27013
FTI Consulting, Inc. ................... Litigation Support Warrants to Purchase 9.3%
2021 Research Drive Services Common Stock
Annapolis, MD 21401
Galaxy American Communications, LLC..... Cable Television Warrants to Purchase 6.0%
1220 N. Main Street Operator Common Stock
Sikeston, MO 63801
Garden Ridge Corporation................ Home Decor Retailer Series A Preferred Stock 2.6%
650 Madison Avenue Common Stock 4.7%
New York, NY 10022
Gibson Guitar Corporation .............. Guitar Manufacturer Warrants to Purchase 3.0%
1818 Elm Hill Pike Common Stock
Nashville, TN 37210
Ginsey Industries, Inc. ................ Bathroom Accessories Convertible Debentures 7.0%
281 Benigno Boulevard Manufacturer Warrants to Purchase 16.0%
Bellmawr, NJ 08031 Common Stock
Global Communications I, LLC............ Communications and Preferred Equity 59.3%
201 East 69th Street Media Businesses Interest
New York, NY 10021 Options for Common 59.3%
Membership Interest
Grant Broadcasting System II............ Television Stations Warrants to Purchase 25.0%
919 Middle River Drive, Common Stock
Suite 409 Warrants to Purchase 25.0%
Ft. Lauderdale, FL 33304 Common Stock in
Affiliate Company
Grant Television, Inc. ................. Television Stations Equity Interest 20.0%
(See Grant Broadcasting System II)
HealthASPex, Inc........................ Third Party Common Stock 24.0%
2812 Trinity Square Drive Administrator Preferred Stock 24.0%
Carrollton, TX 75006
HMT Inc. ............................... Storage Tank Common Stock 27.3%
1422 FM 1960 W. Maintenance & Warrants to Purchase 10.0%
Suite 350 Repair Common Stock
Houston, TX 77068
Hotelevision, Inc. ..................... Hotel Cable-TV Preferred Stock 4.4%
599 Lexington Avenue Network
Suite 2300
New York, NY 10022
Icon International, Inc. ............... Corporate Barter Series A Preferred Stock 3.5%
281 Tressor Boulevard Services Series B Preferred Stock 3.5%
Stamford, CT 06901
Impact Innovations Group (formerly J3
Technology Services Corporation)...... Information Technology Warrants to Purchase 4.0%
5825 Glenridge Drive Services Provider Common Stock
Building II, Suite 107
Atlanta, GA 30328
International Filler Corporation........ Cellulose and Fiber Common Stock 11.0%
50 Bridge Street Producer Warrants to Purchase 2.9%
North Tonawanda, NY 14120 Common Stock
iSolve Incorporated..................... B-to-B e-Commerce Series A 2.9%
281 Tresser Boulevard Preferred Stock
Stamford, CT 06901 Common Stock 1.1%
JRI Industries, Inc. ................... Machinery Manufacturer Warrants to Purchase 7.5%
2958 East Division Common Stock
Springfield, MO 65803
</TABLE>
84
<PAGE> 93
<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>
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 Series D Preferred Stock 3.3%
P.O. Box 7222 Retailer Warrants to Purchase 4.2%
Jackson, TN 38308-7222 Common Stock
Kyrus Corporation....................... Value-Added Reseller, Warrants to Purchase 8.0%
25 Westridge Market Place Computer Systems Common Stock
Chandler, NC 28715
Liberty-Pittsburgh Systems, Inc. ....... Business Forms Printing Common Stock 21.2%
265 Executive Drive
Plainview, NY 11803
Logic Bay Corporation................... Computer-Based Series C Redeemable 29.4%
7900 International Drive Training Developer Preferred Stock
Suite 750
Minneapolis, MN 55425
Love Funding Corporation................ Mortgage Services Series D Preferred Stock 26.0%
1220 19th Street, NW, Suite 801
Washington, DC 20036
Master Plan, Inc. ...................... Healthcare Outsourcing Common Stock 15.6%
21540 Plummer Street
Chatsworth, CA 91311
Med Assets.com, Inc. ................... Healthcare Outsourcing Series B Convertible 8.5%
21540 Plummer Street Preferred Stock
Chatsworth, CA 91311 Warrants to Purchase 5.3%
Preferred Stock
Mid-Atlantic Venture Fund IV, L.P....... Private Equity Fund Limited Partnership 9.7%
128 Goodman Drive Interest
Bethlehem, PA 18015
Midview Associates, L.P. ............... Residential Land Warrants to purchase 35.0%
2 Eaton Street, Suite 1101 Development partnership interests
Hampton, VA 23669
Monitoring Solutions, Inc. ............. Air Emissions Common Stock 25.0%
4303 South High School Road Monitoring Warrants to Purchase 50.0%
Indianapolis, IN 46241 Common Stock
Morton Grove Pharmaceuticals, Inc....... Generic Drug Redeemable Convertible 27.8%
6451 West Main Street Manufacturer Preferred Stock
Morton Grove, IL 60053
Morton Industrial Group................. Friction Materials Common Stock 0.2%
5305 Oakbrook Parkway Manufacturer
Norcross, GA 30093
MVL Group............................... Market Research Warrants to Purchase 8.0%
1061 E. Indiantown Road Service Common Stock
Suite 300
Jupiter, FL 33477
NETtel Communications, Inc. ............ Integrated Series B Convertible 2.5%
1023 31st Street, N.W. Communications Preferred Stock
Washington, DC 20007 Provider Series C Convertible 6.0%
Preferred Stock
Series D Convertible 21.5%
Preferred Stock
Warrants to Purchase 1.8%
Common Stock
NETtel Corporation...................... Integrated Series A Convertible 21.5%
1023 31st Street, N.W. Communications Preferred Stock
Washington, DC 20007 Provider
</TABLE>
85
<PAGE> 94
<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>
Nobel Learning Communities, Inc. ....... Educational Services Series D Convertible 100.0%
1400 N. Providence Road, Preferred Stock
Suite 3055 Warrants to Purchase 13.1%
Media, PA 19063 Common Stock
North American Archery, LLC
(formerly Golden Eagle/
Satellite Archery, LLC)............... Sporting Equipment Convertible Debentures 26.9%
1733 Gunn Highway Manufacturer
Odessa, FL 33556
Nursefinders, Inc. ..................... Home Healthcare Warrants to Purchase 3.4%
1200 Copeland Road, Suite 200 Providers Common Stock
Arlington, TX 76011
Opinion Research Corporation............ Corporate Marketing Warrants to Purchase 8.0%
P.O. Box 183 Research Firm Common Stock
Princeton, NJ 08542
Oriental Trading Company, Inc. ......... Direct Marketer Redeemable Preferred 1.7%
108th Street, 4206 South of Toys Stock
Omaha, Nebraska 68137 Class A Common Stock 1.7%
Warrants to Purchase 1.4%
Common Stock
Outsource Partners, Inc. ............... Outsourced Facility Warrants to Purchase 4.0%
200 Mansell Court East Services Provider Common Stock
Suite 500 Warrants to Purchase 4.0%
Roswell, GA 30076 Preferred Stock
Packaging Advantage Corporation......... Personal Care, Common Stock 9.9%
4633 Downey Road Household and Warrants to Purchase 5.5%
Los Angeles, CA 90058 Disinfectant Product Common Stock
Packager
PF.Net Communications, Inc. ............ Fiber Optic Network Warrants to Purchase 0.6%
677 Washington Blvd. Common Stock
Stamford, CT 06912
Physician Specialty Corporation......... Physician Management Redeemable Preferred 3.1%
1150 Lake Hearn Drive Services Provider Stock
Atlanta, GA 30342 Convertible Preferred 3.0%
Stock
Warrants to Purchase 1.9%
Common Stock
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
Polaris Pool Systems, Inc. ............. Pool Cleaner Warrants to Purchase 2.1%
P.O. Box 1149 Manufacturer Common Stock
San Marcos, CA 92079-1149
Professional Paint, Inc................. Paint Manufacturer Common Stock 11.0%
3900 Joliet Street Series A-1 Senior 100.0%
Denver, CO 80239 Exchangeable Preferred
Stock
Progressive International
Corporation .......................... Retail Kitchenware Common Stock 0.0%
6111 S. 228th Street Redeemable Preferred 12.5%
P.O. Box 97045 Stock
Kent, WA 98064 Warrants to Purchase 6.2%
Common Stock
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
</TABLE>
86
<PAGE> 95
<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>
Soff-Cut Holdings, Inc.................. Concrete Sawing Common Stock 2.7%
1112 Olympic Drive Equipment Manufacturer Series A Preferred Stock 4.0%
Corona, CA 91719 Warrants to Purchase 6.7%
Common Stock
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%
Startec Communications, Inc. ........... Integrated Common Stock 1.3%
10411 Motor City Drive Communications Warrants to Purchase 0.9%
Bethesda, MD 20852 Service Provider Common Stock
Sure-Tel, Inc. ......................... Telephone Services Series A Convertible 41.7%
5 North McCormick Company Redeemable Preferred
Oklahoma City, OK 73127 Stock
Warrants to Purchase 9.6%
Common Stock
Total Foam, Inc. ....................... Packaging Systems Common Stock 49.0%
P.O. Box 688
Ridgefield, CT 06877
Tubbs Snowshoe Company, LLC. ........... Snowshoe Manufacturer Warrants to Purchase 7.7%
52 River Road Common Units
Stowe, VT 05672 Common Units of 10.9%
Affiliate Company
United Pet Group, Inc. ................. Manufacturer of Pet Warrants to Purchase 0.8%
125 High Street Supply Products Common Stock
Boston, MA 02110
Venturehouse Group LLC.................. Private Equity Fund Common Equity Interest 1.5%
1780 Tysons Blvd., Suite 400
McLean, VA 22102
Walker Investment Fund, II, L.P......... Private Equity Fund Limited Partnership 5.1%
3060 Washington Road Interest
Suite 200
Glenwood, MD 21738
Warn Industries......................... Sport Utility Accessories Warrants to Purchase 4.3%
12900 S.E. Capps Rd. Manufacturer Common Stock
Clackamas, OR 97015
Williams Brothers Lumber
Company............................... Builders' Supplies Warrants to Purchase 14.1%
3165 Pleasant Hill Road Common Stock
Duluth, GA 30136
Wilmar Industries, Inc. ................ Repair and Maintenance Warrants to Purchase 3.0%
303 Harper Drive Product Distributor Common Stock
Moorestown, NJ 08057
Wilshire Restaurant, Inc. .............. Restaurant Chain Warrants to Purchase 3.0%
1100 Town & Country Road Common Stock
Suite 1300
Orange, CA 92868-4654
Woodstream Corporation.................. Pest Control Equity Interest 13.8%
69 North Locust Street Manufacturer Warrants to Purchase 7.2%
Lititz, PA 17543 Common Stock
Wyo-Tech Acquisition Corporation........ Vocational School Common Stock 99.0%
4373 N. 3rd Street Preferred Stock 100.0%
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.
87
<PAGE> 96
DETERMINATION OF NET ASSET VALUE OF ALLIED CAPITAL
Allied Capital determines the net asset value per share of its common stock
quarterly. The net asset value per share is equal to the value of Allied
Capital's total assets minus liabilities and preferred stock divided by the
total number of shares of common stock outstanding.
Portfolio assets are carried at fair value as determined by the board of
directors under Allied Capital's valuation policy. As a general rule, Allied
Capital does not value Allied Capital's 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 Allied Capital's 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 the 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 Allied Capital's financial statements in its annual
report refers to the uncertainty with respect to the possible effect on the
financial statements of such valuation.
BENEFICIAL OWNERSHIP OF ALLIED CAPITAL COMMON STOCK
As of December 7, 2000, there were no persons that owned 25% or more of
Allied Capital's outstanding voting securities, and no person would be deemed to
control Allied Capital, as such term is defined in the 1940 Act.
The following table sets forth, as of December 7, 2000, each current
director, the Chief Executive Officer, Allied Capital'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.
Unless otherwise indicated, Allied Capital believes that each beneficial owner
set forth in the table has sole voting and investment power. Allied Capital is
not aware of any shareholder that beneficially owns more than 5% of the
outstanding shares of Allied Capital common stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
NAME OF OWNED OF
BENEFICIAL OWNER BENEFICIALLY CLASS(1)
---------------- ------------ ----------
<S> <C> <C>
DIRECTORS:
William L. Walton........................................... 1,130,380(2,4,9) 1.4%
Brooks H. Browne............................................ 58,366(3) *
John D. Firestone........................................... 43,211(3) *
Anthony T. Garcia........................................... 73,112(3) *
Lawrence I. Hebert.......................................... 31,800(3) *
John I. Leahy............................................... 31,818(3) *
Robert E. Long.............................................. 24,796(3) *
</TABLE>
88
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
NAME OF OWNED OF
BENEFICIAL OWNER BENEFICIALLY CLASS(1)
---------------- ------------ ----------
<S> <C> <C>
Warren K. Montouri.......................................... 241,182(3) *
Guy T. Steuart II........................................... 333,180(3,5) *
T. Murray Toomey, Esq....................................... 47,666(3,6) *
Laura W. van Roijen......................................... 43,526(3) *
George C. Williams, Jr...................................... 434,142(2) *
EXECUTIVE OFFICERS:
Scott S. Binder............................................. 185,191(2) *
Samuel B. Guren............................................. 102,500(2) *
Philip A. McNeill........................................... 331,749(2) *
Penni F. Roll............................................... 109,662(2) *
John M. Scheurer............................................ 533,590(2) *
Joan M. Sweeney............................................. 512,296(2) *
Thomas H. Westbrook......................................... 246,889(2,8) *
G. Cabell Williams III...................................... 841,489(2,4) 1.0%
All directors and executive officers as a group (20 in
number)................................................... 5,031,250(7) 6.0%
</TABLE>
---------------
* Less than 1%
(1) Based on a total of 81,021,686 shares of Allied Capital's common stock
issued and outstanding on December 7, 2000 and shares of Allied Capital's
common stock issuable upon the exercise of immediately exercisable stock
options held by each individual executive officer and non-officer director.
(2) Share ownership for the following directors and executive officers of Allied
Capital includes:
<TABLE>
<CAPTION>
ALLOCATED
OPTIONS EXERCISABLE TO 401(K)
OWNED WITHIN 60 DAYS OF PLAN
DIRECTLY DECEMBER 7, 2000 ACCOUNT
-------- ------------------- ---------
<S> <C> <C> <C>
William L. Walton......................... 351,789 503,313 1,405
Scott S. Binder........................... 47,808 136,087 1,296
Samuel B. Guren........................... 2,500 100,000 0
Philip A. McNeill......................... 182,022 139,915 9,812
Penni F. Roll............................. 51,576 53,916 4,170
John M. Scheurer.......................... 251,917 257,524 24,149
Joan M. Sweeney........................... 236,183 265,523 10,590
Thomas Westbrook.......................... 178,742 68,147 0
George C. Williams, Jr.................... 287,746 146,396 0
G. Cabell Williams, III................... 382,666 183,545 74,952
</TABLE>
(3) Beneficial ownership includes exercisable options to purchase 15,000 shares
of Allied Capital common stock.
(4) Includes 275,278 shares of Allied Capital common stock held by the 401(k)
Plan, of which Messrs. Walton and Williams III are co-trustees, who have the
power to vote the shares on behalf of the participants. Messrs. Walton and
Williams III disclaim beneficial ownership of such shares.
(5) Includes 276,691 shares of common stock held by a corporation for which Mr.
Steuart II serves as an executive officer.
(6) Shares are held by a trust for the benefit of Mr. Toomey and his wife.
(7) Includes a total of 2,004,366 shares of Allied Capital common stock
underlying stock options exercisable within 60 days of December 7, 2000,
which are assumed to be outstanding for the purpose of calculating the
group's percentage ownership, and 275,278 shares held by the 401(k) Plan.
(8) Includes 15,865 shares of Allied Capital common stock held in an IRA.
(9) Includes 9,799 shares of Allied Capital common stock held in an IRA.
89
<PAGE> 98
ALLIED CAPITAL MANAGEMENT
The board of directors supervises Allied Capital's management. 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 Allied Capital's financing arrangements. The Allied Capital board of
directors maintains an Executive Committee, Audit Committee, Compensation
Committee, and Nominating Committee, and may establish additional committees in
the future. All of Allied Capital's directors also serve as directors of its
subsidiaries.
Investment decisions in each business area are made by investment
committees comprised of Allied Capital's most senior investment professionals.
No one person is primarily responsible for making recommendations to a
committee.
Allied Capital is internally managed and the investment professionals
manage its portfolio and the portfolios of companies for which it serves 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 Allied Capital's
approach of lending and investing. Because Allied Capital is internally managed,
Allied Capital pays no investment advisory fees, but instead pays the operating
costs associated with employing investment management professionals.
Structure of Board of Directors
Allied Capital'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 Allied Capital's 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*......... 51 Chairman, Chief Executive
Officer and President 1986 2001
George C. Williams, Jr.*... 74 Chairman Emeritus 1964 2001
Brooks H. Browne........... 51 Director 1990 2001
John D. Firestone.......... 57 Director 1993 2002
Anthony T. Garcia.......... 44 Director 1991 2002
Lawrence I. Hebert......... 54 Director 1989 2002
John I. Leahy.............. 70 Director 1994 2003
Robert E. Long............. 69 Director 1972 2001
Warren K. Montouri......... 71 Director 1986 2003
Guy T. Steuart II.......... 69 Director 1984 2003
T. Murray Toomey, Esq...... 76 Director 1959 2003
Laura W. van Roijen........ 48 Director 1992 2002
</TABLE>
---------------
* Interested persons of Allied Capital, as defined in the 1940 Act.
(1) Includes service as a director of any of Allied Capital's predecessor
companies.
90
<PAGE> 99
Executive Officers
Information regarding Allied Capital's executive officers is as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William L. Walton............. 51 Chairman, Chief Executive Officer and President
Joan M. Sweeney............... 41 Managing Director and Chief Operating Officer
Scott S. Binder............... 46 Managing Director
Samuel B. Guren............... 53 Managing Director
Philip A. McNeill............. 41 Managing Director
John M. Scheurer.............. 48 Managing Director
Thomas H. Westbrook........... 37 Managing Director
G. Cabell Williams, III ...... 46 Managing Director
Penni F. Roll................. 35 Executive Vice President and Chief Financial
Officer
</TABLE>
Biographical Information
Directors
William L. Walton has been the Chairman, Chief Executive Officer and
President of Allied Capital since 1997. William Walton is Chairman and Chief
Executive Officer of Allied Capital Corporation. He has served on the Allied
Capital Board of Directors since 1986, and was named Chairman and CEO in
February 1997. Mr. Walton has an extensive background in general management,
marketing, strategic planning, mergers and acquisitions and financial analysis.
Mr. Walton previously served as Managing Director of New York-based Butler
Capital Corporation 1987-1991 and was the personal venture capital advisor for
William S. Paley, founder and Chairman of CBS. In addition, he was a Senior Vice
President in Lehman Brothers Kuhn Loeb's Investment Banking Group. Mr. Walton
also founded and managed two start-up businesses in the emerging education
industry (1992-1996). He received both a B.A. and a M.B.A. from Indiana
University.
George C. Williams, Jr. is Chairman Emeritus of Allied Capital. Mr.
Williams was an officer of Allied Capital's 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 the father of G. Cabell
Williams III, an executive officer of Allied Capital.
Brooks H. Browne has been the President of Environmental Enterprises
Assistance Fund since 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 Business Mortgage Investors, Inc., Security
Storage Company of Washington, DC, Bryn Mawr Bank Corporation and the National
Organization on Disability. Mr. Firestone is an Advisory Board member of
GeoPortals.com.
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<PAGE> 100
Anthony T. Garcia is currently a private investor. Mr. Garcia was General
Manager of Breen Capital Group (investor in tax liens) from 1997 to 2000. 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 Allbritton Communications Company
(owner of television stations). Mr. Hebert is a director of Allnewsco, Inc.
(news programming service), the President of Westfield News Advertiser, Inc.
(owner of a television station and newspapers), 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., The Wills Group and
Chairman of Gallagher Fluid Seals, Inc. Mr. Leahy is a trustee of St. Mary's
Seminary & University and Trustee Emeritus of Loyola College Sellinger School of
Business.
Robert E. Long is the Managing Director of Goodwyn, Long & Black Investment
Management, Inc. and has been the Chairman and Chief Executive Officer of
Emerald City Radio Partners, LLC since 1997. Mr. Long has been the President and
Chief Executive Officer of Business News Network, Inc. from 1995 to 1998, 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 director of BB&T Bank
(formerly Franklin National Bank) since 1996, a trustee of Suburban Hospital
from 1991 to 1994, and a trustee of The Audubon Naturalist Society from 1979 to
1985.
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
92
<PAGE> 101
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
Joan M. Sweeney, Managing Director and Chief Operating Officer, has been
employed by Allied Capital since 1993. Ms. Sweeney oversees all company
operations and is responsible for strategic planning, financial management,
information technology, marketing, investor relations, and all regulatory
compliance. Ms. Sweeney also has direct responsibility for the small business
lending operations through Allied Capital Express. Prior to joining Allied
Capital, Ms. Sweeney spent ten years of her career consulting with private and
small public companies at both Ernst & Young and Coopers & Lybrand. Ms. Sweeney
was a member of the Commission Division of Enforcement in the late 1980s.
Scott S. Binder, Managing Director, has worked with Allied Capital since
1991 and is responsible for the telecommunications and new media investments
within the private finance group. Prior to joining Allied Capital, Mr. Binder
formed and was President of Overland Communications Group, which owned and
operated cable television systems and radio stations. He also has worked in the
specialty finance and leasing industry.
Samuel B. Guren, Managing Director, joined Allied Capital in 1999 to
develop Allied Capital's private equity investment business. Mr. Guren has more
than 26 years of venture capital investing experience. Prior to joining Allied
Capital, Mr. Guren was the Senior Managing Partner at Baird Capital. He also
served as a Senior Managing Partner at William Blair Venture Partners for 15
years.
Philip A. McNeill, Managing Director, has been employed by Allied Capital
since 1993 and is responsible for co-managing the private finance group. Before
joining Allied Capital, he served as a vice president of M&T Capital
Corporation. Prior to entering the private finance industry, he was founding
director of Western Oklahoma National Bank, and structured and managed numerous
privately negotiated investments.
John M. Scheurer, Managing Director, has been employed by Allied Capital
since 1991 and manages the real estate finance group. He has more than 22 years
of experience in commercial finance and real estate lending and management.
Prior to joining Allied Capital, Mr. Scheurer worked in various capacities with
Capital Recovery Advisors, Inc. and First American Bank. He also started his own
company, The Scheurer Company, and co-founded Hunter & Associates, a major
leasing and consulting real estate firm in the Washington, DC area.
Thomas H. Westbrook, Managing Director, has been with Allied Capital since
1991 and is responsible for the business services investments within the private
finance group. Prior to joining Allied Capital, Mr. Westbrook worked with North
Carolina Enterprise Fund and was a lending officer in NationsBank's corporate
lending unit. He is the former president of the southern RASBIC and has served
on the NASBIC Board of Governors.
G. Cabell Williams, III, Managing Director, has been employed by Allied
Capital since 1981 and is responsible for co-managing the operations of the
private finance group. He has over 19 years of private finance experience, and
has structured
93
<PAGE> 102
numerous types of private debt and equity finance transactions. Mr. Williams has
served in many capacities during his tenure at Allied Capital.
Penni F. Roll, Executive Vice President and Chief Financial Officer, has
been employed by Allied Capital since 1995. Ms. Roll is responsible for
financial management and reporting, accounting, loan servicing, special
servicing, portfolio monitoring and regulatory compliance activities. Prior to
joining Allied Capital, she spent seven years in the financial services practice
at KPMG Peat Marwick, including serving as a Manager from 1993 to 1995.
ALLIED CAPITAL EXECUTIVE COMPENSATION
Under Commission rules applicable to BDCs, Allied Capital is required to
set forth certain information regarding the compensation of certain executive
officers and directors. The following table sets forth compensation paid by
Allied Capital in all capacities during the year ended December 31, 1999 to the
directors and the three highest paid executive officers of Allied Capital,
collectively, the compensated persons.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits
Aggregate Securities Accrued as Directors
Compensation Underlying Part of Fees Paid
from the Options/ Company by the
Name and Position Company(1) SARs(4) Expenses Company
----------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
William L. Walton, Chairman and CEO(2)..... $2,326,190 96,555 -- --
Joan M. Sweeney, Managing Director(2)...... 1,282,793 75,511 -- --
G. Cabell Williams III, Managing
Director(2).............................. 931,890 21,324 -- --
Brooks H. Browne, Director................. 15,000 10,000 -- $15,000
John D. Firestone, Director................ 10,000 10,000 -- 10,000
Anthony T. Garcia, Director................ 13,000 10,000 -- 13,000
Lawrence I. Hebert, Director............... 6,000 10,000 -- 6,000
John I. Leahy, Director.................... 19,000 10,000 -- 19,000
Robert E. Long, Director................... 23,000 10,000 -- 23,000
Warren K. Montouri, Director............... 17,000 10,000 -- 17,000
Guy T. Steuart II, Director................ 7,000 10,000 -- 7,000
T. Murray Toomey, Director................. 7,000 10,000 -- 7,000
Laura W. van Roijen, Director.............. 7,000 10,000 -- 7,000
George C. Williams, Jr., Director, Chairman
Emeritus(3).............................. 609,544 -- -- 17,000
</TABLE>
-------------------------
(1) There were no perquisites paid by Allied Capital 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 as to aggregate compensation for 1999 as
to the three highest paid executive officers of Allied Capital:
<TABLE>
<CAPTION>
VESTED DEFERRED
FORMULA CUT-OFF ESOP COMPENSATION
SALARY BONUS AWARD AWARD CONTRIBUTION CONTRIBUTION
-------- -------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Walton........... $410,014 $577,500 $1,121,769 $170,156 $8,000 $38,751
Ms. Sweeney.......... 258,651 302,500 657,291 37,679 8,000 18,672
Mr. Williams III..... 251,102 302,500 305,233 46,802 8,000 18,253
</TABLE>
The formula award, which was granted in connection with Allied Capital's
1997 merger, totaled approximately $19 million in the aggregate at the time
of grant, 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 1999 for financial reporting
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purposes for Mr. Walton, Ms. Sweeney and Mr. Williams III was $1,472,451,
$862,761 and $400,664, respectively. The amount expensed was based on the
value of the formula award contribution to the deferred compensation plan in
January 1998. On January 4, 2000, the second vested installment of the
formula award was generally distributed to participants in the form of
shares at the market value of Allied Capital's common stock on that day. The
value of the distribution for Mr. Walton, Ms. Sweeney and Mr. Williams III
was $1,121,769, $657,291, and $305,233, respectively. The deferred
compensation plan trust distributed the vested shares of common stock to
brokerage accounts for the participants that restrict the sale of the vested
shares of common stock.
The cut-off award, which totaled $2.9 million in the aggregate, is paid to
individuals on the respective vesting date of any options granted under the
predecessor company option plans that were canceled in connection with the
1997 merger. See "-- Formula Award and Cut-Off Award."
(3) In addition to director's fees, Mr. Williams received $144,000 in consulting
fees, $4,688 in cut-off award and $443,856 in vested formula award. The
amount of the formula award expensed in 1999 with respect to Mr. Williams'
award was $601,068.
(4) See "-- Stock Option Awards" for terms of options granted in 1999. Allied
Capital does not maintain a restricted stock plan or a long-term incentive
plan.
Allied Capital Employment Agreements
During the second quarter of 2000, Allied Capital entered into employment
agreements with nine senior executives, including William L. Walton, Allied
Capital's Chairman and CEO, Joan M. Sweeney, Managing Director and Chief
Operating Officer, and G. Cabell Williams III, Managing Director. Each of the
agreements provides for a three-year term, with annual renewals thereafter, and
specifies each executive's compensation during the term of the agreement, in
accordance with the achievement of certain performance standards.
The annual base salary on the effective date of the employment agreements
of Mr. Walton, Ms. Sweeney, and Mr. Williams was $405,000, $256,500, and
$256,500, respectively. The Allied Capital board of directors has the right to
increase the base salary during the term of the employment agreement. In
addition, each employment agreement states that the Allied Capital board of
directors may provide, at their sole discretion, an annual cash bonus. This
bonus is to be determined with reference to each executive's performance in
accordance with performance criteria to be determined by the Allied Capital
board of directors in its sole discretion. Under each agreement, each executive
also is entitled to participate in Allied Capital's amended stock option plan,
and to receive all other awards and benefits previously granted to each
executive including split dollar life insurance.
In addition, each employment agreement provides for a long-term cash
retention award for the performance period from 2001 through 2003. The long-term
cash retention award will vest and be payable in six equal installments on June
30th and December 31st of each year from 2001 through 2003. Mr. Walton will be
eligible for a long-term cash retention award of $3,375,000, or $1,125,000 per
year, over the performance period; Ms. Sweeney will be eligible for $2,550,000,
or $850,000 per year; Mr. Williams will be eligible for $2,115,000, or $705,000
per year.
Employment will terminate if the term of the agreement expires without
written agreement of both parties. The executive has the right to voluntarily
terminate employment at any time with 30 days' notice, and in such case, the
employee will not receive any severance pay. Among other things, the employment
agreements prohibit the solicitation of employees from Allied Capital in the
event of an executive's departure for a period of two years.
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If employment is terminated with cause, the employee will not receive any
severance pay. If employment is terminated without cause during the term of the
agreement, the executive shall be entitled to severance pay for a period not to
exceed 36 months for Mr. Walton; 30 months for Ms. Sweeney; and 24 months for
Mr. Williams. Severance pay shall include the continuation of the employee's
base salary, and the greater of (a) the average of the annual bonuses paid
during the preceding three years, or (b) the amount of the last annual bonus
paid to the employee. In addition, the executive shall be entitled to receive
any payments under the long-term cash retention award that would have vested and
been payable during the severance period. However, stock options would cease to
vest during the severance period.
If, within 12 months after a change of control (as defined in the
employment agreements) termination of employment occurs either by the executive
officer or Allied Capital, the executive officer shall not be entitled to
severance pay, but will instead be entitled to lump sum compensation as well as
certain other benefits. For Mr. Walton, this lump sum is equal to three years of
base salary and bonus (as calculated for severance pay), plus an amount equal to
$5,565,000. For Ms. Sweeney, this lump sum is equal to two and a half years of
base salary and bonus, plus an amount equal to $2,600,000. For Mr. Williams,
this lump sum is equal to two years of base salary and bonus, plus an amount
equal to $2,350,000. Under the terms of the agreement, Allied Capital would also
provide compensation to offset any applicable excise tax penalties imposed on
the executive under section 4999 of the Code.
The other six employment agreements carry terms substantially similar to
those of Mr. Williams' agreement, as described herein.
Compensation Plans
Stock Option Plan
Allied Capital's stock option plan is intended to encourage stock ownership
in Allied Capital by officers, thus giving them a proprietary interest in Allied
Capital's performance. The stock option plan was approved by shareholders at the
special meeting of shareholders on November 26, 1997. On May 9, 2000, Allied
Capital's shareholders amended the stock option plan to increase the authorized
shares under the plan to 12,350,000 shares as well as make certain other
administrative changes.
The Compensation Committee's principal objective in awarding stock options
to the eligible officers of Allied Capital is to align each optionee's interests
with the success of Allied Capital and the financial interests of its
stockholders by linking a portion of such optionee's compensation with the
performance of Allied Capital's stock and the value delivered to stockholders.
Stock options are granted under the stock option plan at a price not less
than the prevailing market value and will have value only if Allied Capital's
stock price increases. The Compensation Committee determines the amount and
features of the stock options, if any, to be awarded to optionees. The
Compensation Committee evaluates a number of criteria, including the past
service of each such optionee to Allied Capital, the present and potential
contributions of such optionee to the success of Allied Capital and such other
factors as the Compensation Committee shall deem relevant in connection with
accomplishing the purposes of the stock option plan, including the recipient's
current stock holdings, years of service, position with Allied
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Capital and other factors. The Compensation Committee does not apply a formula
assigning specific weights to any of these factors when making its
determination. The Compensation Committee awards stock options on a subjective
basis and such awards depend in each case on the performance of the officer
under consideration.
For the nine months ended, September 30, 2000, a total of 3,832,112 options
were granted, including grants made by the Compensation Committee to certain
officers and automatic grants to non-officer directors of Allied Capital. For
the year ended December 31, 1999, 1,287,736 options were granted. These options
generally vest over a five-year period except that grants to non-officer
directors vest immediately.
On September 8, 1999, Allied Capital received approval from the Commission
to grant options under the stock option plan to non-officer directors. On that
date, each incumbent non-officer director received options to purchase 10,000
shares, and pursuant to the Commission order, each will receive options to
purchase 5,000 shares each year thereafter on the date of the annual meeting of
stockholders. New directors will receive options to purchase 10,000 shares upon
election to the board, and options to purchase 5,000 shares each year thereafter
on the date of the annual meeting.
The stock option plan is designed to satisfy the conditions of Section 422
of the Code so that options granted under the stock option 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.
Formula Award and Cut-Off Award
FORMULA AWARD. The formula award was designed as an incentive compensation
program to replace stock options of Allied Capital's predecessor companies that
were cancelled as a result of the 1997 merger, and balanced share ownership
among key officers. Allied Capital accrued the formula award in equal amounts of
approximately $6.4 million, over the three-year vesting period on the
anniversary of the merger date (December 31) in 1998, 1999 and 2000. The terms
of the formula award required that the award be contributed to Allied Capital's
deferred compensation plan, and used to purchase shares of Allied Capital common
stock in the open market.
On January 3, 2000, the trust that holds the deferred compensation plan
distributed shares of Allied Capital's common stock with a value of $4,274,000
representing the portion of the formula award that vested on December 31, 1999.
These shares are held in restricted accounts at a brokerage firm.
CUT-OFF AWARD. The cut-off award was designed to cap the appreciated value
in unvested options at the announcement date of the 1997 merger. The cut-off
award, in the aggregate, was computed to be $2.9 million. 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 Allied Capital on the future
vesting date. The cut-off award expense for the nine months ended September 30,
2000 and the year ended December 31, 1999 totaled $0.5 million and $0.6 million,
respectively.
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Employee Stock Ownership Plan and 401(k) Plan
Until December 31, 1999, Allied Capital maintained an employee stock
ownership plan (the "ESOP"). All eligible employees (i.e., employees with one
(1) year of service who are at least 21 years of age) of Allied Capital were
eligible participants in the ESOP. Pursuant to this qualified plan, during 1999
Allied Capital contributed 5% of each eligible participant's total cash
compensation for the year (up to $160,000) to a plan account on the
participant's behalf, which fully vests over a two-year period. The contribution
with respect to compensation in excess of $160,000 was made to the deferred
compensation plan. The ESOP used substantially all of these cash contributions
to purchase shares of Allied Capital common stock. At December 31, 1999, the
ESOP held 0.4% of the outstanding shares of Allied Capital, and all of these
shares had been allocated to participants' plan accounts. On December 31, 1999
the ESOP was terminated.
In October 1999, Allied Capital established a 401(k) plan, to replace the
existing ESOP. All Allied Capital employees who are at least 21 years of age
have the opportunity to contribute pre-tax salary deferrals into the 401(k) plan
up to $10,500, and to direct the investment of these contributions. The 401(k)
plan allows eligible participants to invest in shares of Allied Capital's common
stock among other investment options. In addition, beginning in 2000, Allied
Capital will contribute to each eligible participant (i.e., employees with one
(1) year of service), 5% of each participant's total cash compensation for the
year, up to $170,000, to each participant's plan account on the participant's
behalf, which fully vests at the time of contribution. The contribution with
respect to compensation in excess of $170,000 is made to the deferred
compensation plan.
Generally, participants, including the executive officers, transferred the
balance of their ESOP account, including shares of Allied Capital common stock,
into the 401(k) plan on March 16, 2000. On September 30, 2000, the 401(k) plan
held less than 0.3% of the outstanding shares of Allied Capital.
Deferred Compensation Plan
Allied Capital maintains a deferred compensation plan. The deferred
compensation plan is a funded plan that provides for the deferral of
compensation by employees and consultants of Allied Capital. Any employee or
consultant of Allied Capital is eligible to participate in the plan at such time
and for such period as designated by the board of directors. The deferred
compensation plan is administered through a trust, and Allied Capital funds this
plan through cash contributions. The deferred compensation plan holds the
unvested shares of Allied Capital's common stock purchased in connection with
the formula award.
ALLIED CAPITAL TAX STATUS
The following discussion is a general summary of the material United States
federal income tax considerations applicable to Allied Capital and to an
investment in its common stock. This summary 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 that pertain to your purchase of the common stock.
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This summary is intended to apply to investments in common stock and
assumes that investors hold the common stock 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, pension plans and trusts and financial institutions. This
summary does not discuss any aspects of U.S. estate and gift tax or foreign,
state or local tax. It does not discuss the special treatment under federal
income tax laws that could result if Allied Capital invested in tax-exempt
securities or certain other investment assets.
Except as specifically indicated herein, this summary is intended to apply
to U.S. Stockholders (as defined below) and does not purport to discuss all U.S.
federal income tax consequences to persons who are not U.S. Shareholders
("Non-U.S. Shareholders") from an investment in the common stock. (A "U.S.
Shareholder" generally is a shareholder 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.) Non-U.S. Shareholders should consult their own tax advisors to
discuss the consequences of an investment in the common stock.
Taxation as a RIC
Allied Capital intends to be treated for tax purposes as a "regulated
investment company" or "RIC" under Subchapter M of the Code. If Allied Capital
(i) qualifies as a RIC and (ii) distributes to shareholders 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 gain) (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 gain (i.e., net long-term capital gain in excess
of net short-term capital loss) it distributes (or treats as "deemed
distributed") to shareholders. In addition, if Allied Capital distributes in a
timely manner the sum of (i) 98% of its ordinary income for each calendar year,
(ii) 98% of its capital gain net income for the one-year period ending December
31 in that calendar year, and (iii) any income not distributed in prior years,
Allied Capital will not be subject to the 4% nondeductible federal excise tax on
certain undistributed income of RICs (the "Excise Tax Avoidance Requirements").
Allied Capital generally will endeavor to distribute (or treat as deemed
distributed) 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
federal income or excise taxes on its earnings. Allied Capital will be subject
to federal income tax at the regular corporate rate for any amounts of
investment company taxable income or net capital gain not distributed (or deemed
distributed) to the stockholders.
In order to qualify as a RIC for federal income tax purposes, Allied
Capital 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 its assets consists of cash, cash items,
U.S. government securities, securities of other RICs, and
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other securities if such other securities of any one issuer do not represent
more than 5% of Allied Capital's assets or more than 10% of the outstanding
voting securities of the issuer, and (ii) no more than 25% of the value of its
assets is invested in the securities (other than U.S. government securities or
securities of other RICs) of one issuer or of two or more issuers that are
controlled (as determined under applicable Code rules) by Allied Capital and are
engaged in the same or similar or related trades or businesses (the
"Diversification Tests"). The failure of one or more of Allied Capital's
subsidiaries to continue to qualify as RICs could adversely affect Allied
Capital's ability to satisfy the Diversification Tests.
If Allied Capital 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 it in the same taxable year. Any amount accrued as original issue
discount will be included in Allied Capital's investment company taxable income
for the year of accrual and may have to be distributed to the shareholders in
order to satisfy the 90% Distribution Requirement or the Excise Tax Avoidance
Requirements even though Allied Capital has not received any cash representing
such income.
Although it does not currently intend to do so, if Allied Capital were to
invest in certain options, futures, or forward contracts, it may be required to
report income from such investments on a mark-to-market basis, which could
result in the Allied Capital recognizing unrealized gains and losses for federal
income tax purposes even though it may not realize such gains and losses when it
ultimately disposes of such investments. It could also be required to treat such
gains and losses as 60% long-term capital gain or loss and 40% short-term
capital gain or loss regardless of its holding period for the investments. In
addition, if Allied Capital were to engage in certain hedging transactions,
including hedging transactions in options, future contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to Allied Capital, defer losses
to Allied Capital, cause adjustments in the holding periods of Allied Capital's
securities, convert long-term capital gains into short-term capital gains or
convert short-term capital losses into long-term capital losses. These rules
could affect Allied Capital's investment company taxable income or net capital
gain for a taxable year and thus affect the amounts that Allied Capital would be
required to distribute to its shareholders pursuant to the 90% Distribution
Requirement and the Excise Tax Avoidance Requirements for such year.
Although it does not presently expect to do so, Allied Capital is
authorized to borrow funds and to sell assets in order to satisfy distribution
requirements. Under the 1940 Act, its is not permitted to declare distributions
to shareholders unless certain "asset coverage" tests are met with respect to
its outstanding debt obligations. Moreover, it'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 Test. If Allied Capital
disposes of assets in order to meet the 90% Distribution Requirement or the
Excise Tax Avoidance Requirements, it may make such dispositions at times that,
from an investment standpoint, are not advantageous.
If Allied Capital 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
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all of its taxable income, regardless of whether it makes any distributions to
its stockholders. In that case, all distributions to its shareholders will be
characterized as ordinary income (to the extent of its current and accumulated
earnings and profits). In contrast, as is explained below, if Allied Capital
qualifies as a RIC, a portion of its distributions or deemed distributions may
be characterized as long-term capital gain in the hands of shareholders.
The remainder of this Summary assumes that Allied Capital qualifies as a
RIC and satisfies the 90% Distribution Requirement.
Taxation of Shareholders
Allied Capital's distributions are generally taxable to shareholders as
ordinary income or capital gains. Distributions of its investment company
taxable income will be taxable as ordinary income to shareholders to the extent
of its current or accumulated earnings and profits, whether paid in cash or
reinvested in additional common stock. Distributions of its net capital gains
properly designated as "capital gain dividends" will be taxable to a shareholder
as long-term capital gains regardless of the shareholder's holding period for
his or her common stock and regardless of whether paid in cash or reinvested in
additional common stock. Distributions in excess of Allied Capital's earnings
and profits first will reduce a shareholder's adjusted tax basis in such
shareholder's common stock and, after the adjusted basis is reduced to zero,
will constitute capital gains to such shareholder. For a summary of the tax
rates applicable to capital gains, including capital gain dividends, see the
discussion below.
At its option, Allied Capital may elect to retain some or all of its net
capital gains for a tax year, but designate the retained amount as a "deemed
distribution." In that case, among other consequences, Allied Capital will pay
tax on the retained amount for the benefit of its shareholders, the shareholders
will be required to report their share of the deemed distribution on their tax
returns as if it had been distributed to them, and the shareholders will report
a credit for the tax paid thereon by Allied Capital. The amount of the deemed
distribution net of such tax will be added to the shareholder's cost basis for
his or her common stock. Since Allied Capital expects to pay tax on any retained
net capital gains at its regular corporate capital gain tax rate, and since that
rate is in excess of the maximum rate currently payable by individuals on
long-term capital gains, the amount of tax that individual shareholders will be
treated as having paid will exceed the amount of tax that such shareholders
would be required to pay on the retained net capital gains. A shareholder that
is not subject to U.S. federal income tax or tax on long-term capital gains
should be able to file a return on the appropriate form or a claim for refund
that allows such shareholder to recover the taxes paid on his or her behalf. In
the event Allied Capital chooses this option, it must provide written notice to
the shareholders prior to the expiration of 60 days after the close of the
relevant tax year.
Any dividend declared by Allied Capital in October, November, or December
of any calendar year, payable to shareholders 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 shareholders on December 31 of the
year in which the dividend was declared.
You should consider the tax implications of buying common stock just prior
to a distribution. Even if the price of the common stock includes the amount of
the
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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
common stock.
You may recognize taxable gain or loss if you sell or exchange your common
stock. The amount of the gain or loss will be measured by the difference between
your adjusted tax basis in your common stock and the amount of the proceeds you
receive in exchange for such stock. Any gain or loss arising from (or, in the
case of distributions in excess of earnings and profits, treated as arising
from) the sale or exchange of common stock 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 common stock 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 common stock held for six
months or less generally will be treated as a long-term capital loss to the
extent of the amount of capital gain dividends received (or treated as deemed
distributed) with respect to such stock and, for this purpose, the special rules
of Section 852(b)(4)(C) of the Code generally apply in determining the holding
period of such stock. In addition, all or a portion of any loss realized upon a
taxable disposition of common stock may be disallowed if other shares of Allied
Capital's common stock are purchased (under Allied Capital's DRIP plan or
otherwise) within 30 days before or after the disposition.
In general, non-corporate shareholders currently are subject to a maximum
federal income tax rate of 20% (subject to reduction in certain situations) on
their net long-term capital gain (the excess of net long-term capital gain over
net short-term capital loss) for a taxable year (including a long-term capital
gain derived from an investment in the common stock), while other income may be
taxed at rates as high as 39.6%. 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. Non-corporate shareholders with net capital
losses for a year (i.e., capital losses in excess of capital gains) generally
may deduct up to $3,000 of such losses against their ordinary income each year;
any net capital losses of a non-corporate shareholder in excess of $3,000
generally may be carried forward and used in subsequent years as provided in
Section 1212(b) of the Code. Corporate shareholders generally may not deduct any
net capital losses for a year, but may carryback such losses for three years or
carry forward such losses for five years.
Allied Capital will send to each of its shareholders, as promptly as
possible after the end of each calendar year, a notice detailing, on a per share
and per distribution basis, the amounts includible in such shareholder'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 shareholder's particular situation.
Allied Capital's ordinary income dividends to corporate shareholders may, if
certain conditions are met, qualify for the dividends received deduction to the
extent that Allied Capital has received qualifying dividend income during the
taxable year; capital gain dividends distributed by Allied Capital are not
eligible for the dividends received deduction.
A non-U.S. shareholder may be subject to withholding of U.S. federal tax at
a 30% rate (or lower applicable treaty rate) on distributions (including certain
redemptions of common stock) from Allied Capital. Accordingly, investment in
Allied Capital is likely to be appropriate for a non-U.S. shareholder only if
such
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person can utilize a foreign tax credit or corresponding tax benefit in respect
of such withholding tax. Non-U.S. shareholders should consult their own tax
advisors with respect to the U.S. federal income and withholding tax, and state,
local, and foreign tax, consequences of an investment in the common stock.
Allied Capital may be required to withhold U.S. federal income tax at a
rate of 31% ("backup withholding") from all taxable distributions payable to (i)
any shareholder who fails to furnish it with its correct taxpayer identification
number or a certificate that the shareholder is exempt from backup withholding,
and (ii) any shareholder with respect to whom the IRS notifies Allied Capital
that the shareholder has failed to properly report certain interest and dividend
income to the IRS and to respond to notices to that effect. Allied Capital may
be required to report annually to the IRS and to each non-U.S. shareholder the
amount of dividends paid to such shareholder 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. shareholder's country of residence. Backup withholding is not an
additional tax. Any amounts withheld under the backup withholding rules from
payments made to a shareholder may be refunded or credited against such
shareholder'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 YOU OF AN INVESTMENT IN ALLIED CAPITAL, INCLUDING THE POSSIBLE
EFFECT OF ANY PENDING LEGISLATION OR PROPOSED REGULATION.
ALLIED CAPITAL GOVERNMENT REGULATIONS
Allied Capital operates in a highly regulated environment. The following
discussion generally summarizes certain regulations.
BUSINESS DEVELOPMENT COMPANY. A business development company ("BDC") is
defined and regulated by the Investment Company Act of 1940. It is a unique kind
of investment company that primarily 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, Allied Capital may not acquire any asset other than "Qualifying
Assets" unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of our total assets (the "70% test"). The principal
categories of Qualifying Assets relevant to Allied Capital's 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 (Allied Capital's 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;
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(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. Allied Capital provides managerial assistance on a continuing basis to
any portfolio company that requests it, whether or not difficulties are
perceived.
As a BDC, Allied Capital is entitled to issue senior securities in the form
of stock or senior securities representing indebtedness, including debt
securities and preferred stock, 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."
Allied Capital has adopted a Code of Ethics that establishes procedures for
personal investments and restricts certain transactions by its personnel. See
"Where You Can Find More Information."
A BDC may not change the nature of its business so as to cease to be, or
withdraw its election as, a BDC unless authorized by vote of a "majority of the
outstanding voting securities," as defined in the 1940 Act, of its shares. Since
Allied Capital made its BDC election, Allied Capital has not made any
substantial change in the nature of its business.
REGULATED INVESTMENT COMPANY. Allied Capital's status as a RIC enables it
to avoid the cost of federal and state taxation, and as a result achieve pre-tax
investment returns. Allied Capital believes that this tax advantage enables it
to achieve strong equity returns without having to aggressively leverage its
balance sheet.
In order to qualify as a RIC, Allied Capital 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 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 its assets and 10% of the outstanding
voting securities of the issuer, and
(b) no more than 25% of the value of its assets are invested in
securities (other than U.S. government securities) of one issuer, or
of two or more issuers that are controlled by Allied Capital.
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(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 Allied
Capital, 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.
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 $105 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 $77.5 million of
subordinated debentures and $7.0 million of preferred stock investments from the
SBA at September 30, 2000; as a result of the $105 million limit, Allied Capital
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 cost of 8.5%.
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
Lender Program.
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ALLIED CAPITAL FEES AND EXPENSES TABLE
This table describes the various costs and expenses that an investor in
Allied Capital common stock will bear directly or indirectly.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price).......... 0%
Dividend reinvestment plan fees(1)...................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF CONSOLIDATED NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(2)
Operating expenses(3)................................... 3.9%
Interest payments on borrowed funds(4).................. 6.2%
-----
Total annual expenses(5)........................... 10.1%
=====
</TABLE>
-------------------------
(1) The expenses of Allied Capital's DRIP plan are included in "Operating
expenses." Allied Capital 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 "Allied Capital's Dividend
Reinvestment Plan."
(2) "Consolidated net assets attributable to common stock" equals net assets
(i.e., total assets less total liabilities and preferred stock) at September
30, 2000.
(3) "Operating expenses" represent the estimated operating expenses of Allied
Capital for the year ending December 31, 2000 excluding interest on
indebtedness. Operating expenses exclude the formula and cut-off awards. See
"Management -- Compensation Plans."
(4) The "Interest payments on borrowed funds" percentage is based on estimated
interest payments for the year ending December 31, 2000 divided by
consolidated net assets attributable to common stock at September 30, 2000.
Allied Capital had outstanding borrowings of $762.2 million at September 30,
2000. This percentage for the year ended December 31, 1999 was 5.2%. See
"Risk Factors."
(5) "Total annual expenses" is based on estimated expenses for the year ending
December 31, 2000. "Total annual expenses" as a percentage of consolidated
net assets attributable to common stock are higher than the total annual
expenses percentage would be for a company that is not leveraged. Allied
Capital 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
Allied Capital would be 5.4% 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 Allied Capital. In
calculating the following expense amounts, Allied Capital assumed it would have
no additional leverage and that its 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
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5.0% annual return....... $101 $301 $499 $988
</TABLE>
Although the example assumes (as required by the Commission) a 5.0% annual
return, Allied Capital's 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 of common stock that Allied Capital issued 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 "Allied Capital's 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.
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BUSINESS OF BLC
BLC Financial Services, Inc., ("BLC") a Delaware corporation, is primarily
engaged, through its subsidiaries, in the business of originating, selling and
servicing loans to small businesses under two government guaranteed loan
programs, the SBA 7(a) Loan Program and the B&I Program. BLC's principal office
is located at 645 Madison Avenue, New York, New York and it currently has 14
other offices throughout the United States.
BLC was originally incorporated in Texas on October 30, 1973 under the name
Crawford Energy, Inc., and was involved in the oil and gas drilling business. On
August 10, 1990, BLC was reincorporated in Delaware, ceased its oil and gas
drilling business, and changed its name to BLC Financial Services, Inc. BLC
became listed on the American Stock Exchange on April 30, 1998, after previously
being listed on the OTC Bulletin Board.
BUSINESS LOAN CENTER, INC.
Background. Business Loan Center, Inc., a subsidiary of BLC, is a SBLC and
is authorized to originate, sell, and service loans to small businesses under
the SBA 7(a) Loan Program. Business Loan Center currently is a Preferred Lender
in the Guaranteed Loan Program in 63 SBA-designated markets throughout the
United States.
The SBA 7(a) Loan Program. The SBA offers financial assistance to eligible
small businesses in the form of partial government guarantees on loans made to
such businesses by participating lenders such as Business Loan Center under the
Guaranteed Loan Program. The SBA guarantees 80% of an SBA 7(a) loan in those
cases where the aggregate sum of all loans (including the loan under
consideration) made to a borrower and its affiliates under the Guaranteed Loan
Program and related SBA-sponsored financial assistance programs does not exceed
$100,000. The SBA's maximum guaranty percentage for loans in excess of $100,000
is 75%, with a maximum guaranty amount of $750,000.
To qualify for an SBA 7(a) loan, a small business, generally defined as a
business with (i) no more than $5 million in annual sales or (ii) no more than
500 employees, must demonstrate that the requested financing will be used for
specific business purposes and cannot be obtained from the resources of the
business, conventional financing sources or through the personal resources of
the owners of the business. An SBA 7(a) loan provided by Business Loan Center is
typically secured by real estate collateral and may also include liens on
inventory, machinery, equipment, and accounts receivable. Generally, the owners
of 20% or more of the business are required to personally guarantee the
repayment of the loan and may be required to pledge their personal assets.
SBA 7(a) loans are generally priced with a variable interest rate of up to
2.75% over the prime interest rate as published in The Wall Street Journal,
adjusted quarterly. The SBA 7(a) loans have maturities of up to 25 years
depending on the intended use of the loan proceeds. Funds to be used for working
capital purposes generally may not exceed a seven-year maturity, while funds to
be used for machinery and equipment generally have maturities of ten years.
Funds to be used
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for leasehold improvements or the acquisition of land or buildings may have
maturities up to 25 years. Loan principal is amortized over the term of the
loan.
Loan Sales. The SBA-guaranteed portions of loans are sold by Business Loan
Center on a non-recourse basis in an established secondary market. The SBA-
guaranteed portion of the SBA 7(a) loans are generally sold at a premium due to
the lengthy maturity of the underlying loan, the rate of return as compared to
other investment paper backed by the United States Government and the service
fees to be received by Business Loan Center from the purchaser. During fiscal
year 2000, Business Loan Center obtained an average premium of approximately
7.4% on the sale of the SBA-guaranteed portion of the loans sold.
After Business Loan Center sells the SBA-guaranteed portion of a loan in
the secondary market, Business Loan Center continues to service the loan for an
annual fee. Business Loan Center has earned net servicing fees, including
residual interest, (after deducting the fee paid to the SBA) ranging from 1.0%
to 4.41%, with an average service fee for loans originated during fiscal year
2000 of 1.12%.
Business Loan Center also sells the unguaranteed portion of its SBA 7(a)
loans through an agreement with a commercial paper conduit to sell up to 93% of
the unguaranteed portion. A servicing spread of approximately 4.0% is retained
on the unguaranteed portion sold.
Revenues. Business Loan Center derives its revenues primarily from three
sources: (i) interest earned on loans retained for its own account; (ii) gains
from the sale of the SBA-guaranteed portion and unguaranteed portion of loans;
and (iii) servicing fees paid and interest earned relating to the residual
interest of the SBA-guaranteed portion of loans sold in the secondary market and
servicing fees on the unguaranteed portion of loans sold. See "BLC Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
BLC's financial statements attached hereto.
SBA 7(a) Loan Portfolio. At September 30, 2000, Business Loan Center
serviced a loan portfolio of 636 loans in the approximate aggregate principal
amount of $338,621,000. Of this amount, approximately $246,193,000 (73%)
consisted of the SBA-guaranteed portion of these loans, of which approximately
$15,065,000 represented the SBA-guaranteed portion of loans that had not as yet
been sold or were sold pending settlement from the secondary market.
Approximately $92,427,000 (27%) consisted of the unguaranteed portion of loans,
of which approximately $13,652,000 in unguaranteed loans were retained by
Business Loan Center for its own account. The interest rates on these loans are
adjustable and substantially all are 2.75% over the prime rate.
At September 30, 2000, delinquent loans accounted for approximately
$16,471,000 (5%) of the serviced portfolio, of which approximately $756,000
represented Business Loan Center's proportionate share. These figures represent
delinquencies greater than 60 days. Loans in liquidation serviced by Business
Loan Center's portfolio at September 30, 2000 accounted for approximately
$13,766,000 (4%) of the serviced portfolio, of which approximately $2,234,000
represented Business Loan Center's proportionate share.
An estimation of the liquidation value of real estate collateral and other
collateral securing loans in liquidation is performed regularly based on recent
evaluations of
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collateral. All loans in liquidation are reviewed on a weekly basis to determine
changes in status. Of the loans in liquidation, approximately 15% were in the
gas and convenience store industry, 44% were in the hotel/motel industry, and
10% were in the restaurant industry. No other industry accounted for more than
5% of the loans in liquidation. At September 30, 2000, Business Loan Center had
allowances for credit loss and estimated future losses on loans in liquidation
of approximately $568,000 on its financial statements which incorporates
management's assessment of these loans.
Government Regulations. The level of SBA funding for the Guaranteed Loan
Program is subject to the federal budgeting process for each federal fiscal year
ending September 30. Accordingly, the availability of funds for SBA guarantees
could increase or decrease each year. The budget for the federal fiscal year
2001, is estimated to be $10.8 billion for the Guaranteed Loan Program in which
Business Loan Center participates.
The qualification of an SBLC, such as Business Loan Center, to participate
in the Guaranteed Loan Program is subject to termination by the SBA based on
violation of law or SBA regulations or violation of any agreement with the SBA.
Management of Business Loan Center has no reason to believe that its license to
participate in the program will be terminated.
As an SBLC, Business Loan Center's operations are subject to extensive
local, state and federal regulations, including, but not limited to: the SBA Act
and the 1958 Act, as amended. In addition, Business Loan Center is subject to
state laws and regulations with respect to the amount of interest and other
charges which lenders can collect on loans (e.g., usury laws). Business Loan
Center believes it is in material compliance with all applicable rules and
regulations.
Competition. The commercial lending business is highly competitive and BLC
competes with many banks and other non-bank lending institutions, most of which
are substantially larger, and have greater financial resources and name
recognition. There are currently fourteen licensed non-bank lenders which
compete within the Guaranteed Loan Program lending market. Additionally, certain
banks and non-bank lending institutions which participate in the Guaranteed Loan
Program have also been designated as "Preferred" or "Certified Lenders". There
is no assurance that BLC will be able to compete successfully in the future or
that competition will not have a material adverse effect on BLC's business,
financial condition and results of operations.
Loan Production Subsidiaries. BLC, recognizing the need to centralize its
loan originations, has established three regional loan production subsidiaries
to coordinate loan originations and to process applications received from
Business Loan Center's network of independent loan referral sources. Business
Loan Center's three wholly-owned loan production subsidiaries are BLC Financial
Network Inc. ("BLC Network"), BLC Financial Network of Mid-America, Inc. ("BLC
Mid-America"), and BLC Financial Network of Florida, Inc. ("BLC Florida").
During fiscal year 2000, Business Loan Center generated approximately 90%
of its loan volume directly and indirectly, through loan referral sources
constituting the representative network. Generally, a loan referral source is
compensated after the closing of a loan. During the current fiscal year, no one
loan source accounted for more than 8% of Business Loan Center's volume.
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BLC COMMERCIAL CAPITAL CORPORATION
Background. BLC Commercial Capital Corp., a Florida corporation ("BLC
Commercial"), is a wholly owned subsidiary of BLC. On November, 4, 1997 BLC
Commercial was granted the authority to participate in the B&I Program.
The B&I Program. The B&I Program was designed to create jobs and stimulate
rural economies by providing financial backing for rural businesses. The
assistance is available in rural areas, which include all areas other than
cities of more than 50,000 people and their immediately adjacent urbanized
fringe areas. The program provides for guarantees by the USDA of 80% for loan
amounts up to $5,000,000 and 70% for loans between $5,000,000 and $10,000,000.
Interest rates typically range between 1% and 2.25% above the prime interest
rate as published in The Wall Street Journal and adjust either monthly or
quarterly.
Loans typically have maturities between seven and 30 years depending upon
the use of proceeds. The types of businesses eligible are less restrictive than
the SBA (7a) Program and there is an active secondary market for the guaranteed
portion of the loan with premiums comparable to those received by Business Loan
Center in the SBA (7a) Loan Program.
Revenues. BLC Commercial derives its revenues primarily from three
sources: (i) interest earned on loans retained for its own account; (ii) gain on
the sale of the USDA-guaranteed portion of the loans; and (iii) servicing fees
paid on the USDA-guaranteed portion of loans sold in the secondary market.
B&I Program Loan Portfolio. At September 30, 2000, BLC Commercial serviced
a loan portfolio of 19 loans in the approximate aggregate principal amount of
$48,945,000. Of this amount, approximately $39,286,000 consisted of the USDA
guaranteed portion of the loans and approximately $9,660,000 consisted of the
unguaranteed portion of the loans. BLC Commercial has sold a $300,000
participation in the unguaranteed portion of one loan and has retained the
entire unguaranteed portion of the remaining loans for its own account.
At September 30, 2000, one loan in the principal amount of $1,198,000 was
in liquidation, of which BLC Commercial's share was $236,000.
Government Regulation. The level of funding for the B&I Program is subject
to the federal budgeting process for each federal fiscal year. Accordingly, the
availability of funds for USDA guarantees under the B&I Program could increase
or decrease each year. The federal budget for federal fiscal year 2001 is
approximately $2.4 billion.
BLC CAPITAL CORPORATION
Background. BLC Capital Corporation, a Delaware corporation ("BLC
Capital"), is a wholly-owned subsidiary of BLC whose primary function is to
complement the Guaranteed Loan Program by originating, underwriting, closing and
servicing loans which may exceed the SBA's maximum guaranteed portion. In
addition, BLC Capital's lending program makes loans, the proceeds of which are
used for purposes that are not permitted under the Guaranteed Loan Program, such
as acquisition of rental real estate.
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Companion Loan Program. BLC Capital originates first mortgage loans in
conjunction with its SBA loans. These loans are funded by various financial
institutions from which BLC Capital receives a fee. In addition, BLC has
negotiated an agreement with a major financial institution to fund qualified
companion loans originated by BLC from which BLC Capital receives a fee for both
originating and servicing these loans.
Revenues. BLC Capital derives its revenue from servicing fees on those
loans in its portfolio that it services, as well as from commissions on loan
referrals to outside financial institutions. The referral fees received on these
loans ranges from 3% to 9.75% of the loan amount.
Companion Loan Portfolio. At September 30, 2000, BLC Capital through its
Companion Loan Program serviced 26 loans, in the approximate aggregate principal
amount of $17,083,000.
BLC DIRECTORS AND MANAGEMENT
The directors and executive officers of BLC, their ages and present
positions held in BLC are as follows:
<TABLE>
<CAPTION>
YEAR
DIRECTOR OR TERM
EXECUTIVE OFFICER WILL
NAME AGE POSITIONS SINCE EXPIRE
---- --- -------------------------------------- ----------------- ------
<S> <C> <C> <C> <C>
Robert F. Tannenhauser(1)...... 55 President & Chairman of the Board September 1986 2003
Peter D. Blanck(1)(3).......... 43 Director June 1993 2003
Jerome B. Alenick(2)........... 71 Director May 1998 2001
Robert W. D'Loren(3)........... 42 Director June 1997 2001
Irwin E. Redlener, M.D.(3)..... 56 Director June 1997 2002
Kenneth S. Schwartz, M.D.(2)... 55 Director June 1997 2002
Robert W. Wien (2)............. 49 Director June 1997 2001
Leonard Rudolph................ 53 Executive Vice President May 1998 N/A
Jennifer M. Goldstein.......... 29 Chief Financial Officer & Treasurer June 1996 N/A
David I. Redlener.............. 32 Secretary June 1997 N/A
</TABLE>
---------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Each director holds office, for the term limit set forth above, until the
next annual meeting of BLC's shareholders and until his successor has been
elected and qualified.
Robert F. Tannenhauser has been a full time employee of Business Loan
Center, Inc. or its predecessor Business Loan Center, a New York general
partnership, since March 1995. From January 1992 until February 1995, Mr.
Tannenhauser was of counsel to the law firm of Hall Dickler Kent Friedman &
Wood, LLP. Mr. Tannenhauser has been or is a principal or general partner of
various corporations or partnerships engaged in the oil and gas or real estate
businesses. Additionally, Mr. Tannenhauser serves as a Director of the
Children's Health Fund, together with Dr. Redlener.
Peter D. Blanck has been a Professor of Law since 1993, and a Professor of
Occupational Medicine since 1997 with the University of Iowa. Since February
1992,
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Dr. Blanck has been a director and the President of Futuronics Corporation. Dr.
Blanck is the brother-in-law of Robert F. Tannenhauser.
Robert W. D'Loren has been President of CAK Universal Credit Corporation
since February 1, 1998. Prior to that he was self-employed for eleven years and
conducted business in a company known as D'Loren, Levien & Company, LLC., which
provided investment banking services to the mortgage and asset-backed industry.
Prior to forming his own company in 1986, Mr. D'Loren served as manager in the
accounting firm of Deloitte & Touche, LLP.
Irwin E. Redlener is currently President of the Children's Hospital at
Montefiore Medical Center and has been a Professor of Pediatrics at the Albert
Einstein College of Medicine, Montefiore Medical Center since 1990. Since 1990,
Dr. Redlener has also served as Director of the Division of Community Pediatrics
at Montefiore. Dr. Redlener is President and Director of the Children's Health
Fund, a not-for-profit foundation developed to support health care for homeless
and medically underserved children. Dr. Redlener has been a special consultant
on health care policy for the White House and the federal Department of Health
and Human Services.
Kenneth S. Schwartz is a principal of S&D Medical LLP, New York. Prior to
this, he had been Chief Medical Officer of American Imaging Management Inc. in
Northbrook, Illinois since December 1998. From 1996 to 1998, Dr. Schwartz was
Senior Executive Vice President of Complete Management, Inc., New York, New
York. From 1981 to 1995, Dr. Schwartz served as a Director of Radiology at
Hudson Valley Hospital, Peekskill, New York and was Medical Director at Putnam
Hospital Center, Carmel, New York from 1991 through 1994. From March 1995 to
November 1996, he was Systems Director of Radiology and imaging at St. Francis
Hospital in Hartford, Connecticut.
Robert W. Wien has been the Managing Director and Director of Investment
Banking at Josephthal & Co., Inc. (formally Josephthal, Lyon & Ross,
Incorporated) since May 1999; he served as Managing Director, Director of
Mergers and Acquisitions from May 1996 until May 1999. From July 1994 to May
1996, Mr. Wien held the position of Director of Corporate Finance and Real
Estate Advisory Services at Coopers & Lybrand, LLP. Additionally, Mr. Wien
served as Senior Vice President of Investment Banking at Dean Witter Reynolds,
Inc. from April 1987 to June 1994. Mr. Wien is a member of the Bar in the State
of New York and a licensed Real Estate Broker in the State of New York.
Jerome B. Alenick has been sole proprietor of Jerome B. Alenick Investments
& Financial Services since 1991. From 1990 to 1991 Mr. Alenick was Executive
Vice President of The Kushner Companies. Mr. Alenick is a member of the Bars of
the State of New Jersey and the District of Columbia and is a licensed Real
Estate Broker in the State of New Jersey. He has been an Adjunct Professor of
Real Estate at New York University since 1993 and has been a member of the
faculty at New York University since 1983.
Leonard Rudolph joined BLC as Executive Vice President in May of 1998 and
currently serves as President of Business Loan Center, Inc. From 1996 until
joining BLC, Mr. Rudolph served as Executive Vice President, Senior Credit
Officer of Sterling National Bank. Additionally, between 1991 and 1996, Mr.
Rudolph held the position of Senior Vice President of Sterling National Bank.
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Jennifer M. Goldstein has been serving as Chief Financial Officer since
June 1998, and continues to serve as Treasurer, a position she has held since
June 1997. Jennifer Goldstein was Assistant Secretary of BLC from February 1996
to June 1997. From June 1994 until the present, Ms. Goldstein has been employed
by Business Loan Center. Ms. Goldstein graduated with a degree in Accounting
from San Diego State University and received an MBA in Finance from Pace
University.
David I. Redlener was elected Secretary of BLC in June 1997. From September
1994 until December 1996, Mr. Redlener was employed as an Assistant District
Attorney in the County of the Bronx, New York. Currently, Mr. Redlener is
employed as Counsel and Vice President of Business Loan Center, Inc. Mr.
Redlener graduated with a degree in Economics from Hunter College and earned his
law degree from Saint Louis University School of Law in May 1994. He is
currently pursuing a MBA in Finance at Fordham University. Mr. Redlener is the
son of Dr. Irwin Redlener, a Director of BLC.
BLC EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all plan and non-plan compensation paid to
the named individual for services rendered in all capacities to BLC and its
subsidiaries during the three fiscal years ended June 30, 2000. The following
salaries and/or benefits are presently payable pursuant to employment
agreements.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------- SECURITIES
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OTHER UNDERLYING OPTIONS
--------------------------- ----------- -------- ------- ----- ------------------
<S> <C> <C> <C> <C> <C>
Robert F. Tannenhauser......... 2000 $300,000 $ 0 $0 235,000
President and Director 1999 $224,285(1) $50,000 $0 375,000
1998 $208,085(1) $ 0 $0 500,000
Leonard Rudolph................ 2000 $179,808 $15,000 $0 20,000
Executive Vice President 1999 $170,000 $10,000 $0 25,000
1998 $ 36,154(2) $ 0 $0 70,000(3)
Jennifer M. Goldstein.......... 2000 $143,269 $ 0 $0 100,000
Chief Financial Officer and 1999 $124,038 $35,000 $0 75,000
Treasurer 1998 $ 91,923 $15,000 $0 100,000
</TABLE>
---------------
(1) Includes premiums for excess health insurance.
(2) Based upon approximately two months of salary at an annual rate of $170,000
(3) During the year ended June 30, 1999, the exercise price for these options
were repriced to $3.25 from $4.81.
Compensation of Directors. During fiscal year 2000, pursuant to
non-qualified stock option agreements, each director was granted 35,000 options
to purchase common stock at an exercise price of $2.20, all of which are
exercisable immediately or at any time prior to March 29, 2005. As additional
compensation, each director is to receive $1,000 per meeting of the board of
directors and/or committee thereof.
Executive Employment Agreements. BLC has entered into employment
agreements with Robert F. Tannenhauser, Leonard Rudolph, and Jennifer M.
Goldstein.
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Mr. Tannenhauser and Ms. Goldstein will enter into new employment agreements in
conjunction with the Merger.
Robert F. Tannenhauser. Robert F. Tannenhauser's employment agreement
provides that he shall be employed as President and Chairman of the Board of BLC
and as Chief Executive Officer of Business Loan Center through January 15, 2001
at an annual gross salary of $200,000. During the fiscal year ended June 30,
1999, the Board of Directors voted to increase his salary to $300,000. Mr.
Tannenhauser is also entitled to participate in all benefit plans established
from time to time by BLC and Business Loan Center on the same basis as all other
executive employees.
The agreement shall automatically renew for successive one-year periods
until BLC registers the shares of common stock held by Mr. Tannenhauser under
the Securities Act and lists the common stock for trading on Nasdaq AMEX or
another recognized securities exchange. Thereafter, the agreement shall
automatically renew for additional successive one-year periods unless notice to
the contrary is given by any party not less than 90 days prior to the expiration
of the then current term.
The agreement obliges BLC to pay to Mr. Tannenhauser the greater of
$200,000 or his annual gross salary if (i) Mr. Tannenhauser's employment is
terminated for any reason other than his death or disability, (ii) the agreement
is not renewed by Business Loan Center or (iii) Mr. Tannenhauser terminates the
agreement due to a reduction in Mr. Tannenhauser's salary or benefits or the
diminution of his responsibility, authority or status as chief executive.
Leonard Rudolph. Leonard Rudolph's employment agreement provides that he
shall be employed as Executive Vice President and President of Business Loan
Center, Inc. through April 30, 2003 at an annual gross salary of $170,000. Mr.
Rudolph was also granted a $10,000 signing bonus as well as options to purchase
70,000 shares of BLC common stock at an exercise price of $4.81, which shall
vest equally over four years. During fiscal year 2000, Mr. Rudolph's salary was
increased to $185,000. During fiscal year 1999, the board of directors of BLC
adjusted the exercise price of the options to purchase 70,000 shares to $3.25
per share. Mr. Rudolph is also entitled to participate in all benefit plans
established from time to time by BLC and Business Loan Center, Inc. on the same
basis as all other executive employees. He may terminate this agreement in the
event that Robert. F. Tannenhauser is no longer affiliated with BLC. Mr.
Tannenhauser shall be deemed to be affiliated with BLC as long as he serves as
an officer or director of BLC. A termination under this provision shall not be
deemed a termination for cause under his employment agreement.
The agreement shall automatically renew for successive one-year periods
unless notice to the contrary is given by any party not less than 90 days prior
to the expiration of the then current term.
The agreement obliges BLC to pay to Mr. Rudolph the greater of $170,000 or
his annual gross salary if (i) Mr. Rudolph's employment is terminated for any
reason other than his death or disability, (ii) the agreement is not renewed by
BLC or Business Loan Center or (iii) Mr. Rudolph terminates the agreement due to
a reduction in Mr. Rudolph's salary or benefits or the diminution of his
responsibility, authority or status as an executive.
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Jennifer M. Goldstein. Jennifer M. Goldstein's employment agreement
provides that she shall be employed as Treasurer and Chief Financial Officer of
BLC, BLC Commercial, BLC Capital and Business Loan Center through September 30,
2002 at an initial annual gross salary of $100,000. Effective in each October
beginning in 1998 and ending in 2000, this base salary increases by $25,000.
Concurrent with the signing of her employment agreement, Ms. Goldstein was
granted options to purchase 100,000 shares of common stock at an exercise price
of $0.82, which shall vest equally over the next five years. Ms. Goldstein is
also entitled to participate in all benefit plans established from time to time
by BLC and Business Loan Center on the same basis as all other executive
employees. She may terminate this agreement in the event that Robert F.
Tannenhauser is no longer affiliated with BLC. Mr. Tannenhauser shall be deemed
to be affiliated with BLC as long as he serves as an officer or director of BLC.
A termination under this provision shall not be deemed a termination for cause
under her employment agreement.
The agreement shall automatically renew for successive one-year periods
unless notice to the contrary is given by any party not less than 90 days prior
to the expiration of the then current term.
The agreement obliges BLC to pay to Ms. Goldstein the greater of $100,000
or her annual gross salary if (i) Ms. Goldstein's employment is terminated for
any reason other than her death or disability, (ii) the agreement is not renewed
by BLC or Business Loan Center or (iii) Ms. Goldstein terminates the agreement
due to a reduction in salary or benefits or the diminution of her
responsibility, authority or status as an executive.
RELATED PARTY TRANSACTIONS
Since June 30, 1992, various members of the immediate family and affiliates
of Robert F. Tannenhauser have made available funds to BLC for the purpose of
originating loans. In exchange for extending such loans, BLC paid interest to
the person or entities funding such loans during fiscal years 2000, 1999, 1998,
1997 and 1996. Interest rates charged on these loans ranged from 9% to 9.25% per
annum. No such loans were outstanding subsequent to June 30, 2000. For those
periods, BLC incurred interest expense relating to such individuals in the
aggregate amounts of $20,000, $19,000, $17,000, $157,000, and $130,000,
respectively. The maximum amounts outstanding for these loans during the periods
in question were $300,000, $1,077,000, $2,594,000, $2,594,000, and $2,108,000,
respectively. Additionally, certain members and affiliates of Mr. Tannenhauser's
family participated in the debenture offering placed by BLC during fiscal year
1998 and 1999. The debentures raised during these years yielded an annual
interest rate of 9.25% and 9%, respectively. During the period July 1, 2000
through October 31, 2000, and fiscal year 2000, interest expense relating to
such individuals approximated $54,000 and $95,000, respectively, based upon the
outstanding debenture of $1,240,000. Additionally, during fiscal year 1999,
interest expense relating to such individuals totaled approximately $88,000
based upon outstanding debentures to said parties in the aggregate amount of
$950,000.
On November 11, 1997, BLC entered into an investment banking agreement with
Josephthal pursuant to which BLC paid a $25,000 retainer to Josephthal and
agreed to pay an additional $12,500 per month for three months commencing in
January 1998. Thereafter the fee would be reduced to $5,000 per month. After
inquiries with
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industry professionals regarding the reasonableness of Josephthal's proposal and
after further negotiations with Josephthal, the Company concluded that
Josephthal's fee arrangement was reasonable with respect to investment banking
services provided within the financial services marketplace. For fiscal years
1999 and 1998, BLC paid Josephthal approximately $27,000 and $85,000 in fees,
respectively. No fees were paid during the period July 1, 2000 through October
31, 2000 or during Fiscal Year 2000. In addition, BLC issued to Josephthal,
pursuant to such investment banking agreement, warrants to purchase 90,000
shares of BLC common stock. The initial exercise price for the warrants is $1.10
per share. In connection with the proposed merger, BLC canceled its investment
banking agreement with Josephthal effective October 30, 2000, and therefore, no
further fees or warrants will be granted. Robert W. Wien, a director of BLC, is
a Senior Managing Director of Josephthal.
On December 1, 1997, BLC entered into an agreement with D'Loren Levien &
Company LLC for investment banking services. This agreement provided that
D'Loren could earn warrants to purchase up to 800,000 BLC shares at exercise
prices between $1.86 per share and $3.55 per share for the rendering of certain
investment banking services. As of October 31, 2000, D'Loren had earned warrants
exercisable for 200,000 shares of BLC common stock, the earned warrants. Upon a
change in control of BLC, the agreement provided that D'Loren would have the
right to purchase the remaining 600,000 shares of BLC common stock. In
anticipation of the merger, on October 31, 2000, D'Loren agreed to forfeit, on
closing of the merger, the change of control warrants to purchase 600,000 shares
at Allied Capital's request. In lieu of the forfeited change of control
warrants, BLC reduced the exercise price of the earned warrants from $1.86 per
share to a total exercise consideration of $10.00. The economic value of the
reduction in exercise price approximates the economic value of the forfeited
change of control warrants. BLC has represented that the change of control
warrants will be cancelled prior to the closing of the merger. Robert D'Loren, a
principal of D'Loren, is a director of BLC.
At September 30, 2000, Peter Blanck, Robert D'Loren and Irwin Redlener were
members of the compensation committee of the board of directors of BLC. The
compensation committee's functions include the review and approval of
compensation and terms of employment for all executive officers and
administering the grant of employee stock options pursuant to the 1995 Amended
Management Incentive Plan. Peter Blanck is a substantial shareholder, debenture
holder and warrant holder of BLC and brother-in-law to Robert F. Tannenhauser,
who serves as President and Chairman of the Board. In addition, Robert D'Loren
and Irwin Redlener are also warrant and/or option holders and/or shareholders of
BLC. Irwin Redlener is the father of BLC's Secretary, David I. Redlener.
BLC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
BLC's financial statements included in this report and the notes accompanying
the financial statements. See BLC's annual financial statements as of and for
the years ended June 30, 2000, 1999 and 1998 at F-10 to F-28 and BLC's first
quarter financial statements for the quarter ended September 30, 2000 at F-2 and
F-9. The discussion of results, causes and trends should not be construed to
imply any conclusion that such results or trends will necessarily continue in
the future.
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Liquidity and Capital Resources
BLC actively engages in commercial lending through Business Loan Center,
BLC Commercial, and BLC Capital, and therefore, BLC has a constant need for debt
financing. Cash used by BLC and its subsidiaries to fund loans, repay existing
debt and to fund operating expenses is currently provided only partially through
collections on loans and proceeds from loan sales. The remainder of BLC's cash
requirements is derived from existing capital and short and long-term borrowing.
BLC currently maintains a $50 million credit facility to fund both the
guaranteed and unguaranteed portion of 7(a) program loan originations, as well
as a $15 million credit facility to fund both the guaranteed and unguaranteed
portions of B&I loans. Borrowings under the guaranteed line are repaid
immediately upon the sale of the guaranteed portion into the secondary market.
During the fiscal year ending June 30, 2000, BLC, through its subsidiary
Business Loan Center, Inc., successfully completed the closing of a commercial
paper conduit facility totaling $75 million. This type of facility structure
provides for periodic non-recourse sales of the unguaranteed portion of SBA
loans into the facility on a revolving basis. The initial sales, which took
place in December 1999, consisted of two pools of unguaranteed SBA 7(a) loans
approximating $23.2 million. Between January 1, 2000 and September 30, 2000,
Business Loan Center sold additional unguaranteed loans into the facility
totaling approximately $24 million. As of September 30, 2000, the outstanding
balance of loans sold into the facility approximated $40,182,000. Proceeds from
the sales were used to repay the credit lines.
In addition, BLC, through a private placement of convertible debentures,
raised approximately $1,621,000 during the year ended June 30, 2000. The
debentures were initially convertible into common stock at $3.50 per share.
However, during the year ended June 30, 2000, the conversion price was reduced
to $2.75 per share. The debentures have a four-year term and pay interest
quarterly at the rate of 9% per annum.
At September 30, 2000 and June 30, 2000, sales of the guaranteed portions
of loans in the aggregate amount of $9,223,000 and $13,926,000, respectively,
were pending settlement in the secondary market, while $5,842,000 and
$7,494,000, respectively, were pending construction and/or renovation
completions. Upon the completion of these funding projects, participation in
these loans may be sold in the secondary market, providing BLC with a source of
revenues. Subsequent to June 30, 2000, BLC received net cash premiums, after
repayment of indebtedness, of approximately $1,195,000 from those loans pending
settlement at June 30, 2000. Subsequent to September 30, 2000, BLC received net
cash premiums of approximately $563,000 from those loans pending settlement at
September 30, 2000.
Pursuant to a loan participation agreement entered into with a purchaser
during the fiscal year ended June 30, 1996, Business Loan Center, at its option,
in respect to loans which are delinquent for more than 60 days is required to
either (i) repurchase the loan or (ii) substitute interest in another loan of
equal value. During fiscal year 2000, four loans with an aggregate value of
approximately $223,000 were repurchased. There have been no loan repurchases
during the quarter ended September 30, 2000.
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BLC believes that its current capital resources and future cash flows will
be sufficient to meet its future financial obligations and projected capital
requirements, based on the resources provided by the credit facilities described
above, the anticipated proceeds from sales of both the guaranteed and
unguaranteed portion of loans in the secondary market, the cash generated from
the existing portfolio in the form of interest and servicing income, and the
regular principal repayments on loans receivable. Management believes that
Business Loan Center and BLC Commercial should be able to originate and fund at
least $190 million in new loans during fiscal year 2001. However, there can be
no assurances that BLC will be able to achieve this level.
Results of Operations
General
Demand for long-term commercial loans throughout the United States has
continued to remain at substantially high levels over the last several years.
The Guaranteed Loan Programs have assisted participating lenders in providing
record amounts of guaranteed loans over the past three federal fiscal years.
Business Loan Center and BLC Commercial have contributed to the success of the
Guaranteed Loan Programs by originating loans in the principal amount of
approximately $163,568,000, for fiscal year 2000, resulting in a serviced loan
portfolio approximating $376,007,000 at June 30, 2000. The serviced loan
portfolio at September 30, 2000 was $388,000,000. By establishing an effective
loan origination network spanning the United States, management believes that
BLC has positioned itself to achieve ongoing growth, both with respect to the
amount of loans originated and the geographic areas in which it operates. The
origination network is currently comprised of loan referral sources that service
several broad geographic regions and provide customers with a variety of
financial products.
Management of BLC is sensitive to industry and geographical trends,
including failure rates in various industries, general condition of local
economies, and the resultant effect on businesses and real estate values.
Generally, BLC's current lending pattern, both regarding industry and geographic
location, is extremely diverse. At June 30, 2000, businesses in over 145
distinct industries in approximately 45 different states had received loans from
Business Loan Center. The largest industry sectors in Business Loan Center's
serviced portfolio at June 30, 2000 include: lodging, approximating 33% of the
aggregate loan portfolio, gas stations and convenience stores, approximating 10%
and restaurants, approximating 11% of the aggregate loan portfolio. The
diversity of the portfolio at September 30, 2000 is substantially the same as at
June 30, 2000.
Comparison of the Quarter Ended September 30, 2000 vs. the Quarter Ended
September 30, 1999
BLC recorded net income of approximately $752,000 (or $.04 per basic share)
for the three months ended September 30, 2000, as compared to net income of
approximately $472,000 (or $.02 per basic share) for the three months ended
September 30, 1999.
Revenues for the three months ended September 30, 2000 totaled $5,500,000
compared to $4,513,000 at September 30, 1999 a 22% increase. This increase in
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revenues resulted primarily from an increase in gain on sale of loans as well as
an increase in service fee income. At September 30, 2000, BLC maintained a
serviced loan portfolio of 655 loans, which approximated $388,000,000 as
compared to 497 loans, which approximated $273,921,000 at September 30, 1999.
Gain on sale of loans increased from $2,119,000 at September 30, 1999 to
$3,195,000 at September 30, 2000, a 51% increase. This increase can be
attributed to higher premiums earned on the sale of the guaranteed portions of
loans sold, as well as the securitization of $7,658,000 in unguaranteed loans in
the quarter. The average premium on loans sold during the quarter ended
September 30, 2000 was approximately 8%, as compared to 6% in the same quarter
last year. BLC sold $22,054,000 in guaranteed loans during the quarter ended
September 30, 2000 as compared to $22,683,000 in the quarter ended September 30,
1999.
Interest income decreased from approximately $1,132,000 for the three
months ended September 30, 1999 to approximately $990,000 for the three months
ended September 30, 2000, or by approximately 13%. This decrease was due in part
to the securitization and sale of the unguaranteed portion of SBA loans during
the quarter ended September 30, 2000. BLC's performing and retained loan
portfolio held by it at September 30, 2000 was $31,444,000 compared to
$45,207,000 at September 30, 1999. This decrease in the interest income was
partially offset by an increase in the prime rate, which increased to 9.5% at
September 30, 2000 from 8% at September 30, 1999.
Service fee income, increased by approximately 15% from the prior year's
quarter, due in part to BLC's increased serviced and sold loan portfolio which
approximated $332,615,000 at September 30, 2000 compared to $212,516,000 at
September 30, 1999. This increase was partially offset by an overall decrease in
the service fee rates earned on the sale of the guaranteed portion of SBA loans
as well as an increase in the amortization or principal payments on the residual
interest. The BLC continues to earn additional residual interest income, on both
the unguaranteed and guaranteed loans sold.
Loans in the aggregate amount of approximately $27,495,000 were funded by
BLC during the three months ended September 30, 2000, as compared to loans in
the aggregate principal amount of approximately $34,267,000 for the three months
ended September 30, 1999. The guaranteed principal amounts of the loans funded
during the three months ended September 30, 2000 aggregated $20,581,000 compared
to approximately, $24,891,000 for the prior year's period.
As of September 30, 2000, BLC's loan production offices were located in
Richmond and Alexandria, Virginia (near Washington D.C.), Panama City, Florida,
Wichita, Kansas, McKinney, Texas, Manalapan and Mt. Arlington, New Jersey,
Seattle, Washington, Phoenix, Arizona, Omaha, Nebraska, Oklahoma City, Oklahoma
and Hartford, Connecticut.
At September 30, 2000, 32 proposed loans in the approximate aggregate
principal amount of $13,426,000 had received both Business Loan Center, Inc.
(Business Loan Center) and SBA approval and were awaiting closing. In addition,
70 proposed loans in the approximate aggregate principal amount of $40,241,000
were approved by Business Loan Center and awaiting submission to the SBA or
awaiting SBA approval. Business Loan Center's existing capital resources should
enable it to fund these loans and additional loans in process.
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At September 30, 2000, one proposed loan in the approximate aggregate
principal amount of $1,400,000 had received both BLC Commercial Capital Corp.
and USDA approval and were awaiting closing. In addition, 8 proposed loans in
the approximate aggregate principal amount of $34,860,000 were approved by BLC
Commercial Capital Corp. and awaiting submission to the USDA or awaiting USDA
approval. BLC Commercial Capital Corp.'s existing capital resources should
enable it to fund these loans and additional loans in process.
BLC's operating expenses increased from approximately $2,102,000 for the
three months ended September 30, 1999 to approximately $2,495,000 for the
quarter ended September 30, 2000, an increase of 19%. This was due to an
increase in payroll expenses as well as an increase in the allowance for credit
losses.
General and administrative expenses of approximately $808,000 for the three
months ended September 30, 2000 increased from approximately $775,000, an
increase of 4%.
Interest expense increased by approximately 11% during the three months
ended September 30, 2000 as compared to the prior year's period. This was due to
an overall increase in the borrowing base rate as well as increases in
borrowings under the B&I credit facility. This increase was partially offset by
a decrease in the average retained SBA loan portfolio at September 30, 2000, as
a result of the securitization of the SBA unguaranteed loans.
Comparison of Fiscal Year 2000 vs. Fiscal Year 1999
BLC recorded net income of $5,282,000 (or $0.26 per basic share) for the
fiscal year ended June 30, 2000 as compared to net income of $3,103,000 (or
$0.16 per basic share) for the year ended June 30, 1999. Net income before
provision for income taxes, operating income was $8,138,000 for fiscal year
2000, as compared to $5,154,000 for fiscal year 1999.
Revenues for fiscal year 2000 grew from approximately $19,422,000 at June
30, 1999 to $26,366,000 at June 30, 2000, an increase of 36%. This increase in
revenues resulted primarily from an increase in gain on sale of loans and
interest income, which arose from increased loan originations as well as
increased loan sales during the fiscal year. During fiscal year 2000, BLC
originated $163,568,000 in new loans as compared to $112,142,000, which
represents an increase of over 45%. As of June 30, 2000, BLC maintained a
serviced loan portfolio of 626 loans, which approximated $376,007,000 as
compared to 454 loans, which approximated $248,544,000 at June 30, 1999.
Gain on sale of loans increased from $11,868,000 for fiscal year 1999 to
$16,687,000 for fiscal year 2000, an increase of 41%. This is attributable to
increases sales of both the guaranteed and unguaranteed portions of loans
originated. BLC sold $120,983,000 in guaranteed loans during fiscal year 2000 as
compared to $79,240,000 in fiscal year 1999. The unguaranteed portion of loans
securitized and sold during fiscal year 2000 increased to $39,191,000 from
$24,317,000 for fiscal year 1999. These increases were partially offset by an
overall reduction in the average premium received on the sale of the guaranteed
portion of the loans in the secondary marketplace. During fiscal year 1999, the
average premium received on the sale of the guaranteed portion of loans was 109%
as compared to 108% for fiscal year 2000.
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Interest income increased from approximately $3,550,000 for fiscal year
1999 to approximately $4,654,000 for fiscal year 2000, or by 31%. This increase
resulted from both an increase in the prime rate, which is the base rate for all
of BLC's loan originations, as well as an increase in the overall loan
originations experienced during the fiscal year. The prime rate increased to
9.5% as of June 30, 2000, as compared to 8% at June 30, 1999.
Service fee income was $2,355,000 as of June 30, 1999 as compared to
$2,896,000 at June 30, 2000, an increase of 23%. This increase was primarily due
to an increase in the serviced and sold loan portfolio which approximated
$315,340,000 at June 30, 2000 compared to $195,773,000 at June 30, 1999. The
increase was partially offset by an overall decrease in the service fee rates
earned on the sale of guaranteed portion of SBA loans as well as an increase in
the amortization or principal payments on the residual interests. The average
service fee earned on the sale of the guaranteed portion of SBA loans originated
during fiscal year 2000 was 1.12% as compared to 1.54% for fiscal year 1999.
Service fees and residual interest rates earned on both the SBA and USDA
guaranteed loans sold in the secondary market ranged between 0.25% and
approximately 4.41%.
Miscellaneous income increased from $1,649,000 at June 30, 1999 to
$2,129,000 at June 30, 2000, an increase of 29%. This increase can be attributed
to increased fees earned on the origination and sales of non-SBA loans, as well
as fees earned in connection with packaging these and other SBA and B&I loans.
Operating expenses increased from approximately $8,636,000 for fiscal year
1999 to approximately $11,237,000 for fiscal year 2000, an increase of 30%. This
increase resulted from increases in payroll, commissions and travel associated
with continued growth and expansion.
General and administrative expenses increased to approximately $3,126,000
for fiscal year 2000 compared to $2,746,000 at fiscal year 1999, an increase of
14%. This was due to increases in corporate and legal services as well as
amortization of costs associated with additional financing obtained throughout
the past fiscal year.
Interest expense increased by approximately 34% during fiscal year 2000 as
compared to the prior year's period. The increase was due to increased borrowing
to meet the continued growth in loan production activities as well as an
increase in the base borrowing rate.
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The number and aggregate principal amount of the loans in BLC's portfolio
at the end of fiscal year 2000 may be classified and compared to the loans in
its portfolio at the end of fiscal year 1999 as follows:
<TABLE>
<CAPTION>
YEAR ENDED 6/30/00 YEAR ENDED 6/30/99
------------------------------------------ ------------------------------------------
TOTAL GUARANTEED UNGTEED. # TOTAL GUARANTEED UNGTEED.
(IN THOUSANDS, AMOUNT AMOUNT AMOUNT LOANS AMOUNT AMOUNT AMOUNT # LOANS
EXCEPT # LOANS) -------- ---------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing Loans................. $352,314 $258,867 $93,447 578 $238,586 $173,610 $64,976 418
Delinquent Loans................. 11,447 8,293 3,154 15 870 653 217 1
Loans in liquidation............. 12,246 8,921 3,325 33 9,088 7,415 1,673 35
-------- -------- ------- --- -------- -------- ------- ---
Total Loans................ $376,007 $276,081 $99,926 626 $248,544 $181,678 $66,866 454
======== ======== === ======== ======== ===
LESS:
Loans Sold....................... $75,934 $42,878
Allowance for Credit Losses...... 1,153 914
Deferred Income & Other.......... 548 1,138
------- -------
Loans Receivable Net............. $22,291 $21,936
======= =======
</TABLE>
Loans for which interest and principal payments are due for a period
greater than 60 days are categorized by BLC as "delinquent." Delinquent loans
generally are a result of various factors, including temporary downturns in the
borrower's business, seasonal working capital constraints, changes in business
location or products, and other factors specifically related to each borrower.
The borrowers often regain current status after a period of time.
In certain cases, when the aforementioned factors prevent the borrower from
making any payments for a prolonged period of time, and the loan falls beyond 90
days past due, the loan may then be categorized as in "liquidation." After
formal request is made by BLC or the fiscal transfer agent, the SBA honors its
guaranty by purchasing the guaranteed portion of the loan, as well as all
interest that is due for a period of up to 120 days. In general, loans in
liquidation are serviced through the efforts of Business Loan Center.
Comparison of Fiscal Year 1999 vs. Fiscal Year 1998
BLC recorded net income of $3,103,000 (or $0.16 per basic share) for fiscal
year 1999 as compared to net income of $3,226,000 (or $0.18 per basic share) for
the year ended June 30, 1998. Net income before provision for income taxes and
extraordinary item, operating income, was $5,154,000 for fiscal year 1999, as
compared to $5,337,000 for fiscal year 1998.
Revenues for fiscal year 1999 increased approximately 23% to $19,422,000
from fiscal year 1998 primarily due to gains on loan sales, servicing fee
income, and interest income. This rise is attributed to an increased serviced
loan portfolio of BLC as well as an increase in loan originations and loan sales
during the respective periods. As of June 30, 1999 BLC maintained a serviced
loan portfolio of 454 loans, which approximated $248,544,000 as compared to 359
loans, which approximated $175,889,000 at June 30, 1998.
Interest income increased from approximately $2,439,000 for fiscal year
1998 to approximately $3,550,000 for fiscal year 1999, or by approximately 46%.
This was primarily due to an increase in the average outstanding and performing
retained loan portfolio held by BLC during the year, which included both the
unguaranteed portions of loans held as well as the guaranteed portion of loans
held for multiple
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disbursements and/or construction disbursements. A portion of this increase can
be attributed to the increase in BLC's performing and retained loan portfolio at
June 30, 1999 which approximated $34,027,000 as compared to $28,971,000 at June
30, 1998.
Service fee income increased by approximately 105% from the prior year
primarily due to BLC's increased serviced and sold loan portfolio which
approximated $195,773,000 at June 30, 1998. Servicing fees earned by BLC on
those guaranteed loans sold in the secondary market have ranged between 0.50%
and 4.06% per annum.
Operating expenses increased from approximately $6,481,000 for fiscal year
1998 to approximately $8,636,000 for fiscal year 1999. This increase resulted
from increases in payroll, commissions and travel associated with continued
growth and expansion. With the addition of new offices during the year, BLC
experienced an unusually high rate of operational expenses. It is expected that
a corresponding increase in loan origination levels, and therefore, revenues
should result from these production offices during the fiscal year ended June
30, 2000.
General and administrative expenses of approximately $2,746,000 for fiscal
year 1999 increased from approximately $1,753,000 for the prior year's period
primarily due to additional loan production offices, corporate services and
amortization of costs associated with the additional financing obtained
throughout the past fiscal year.
Interest expense increased by approximately 34% during fiscal year 1999 as
compared to fiscal year 1998. The increase was due to increased borrowing to
meet continued growth in loan production activities during this period which was
somewhat offset by an interest rate reduction obtained by BLC from its lender.
Loans in the approximate aggregate principal amount of $112,142,000 were
originated during fiscal year 1999, as compared to loans in the approximate
aggregate principal amount of $93,854,000 for fiscal year 1998, representing a
19% increase in origination activities during the referenced periods. The
guaranteed principal amount of the loans originated during fiscal year 1999
approximated $81,205,000 as compared to the aggregate guaranteed principal of
$67,357,000 for fiscal year 1998. Of those loans originated and fully funded
during fiscal year 1999, substantially all of the guaranteed portions were sold
in the secondary market subsequent to the full funding of each loan, at premium
rates approximating 109%. During fiscal year 1999, BLC securitized and sold
approximately $24,317,000 in unguaranteed loans. Sales of both the guaranteed
and unguaranteed portion of these loans during fiscal year 1999 resulted in
$11,868,000 of gains as compared to $10,583,000 for fiscal year 1998.
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The number and aggregate principal amount of the loans in BLC's portfolio
at the end of fiscal year 1999 may be classified and compared to the loans in
its portfolio at the end of fiscal year 1998 as follows:
<TABLE>
<CAPTION>
YEAR ENDED 6/30/99 YEAR ENDED 6/30/98
--------------------- ---------------------
TOTAL GUARANTEED UNGTEED. TOTAL GUARANTEED UNGTEED.
(IN THOUSANDS, AMOUNT AMOUNT AMOUNT # LOANS AMOUNT AMOUNT AMOUNT # LOANS
EXCEPT # LOANS) -------- ---------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Performing Loans................. $238,586 $173,610 $64,976 418 $164,037 $120,298 $43,739 321
Delinquent Loans................. 870 653 217 1 2,630 2,060 570 3
Loans in liquidation............. 9,088 7,415 1,673 35 9,222 7,413 1,809 35
-------- --------- ------- ----- -------- --------- ------- -----
Total Loans................ $248,544 $181,678 $66,866 454 $175,889 $129,771 $46,118 359
======== ========= ===== ======== ========= =====
LESS:
Loans Sold....................... $42,878 $22,289
Allowance for Credit Losses...... 914 641
Deferred Income & Other.......... 1,138 1,148
------- -------
Loans Receivable Net............. $21,936 $22,040
------- -------
</TABLE>
Loans for which interest and principal payments are due for a period
greater than 60 days are categorized by BLC as "delinquent." Delinquent loans
generally are a result of various factors, including temporary downturns in the
borrower's business, seasonal working capital constraints, changes in business
location or products, and other factors specifically related to each borrower.
The borrowers often regain current status after a period of time.
In certain cases, when the aforementioned factors prevent the borrower from
making any payments for a prolonged period of time, and the loan falls beyond 90
days past due, the loan may then be categorized as in "liquidation." After
formal request is made by BLC or the fiscal transfer agent, the SBA honors its
guaranty by purchasing the guaranteed portion of the loan, as well as all
interest that is due for a period of up to 120 days. In general, loans in
liquidation are serviced through the efforts of BLC's servicing staff.
BLC QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
In general, BLC manages its interest rate risk through the use of
variable-based interest rate indices for its borrowing and lending activities.
Specifically, BLC's borrowing rates from its lender are based upon a spread
above Prime Rate and the LIBOR Rate while the lending rate to its borrowers is
based upon a spread above the Prime Rate. During fiscal year 2000 BLC entered
into a $75 million revolving facility which allows BLC to sell the unguaranteed
portion of SBA loans into a securitization conduit. As BLC periodically sells
loans into the conduit, it reduces its exposure to the lender. Accordingly, the
potential interest rate mismatch from the changes in the indices is of short
duration.
To match the interest rates on the Prime Rate loans made to borrowers and
the LIBOR-based borrowings from its lender, BLC enters into interest rate swaps
to reduce the interest rate risk. The net charge to operations during fiscal
year 2000 due to the interest rate swaps approximated $11,700. As a result,
management believes that BLC has reasonably insulated itself from the impact of
a change in interest rates.
BLC's servicing assets and residual interests are valued each reporting
period based on a discounted cash flow analysis using current interest rates to
discount expected future cash flows. If the discount rate and estimated fair
value interest rates
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increase, the carrying value of these assets may be negatively impacted.
However, it should be noted that an interest rate change would not significantly
impact the estimated cash flows of these assets.
DESCRIPTION OF ALLIED CAPITAL STOCK AND DISTRIBUTIONS
On September 18, 2000, Allied Capital's board of directors voted
unanimously to amend Allied Capital's article of incorporation to increase its
authorized capital stock from 100,000,000 shares, $0.0001 par value, to
200,000,000 shares, and authorized management to hold a special meeting of
shareholders on November 15, 2000 to seek shareholder approval for such
amendment. Shareholders of record on September 28, 2000 were mailed a notice and
proxy statement for this purpose and voted in favor of the charter amendment.
The charter amendment was filed with the state of Maryland on November 17, 2000.
The Allied Capital board of directors may classify and reclassify any
unissued shares of capital stock 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.
The following summary of the capital stock and other securities does not
purport to be complete and is subject to, and qualified in its entirety by
Allied Capital's articles of incorporation. Reference is made to the Allied
Capital articles of incorporation for a detailed description of the provisions
summarized below.
COMMON STOCK
At December 7, 2000, there were 81,021,686 shares of Allied Capital common
stock outstanding and 11,917,082 shares of Allied Capital common stock reserved
for issuance under the Amended Stock Option Plan. The following are the
outstanding classes of securities of Allied Capital as of December 7, 2000:
<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 200,000,000 234,977 80,786,709
</TABLE>
-------------------------
* Represents shares of Allied Capital held in a trust for the Deferred
Compensation Plan. See "Allied Capital Business -- Allied Capital Executive
Compensation."
All shares of Allied Capital 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. Distributions may be paid to the
holders of Allied Capital common stock if and when declared by the Board of
Directors of Allied Capital out of funds legally available therefore. Allied
Capital common stock has no preemptive, conversion, or redemption rights and is
freely transferable. In the event of liquidation, each share of Allied Capital
common stock is entitled to share ratably
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<PAGE> 134
in all assets of Allied Capital that are legally available for distributions
after payment of all debts and liabilities and subject to any prior rights of
holders of preferred stock, if any, then outstanding. Each share of Allied
Capital common stock 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 of
Allied Capital common stock offered hereby will be, when issued and paid for,
fully paid and non-assessable.
Allied Capital pays quarterly dividends to shareholders of Allied Capital
common stock. The amount of Allied Capital quarterly dividends is determined by
the Allied Capital board of directors. Allied Capital's board has established a
dividend policy for 2000 to review the dividend rate quarterly and to adjust the
quarterly dividend rate as Allied Capital earnings momentum builds. In addition,
the Allied Capital board of directors may determine to retain a portion of
capital gains during 2000. Allied Capital cannot assure that it will achieve
investment results or maintain a tax status that will permit any particular
level of dividend payment.
Allied Capital's credit facilities limit its ability to declare dividends
if it defaults under certain provisions.
Allied Capital has adopted an "opt out" DRIP plan for Allied Capital common
shareholders. Under the DRIP plan, if your shares of Allied Capital common stock
are registered in your name, your Allied Capital dividends will be automatically
reinvested in additional shares of Allied Capital common stock unless you "opt
out" of the DRIP plan.
PREFERRED STOCK
In addition to shares of Allied Capital common stock, the Allied Capital
articles of incorporation authorize the issuance of preferred stock. The Allied
Capital board of directors is authorized to provide for the issuance of Allied
Capital preferred stock with such preferences, powers, rights and privileges as
the Allied Capital board deems appropriate; except that, such an issuance must
adhere to the requirements for the 1940 Act. The 1940 Act requires, among other
things, that (i) immediately after issuance and before any distribution is made
with respect to Allied Capital common stock, the Allied Capital preferred stock,
together with all other senior securities, must not exceed an amount equal to
50% of Allied Capital's total assets and (ii) the holders of shares of Allied
Capital preferred stock, if any are issued, must be entitled as a class to elect
two directors at all times and to elect a majority of the directors if dividends
on the Allied Capital preferred stock are in arrears by two years or more.
COMPARISON OF RIGHTS OF ALLIED CAPITAL AND BLC SHAREHOLDERS
Allied Capital and BLC are incorporated under the laws of Maryland and
Delaware, respectively. Upon consummation of the merger, BLC common shareholders
become shareholders of Allied Capital, and their rights will be governed by the
laws of Maryland and Allied Capital's articles of incorporation and bylaws
instead of the laws of Delaware and BLC's certificate of incorporation and
bylaws. Certain significant differences between the rights of Allied Capital
shareholders under Maryland law and BLC shareholders under Delaware law are
summarized below.
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<PAGE> 135
This summary does not purport to be a complete description of all of the
differences between the rights of BLC common shareholders and the rights of
shareholders of Allied Capital.
As of December 7, 2000, BLC had 26,386,093 shares of common stock issued
and outstanding. BLC is listed on the American Stock Exchange and trades under
the symbol "BCL."
For a full review of the differences you should read relevant provisions of
Maryland law, Delaware law, the Allied Capital amended and restated articles of
incorporation and bylaws as well as the BLC certificate of incorporation and
bylaws, all of which are available upon request.
Maryland law and the Allied Capital articles of incorporation and bylaws
contain provisions that may be deemed to have an anti-takeover effect and may
delay, defer or prevent a change in control of Allied Capital or other
transactions that an Allied Capital shareholder might consider is in its best
interest, including a transaction that might result in a premium over the market
price for the shares held by Allied Capital shareholders. These provisions are
expected to discourage various types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
Allied Capital to negotiate with Allied Capital's board of directors. Allied
Capital's management believes that the benefits of these provisions outweigh the
disadvantages of these provisions because negotiation with Allied Capital's
board of directors could result in an improvement of the terms received by
Allied Capital shareholders.
<TABLE>
<S> <C>
AUTHORIZED CAPITAL STOCK
Allied Capital BLC
Allied Capital's articles of BLC's certificate of incorporation
incorporation authorize 100,000,000 authorizes 35,000,000 shares of common
shares of common stock, par value stock, par value $.01 per share, and
$0.0001 per share. The Allied Capital 2,000,000 shares of preferred stock,
articles of incorporation authorize the par value $.01 per share.
issuance of preferred stock by the
board of directors; except that, such
an issuance of preferred stock must
adhere to the requirements of the 1940
Act.
VOTING RIGHTS
Allied Capital -- Maryland Law BLC -- Delaware Law
Maryland law provides that, unless Delaware law provides that a
otherwise provided in the articles of corporation may designate the voting
incorporation: (i) each share of rights of each class of stock and must
capital stock is entitled to one specify the voting rights of such class
vote; (ii) the presence in person or by of stock in the certificate of
proxy of shareholders entitled to cast incorporation or the board of
a majority of all the votes entitled to directors' resolutions providing for
be cast at a meeting constitutes a the issuance of stock. Each holder of
quorum; and (iii) in matters other than BLC common stock is entitled to one
the election of directors or the vote per share.
approval of extraordinary transactions,
a majority of all the votes cast at a BLC's certificate of incorporation
meeting at which a quorum is present is permits the BLC board of directors to
sufficient issue BLC
</TABLE>
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<PAGE> 136
<TABLE>
<S> <C>
VOTING RIGHTS (CONTINUED)
to approve a matter which properly preferred stock in one or more series
comes before a shareholder meeting. that may have voting power that differs
from that of the BLC common stock.
Maryland law limits the voting rights BLC's certificate of incorporation
of "control shares" held by persons permits the BLC board of directors to
who, directly or indirectly, have the designate the extent, if any, to which
power to exercise: (i) one-fifth or the holders of the shares of preferred
more, but less than one-third; (ii) stock will be entitled to vote as a
one-third or more, but less than a class or otherwise with respect to the
majority; or (iii) a majority or more election of directors or otherwise.
of all voting power in the election of
directors.
Control shares of a Maryland
corporation acquired in a control share
acquisition generally do not have
voting rights except to the extent
approved by two-thirds of the votes
entitled to be cast by shareholders in
the election of 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," and is
otherwise in compliance with the
control share statute.
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 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.
SHAREHOLDER NOMINATIONS
Allied Capital -- Maryland Law BLC -- Delaware Law
The Allied Capital bylaws do not Delaware law provides that special
provide for nominations by meetings of the shareholders of a
shareholders of persons for election to corporation may be called by the
the board of
</TABLE>
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<TABLE>
<S> <C>
SHAREHOLDER NOMINATIONS (CONTINUED)
directors. corporation's board of directors or by
such other persons as may be authorized
in the corporation's certificate of
incorporation or bylaws.
Under BLC's bylaws, nominations of
persons for election to the board of
directors and the proposal of business
to be considered by the shareholders at
an annual meeting of shareholders may
be: (i) pursuant to the notice of the
meeting; (ii) by or at the direction of
the board of directors; or (iii) by any
shareholder who is entitled to vote at
such meeting and who complies with the
procedures set forth in the bylaws.
In order for a shareholder's nomination
to comply with the bylaws, written
notice must be given to the Secretary
of BLC not later than 60 days nor
earlier than 90 days prior to the
anniversary of the prior annual
meeting.
Under BLC's bylaws, nominations of
persons for election to the board of
directors may be made at a special
meeting of shareholders: (i) pursuant
to the notice of a special meeting of
shareholders; (ii) by or at the
direction of the board of directors; or
(iii) provided that the board of
directors has determined that directors
are to be elected at such meeting, by
any shareholder of BLC.
SIZE OF THE BOARD OF DIRECTORS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, a corporation must Delaware law provides that the
generally have at least three directors certificate of incorporation or the
at all times. Subject to this bylaws of a corporation may allow the
provision, a corporation's bylaws may shareholders or the board of directors
alter the number of directors and to fix or change the number of
authorize a majority of the entire directors, but a corporation must have
board of directors to alter within at least one director. The BLC
specified limits the number of certificate of incorporation provides
directors set by the corporation's that the number of members of the board
articles of incorporation or its of directors shall be between six and
bylaws. The Allied Capital articles of twelve. The number of persons currently
incorporation provide that the number constituting the BLC board of directors
of persons constituting the board of is seven.
directors may not be less than three
nor more than fifteen unless changed by
an amendment to the Allied Capital
bylaws. The number of persons
</TABLE>
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<TABLE>
<S> <C>
SIZE OF THE BOARD OF DIRECTORS (CONTINUED)
currently constituting the Allied
Capital board of directors is twelve.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Allied Capital -- Maryland Law BLC -- Delaware Law
The directors of Allied Capital are Under Delaware law, directors, unless
divided into three classes, with their terms are staggered, are elected
approximately one-third of the at each annual shareholders meeting.
directors elected by the shareholders The certificate of incorporation may
annually. Consequently, members of the authorize the election of directors by
board of directors of directors serve one or more classes or series of
staggered three-year terms. shares, and the certificate of
incorporation, an initial bylaw or a
bylaw adopted by a vote of the
shareholders may provide for staggered
terms for the directors. The BLC bylaws
provide for a classified board of
directors such that approximately
one-third of the directors of BLC are
elected at each annual shareholder
meeting, and directors serve staggered
three-year terms.
ELECTION OF THE BOARD OF DIRECTORS
Allied Capital -- Maryland Law BLC -- Delaware Law
Maryland law provides that a Pursuant to Delaware law, elections for
corporation's directors will be elected the BLC board of directors are decided
by a plurality of the votes cast at a by a plurality of the votes cast.
meeting at which a quorum is present. Under Delaware law, shareholders do not
have cumulative voting rights unless
Under Maryland law, a corporation's the certificate of incorporation so
articles of incorporation may provide provides. The BLC certificate of
that shareholders can elect directors incorporation does not grant cumulative
by cumulative voting. The Allied voting rights to holders of BLC common
Capital articles of incorporation do stock.
not grant cumulative voting rights with
respect to the election of directors to
holders of Allied Capital common stock.
Maryland law permits the bylaws of the
corporation to provide for the term of
office a director may serve, except
that (1) the term of office of a
director may not be longer than five
years or, except in the case of an
initial or substitute director, shorter
than the period between annual meetings
and (2) the term of office of at least
one class of directors will expire each
year. The Allied Capital articles of
</TABLE>
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<TABLE>
<S> <C>
ELECTION OF THE BOARD OF DIRECTORS (CONTINUED)
incorporation provide for a classified
board of directors as described above.
REMOVAL OF DIRECTORS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, unless the Under Delaware law, in the case of a
corporation's articles of incorporation corporation whose board of directors is
provide otherwise, the shareholders of classified, except as otherwise
a corporation with a classified board provided in a corporation's certificate
of directors may remove a director, of incorporation, the shareholders may
only for cause, by the affirmative vote remove any director only for cause by
of a majority of all the votes entitled the vote of a majority of all the votes
to be cast for the election of entitled to be cast in the election of
directors. The Allied Capital articles the directors. BLC's bylaws provide
of incorporation provide that directors that directors may be removed at any
may be removed with or without cause time, with or without cause, by vote at
only by the affirmative vote of the a meeting or by written consent of a
holders of a majority of the votes majority the holders of stock entitled
entitled to be cast in the election of to vote on the election of directors.
directors. BLC's bylaws further provide that
directors may be removed only for cause
by a majority of the board of
directors.
FILLING VACANCIES
Allied Capital -- Maryland Law BLC -- Delaware Law
Under the Allied Capital articles of Under Delaware law, unless the
incorporation and bylaws, vacancies in certificate of incorporation or bylaws
the Allied Capital board of directors provide otherwise, the board of
caused by the removal or resignation of directors or shareholders of a
a director may be filled by the vote of corporation may fill any vacancy on the
a majority of the remaining directors board of directors, including vacancies
or, if the vacancy is caused by an resulting from an increase in the
increase in the number of directors, by number of directors.
a majority of the entire board of The BLC bylaws provide that all
directors, and the appointee shall hold vacancies and newly created
office for the unexpired term of his directorships resulting from any
predecessor, or until his successor is increase in the authorized number of
elected or appointed. directors may be filled by a majority
vote of the remaining directors, though
less than a quorum. Vacancies are
filled for the unexpired portion of the
term.
STANDARD OF CONDUCT FOR DIRECTORS
Allied Capital -- Maryland Law BLC -- Delaware Law
The standard of conduct for directors Generally, directors of Delaware
under Maryland law requires that a corporations are subject to a duty of
director of a Maryland corporation loyalty, a duty of care and a duty of
perform his or her duties in "good candor to shareholders. The duty of
faith," with "a reasonable belief" loyalty requires directors to not
that his or her actions are "in the advance their own interests at the
best interests of the corporation" and expense of shareholders. The duty of
with the care of an "ordinarily prudent care requires "directors in managing
person in a like position under similar the corporate affairs to use that
circumstances." amount of care which
</TABLE>
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<TABLE>
<S> <C>
STANDARD OF CONDUCT FOR DIRECTORS (CONTINUED)
ordinarily careful and prudent men
would use in similar circumstances,"
and the duty of candor requires
directors "to disclose fully and fairly
all material information within the
board of directors's control when it
seeks stockholder action." Recent case
law has established "gross negligence"
as the test for breach of the standard
for the duty of care in the process of
decision-making by directors.
LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS; INSURANCE
Allied Capital -- Maryland Law BLC -- Delaware Law
In addition to the restrictions under Delaware law provides that a
Maryland law and in Allied Capital's corporation may indemnify any person
articles of incorporation and bylaws, made a party or threatened to be made a
Allied Capital is subject to certain party to any type of proceeding, other
restrictions on indemnification under than an action by or in the right of
the 1940 Act and the rules and the corporation, because he or she is
regulations thereunder. or was an officer, director, employee
or agent of the corporation or was
Maryland law requires a corporation, serving at the request of the
unless its articles of incorporation corporation in that capacity for
provide otherwise, to indemnify a another entity, against expenses
director or officer who has been (including attorneys' fees), judgments,
successful, on the merits or otherwise, fines and amounts paid in settlement
in the defense of any proceeding to actually and reasonably incurred in
which he is made a party by reason of connection with such proceeding if:
his service in that capacity. Maryland
law permits a corporation to indemnify - He acted in good faith and in a
its present and former directors and manner he or she reasonably believed
officers, among others, in connection was in or not opposed to the best
with any proceeding to which they may interests of the corporation; and
be made a party by reason of their - In the case of a criminal proceeding,
service in those or other capacities he or she had no reasonable cause to
unless it is established that: believe that his conduct was
unlawful.
- The act or omission of the
director or officer was material A corporation may indemnify any person
to the matter giving rise to the made a party or threatened to be made a
proceeding and was committed in party to any threatened, pending or
bad faith or was the result of completed action or suit brought by or
active and deliberate in the right of the corporation because
dishonesty; he was an officer, director, employee
or agent of the corporation, or is or
- The director or officer actually was serving at the request of the
received an improper personal corporation as a director, officer,
benefit in money, property or employee or agent of another
services; or corporation or other entity, against
expenses (including attorneys' fees)
- In the case of any criminal actually and reasonably incurred in
proceeding, the director or connection with such action or suit if
officer had reasonable cause to he acted in good faith and in a manner
believe that the act or omission reasonably believed to be in or not
was unlawful. opposed to the best interests of the
The indemnity may include judgments,
penalties, fines, settlements and
reasonable
</TABLE>
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<TABLE>
<S> <C>
LIABILITY OF DIRECTORS; INDEMNIFICATION OF
DIRECTORS AND OFFICERS; INSURANCE (CONTINUED)
expenses actually incurred by the corporation, unless such person is
director or officer in connection with found to be liable, in which case
the proceeding; provided, however, that indemnification is permitted only if
if the proceeding is one by or in the the court deems it to be proper.
right of the corporation,
indemnification is not permitted with Under Delaware law, a corporation must
respect to any proceeding in which the indemnify a director or officer who
director or officer has been adjudged successfully defends himself in a
to be liable to the corporation. In proceeding to which he was a party
addition, a director or officer may not because he was a director or officer of
be indemnified with respect to any the corporation against expenses
proceeding charging improper personal actually and reasonably incurred by
benefit to the director or officer in him. Expenses incurred by an officer or
which the director or officer was director in defending a civil or
adjudged to be liable on the basis that criminal proceeding may be paid by the
personal benefit was improperly corporation upon receipt of an
received. The termination of any undertaking by or on behalf of such
proceeding by conviction or upon a plea director or officer to repay such
of nolo contendere or its equivalent or amount if it is determined that he is
an entry of an order of probation prior not entitled to be indemnified by the
to judgment creates a rebuttable corporation.
presumption that the director or
officer did not meet the requisite Under Delaware law, termination of any
standard of conduct required for proceeding by conviction or upon a plea
permitted indemnification. The of nolo contendere or its equivalent
termination of any proceeding by shall not, of itself, create a
judgment, order or settlement, however, presumption that such person is
does not create a presumption that the prohibited from being indemnified.
director or officer failed to meet the
requisite standard of conduct for The BLC certificate of incorporation
permitted indemnification. provides that each director, officer
and employee of the corporation shall
In addition, Maryland law requires be indemnified by the corporation to
Allied Capital, as a condition to the fullest extent permitted by
advancing expenses, to obtain a written Delaware law.
affirmation by the director or officer
of his good faith belief that he has
met the standard of conduct necessary
for indemnification by Allied Capital
and that such person will repay the
amount if it is determined that the
standard of conduct was not met.
Allied Capital is further restricted in
its ability to advance expenses by
certain provisions of the 1940 Act.
Allied Capital's articles of
incorporation provide that to the
fullest extent of Maryland law, and
subject to the restrictions in the 1940
Act, Allied Capital will indemnify and
advance expenses to its present and
former directors and officers.
Notwithstanding the indemnification
described above, pursuant to Maryland
law, nothing in the articles of
</TABLE>
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<TABLE>
<S> <C>
LIABILITY OF DIRECTORS; INDEMNIFICATION OF
DIRECTORS AND OFFICERS; INSURANCE (CONTINUED)
incorporation shall limit or alter
liability of directors under the
federal securities laws.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
Allied Capital -- Maryland Law BLC -- Delaware Law
Maryland law permits a corporation's Under Delaware law, a corporation's
articles of incorporation to include a certificate of incorporation may
provision expanding or limiting the eliminate the personal liability of
liability of its directors and officers directors for monetary damages for
to the corporation or its breach of such directors' fiduciary
shareholders for money damages, except duty, except liability for:
for liability resulting from:
- Any breach of the director's duty of
- Actual receipt of an improper loyalty to the corporation or
benefit or profit in money, its shareholders;
property or services, in which
case recovery is limited to the - Acts or omissions not in good faith
actual amount of the benefit or or which involve intentional
profit actually received; or misconduct or a knowing violation of
law;
- A judgment or other final
adjudication adverse to the - Liability under Section 174 of
person that is entered in a Delaware law for unlawful payment of
proceeding based on a finding in the dividends or stock redemptions or
proceeding that the person's action, repurchases; or
or failure to act, was the result of
active and deliberate dishonesty and - Any transaction from which the
was material to the cause of action director derived an improper personal
adjudicated in the proceeding. benefit.
The Allied Capital articles of The certificate of incorporation
incorporation provide that, to the provides for the elimination or
fullest extent permitted by law, Allied limitation of a director's liability to
Capital directors and officers are not BLC to the fullest extent permitted by
liable to Allied Capital or its Delaware law.
shareholders for money damages.
However, such provisions do not limit
the availability of equitable relief to
Allied Capital or its shareholders.
INSPECTION OF BOOKS AND RECORDS
Allied Capital -- Maryland Law BLC -- Delaware Law
Maryland law provides that persons who Delaware law allows any shareholder,
together have been shareholders for upon written demand under oath stating
more than six months and own at least the purpose thereof, the right during
5% of the outstanding stock of any usual hours for business to inspect for
class of a corporation may inspect and any proper purpose the corporation's
copy the corporation's books of account stock ledger, a list of its
and stock ledger, request and receive a shareholders, and its other books and
statement of the corporation's affairs records, and to make copies or extracts
and, in the case of a corporation which therefrom. A proper purpose means a
does not maintain the original or a purpose reasonably related to such
duplicate stock ledger at its person's interest as a
</TABLE>
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<TABLE>
<S> <C>
INSPECTION OF BOOKS AND RECORDS (CONTINUED)
principal office, request and receive a shareholder.
list of its shareholders. In addition,
any shareholder of a corporation may
inspect and copy the bylaws, minutes of
the proceedings of shareholders and
annual statements of affairs of a
corporation and request the corporation
to provide a sworn statement showing
all stock and other securities issued
during a specified period, the
consideration received by the
corporation per share, and the value of
any consideration received by the
corporation, other than money, as set
forth in a resolution of the board of
directors.
AMENDMENTS TO ARTICLES OF INCORPORATION
Allied Capital -- Maryland Law BLC -- Delaware Law
Maryland law allows amendment of a Delaware law provides that, unless a
corporation's articles of incorporation higher vote is required in the
if its board of directors adopts a certificate of incorporation, an
resolution setting forth the amendment amendment to the certificate of
proposed, declaring it advisable and incorporation adopted in a resolution
directing that the proposed amendment of the board of directors may be
be submitted for consideration at approved by the affirmative vote of a
either an annual or special meeting of majority of the outstanding shares
the shareholders. Unless a lesser or entitled to vote thereon and the
greater proportion of votes is holders of a majority of the
specified in a corporation's articles outstanding shares of each class
of incorporation, the proposed entitled to vote upon the proposed
amendment must be approved by amendment as a class.
two-thirds of all votes entitled to
vote on the matter at any such meeting. BLC's certificate of incorporation
generally provides that amendments to
Allied Capital's articles of the certificate of incorporation
incorporation provide that the require the affirmative vote of the
corporation reserves the right to amend outstanding shares entitled to vote on
the articles in any way, including such amendment. Certain amendments
amendments that adversely affect the require the affirmative vote of at
rights of shareholders. least seventy-five percent (75%) of the
outstanding shares entitled to vote on
such amendment, and amendments by or on
behalf of an interested stockholder
require the affirmative vote of not
less than seventy-five percent (75%) of
the outstanding shares entitled to vote
on such amendment and not owned by such
interested stockholder.
BYLAW AMENDMENTS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, the power to change Delaware law provides that a
the bylaws is vested with the corporation's bylaws may be amended by
shareholders, except to the extent the that corporation's shareholders, or, if
articles of incorporation or bylaws so provided in the corporation's
vest it certificate of
</TABLE>
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<TABLE>
<S> <C>
BYLAW AMENDMENTS (CONTINUED)
in the board of directors. incorporation, the corporation's
directors.
The Allied Capital bylaws vest the
power to change the bylaws with the BLC's certificate of incorporation
board of directors. Generally, this provides that the directors will have
power may only be exercised by a power to make, alter or repeal bylaws
majority of the board of directors then if they act pursuant to a majority vote
in office, provided that the notice of of the whole board of directors. BLC's
the meeting at which such amendment is certificate of incorporation provides
to be voted upon included the proposal that the shareholders may alter or
to amend the bylaws. repeal the bylaws by an affirmative
vote of not less than seventy-five
percent (75%) of the shares entitled to
vote.
VOTE ON MERGER OR SALE OF SUBSTANTIALLY ALL ASSETS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, the board of Delaware law provides that, unless
directors must adopt a resolution that otherwise specified in a corporation's
declares a merger or sale of certificate of incorporation, a sale,
substantially all of a corporation's lease or exchange of all or
assets advisable and direct that the substantially all of the corporation's
proposed transaction be submitted for property and assets, a merger or
consideration at either an annual or consolidation of the corporation with
special meeting of the corporation's another corporation or a dissolution of
shareholders. At such meeting, unless the corporation requires the approval
the articles of incorporation state of the board of directors (except in
otherwise, the holders of two-thirds of limited circumstances) plus, with
the shares of the corporation entitled exceptions, the affirmative vote of a
to vote are required to approve the majority of the outstanding stock
following: entitled to vote thereon.
- Sale, lease, exchange or BLC's certificate of incorporation
transfer of all or substantially provides that a merger or business
all of the assets of a combination with an "interested
corporation not in the ordinary stockholder" requires approval by the
course of business conducted by affirmative vote of not less than
it; and seventy-five percent (75%) of the
- Any merger, consolidation or shares entitled to vote on such
share exchange involving the combination not owned by such
corporation. interested stockholder unless the
transaction is approved by a majority
Allied Capital's articles of of the "Continuing Directors," provided
incorporation and bylaws do not contain that there are at least three
an exception to this provision. "Continuing Directors." An "interested
stockholder" is defined as any person
Maryland law provides that the vote of who (A) is the beneficial owner,
the shareholders of a surviving directly or indirectly, of fifteen
corporation is not required to approve percent (15%) or more of the voting
a merger if (1) the plan of merger does power of the outstanding stock of BLC
not reclassify or change its or (B) is an affiliate of BLC or its
outstanding stock or otherwise amend subsidiaries and owned 15% or more of
the corporation's articles of the voting power of BLC stock within
incorporation and (2) the number of the past two (2) years or (C) is an
shares of common stock to be issued or assignee of an interested stockholder
transferred in the merger does not in the past two years.
increase by more than 20% the number of
its shares of the same class or series
</TABLE>
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<TABLE>
<S> <C>
VOTE ON MERGER OR SALE OF SUBSTANTIALLY ALL ASSETS (CONTINUED)
outstanding immediately before the
merger becomes effective.
SHAREHOLDER MEETINGS
Allied Capital -- Maryland Law BLC -- Delaware Law
The Allied Capital bylaws provide that The BLC bylaws provide that an annual
an annual meeting of shareholders is meeting of shareholders for the
to be held each year in the month of election of directors and for the
May at such time and place designated transaction of any other proper
by the Allied Capital board of business shall be held at such time and
directors. date in each year as the board of
directors, the chairman or the
Under Maryland law, a special meeting president may from time to time
of shareholders may be called by the determine.
president, the board of directors or
any other person specified in the Subject to the rights of the holders of
corporation's articles of incorporation any series of preferred stock or any
or bylaws. other series or class of stock as set
forth in BLC's certificate of
Under the Allied Capital bylaws, a incorporation to elect additional
special meeting of the shareholders of directors under specified
Allied Capital may be called at any circumstances, a special meeting of the
time by the chairman, the president or shareholders entitled to vote on any
the board of directors. business to be considered at any such
meeting may be called by the chairman,
The Secretary of Allied Capital is the president or any vice president,
required to call a special meeting of and shall be called by the chairman,
shareholders upon the written request the president or the secretary when
of shareholders entitled to cast not directed to do so by resolution of the
less than a majority of all the votes board of directors or at the written
entitled to be cast at such meeting. request of directors representing a
Such a request must state the purpose majority of the whole board of
of the meeting and matters proposed to directors. Any such request shall state
be acted on. The shareholders calling the purpose of the proposed special
such a special meeting are required to meeting.
reimburse Allied Capital for the costs
of preparing and mailing a notice of
such a meeting to the shareholders.
CORPORATE ACTION WITHOUT A MEETING
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, any action required Under BLC's certificate of
or permitted to be taken at a meeting incorporation, any action required by
of shareholders may be taken without statute to be taken at any annual or
a meeting if (1) a unanimous written special meeting of the shareholders, or
consent setting forth the action and any action which may be taken at any
signed by each shareholder entitled to annual or special meeting of the
vote on such matters and (2) a written shareholders, may be taken without a
waiver of any right to dissent signed meeting, without prior notice and
by each shareholder entitled to notice without a vote, if a consent in
of the meeting but not entitled to vote writing, setting forth the action taken
at it, are filed with the records of is signed by the holders of outstanding
the shareholders' meeting. stock of not less than seventy-five
percent (75%) of the shares entitled to
vote on such action at a meeting at
which all shares entitled to vote
thereon were present and voted.
</TABLE>
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<PAGE> 146
<TABLE>
<S> <C>
DIVIDENDS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law the board of Subject to any restrictions contained
directors has the power to authorize in a corporation's certificate of
and cause the corporation to pay, out incorporation, Delaware law generally
of funds legally available therefor, provides that a corporation may declare
distributions in cash, property or and pay dividends out of "surplus,"
securities of the corporation unless which means the excess of net assets
the declaration of such distributions over capital, or when no surplus
would be restricted by the articles of exists, out of net profits for the
incorporation. Maryland law further fiscal year in which the dividend is
provides that no distribution may be declared and/or the preceding fiscal
made (1) if the corporation would year. Dividends may not be paid,
become unable to pay its debts as they however, out of net profits if the
become due in the usual course of capital of the corporation is less than
business or (2) the corporation's total the amount of capital represented by
assets would be less than the sum of the issued and outstanding stock of all
its liabilities plus, unless the classes having a preference upon the
articles of incorporation permit distribution of assets. In accordance
otherwise, the amount that would be with Delaware law, "capital" is
needed, if the corporation were to be determined by the board of directors
dissolved at the time of the and may not be less than the aggregate
distribution, to satisfy the par value of the outstanding capital
preferential rights superior to those stock.
receiving the distribution.
The BLC certificate of incorporation
provides that the holders of shares of
common stock are entitled to receive,
when and if declared by the board of
directors, out of the assets of BLC
which are by law available therefor,
dividends payable either in cash in
stock or otherwise.
APPRAISAL OR DISSENTERS' RIGHTS
Allied Capital -- Maryland Law BLC -- Delaware Law
Under Maryland law, shareholders of a Under Delaware law, shareholders of a
corporation are entitled to dissenters' corporation are entitled to dissenters'
rights of appraisal in connection with rights of appraisal in connection with
a: a merger or consolidation of the
corporation. Shareholders generally do
- Merger or consolidation; not have appraisal rights if:
- Share exchange; - A vote of the shareholders of the
corporation is not necessary to
- Transfer of assets requiring authorize the transaction; or
shareholder approval;
- The shares held by the shareholders
- Amendment to the articles of are of a class or series listed on a
incorporation which alters the national securities exchange,
contract rights of any outstanding designated as a national market
stock and substantially adversely system security on an interdealer
affects shareholder rights if the quotation system by the NASD or are
right to do so is not reserved in the held of record by more than 2,000
articles of incorporation; or shareholders on the date set to
determine the shareholders
- Business combination
transaction.
</TABLE>
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<TABLE>
<S> <C>
APPRAISAL OR DISSENTERS' RIGHTS (CONTINUED)
entitled to vote on the transaction.
However, except with respect to
transactions involving an interested However, appraisal rights are available
shareholder, shareholders generally for the shares, or depository receipts
have no dissenter's right of appraisal representing such shares, of any class
with respect to their shares if: or series of stock of a corporation if
the holders are required by the terms
- The shares are listed on a of the agreement of merger or
national securities exchange or consolidation to accept for their stock
are designated as a national anything except:
market system security on an
interdealer quotation system by - Shares of stock or depository
the NASD; or receipts representing such shares, of
the corporation surviving or
- The shares are that of the resulting from the transaction;
successor in the merger, unless or
(1) the merger alters the
contractual rights of the shares - Shares of stock or depository
as expressly set forth in the receipts representing such shares, of
articles of incorporation and the any other corporation which at the
articles of incorporation do not effective date of the transaction
reserve the right to do so or (2) the will be listed on a national
shares are to be changed or converted securities exchange, designated as a
in whole or in part in the merger national market system security on an
into something other than either interdealer quotation system by the
shares in the successor or cash, NASD or are held of record by more
scrip, or other rights or interests than 2,000 shareholders;
arising out of provisions for the
treatment of fractional shares in the - Cash in lieu of fractional shares or
successor. depository receipts of the
corporation surviving or resulting
from the transaction; or
- Any combination of such shares of
stock, depository receipts and cash
in lieu of fractional shares.
A corporation may provide in its
certificate of incorporation that
appraisal rights shall be available for
the shares of any class or series of
its stock as the result of an amendment
to its certificate of incorporation,
any merger or consolidation to which
the corporation is a party or a sale of
all or substantially all of the assets
of the corporation.
DERIVATIVE SUITS
Allied Capital -- Maryland Law BLC -- Delaware Law
There is no statutory right to Under Delaware law, BLC shareholders
bring a derivative suit under have a statutory right to bring a
Maryland law; however, there is a derivative suit.
clear common law right in Maryland to
bring a derivative suit.
</TABLE>
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<PAGE> 148
Following the merger, New BLC will adopt a new certificate of incorporation
and bylaws, which among other things will eliminate certain restrictions on
voting power.
ALLIED CAPITAL'S DIVIDEND REINVESTMENT PLAN
Allied Capital has adopted an "opt out" dividend reinvestment plan ("DRIP
plan"). Under the DRIP plan, if you own shares of Allied Capital common stock
registered in your own name, the Allied Capital transfer agent, acting as
reinvestment plan agent, will automatically reinvest any dividend in additional
shares of Allied Capital common stock. Shareholders may change enrollment status
in the DRIP plan at any time by contacting either the plan agent or Allied
Capital.
A shareholder's ability to participate in a DRIP plan may be limited
according to how the shares of Allied Capital common stock 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 of Allied Capital common stock in their
own name. Shareholders will be informed of their right to opt out of the DRIP
plan in Allied Capital annual and quarterly 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, 59 Maiden Lane, New York, New York 10038. Their telephone number
is 800-937-5449.
Under the DRIP plan, Allied Capital may issue new shares unless the market
price of the outstanding shares of Allied Capital common stock is less than 110%
of the last reported net asset value. Alternatively, the plan agent may buy
shares of Allied Capital common stock in the market. Allied Capital values newly
issued shares of Allied Capital common stock for the DRIP plan at the average of
the reported last sale prices of the outstanding shares of Allied Capital common
stock 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 of Allied Capital common stock, 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.
LEGAL PROCEEDINGS
Allied Capital is a party to certain lawsuits in the normal course of its
business, except as discussed in "The Merger Proposal -- Certain Litigation
Relating to the Merger." While the outcome of these legal proceedings cannot at
this time be predicted with certainty, Allied Capital does not expect that these
proceedings will have a material effect upon Allied Capital's financial
condition or results of operations.
BLC is a party to certain lawsuits in the normal course of its business,
except as discussed in "The Merger Proposal -- Certain Litigation Relating to
the Merger." While the outcome of these legal proceedings cannot at this time be
predicted with
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<PAGE> 149
certainty, Allied Capital does not expect that these proceedings will have a
material effect on BLC's financial condition or results of operations.
SHAREHOLDER PROPOSALS FOR
BLC 2001 ANNUAL MEETING
The board of directors of BLC previously announced that it intended to
schedule an annual meeting of shareholders of the Company for February 15, 2001,
if necessary. The annual meeting will be held only if the merger transaction
discussed in this proxy statement/prospectus is not approved. In order for
shareholder proposals for this meeting to have been eligible for inclusion in
BLC's proxy statement for that meeting, they must have been received by BLC at
its principal office in New York, New York by October 15, 2000. Shareholders who
intend to present a proposal at the 2001 annual meeting of shareholders of BLC
without inclusion of such proposal in BLC's 2001 proxy materials are required to
provide notice of such proposal to BLC no later than December 15, 2000.
OTHER MATTERS
It is not expected that any matters other than those described in this
proxy statement/prospectus will be brought before the BLC special meeting. If
any other matters are presented, however, it is the intention of the persons
named in the BLC proxy to vote the proxy in accordance with the discretion of
the persons named in such proxy.
LEGAL MATTERS
The validity of the Allied Capital common stock to be issued in connection
with the Merger and certain tax consequences will be passed upon for Allied
Capital by Sutherland Asbill & Brennan LLP, Washington, DC. Certain legal
matters relating to BLC will be passed upon for BLC by Weil, Gotshal & Manges
LLP, New York, New York.
EXPERTS
The consolidated financial statements of Allied Capital, included in Allied
Capital's annual report on its 1999 Form 10-K and incorporated by reference in
this proxy statement/prospectus on Form N-14, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of BLC included in this proxy
statement/ prospectus, have been audited by Richard A. Eisner & Company, LLP,
independent auditors, to the extent indicated in their report appearing herein
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
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<PAGE> 150
WHERE YOU CAN FIND MORE INFORMATION
Allied Capital and BLC file annual, quarterly, and special reports, proxy
statements, and other information with the Commission. You may read and copy any
reports, statements, or other information filed by Allied Capital or BLC at the
Commission's public reference rooms at 450 5th Street, N.W., Washington, D.C.
20549. Please call the Commission at 1-202-942-8090 for more information on the
public reference rooms. The Commission also maintains an Internet site at
"http://www.sec.gov" that contains reports, proxy and information statements,
and other information regarding issuers, like Allied Capital and BLC, that file
electronically with the Commission. Copies may also be obtained, after paying a
duplicating fee, by electronic request to [email protected] or by written
request to Public Reference Section, Washington, D.C. 20549-0102.
You can also inspect reports, proxy statements, and other information about
Allied Capital at the offices of the Nasdaq National Market, 1735 K Street,
N.W., Washington, D.C. 20006. You can inspect reports, proxy statements, and
other information about BLC at the offices of The American Stock Exchange, 86
Trinity Place, New York, New York 10006.
Allied Capital has filed with the Commission a registration statement on
Form N-14 to register the Allied Capital common stock to be issued in the
merger. This proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Allied Capital in addition to being a proxy
statement of BLC for the BLC special meeting. As allowed by Commission rules,
this proxy statement/prospectus does not contain all the information you can
find in the registration statement and the exhibits to the registration
statement.
The Commission allows us to "incorporate by reference" information into
this proxy statement/prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is considered part of
this proxy statement/ prospectus, except for any information superseded by
information in (or incorporated by reference in) this proxy
statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that Allied Capital has previously filed with the Commission. These
documents contain important information about Allied Capital and its finances.
<TABLE>
<CAPTION>
ALLIED CAPITAL FILINGS PERIOD
---------------------- ------
<S> <C>
Annual Report on Form 10-K................... Year ended December 31, 1999
("1999 Form 10-K")
Quarterly Reports on Form 10-Q............... Quarter ended March 31, 2000,
Quarter ended June 30, 2000
Quarter ended September 30, 2000
</TABLE>
Allied Capital is also incorporating by reference all additional documents
that it may file with the Commission between the date of this proxy
statement/prospectus and the date of the special meeting.
Documents incorporated by reference are available from Allied Capital
without charge, except for any exhibits to those documents unless Allied Capital
has
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<PAGE> 151
specifically incorporated by reference a particular exhibit in this proxy
statement/ prospectus. Shareholders may obtain documents incorporated by
reference in this proxy statement/prospectus by requesting them in writing or by
telephone from Allied Capital at the following address:
Suzanne Sparrow, Secretary
Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
Phone: (888) 818-5298
If you would like to request documents from Allied Capital, please do so by
December 22, 2000 to receive them before the BLC Special Meeting.
We have not authorized anyone to provide you with information that is
different from, or in addition to, what is contained or referred to in this
proxy statement/ prospectus. Allied Capital has supplied all information
contained or incorporated by reference in this proxy statement/prospectus
relating to Allied Capital, and BLC has supplied all such information relating
to BLC. If you are in a jurisdiction where offers to exchange or sell, or
solicitations of offers to exchange or buy, the securities offered by this
document or the solicitation of proxies is unlawful, or if you are a person to
whom it is unlawful to direct these types of activities, then the offer
presented in this document does not extend to you. The information contained in
this document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
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<PAGE> 152
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUARTERLY FINANCIAL STATEMENTS
Consolidated Condensed Financial Statements -- September 30,
2000 (unaudited).......................................... F-2
Consolidated Condensed Balance Sheets -- September 30, 2000
(unaudited) and June 30, 2000............................. F-3
Consolidated Condensed Statements of Income -- For the Three
Months ended September 30, 2000, 1999, and 1998
(unaudited)............................................... F-4
Consolidated Condensed Statements of Changes in
Shareholders' Equity -- For the Three Months Ended
September 30, 2000 (unaudited)............................ F-5
Consolidated Condensed Statements of Cash Flows -- For the
Three Months Ended September 30, 2000 and 1999
(unaudited)............................................... F-6
Notes to Consolidated Condensed Financial Statements -- For
the Three Months Ended September 30, 2000................. F-7
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements -- June 30, 2000.......... F-10
Consolidated Balance Sheets -- June 30, 2000 and 1999....... F-11
Consolidated Statements of Income -- For the Years Ended
June 30, 2000, 1999, and 1998............................. F-12
Consolidated Statements of Changes in Shareholders'
Equity -- For the Years Ended June 30, 2000, 1999, and
1998...................................................... F-13
Consolidated Statements of Cash Flows -- For the Years Ended
June 30, 2000, 1999, and 1998............................. F-14
Notes to Consolidated Financial Statements.................. F-15
Independent Auditors Report................................. F-28
</TABLE>
F-1
<PAGE> 153
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
F-2
<PAGE> 154
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED)
<S> <C> <C>
Assets
Loans receivable -- net................................... $20,854 $22,291
Loans held for sale....................................... 5,842 7,494
Cash...................................................... 7,202 9,609
Restricted cash........................................... 1,864 1,860
Accounts receivable -- loans sold......................... 9,786 15,121
Accounts and other receivables............................ 2,126 1,803
Prepaid expenses and deposits............................. 652 592
Leasehold improvements, furniture and equipment, net of
accumulated depreciation............................... 1,253 1,288
Servicing assets.......................................... 7,507 7,189
Residual interests........................................ 17,284 16,794
Deferred financing costs, net of accumulated
amortization........................................... 1,046 1,132
Other assets.............................................. 647 723
------- -------
Total assets...................................... $76,063 $85,896
======= =======
Liabilities
Advances under credit facilities.......................... $36,353 $45,840
Accounts payable and accrued expenses..................... 1,262 2,073
Due to participants....................................... 2,239 2,466
Allowance for estimated future losses on loans sold....... 6 10
Convertible debentures.................................... 6,486 6,486
Customer deposits......................................... 1,773 2,443
Deferred income tax liability............................. 1,737 1,487
------- -------
Total liabilities................................. 49,856 60,805
------- -------
Shareholders' equity:
Preferred stock, $.10 par value:
Authorized -- 2,000,000 shares, issued and
outstanding -- none
Common stock, $.01 par value:
Authorized -- 35,000,000 shares, issued and outstanding
21,546,936 and 20,467,875, respectively............... 215 205
Additional paid-in capital................................ 13,744 12,923
Retained earnings......................................... 11,899 11,147
Notes receivable for exercise of options.................. (522) 0
Accumulated other comprehensive income -- unrealized gain
on residual interests.................................. 871 816
------- -------
Total shareholders' equity........................ 26,207 25,091
------- -------
Total liabilities and shareholders' equity........ $76,063 $85,896
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 155
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------ ------
<S> <C> <C> <C>
Revenues:
Gain on sale of loans..................................... $3,195 $2,119 $2,671
Interest income........................................... 990 1,132 1,010
Service fee income........................................ 786 685 420
Miscellaneous............................................. 529 577 525
------ ------ ------
Total revenues.................................... 5,500 4,513 4,626
------ ------ ------
Expenses:
Operating costs........................................... 2,495 2,102 2,091
General and administrative................................ 808 775 722
Interest.................................................. 945 854 836
------ ------ ------
Total expenses.................................... 4,248 3,731 3,649
------ ------ ------
Income before provision for income taxes.................... 1,252 782 977
Provision for income taxes.................................. 500 310 410
------ ------ ------
Net income.................................................. $ 752 $ 472 $ 567
====== ====== ======
Earnings per share
Basic..................................................... $ 0.04 $ 0.02 $ 0.03
Diluted................................................... $ 0.03 $ 0.02 $ 0.03
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 156
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE ACCUMULATED
------------------- ADDITIONAL FOR OTHER
NUMBER OF PAID-IN RETAINED EXERCISE COMPREHENSIVE COMPREHENSIVE
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AMOUNT CAPITAL EARNINGS OF OPTIONS INCOME INCOME TOTAL
SHARES) ---------- ------ ---------- -------- ---------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 2000........ 20,467,875 $205 $12,923 $11,147 $816 $25,091
Net income.................. 752 752 752
Warrants and non-qualified
options exercised......... 1,079,061 10 642 (522) 130
Pre-confirmation net
operating loss
utilization............... 179 179
Change in unrealized gain on
residual interests, net of
income tax effect......... 55 55 55
---------- ---- ------- ------- ----- ---- ---- -------
$807
====
Balance, September 30, 2000... 21,546,936 $215 $13,744 $11,899 $(522) $871 $26,207
========== ==== ======= ======= ===== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 157
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 752 $ 472
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 655 438
Provisions for credit losses........................... 150 29
Deferred income tax expense............................ 429 247
Loans held for sale.................................... 1,652 (2,193)
Changes in:
Restricted cash........................................ (4) (383)
Accounts receivable -- loans sold...................... 5,335 2,538
Accounts and other receivables......................... (323) 1,072
Servicing asset........................................ (725) (591)
Due to participants.................................... (227) 156
Prepaid expenses and other............................. (60) (348)
Accrued expenses....................................... (811) 152
Customer deposits...................................... (670) 286
------- -------
Net cash provided by operating activities......... 6,153 1,875
------- -------
Cash flows from investing activities:
Loans originated and purchased............................ (6,799) (9,209)
Principal collections and sales of loans receivable....... 8,159 425
Origination of residual interests......................... (1,163) (535)
Principal collections of residual interests............... 728 335
Acquisition of equipment.................................. (54) (206)
------- -------
Net cash provided by (used in) investing
activities....................................... 871 (9,190)
------- -------
Cash flows from financing activities:
Net borrowings under lines of credit...................... (9,487) 5,088
Net proceeds from debentures.............................. 0 662
Proceeds from issuance of common stock and exercise of
warrants and options................................... 130 0
Principal payments on notes payable....................... 0 (25)
Deferred financing cost................................... (74) (200)
------- -------
Net cash provided by (used in) financing
activities....................................... (9,431) 5,525
------- -------
Net decrease in cash........................................ (2,407) (1,790)
Cash at beginning of period................................. 9,609 4,229
------- -------
Cash at end of period....................................... $ 7,202 $ 2,439
======= =======
Supplemental disclosures of cash flow information:
Cash paid during period for interest expense.............. $ 997 $ 776
Cash paid during period for income taxes.................. $ 175 $ 190
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 158
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and the
applicable rules of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending June 30, 2001. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended June 30, 2000.
PRINCIPLES OF CONSOLIDATION AND PREPARATION
The accompanying consolidated financial statements include the accounts of
BLC Financial Services, Inc. (the "Company") and its wholly owned subsidiaries.
BUSINESS OPERATIONS
The Company is primarily engaged in the business of originating, selling
and servicing loans to small businesses under the Section 7(a) Guaranteed Loan
Program ("7(a) Program") sponsored by the United States Small Business
Administration ("SBA"). Additionally, the Company originates, sells and services
loans to businesses under the United States Department of Agriculture ("USDA")
Rural Business -- Cooperative Business and Industry ("B&I") Guaranteed Loan
Program.
LOAN AND REVENUE RECOGNITION
The Company's policy is to sell the SBA or USDA guaranteed portion of all
loans that it originates in the secondary market on a non-recourse basis. The
guaranteed portion of the loans receivable that have been originated, but not
yet sold, are carried at the lower of aggregate cost or market value. Market
value is determined by outside commitments from investors or current yield on
similar loans. Loans receivable held for investment are stated at the principal
amount outstanding less deferred income.
Upon the sale of the loans, the Company allocates the cost, based upon the
relative fair values, to the guaranteed portion of the loan, the unguaranteed
portion of the loan, the servicing asset and residual interest, if any.
Gain on sales of loans receivable principally represents the present value
of the differential between the interest rates charged by the Company and the
interest rates passed on to the purchaser of the receivables, after considering
the effects of estimated prepayments, repurchases and normal servicing fees.
Gains on the sale of loans receivable are recorded on the trade date using the
specific identification method.
F-7
<PAGE> 159
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally ceases to accrue interest income on loan receivables
which become 90 days delinquent. The Company then categorizes these loans as
being in liquidation, and takes appropriate steps to attempt to collect the loan
in full. Any interest received on delinquent loans is either applied against
principal or reported as interest income, according to management's judgement as
to the collectability of principal.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
140") which is effective for periods beginning after December 15, 2000 for
certain provisions and transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. This statement
reconsidered and clarified certain provisions of and supercedes Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities". The Company does not
expect the adoption of FAS 140 to have a material impact on the Company's
results of operations, financial position or cash flows.
PER SHARE INFORMATION
Basic EPS is determined using net income divided by the weighted average
shares outstanding during the period. Diluted EPS is computed by dividing net
income, plus the after tax effect of the interest expense on the convertible
debentures, by the weighted average shares outstanding, assuming all dilutive
potential common shares were issued using the treasury stock method calculated
based upon average market price for the period.
DERIVATIVES
In connection with selling loans into a revolving securitization, the
Company enters into interest rate swaps in order to hedge against changes
between the prime rate and LIBOR. These are accounted for as cash flow hedges.
"Statement of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities" requires that the impact of cash flow hedges
be included in other comprehensive income until the related cash flow is
recognized in the statement of income.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("FAS 138") which is effective for
periods beginning after June 15, 2000. This statement amends certain provisions
of FAS 133. The Company does not expect the adoption of FAS 138 to have a
material impact on the Company's results of operations, financial position or
cash flows.
F-8
<PAGE> 160
BLC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
2. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses for the three months ended September 30, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) ------ ----
<S> <C> <C>
Balance at June 30,......................................... $1,153 $914
Provision for loan loss..................................... 154 28
Write-off................................................... 0 (39)
------ ----
Balance at September 30,.................................... $1,307 $903
====== ====
</TABLE>
3. SUBSEQUENT EVENTS
On October 31, 2000, BLC Financial Services, Inc. entered into a definitive
merger agreement to be acquired by Allied Capital Corporation ("Allied Capital")
through a stock for stock exchange. This transaction will create a private
portfolio company controlled by Allied Capital. Allied Capital also plans to
merge its small business portfolio and Allied Capital Express operations into
the new portfolio company. Allied Capital Express is Allied Capital's small
business lending division.
F-9
<PAGE> 161
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
F-10
<PAGE> 162
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Loans receivable -- net................................ $22,291,000 $21,936,000
Loans held for sale.................................... 7,494,000 8,922,000
Cash................................................... 9,609,000 4,229,000
Restricted cash........................................ 1,860,000 1,728,000
Accounts receivable -- loans sold...................... 15,121,000 8,982,000
Accounts and other receivables......................... 1,803,000 2,681,000
Prepaid expenses and security deposits................. 592,000 595,000
Leasehold improvements, furniture and equipment, net of
accumulated depreciation of $882,000 in 2000; $571,000
in 1999............................................... 1,288,000 1,207,000
Servicing assets....................................... 7,189,000 4,761,000
Residual interests..................................... 16,794,000 10,877,000
Deferred tax asset..................................... 0 1,000,000
Deferred financing costs, net of accumulated
amortization of $1,344,000 in 2000; $774,000 in
1999.................................................. 1,132,000 669,000
Other assets........................................... 723,000 450,000
----------- -----------
$85,896,000 $68,037,000
=========== ===========
LIABILITIES
Advances under credit facilities....................... $45,840,000 $39,488,000
Accounts payable and accrued expenses.................. 2,073,000 643,000
Due to participants.................................... 2,466,000 1,640,000
Allowance for estimated future losses on loans sold.... 10,000 77,000
Notes payable.......................................... 0 120,000
Convertible debentures................................. 6,486,000 4,725,000
Customer deposits...................................... 2,443,000 2,197,000
Deferred tax liability................................. 1,487,000 0
----------- -----------
Total liabilities................................. 60,805,000 48,890,000
----------- -----------
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value:
Authorized -- 2,000,000 shares, issued and
outstanding -- none
Common stock, $.01 par value:
Authorized -- 35,000,000 shares, issued and outstanding
20,467,875 in 2000 and 20,288,875 in 1999............. 205,000 202,000
Additional paid-in capital.................................. 12,923,000 12,659,000
Retained earnings........................................... 11,147,000 5,865,000
Accumulated other comprehensive income -- unrealized gain on
residual interests (net of income taxes of $533,000 in
2000; $305,000 in 1999)................................... 816,000 421,000
----------- -----------
Total shareholders' equity........................ 25,091,000 19,147,000
----------- -----------
$85,896,000 $68,037,000
=========== ===========
</TABLE>
See notes to financial statements
F-11
<PAGE> 163
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gain on sale of loans............................ $16,687,000 $11,868,000 $10,583,000
Interest income.................................. 4,654,000 3,550,000 2,439,000
Service fee income............................... 2,896,000 2,355,000 1,150,000
Miscellaneous.................................... 2,129,000 1,649,000 1,557,000
----------- ----------- -----------
26,366,000 19,422,000 15,729,000
----------- ----------- -----------
Expenses:
Operating costs.................................. 11,237,000 8,636,000 6,481,000
General and administrative....................... 3,126,000 2,746,000 1,753,000
Interest......................................... 3,865,000 2,886,000 2,158,000
----------- ----------- -----------
18,228,000 14,268,000 10,392,000
----------- ----------- -----------
Income before provision for income taxes.............. 8,138,000 5,154,000 5,337,000
Provision for income taxes............................ 2,856,000 2,051,000 2,111,000
----------- ----------- -----------
Net income............................................ $ 5,282,000 $ 3,103,000 $ 3,226,000
=========== =========== ===========
Earnings per share
Basic............................................ $ .26 $ .16 $ .18
Diluted.......................................... $ .22 $ .14 $ .15
</TABLE>
See notes to financial statements
F-12
<PAGE> 164
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED ACCUMULATED
--------------------- ADDITIONAL EARNINGS OTHER
NUMBER PAID-IN (ACCUMULATED COMPREHENSIVE COMPREHENSIVE
OF SHARES AMOUNT CAPITAL DEFICIT) INCOME INCOME TOTAL
---------- -------- ----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997......... 17,341,243 $173,000 $ 7,391,000 $ (464,000) $ 90,000 $ 7,190,000
Exercise of warrants........... 2,437,206 24,000 1,264,000 1,288,000
Net income..................... 3,226,000 $3,226,000 3,226,000
Pre-confirmation net operating
loss utilization.............. 1,996,000 1,996,000
Issuance of warrants in
connection with professional
services rendered............. 189,000 189,000
Change in unrealized gain on
residual interests, net of
income tax effect............. 380,000 380,000 380,000
---------- -------- ----------- ----------- -------- ---------- -----------
$3,606,000
----------
Balance, June 30, 1998......... 19,778,449 197,000 10,840,000 2,762,000 470,000 14,269,000
Exercise of warrants and
options....................... 510,426 5,000 286,000 291,000
Net income..................... 3,103,000 $3,103,000 3,103,000
Pre-confirmation net operating
loss utilization.............. 1,533,000 1,533,000
Change in unrealized gain on
residual interests, net of
income tax effect............. (49,000) (49,000) (49,000)
---------- -------- ----------- ----------- -------- ---------- -----------
$3,054,000
----------
Balance, June 30, 1999......... 20,288,875 202,000 12,659,000 5,865,000 421,000 19,147,000
Exercise of warrants and
options....................... 179,000 3,000 89,000 92,000
Net income..................... 5,282,000 5,282,000 5,282,000
Pre-confirmation net operating
loss utilization.............. 92,000 92,000
Issuance of warrants in
connection with professional
services rendered............. 83,000 83,000
Change in unrealized gain on
residual interests, net of
income tax effect............. 395,000 395,000 395,000
---------- -------- ----------- ----------- -------- ---------- -----------
$5,677,000
==========
Balance, June 30, 2000......... 20,467,875 $205,000 $12,923,000 $11,147,000 $816,000 $25,091,000
========== ======== =========== =========== ======== ===========
</TABLE>
See notes to financial statements
F-13
<PAGE> 165
BLC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income.............................................. $ 5,282,000 $ 3,103,000 $ 3,226,000
Adjustments to reconcile net income to net cash provided
by (used in) Operating activities:
Depreciation....................................... 310,000 233,000 131,000
Amortization....................................... 1,809,000 1,047,000 782,000
Provisions for credit losses....................... 702,000 398,000 190,000
Deferred income tax expense........................ 2,351,000 1,560,000 1,711,000
Issuance of warrants in connection with
professional services rendered................... 83,000 0 189,000
Loans held for sale originated..................... (32,345,000) (14,700,000) (20,202,000)
Sales of loans held for sale....................... 33,773,000 15,237,000 15,863,000
Changes in:
Restricted cash.................................... (132,000) 40,000 (1,768,000)
Accounts receivable -- loans sold.................. (6,139,000) (730,000) (5,005,000)
Accounts and other receivables..................... 878,000 (1,675,000) (724,000)
Prepaid expenses and security deposits............. 3,000 (162,000) (212,000)
Servicing assets................................... (3,696,000) (2,299,000) (1,712,000)
Accrued expenses................................... 1,430,000 (520,000) 741,000
Due to participants................................ 826,000 1,376,000 (260,000)
Customer deposits.................................. 246,000 993,000 873,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities....................................... 5,381,000 3,901,000 (6,177,000)
------------ ------------ ------------
Cash flows from investing activities:
Loans originated........................................ (41,377,000) (21,793,000) (22,673,000)
Principal collections and sales of loans receivable..... 39,980,000 18,480,000 8,937,000
Origination of residual interest........................ (7,085,000) (6,965,000) (3,823,000)
Principal collections on residual interests............. 1,791,000 1,061,000 429,000
Acquisition of equipment................................ (391,000) (698,000) (529,000)
------------ ------------ ------------
Net cash used in investing activities.............. (7,082,000) (9,915,000) (17,659,000)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under lines of credit.................... 6,352,000 6,947,000 23,921,000
Net proceeds from notes payable......................... 0 620,000 0
Proceeds from issuance of debentures.................... 1,621,000 922,000 2,978,000
Proceeds from issuance of common stock and exercise of
warrants and options.................................. 92,000 291,000 1,288,000
Principal payments on debentures........................ 0 (25,000) 0
Due to affiliates....................................... 140,000 0 (2,394,000)
Deferred financing costs................................ (1,004,000) (196,000) (920,000)
Principal payments on notes payable..................... (120,000) (46,000) (110,000)
------------ ------------ ------------
Net cash provided by financing activities.......... 7,081,000 8,513,000 24,763,000
------------ ------------ ------------
Net increase in cash........................................ 5,380,000 2,499,000 927,000
Cash at beginning of year................................... 4,229,000 1,730,000 803,000
------------ ------------ ------------
Cash at end of year......................................... $ 9,609,000 $ 4,229,000 $ 1,730,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest........................................... $ 3,696,000 $ 2,899,000 $ 1,950,000
Income taxes....................................... $ 408,000 $ 1,011,000 $ 175,000
</TABLE>
See notes to financial statements
F-14
<PAGE> 166
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BUSINESS OPERATIONS:
The Company is primarily engaged in the business of originating, selling
and servicing loans to small businesses under the Section 7(a) Guaranteed Loan
Program sponsored by the United States Small Business Administration ("SBA").
Additionally, the Company originates, sells and services loans to businesses
under the United States Department of Agriculture Rural Business Cooperative
Business and Industry Guaranteed Loan Program ("B&I"). The Company sells the SBA
and B&I guaranteed portion of the loan in the secondary market, without
recourse, at either a premium or at par, and sells the majority of the remaining
SBA unguaranteed portions either as loan sales or securitizations. These sales
may be with limited recourse, full recourse or no recourse.
PRINCIPLES OF CONSOLIDATION AND PREPARATION:
The accompanying consolidated financial statements include the accounts of
BLC Financial Services, Inc. (the "Company") and its corporate subsidiaries
after elimination of all significant intercompany accounts and transactions. The
prior years' financial statements have been reclassified to conform to the
current year presentation.
ACCOUNTING FOR LOANS AND REVENUE RECOGNITION:
The guaranteed portion of the loans receivable that have been originated,
but not yet sold, are carried at the lower of aggregate cost or market value.
Market value is determined by outside commitments from investors or current
yield on similar loans. Loans receivable held for investment are stated at the
principal amount outstanding less deferred income.
Upon the sale of loans, the Company allocates the cost, based upon the
relative fair values, to the guaranteed portion of the loan, the unguaranteed
portion of the loan, the servicing asset and residual interest, if any. Gain on
sales of loans receivable principally represents the present value of the
differential between the interest rates charged by the Company and the interest
rates passed on to the purchaser of the receivables, after considering the
effects of estimated prepayments, repurchases and normal servicing fees. Gains
on the sale of loan receivables are recorded on the trade date using the
specific identification method.
The Company generally ceases to accrue interest income on loan receivables
which become 90 days delinquent. Once the Company has determined that it will be
unable to collect all amounts due according to the contractual terms of the loan
agreement, the loan is categorized as impaired and management actively begins
the liquidation process. Typically the SBA or USDA is contacted and the
guaranteed portions of the loan are then repurchased from either the secondary
marketplace or from the Company. Contractual interest received on nonaccrual
loans is either applied against principal or reported as interest income,
according to management's judgement as to the collectibility of principal.
F-15
<PAGE> 167
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -- (CONTINUED)
CREDIT LOSSES:
The adequacy of the allowances for credit losses on loans receivable and
loans sold with recourse are determined through a quarterly review of
outstanding loans, commitments to extend credit and the outstanding loans sold
with recourse. The impact of economic conditions on the creditworthiness of the
borrowers is given consideration, as well as credit loss experience, changes in
the composition and volume of the loan portfolio, and management's assessment of
the risk inherent in the loan portfolio. These and other factors are used in
assessing the overall adequacy of the allowance for credit losses and the
resulting provision for credit losses.
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance for credit losses at a level considered adequate to cover
the losses of principal in the existing portfolio. However, the amount to be
realized from collateral securing the impaired loans cannot be determined until
their ultimate disposition. The Company's charge off policy is based on an
account by account review for all loans receivable.
Under certain limited circumstances, the Company may be liable, on loans
that it originated, for losses incurred by the SBA. Management considers this
contingency in determining the adequacy of the allowance for credit losses.
RESIDUAL INTERESTS:
Upon the sale of loans, the Company may recognize a residual interest. The
residual interest represents the estimated discounted cash flow of the
differential between the total interest to be earned on the loans sold and the
sum of the interest to be paid to the participants and the contractual servicing
fee.
The fair value of the residual interest is determined based on various
economic factors including loan size, dates of origination, terms and geographic
locations. The Company also used other available information such as reports on
historical average loan maturity as compared to the contractual loan maturity.
The Company periodically reviews these factors and, if necessary, adjusts the
remaining asset to the fair value of the residual interest. As of June 30, 2000,
the average loan prepayment, estimated loan loss and cash flow discount rate
assumptions are 18%, 1% and 9 3/4%, respectively.
The residual interests are accounted for as available-for-sale securities
and are stated at estimated fair value. Unrealized gains and losses, net of the
income tax effect, have been included in total accumulated other comprehensive
income.
SERVICING ASSETS:
Servicing assets arise from the sale of fractional interests of loans.
Servicing assets represent the estimated present value of the differential
between the contractual servicing fee and the Company's normal servicing cost.
These capitalized amounts are amortized over the estimated average life of the
loans in each pool sold. The Company reviews the carrying
F-16
<PAGE> 168
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -- (CONTINUED)
amount of each pool for possible impairment. If the estimated present value of
the future servicing income is less than the carrying amount, the Company
recognizes an impairment loss and reduces future amortization accordingly.
Management has determined that the primary risk characteristics for the
servicing pools are the type of loan and the year of origination.
LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT:
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over five to seven years, which approximates the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the lease term or its economic life.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income plus all other changes in net
assets from nonownership sources.
DERIVATIVES
In connection with selling loans into a revolving securitization, the
Company enters into interest rate swaps in order to hedge against changes
between the prime rate and LIBOR. These are accounted for as cash flow hedges.
"Statement of Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities" requires that the impact of cash flow hedges
be included in other comprehensive income until the related cash flow is
recognized in the statement of income.
PER SHARE INFORMATION:
Basic earnings per share ("EPS") is determined using net income divided by
the weighted average shares outstanding during the period. Diluted EPS is
computed by dividing net income, plus the after tax effect of the interest
expense on the convertible debentures, by the weighted average shares
outstanding, assuming all dilutive potential common shares were issued using,
with respect to the assumed proceeds from the exercise of dilutive options and
warrants, the treasury stock method calculated based upon average market price
for the period.
F-17
<PAGE> 169
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -- (CONTINUED)
The following table presents the basic and diluted EPS for the years ended
June 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------- -------------------------------- ----------
WEIGHTED WEIGHTED
AVERAGE PER AVERAGE PER
NUMBER OF SHARE NUMBER OF SHARE
AMOUNT SHARES AMOUNT AMOUNT SHARES AMOUNT AMOUNT
---------- ---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income..................................... $5,282,000 $3,103,000 $3,226,000
========== ========== ==========
Basic EPS
Income available to common Shareholders....... $5,282,000 20,299,453 $.26 $3,103,000 20,017,158 $.16 $3,226,000
==== ====
Effect of diluted stock options and
warrants.................................... 2,011,820 2,613,168
Effect of convertible debentures.............. 316,000 2,806,893 195,000 1,747,962 91,000
---------- ---------- ---------- ---------- ----------
Diluted EPS
Income available to common shareholders....... $5,598,000 25,118,166 $.22 $3,298,000 24,378,288 $.14 $3,317,000
========== ========== ==== ========== ========== ==== ==========
<CAPTION>
1998
-------------------
WEIGHTED
AVERAGE PER
NUMBER OF SHARE
SHARES AMOUNT
---------- ------
<S> <C> <C>
Net income.....................................
Basic EPS
Income available to common Shareholders....... 18,287,002 $.18
Effect of diluted stock options and
warrants.................................... 2,306,048
Effect of convertible debentures.............. 831,025
----------
Diluted EPS
Income available to common shareholders....... 21,424,075 $.15
========== ====
</TABLE>
INCOME TAXES:
The Company and its subsidiaries file a consolidated Federal income tax
return. Deferred income taxes relate to temporary differences and the net
operating loss carryforwards.
USE OF ESTIMATES:
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK BASED COMPENSATION:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("FAS 123") allows companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") but disclose the pro forma effects on net income
had the fair value of the options been expensed. The Company has elected to
continue to apply APB 25 in accounting for its employee stock option incentive
plans.
NOTE 2. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
The loans receivable are principally long-term business loans, with initial
terms ranging from 7 to 25 years, made to qualifying small businesses. The loans
have variable interest rates which adjust based upon the prime rate.
F-18
<PAGE> 170
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT
LOSSES -- (CONTINUED)
As of June 30, 2000 and 1999, loans receivable-net consisted of:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Loans receivable........................................... $23,966,000 $23,860,000
Less:
Deferred income.......................................... (522,000) (1,010,000)
Allowance for credit losses.............................. (1,153,000) (914,000)
----------- -----------
Net loans receivable....................................... $22,291,000 $21,936,000
=========== ===========
</TABLE>
As of June 30, 2000, contractual maturities of loans receivable for each of
the next five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2001........................................................ $330,000
2002........................................................ 370,000
2003........................................................ 414,000
2004........................................................ 463,000
2005........................................................ 519,000
</TABLE>
As of June 30, 2000 and 1999, the impaired loan portfolio totaled
$1,879,000 and $1,673,000, respectively, for which specific allocations to the
allowance for credit losses aggregated $538,000 and $382,000 respectively. The
average balance of the impaired loan portfolio for the year ended June 30, 2000
and 1999 approximated $1,776,000 and $1,741,000, respectively. The Company
recognized approximately $138,000 in interest income on its impaired loan
portfolio during the year ended June 30, 2000. The Company did not recognize any
interest income on its impaired loan portfolio during the years ended June 30,
1999 and 1998.
Changes in the allowance for credit losses for the three years ended June
30, 2000 were as follows:
<TABLE>
<S> <C>
Balance as of June 30, 1997................................. $ 901,000
Benefit for credit losses................................... (177,000)
Loans charged off........................................... (83,000)
----------
Balance as of June 30, 1998................................. 641,000
Provision for credit losses................................. 787,000
Loans charged off........................................... (514,000)
----------
Balance as of June 30, 1999................................. 914,000
Provision for credit losses................................. 769,000
Loans charged off........................................... (530,000)
----------
Balance as of June 30, 2000................................. $1,153,000
==========
</TABLE>
F-19
<PAGE> 171
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. SERVICING ASSETS AND RESIDUAL INTERESTS
Changes in servicing assets and residual interests for the three years
ended June 30, 2000 are as follows:
<TABLE>
<CAPTION>
SERVICING RESIDUAL
ASSETS INTERESTS
----------- -----------
<S> <C> <C>
Balance, June 30, 1997..................................... $ 1,972,000 $ 952,000
Assets originating from loan sales......................... 1,712,000 3,823,000
Amortization............................................... (414,000)
Principal payments......................................... (429,000)
Change in market value..................................... 711,000
----------- -----------
Balance, June 30, 1998..................................... 3,270,000 5,057,000
Assets originating from loan sales......................... 2,299,000 6,965,000
Amortization............................................... (808,000)
Principal payments......................................... (1,061,000)
Change in market value..................................... (84,000)
----------- -----------
Balance, June 30, 1999..................................... 4,761,000 10,877,000
Assets originating from loan sales......................... 3,696,000 7,085,000
Amortization............................................... (1,268,000)
Principal payments......................................... (1,791,000)
Change in market value..................................... 623,000
----------- -----------
Balance, June 30, 2000..................................... $ 7,189,000 $16,794,000
=========== ===========
</TABLE>
As of June 30, 2000, the net unrealized gains related to residual interests
were $1,349,000.
NOTE 4. FINANCING
As of June 30, 2000, the Company had $65,000,000 in revolving credit
facilities. The facilities are collateralized by loans receivable, loans held
for sale and accounts receivable - loans sold and the interest rates range from
the LIBOR rate plus 2% to the prime rate plus 1%. The facilities expire in
August 2001 and include covenants requiring the Company to, among other matters,
maintain minimum tangible net worth.
Debentures aggregating $3,303,000 as of June 30, 2000 and June 30, 1999
bear interest at 9 1/4% per annum, mature November 2001 and are convertible into
1,649,549 shares of the Company's common stock. Debentures aggregating
$3,183,000 as of June 30, 2000 and $1,422,000 as of June 30, 1999 bear interest
at 9% per annum, mature February 2003 and are convertible into 1,157,344 shares
of the Company's common stock. Debentures aggregating $1,540,000 (total
outstanding at the modification date) were initially convertible into common
stock at $3.50 per share. However, during the year ended June 30, 2000, the
conversion price was reduced to $2.75 per share, which exceeded the market price
at the modification date. This modification did not result in a charge to
operations. Additionally, these notes are subordinated to the revolving lines of
credit.
The principal payments on debentures of $3,303,000 and $3,183,000 are due
during the years ending June 30, 2002 and June 30, 2004, respectively.
F-20
<PAGE> 172
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES
The significant components of the Company's deferred income tax assets and
liabilities as of June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ----------
<S> <C> <C>
Deferred income tax assets:
Net operating losses..................................... $ 448,000 $1,305,000
Allowance for credit losses.............................. 442,000 382,000
Loan discount............................................ 199,000 390,000
Alternative minimum tax credit carryforward.............. 269,000 220,000
------------ ----------
1,358,000 2,297,000
Valuation allowance........................................ (448,000) (992,000)
------------ ----------
910,000 1,305,000
Deferred income tax liability:
Unrealized gain on residual Interest..................... (533,000) (305,000)
Gain on securitization................................... (1,864,000) 0
------------ ----------
(2,397,000) (305,000)
------------ ----------
Net deferred income tax (liability) asset.................. $ (1,487,000) $1,000,000
============ ==========
</TABLE>
The valuation allowance represents the tax benefit of the pre confirmation
net operating losses not utilized.
The significant components of the provision for income taxes for the years
ended June 30, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal....................................... $ 61,000 $ 98,000 $ 123,000
State......................................... 355,000 393,000 277,000
---------- ---------- -----------
Total current taxes...................... 416,000 491,000 400,000
---------- ---------- -----------
Deferred:
Federal, including utilization of
preconfirmation net operating losses
credited to additional paid in capital..... 2,650,000 2,248,000 3,572,000
State......................................... 334,000 10,000 (22,000)
Change in valuation allowance................. (544,000) (698,000) (1,839,000)
---------- ---------- -----------
Total deferred taxes..................... 2,440,000 1,560,000 1,711,000
---------- ---------- -----------
Provision for income taxes.................... $2,856,000 $2,051,000 $ 2,111,000
========== ========== ===========
</TABLE>
F-21
<PAGE> 173
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES -- (CONTINUED)
The difference between the statutory federal income tax rate on the
Company's income before income taxes and the Company's effective income tax rate
for the years ended June 2000, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
State income tax, net of federal benefit.................... 5.6 5.2 4.8
Miscellaneous............................................... (4.5) 0.6 0.8
---- ---- ----
Effective income tax rate................................... 35.1% 39.8% 39.6%
==== ==== ====
</TABLE>
NOTE 6. STOCK OPTIONS AND WARRANTS
The Company has stock option plans (the "Plans") for directors, officers
and employees that provide for the grant of nonqualified and incentive stock
options. The Board of Directors determines the exercise price (not to be less
than fair market value for incentive options) at the date of grant. The options
have a maximum term of 10 years and outstanding options expire from November
2000 through June 2005.
The Company applies APB 25 in accounting for its employee stock option
incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the
exercise price of the option at the date of grant. The effects of applying FAS
123 on the Company's pro forma results is not necessarily representative of the
effects on reported net income or loss for future years due to, among other
things, the vesting period of the stock options and the fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under FAS 123,
the Company's net income would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma income................................. $4,720,000 $2,938,000 $3,164,000
Pro forma earnings per share:
Basic.......................................... 0.23 0.15 0.17
Diluted........................................ 0.19 0.12 0.15
</TABLE>
The fair value of each option granted in 2000, 1999 and 1998 has been
estimated on the date of grant using the Black Scholes options pricing model
with the following assumptions: no dividend yield, expected volatility of 40%
(1998 and 1999) and 89% (2000), risk free interest rates ranging from 4.58% to
6.26% and expected lives of five years. The average fair value of options
granted during 2000, 1999 and 1998 were $1.33, $1.07 and 1.00, respectively.
F-22
<PAGE> 174
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
The following table summarizes stock option transactions under the Plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at the
beginning of year............. 3,491,017 $1.34 2,831,975 $1.04 1,922,475 $0.57
Options granted................. 800,000 2.05 1,049,042 2.84 1,332,000 1.54
Options exercised............... (179,000) .51 (35,000) .59 (422,500) 0.50
Options expired or canceled..... (3,000) .82 (355,000) 3.47
--------- --------- ---------
Outstanding options at the end
of year....................... 4,109,017 $1.52 3,491,017 $1.34 2,831,975 $1.04
========= ========= =========
</TABLE>
The following table summarizes information about the Plans' outstanding
options as of June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50 - $0.90 2,264,975 1.19 $ .71 1,711,475 $0.67
$1.47 - $2.90 1,498,542 3.93 2.33 527,117 2.26
$3.25 - $3.63 345,500 2.89 3.27 186,100 3.27
</TABLE>
As of June 30, 2000, 1999 and 1998, respectively, 1,086,000, 673,500 and
1,075,500 shares were available for grant under the Employee Stock Option Plan.
During the fiscal year ended June 30, 2000, the shareholders approved an
increase in the shares available under this Plan from 2,500,000 shares to
3,500,000 shares.
As of June 30, 2000, warrants outstanding to purchase 1,161,957 shares of
the Company's common stock ranged from $0.50 to $2.10 per share. These warrants
expire from November 2000 through June 2004.
As of June 30, 2000, 9,163,867 shares have been reserved for the exercise
of warrants, stock options and conversion of debentures.
During the years ended June 30, 1998 and June 30, 2000, the Company issued
warrants, which were immediately exercisable, to purchase 415,000 shares of
common stock (exercisable between $1.10 and $1.85 per share) and 60,000 shares
of common stock (exercisable at $2.10 per share), respectively, in connection
with professional services rendered. The fair value of each warrant granted has
been estimated on the date of grant using the Black Scholes pricing model with
the following assumptions: no dividend yield, expected volatility of 40% (1998)
and 89% (2000), risk free interest rates ranging from 5.5% to 6.66% and expected
lives ranging from 3 to 5 years.
F-23
<PAGE> 175
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. COMMITMENTS
REVOLVING SECURITIZATION:
During the year ended June 30, 2000, the Company entered into a $75 million
revolving securitization. Under the terms of this facility, the Company may
periodically sell the unguaranteed portion of the SBA loans to the
securitization conduit. Additionally, since the interest rates on the loans are
based upon the prime rate and the securitization interest rate is based upon
LIBOR, the Company concurrently with selling loans, enters into interest rate
swaps with an affiliate of the entity which purchases the securitization
instruments. During the year ended June 30, 2000, as a result of the interest
rate swap transactions, the charge to operations aggregated $12,000. As of June
30, 2000, the current balance of loans sold into this facility aggregated
$35,995,000.
LEASE COMMITMENTS:
The Company has entered into operating leases for office space expiring
through May 2009. Minimum future rental payments under these leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
2001........................................................ $ 752,000
2002........................................................ 574,000
2003........................................................ 575,000
2004........................................................ 559,000
2005........................................................ 538,000
Thereafter.................................................. 2,016,000
----------
$5,014,000
==========
</TABLE>
Rent expense for the years ended June 30, 2000, 1999 and 1998 aggregated
$786,000, $481,000 and $294,000, respectively.
NOTE 8. FINANCIAL INSTRUMENTS, CREDIT RISK CONCENTRATION AND OTHER MATTERS
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Values of Financial Instruments" ("FAS 107") requires disclosure of fair
value information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because no
market exists for certain of the Company's assets and liabilities, fair value
estimates are based upon judgments regarding credit risk, investor expectation
of economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment,
which significantly affect the estimates.
F-24
<PAGE> 176
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. FINANCIAL INSTRUMENTS, CREDIT RISK CONCENTRATION AND OTHER
MATTERS -- (CONTINUED)
The following summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements in
accordance with FAS 107:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Cash................................... $ 9,609,000 $ 9,609,000 $ 4,229,000 $ 4,229,000
Loans held for sale.................... 7,494,000 8,131,000 8,922,000 9,725,000
Servicing assets and residual
interest............................. 22,634,000 24,611,000 15,638,000 15,979,000
Loans receivable....................... 23,966,000 25,297,000 23,860,000 24,573,000
Accounts receivable.................... 15,121,000 15,121,000 8,982,000 8,982,000
Notes payable.......................... 45,840,000 45,840,000 39,608,000 39,608,000
Debentures............................. 6,486,000 6,486,000 4,725,000 4,725,000
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments are as follows:
CASH:
The carrying amount of cash approximates fair value.
LOANS HELD FOR SALE:
The Company has estimated the fair values reported based on recent sales.
LOANS RECEIVABLE, SERVICING ASSETS AND RESIDUAL INTERESTS:
The Company has estimated the fair value reported based on the present
value of expected future cash flows.
ACCOUNTS RECEIVABLE:
The carrying amount of accounts receivable approximates fair value.
NOTES PAYABLE:
Since these are primarily variable rate and short-term, the carrying
amounts approximate fair value.
DEBENTURES:
The fair value of the debentures is based upon the greater of market value
of the underlying common stock into which the debentures are convertible or the
effect of the difference between a market rate of interest and the stated fixed
rate of interest.
F-25
<PAGE> 177
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. FINANCIAL INSTRUMENTS, CREDIT RISK CONCENTRATION AND OTHER
MATTERS -- (CONTINUED)
LOAN COMMITMENTS:
Typically, the Company does not charge fees for commitments to originate
loans, except with respect to loans originated under the B&I Loan Program,
additionally, since the loans are variable rate, changes in interest rates do
not affect their fair value. Accordingly, the off-balance sheet instruments have
no estimated fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and loans receivable. The
Company maintains its cash in highly rated financial institutions. As of June
30, 2000, the Company had bank deposits exceeding federally insured limits by
approximately $11,759,000. The Company originates loans to a large number of
customers in diverse commercial entities and states. In the normal course of
business, the Company enters into commitments to extend credit. The Company uses
the same credit policies in making commitments as it does for loans receivable
reflected on the balance sheet. As of June 30, 2000, the Company's commitments
to extend credit aggregated $72,250,000. However, approximately $55,188,000 of
the commitments are SBA and B&I guaranteed loans which the Company intends to
sell in the secondary market.
As of June 30, 2000, the outstanding balance of loans sold with limited or
unlimited recourse aggregated $70,309,000. The Company's maximum exposure under
the recourse provisions is $9,568,000. The Company lends to diverse industries
across the United States, however, at June 30, 2000, loans originated in the
states of New York and Virginia represented approximately 11% and 10%,
respectively, of the Company's loans receivable. No other state represented more
than 10% of the Company's loans receivable. As of June 30, 2000, the lodging and
restaurant industries represented approximately 12% and 12% of the Company's
loans receivable, respectively. No other industry represented more than 10% of
the Company's loans receivable.
CONCENTRATIONS:
During the year ended June 30, 2000, no loan production company accounted
for more than 8% of loan originations. During the years ended June 30, 2000 and
1999, two loan production companies accounted for 15% and 24% of the Company's
loan originations, respectively. During the years ended June 30, 2000, 1999 and
1998, 83% of the guaranteed loans were sold to five securities dealers, 75% were
sold to three securities dealers and 83% were sold to four securities dealers,
respectively.
NOTE 9. RELATED PARTIES TRANSACTIONS
During the years ended June 30, 2000, 1999 and 1998, the maximum amount of
outstanding short-term loans payable to family members of an officer/shareholder
aggregated $300,000, $1,077,000 and $2,594,000, respectively. As of June 30,
2000 and 1999 no loans to the family
F-26
<PAGE> 178
BLC FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. RELATED PARTIES TRANSACTIONS -- (CONTINUED)
members were outstanding. Interest expense on these loans aggregated $20,000,
$19,000 and $17,000 in the years ended June 30, 2000, 1999 and 1998,
respectively.
Family members of an officer/shareholder purchased $950,000 of the
debentures issued in 1998 and $290,000 of the debentures issued in 1999. For the
year ended June 30, 2000 and 1999, interest expense on these debentures
aggregated $95,000 and $88,000, respectively. During the fiscal year ended June
30, 2000, an officer/shareholder exchanged $140,000 of advances due to him to an
unrelated third party that was then subsequently exchanged for a debenture.
NOTE 10. EMPLOYEE BENEFIT PLAN
The Company maintains a contributory employee savings plan for
substantially all its employees, in accordance with the provisions of Section
401(k) of the Internal Revenue Code. Pursuant to the terms of the plan,
participants can defer a portion of their income through contributions to the
plan.
F-27
<PAGE> 179
INDEPENDENT AUDITORS REPORT
Shareholders and Board of Directors
BLC Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of BLC
Financial Services, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three year period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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. 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 financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of BLC Financial
Services, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three year period ended June 30, 2000, in conformity
with generally accepted accounting principles.
/s/ Richard A. Eisner & Company,
LLP
Florham Park, New Jersey
September 15, 2000
F-28
<PAGE> 180
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 31, 2000
BY AND AMONG
ALLIED CAPITAL CORPORATION,
ALLIED CAPITAL B SUB CORPORATION,
AND
BLC FINANCIAL SERVICES, INC.
<PAGE> 181
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER; EFFECT OF MERGER................................ A-1
Section 1.1 The Merger.................................................. A-1
Section 1.2 Effective Time of the Merger................................ A-1
Section 1.3 Effects of Merger........................................... A-1
ARTICLE II THE SURVIVING CORPORATION................................... A-2
Section 2.1 Certificate of Incorporation................................ A-2
Section 2.2 By-Laws..................................................... A-2
Section 2.3 Officers and Directors...................................... A-2
ARTICLE III CONVERSION OF SHARES........................................ A-2
Section 3.1 Conversion of Shares........................................ A-2
Section 3.2 Surrender................................................... A-3
Section 3.3 Dividends; Transfer Taxes................................... A-4
Section 3.4 Fractional Securities....................................... A-4
Section 3.5 Closing of Company Transfer Books........................... A-4
Section 3.6 Stockholder Approval........................................ A-4
Section 3.7 Tax Treatment............................................... A-4
Section 3.8 Exercise and Conversion of Vested Stock Options and
Warrants.................................................... A-5
Section 3.9 Redemption or Conversion of Convertible Debentures.......... A-5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-5
Section 4.1 Execution and Delivery...................................... A-5
Section 4.2 Consents and Approvals...................................... A-5
Section 4.3 No Breach................................................... A-6
Section 4.4 Organization, Standing and Authority........................ A-6
Section 4.5 Capitalization of the Company............................... A-7
Section 4.6 Options and Other Stock Rights.............................. A-7
Section 4.7 Subsidiaries................................................ A-7
Section 4.8 Corporate Records........................................... A-8
Section 4.9 Information in Disclosure Documents......................... A-8
Section 4.10 SEC Documents; Financial Statements......................... A-8
Section 4.11 Liabilities................................................. A-9
Section 4.12 No Company Material Adverse Effect.......................... A-9
Section 4.13 Compliance with Laws........................................ A-9
Section 4.14 Permits..................................................... A-9
Section 4.15 Actions and Proceedings..................................... A-10
Section 4.16 Contracts and Other Agreements.............................. A-10
Section 4.17 Loan Portfolios............................................. A-12
Section 4.18 Real Property............................................... A-12
Section 4.19 Intellectual Property....................................... A-14
Section 4.20 Receivables................................................. A-15
Section 4.21 Banking..................................................... A-15
Section 4.22 Liens....................................................... A-15
Section 4.23 Employee Benefit Plans...................................... A-15
Section 4.24 Employee Relations.......................................... A-16
Section 4.25 Insurance................................................... A-17
Section 4.26 Officers, Directors, Employees, Consultants................. A-17
Section 4.27 Transactions with Directors, Officers and Affiliates........ A-17
Section 4.28 Operations of the Company................................... A-17
Section 4.29 Brokerage................................................... A-19
Section 4.30 Taxes....................................................... A-19
</TABLE>
i
<PAGE> 182
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.31 Environmental Laws.......................................... A-20
Section 4.32 Company Action.............................................. A-21
Section 4.33 Opinion of Financial Advisor................................ A-21
Section 4.34 Cancellation of Certain Agreements.......................... A-21
Section 4.35 Status of Certain Employment Agreements..................... A-21
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB............ A-21
Section 5.1 Execution and Delivery...................................... A-22
Section 5.2 Consents and Approvals...................................... A-22
Section 5.3 No Breach................................................... A-22
Section 5.4 SEC Documents; Financial Statements......................... A-23
Section 5.5 Shares of Parent Common Stock............................... A-23
Section 5.6 Organization, Standing and Authority of Parent and Sub...... A-24
Section 5.7 Capitalization.............................................. A-24
Section 5.8 Brokerage................................................... A-24
Section 5.9 Information in Disclosure Documents......................... A-24
Section 5.10 No Material Adverse Change.................................. A-25
Section 5.11 Sub Action.................................................. A-25
Section 5.12 Options and Other Stock Rights.............................. A-25
Section 5.13 Tax Information in Disclosure Documents..................... A-25
Section 5.14 Liabilities................................................. A-25
Section 5.15 Compliance with Laws........................................ A-25
Section 5.16 Permits..................................................... A-26
Section 5.17 Actions and Proceedings..................................... A-26
Section 5.18 Loan Portfolio.............................................. A-26
Section 5.19 No Prior Activities......................................... A-26
ARTICLE VI COVENANTS AND AGREEMENTS.................................... A-26
Section 6.1 Conduct of Business......................................... A-26
Section 6.2 Litigation Involving the Company............................ A-27
Section 6.3 Continued Effectiveness of Representations and Warranties of
the Parties................................................. A-28
Section 6.4 Corporate Examinations and Investigations;
Confidentiality............................................. A-28
Section 6.5 Indemnification of Company Officers and Directors........... A-28
Section 6.6 Registration Statement/Proxy Statement...................... A-29
Section 6.7 Compliance with the Securities Act.......................... A-29
Section 6.8 Nasdaq Listing.............................................. A-29
Section 6.9 Acquisition Proposals....................................... A-29
Section 6.10 Parent and Sub Approvals.................................... A-31
Section 6.11 Company Approvals........................................... A-31
Section 6.12 Nomination to Surviving Company Board....................... A-31
Section 6.13 Expenses.................................................... A-31
Section 6.14 Further Assurances.......................................... A-32
Section 6.15 Hart-Scott-Rodino........................................... A-32
Section 6.16 SBA Approval................................................ A-32
Section 6.17 Updating Schedules.......................................... A-32
Section 6.18 Employee Benefits........................................... A-32
Section 6.19 Company Recapitalization.................................... A-33
ARTICLE VII CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER.................................................. A-33
Section 7.1 Company Stockholder Approval................................ A-33
Section 7.2 Listing of Shares........................................... A-33
Section 7.3 Hart-Scott-Rodino........................................... A-33
</TABLE>
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<PAGE> 183
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 7.4 Effectiveness of Registration Statement..................... A-34
Section 7.5 SBA Approval................................................ A-34
Section 7.6 Litigation.................................................. A-34
Section 7.7 Futuronics Merger; Company Recapitalization................. A-34
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATION OF PARENT AND SUB TO
EFFECT THE MERGER........................................... A-34
Section 8.1 Representations and Covenants............................... A-34
Section 8.2 Absence of Material Adverse Change.......................... A-34
Section 8.3 Receipt of Agreements....................................... A-35
Section 8.4 Exercise and Conversion of Vested Stock Options and
Warrants.................................................... A-35
Section 8.5 Unvested Options............................................ A-35
Section 8.6 Convertible Debentures...................................... A-35
Section 8.7 Tax Opinion................................................. A-35
Section 8.8 Closing Conditions.......................................... A-35
ARTICLE IX CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO
EFFECT THE MERGER........................................... A-35
Section 9.1 Representations and Covenants............................... A-35
Section 9.2 Absence of Material Adverse Change.......................... A-36
Section 9.3 Tax Opinion................................................. A-36
Section 9.4 Closing Conditions.......................................... A-36
ARTICLE X CLOSING..................................................... A-36
ARTICLE XI NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES COVENANTS AND
AGREEMENTS.................................................. A-36
Section 11.1 Non-Survival of Representations, Warranties, Covenants and
Agreements.................................................. A-36
ARTICLE XII TERMINATION OF AGREEMENT.................................... A-36
Section 12.1 Termination................................................. A-36
Section 12.2 Effect of Termination....................................... A-37
ARTICLE XIII DEFINITIONS................................................. A-37
Section 13.1 Definitions................................................. A-37
ARTICLE XIV MISCELLANEOUS............................................... A-43
Section 14.1 Publicity................................................... A-43
Section 14.2 Parent Guaranty............................................. A-43
Section 14.3 Notices..................................................... A-43
Section 14.4 Entire Agreement............................................ A-43
Section 14.5 Waivers and Amendments; Non Contractual Remedies;
Preservation of Remedies; Liability......................... A-44
Section 14.6 GOVERNING LAW............................................... A-44
Section 14.7 Binding Effect; No Assignment............................... A-44
Section 14.8 Third Party Beneficiaries................................... A-44
Section 14.9 Counterparts................................................ A-44
Section 14.10 Exhibits and Schedules...................................... A-44
Section 14.11 Headings.................................................... A-45
Section 14.12 Submission to Jurisdiction; Venue........................... A-45
Section 14.13 Specific Performance........................................ A-45
Section 14.14 Severability................................................ A-45
</TABLE>
iii
<PAGE> 184
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October
31, 2000, is made by and among Allied Capital Corporation, a Maryland
corporation ("Parent"), Allied Capital B Sub Corporation, a Delaware corporation
and a wholly owned subsidiary of Parent ("Sub"), and BLC Financial Services,
Inc., a Delaware corporation (the "Company"). Certain terms used in this
Agreement are defined in Article XIII.
WITNESSETH:
WHEREAS, Parent and Sub desire to effect a business combination by means of
the merger of Sub with and into the Company;
WHEREAS, the Board of Directors of Parent and Sub and the stockholder of
Sub and the Board of Directors of the Company have approved the merger of Sub
with and into the Company (the "Merger"), upon the terms and subject to the
conditions set forth herein;
WHEREAS, simultaneously with the execution of this Agreement, the Named
Persons and Parent are entering into a Voting Agreement in the form attached
hereto as Exhibit A (the "Voting Agreement"); and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, the parties hereto agree
as follows:
ARTICLE I
THE MERGER; EFFECT OF MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of
this Agreement and in accordance with the applicable provisions of the Delaware
General Corporation Law, as amended, and any rules and regulations thereunder
(the "Delaware Corporation Law"), Sub shall be merged with and into the Company
and the separate existence of Sub shall thereupon cease. The name of the
Company, as the surviving corporation in the Merger (the "Surviving
Corporation"), shall by virtue of the Merger be changed to such name as Parent,
in its sole discretion, may choose.
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time as a properly executed certificate of merger or other
appropriate document is duly filed with the Secretary of State of Delaware,
which filing shall be made as soon as practicable following fulfillment or
waiver of the conditions set forth in Articles VII, VIII and IX hereof or such
later time as is specified in such filing (the "Effective Time").
SECTION 1.3 EFFECTS OF MERGER. The Merger shall have the effects set forth
in Section 259 of the Delaware Corporation Law.
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ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1 CERTIFICATE OF INCORPORATION. The certificate of incorporation
of the Company as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, and thereafter may be
amended in accordance with its terms and as provided by the Delaware Corporation
Law.
SECTION 2.2 BY-LAWS. The by-laws of the Company as in effect immediately
prior to the Effective Time shall be the by-laws of the Surviving Corporation,
and thereafter may be amended in accordance with their terms and as provided by
the Delaware Corporation Law.
SECTION 2.3 OFFICERS AND DIRECTORS. The officers of the Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation after the Effective Time and the directors of Sub immediately prior
to the Effective Time shall be the directors of the Surviving Corporation after
the Effective Time, in each case until their respective successors are duly
elected and qualified.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF SHARES. (a) At the Effective Time, by virtue of
the Merger and without any action on the part of any Company stockholder:
(1) Conversion of Company Common Stock. Each share of Company Common Stock
outstanding after giving effect to the Company Recapitalization shall
be converted into 0.180 fully paid and nonassessable shares of Parent
Common Stock (the "Exchange Ratio").
(2) Each share of Company Class B Stock outstanding upon consummation of
the Company Recapitalization shall be converted into one validly
issued, fully paid and nonassessable share of Company Common Stock.
(3) Cancellation of Company Treasury Stock. All shares of Company Common
Stock which are held in the treasury of the Company upon consummation
of the Company Recapitalization shall be canceled and shall cease to
exist.
(b) If at any time prior to the Effective Time, the outstanding shares
of Parent Common Stock shall be changed into a different number of shares
or a different class by reason of any reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or if a stock
dividend thereon shall be declared with a record date within such period,
the Exchange Ratio shall be correspondingly adjusted. The issuance of
shares of Parent Common Stock pursuant to Parent's dividend reinvestment
plan consistent with past practices shall not constitute a stock dividend
for this purpose.
(c) Each issued and outstanding share of capital stock of Sub shall be
converted into that number of validly issued, fully paid and non-assessable
shares of Company Common Stock as shall result in (i) the sum of the
aggregate number of shares of Company Common Stock issued to Parent upon
such conversion plus (ii) the aggregate number of shares of Company Common
Stock issued to Futuronics pursuant to Section 3.1(a)(2) being equal to
94.9 percent of the total number of shares of Company Common Stock issued
pursuant to Section 3.1(a)(2) and this Section 3.1(c).
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(d) All Company Common Stock outstanding immediately after the Company
Recapitalization and immediately prior to the Effective Time (the "Canceled
Company Stock") shall cease to exist, and each certificate previously
representing such Canceled Company Stock shall (subject to Section 3.3)
thereafter represent for all corporate purposes the shares of Parent Common
Stock into which such shares of Canceled Company Stock have been converted
pursuant to the Merger. Certificates previously representing such shares of
Canceled Company Stock shall be exchanged for a confirmation of ownership
of Parent Common Stock issued in consideration therefor upon surrender in
accordance with Section 3.2, without interest.
(e) The Parent shall issue shares of Parent Common Stock to be issued
in the Merger in uncertificated form, and in accordance with Section 3.2
shall send to each person entitled to receive such shares the information
required under Section 2-210(c) of the Maryland General Corporation Law
with respect to such shares (a "Confirmation").
SECTION 3.2 SURRENDER. (a) Prior to the Closing, Parent shall select a
person or persons to act as exchange agent for the Merger (the "Exchange
Agent"), which person or persons shall be reasonably acceptable to the Company,
for the purpose of exchanging certificates representing Canceled Company Stock
for Confirmations as to the Share Consideration. On the Closing Date, the
Surviving Corporation shall deliver to the Exchange Agent, in trust for the
benefit of the holders of Canceled Company Stock immediately prior to the
Effective Time (the "Converting Stockholders"), the Share Consideration and
related information. As soon as reasonably practicable after the Effective Time
but in no event more than five Business Days after the Effective Time, the
Surviving Corporation shall cause the Exchange Agent to send a notice and a
letter of transmittal to each Converting Stockholder advising such holder of the
effectiveness of the Merger and the procedure for surrendering to the Exchange
Agent for cancellation such holder's certificates representing Canceled Company
Stock ("Certificates"), in exchange for the Share Consideration. Each Converting
Stockholder will be entitled to receive, upon surrender to the Exchange Agent
for cancellation of one or more Certificates, a Confirmation representing the
number of shares of Parent Common Stock into which such shares are converted in
the Merger. Parent Common Stock into which Canceled Company Stock shall be
converted in the Merger shall be deemed to have been issued at the Effective
Time (the "Share Consideration"). In the event that any Converting Stockholder's
Certificates have been lost, stolen or destroyed, such Converting Stockholder
will be entitled to receive the Share Consideration only after providing an
affidavit of loss and indemnity bond, in form satisfactory to the Exchange
Agent.
(b) Converting Stockholders shall be entitled, at and after the
Effective Time, to vote the number of shares of Parent Common Stock into
which their shares of Canceled Company Stock shall have been converted so
long as they remain record holders of such shares of Parent Common Stock,
regardless of whether the Certificates formerly representing the Canceled
Company Stock shall have been surrendered in accordance with this Section
3.2 or a Confirmation with respect to such shares of Parent Common Stock
shall have been issued.
(c) Any Converting Stockholder who has not exchanged his Certificates
for Parent Common Stock in accordance with subsection (a) within six months
after the Effective Time shall have no further claim upon the Exchange
Agent, and shall thereafter look only to Parent and the Surviving
Corporation for payment in respect of his shares of Canceled Company Stock.
Until so surrendered, Certificates shall represent solely the right to
receive the Share Consideration. If any Certificates entitled to payment
pursuant to Section 3.1 shall not have been surrendered for such payment
prior to such date on which any
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payment in respect thereof would otherwise escheat to or become the
property of any Governmental Entity, the shares of Canceled Company Stock
represented thereby shall, to the extent permitted by applicable law, be
deemed to be canceled and no money or other property will be due to the
holder thereof.
SECTION 3.3 DIVIDENDS; TRANSFER TAXES. No dividends that are declared or
made with respect to Parent Common Stock will be paid to persons entitled to
receive Confirmations representing Parent Common Stock pursuant to this
Agreement until such persons surrender their Certificates, together with a
properly completed letter of transmittal. Such dividends shall instead be paid
to the Exchange Agent on behalf of, and as nominee for, such person, and held by
the Exchange Agent in a non-interest bearing account. Upon such surrender, there
shall be paid to the person in whose name the Confirmation representing such
Parent Common Stock shall be issued dividends which shall have become payable
with respect to such Parent Common Stock in respect of any record date occurring
after the Effective Time. In no event shall the person entitled to receive such
dividends be entitled to receive interest on such dividends. Dividends paid to
the Exchange Agent pursuant to this Section 3.3 that remain unclaimed by the
holders of Canceled Company Stock shall not revert or be returned to the Parent,
and the Parent hereby waives any rights it may have to such assets. In the event
that any portion of the Share Consideration for any shares of Parent Common
Stock is to be delivered to a person other than that in which the Certificates
surrendered in exchange therefor are registered, it shall be a condition of such
delivery that the Certificate or Certificates so surrendered shall be properly
endorsed or be otherwise in proper form for transfer (including signature
guarantee) and that the person requesting such delivery shall pay to the
Exchange Agent any transfer or other taxes required by reason of such delivery
to a person other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
shares of Canceled Company Stock for any shares of Parent Common Stock or
dividends thereon delivered to a public official pursuant to any applicable
escheat laws.
SECTION 3.4 FRACTIONAL SECURITIES. Parent shall issue fractional shares of
Parent Common Stock to the extent the conversion results in a fraction of a
share, in which case such fraction shall be rounded to the nearest
one-thousandth of a share (rounding upward from the mid-point between
thousandths of a share).
SECTION 3.5 CLOSING OF COMPANY TRANSFER BOOKS. Immediately prior to the
Effective Time, the Company Common Stock transfer books shall be closed and no
transfer of Canceled Company Stock shall thereafter be made.
SECTION 3.6 STOCKHOLDER APPROVAL. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-Laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action upon this Agreement and the Company
Recapitalization. The Board of Directors of the Company has approved the Merger
and the Company Recapitalization and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the
Company Recapitalization and the adoption of this Agreement at the Company
Meeting. Notwithstanding the foregoing, nothing in this Section 3.6 shall
preclude or limit the Board of Directors of the Company from complying with its
fiduciary duties under applicable law.
SECTION 3.7 TAX TREATMENT. The Merger is intended to constitute a
reorganization under Section 368(a) of the Code, and Parent and the Company
shall not report the transaction on
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any tax return in a manner or take any action in any audit or other judicial or
administrative proceeding or otherwise that is inconsistent therewith.
SECTION 3.8 EXERCISE AND CONVERSION OF VESTED STOCK OPTIONS AND
WARRANTS. The Company shall use all reasonable efforts to cause all vested
Company Stock Options and all Company Warrants to be fully exercised for the
purchase of Company Common Stock prior to the Effective Time, and may make full
recourse loans to the holders of such Company Stock Options or otherwise arrange
for the cashless exercise thereof.
SECTION 3.9 REDEMPTION OR CONVERSION OF CONVERTIBLE DEBENTURES. The
Company shall use all reasonable efforts to redeem all outstanding Company
Convertible Debentures prior to the Effective Time in accordance with the terms
thereof to the extent not converted into Company Common Stock in accordance with
the terms thereof prior to such time.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub that, except as set
forth in the disclosure schedule attached hereto (the "Company Disclosure
Schedule"), which Company Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and may be amended from time to time pursuant to the provisions hereof:
SECTION 4.1 EXECUTION AND DELIVERY. The Company has the corporate power
and authority to enter into this Agreement and each other agreement, document or
instrument contemplated hereby or to be executed in connection herewith to which
the Company is a party (the "Company Documents") and, subject to approval of
this Agreement by the holders of the Company Common Stock, to carry out its
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and the Company Documents and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by the Company's Board of Directors. This Agreement constitutes the
valid and binding obligation of the Company and the Company Documents, when
executed and delivered, will constitute the valid and binding obligations of the
Company, in each case enforceable in accordance with their respective terms,
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. Except for the approval of the holders of a majority of the
outstanding shares of Company Common Stock, no other corporate proceedings on
the part of the Company are necessary after the date of this Agreement to
authorize this Agreement and the Company Documents and the transactions
contemplated hereby and thereby.
SECTION 4.2 CONSENTS AND APPROVALS. The execution and delivery by the
Company of this Agreement and the Company Documents, the performance by the
Company of its obligations hereunder and thereunder, and the consummation by the
Company of the transactions contemplated hereby and thereby, as the case may be,
do not require the Company to obtain any consent, approval or action of, or make
any filing or registration with, or give any notice to, any person or any
Governmental Entity, other than (i) in connection, or in compliance, with the
provisions of the H-S-R Act, if applicable, and the Exchange Act, which will be
duly obtained or made, as the case may be, on or prior to the Closing, and will
be in full force and effect on the Closing Date, (ii) in the case of the
performance by the
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<PAGE> 189
Company of its obligations hereunder and under the Company Documents and the
consummation by the Company of the transactions contemplated hereby and by the
Company Documents, the approval of the holders of the Company Common Stock as
specified in Section 4.1, (iii) the approval of the United States Small Business
Administration (the "SBA"), (iv) the filing of the Certificate of Merger with
the Secretary of State of Delaware and (v) any approvals from any party required
under any of the Company's or its Subsidiaries' existing financing agreements as
set forth on Section 4.2(v) of the Company Disclosure Schedule.
SECTION 4.3 NO BREACH. Except as set forth in Section 4.3 of the Company
Disclosure Schedule and for filings, notices, consents and approvals as may be
required by Delaware Corporation Law, the Securities Act, the Exchange Act and
the 1940 Act, the execution, delivery and performance by the Company of this
Agreement and the Company Documents and the consummation by the Company of the
transactions contemplated hereby and thereby in accordance with the terms and
conditions hereof and thereof will not (i) violate any provision of the
Certificate of Incorporation or By-Laws of the Company; (ii) violate, conflict
with or result in the breach of any of the terms of, result in any modification
of the effect of, otherwise give any other contracting party the right to
terminate, or constitute (or with notice or lapse of time or both, constitute) a
default under, any contract or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by or to which the assets or
properties of the Company or any of its Subsidiaries may be bound or subject;
(iii) violate any order, judgment, injunction, award or decree of any
Governmental Entity against, or binding upon, or any agreement with, or
condition imposed by, any Governmental Entity, binding upon the Company or any
of its Subsidiaries, or upon the securities, assets or business of the Company
or any of its Subsidiaries; (iv) violate any statute, law or regulation of any
jurisdiction as such statute, law or regulation relates to the Company or any of
its Subsidiaries, or to the securities, assets or business of the Company or any
of its Subsidiaries; (v) result in the creation or imposition of any lien or
other encumbrance or the acceleration of any indebtedness or other obligation of
the Company or any of its Subsidiaries; or (vi) result in the breach of any of
the terms or conditions of, constitute a default under, or otherwise cause a
violation of, any Permit of the Company or any of its Subsidiaries; except in
the case of (ii) through (vi) above, for violations, conflicts, breaches,
defaults, modifications, impairments, liens or other encumbrances that would
not, individually or in the aggregate, have a material adverse effect on the
funding, management, business, properties, assets, condition (financial or
otherwise), liabilities or operations of the Company and its Subsidiaries, taken
as a whole, or adversely affect the consummation of the transactions
contemplated hereby in any material respect, but excluding therefrom any such
change, effect, event, occurrence or state of facts resulting from or arising in
connection with (A) changes or conditions generally affecting the industries in
which the Company or its Subsidiaries operate, except to the extent the changes
or conditions referred to in this Clause (A) affect the funding of the Company
and its Subsidiaries or (B) this Agreement, the transactions contemplated hereby
or the announcement thereof (a "Company Material Adverse Effect").
SECTION 4.4 ORGANIZATION, STANDING AND AUTHORITY. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being conducted or currently proposed to be
conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of such activities make
such qualification necessary, except where the failure to so qualify would not,
individually or in the aggregate, have a Company Material Adverse Effect. All
such jurisdictions are set forth on Section 4.4 of the
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<PAGE> 190
Company Disclosure Schedule. The copies of the Certificate of Incorporation and
By-Laws of the Company included as part of Section 4.4 of the Company Disclosure
Schedule constitute accurate and complete copies of such organizational
instruments and accurately reflect all amendments thereto through the date
hereof.
SECTION 4.5 CAPITALIZATION OF THE COMPANY. The authorized capital stock of
the Company consists of 35,000,000 shares of Company Common Stock. As of the
date of this Agreement there were 22,061,443 shares of Company Common Stock
outstanding. Except as set forth in Section 4.5 of the Company Disclosure
Schedule, as of the date hereof there are no bonds, debentures, notes or other
indebtedness having the right to vote on any matters on which the Company's
stockholders may vote issued or outstanding. Section 4.5 of the Company
Disclosure Schedule sets forth a true and complete list as of the date indicated
of the holders of all (i) outstanding vested and unvested Company Stock Options,
(ii) outstanding Company Convertible Debentures and (iii) outstanding Company
Warrants, showing as to each such holder the number of Company Stock Options
(vested or unvested), Company Convertible Debentures or Company Warrants so
held, such holder's mailing address and in the case of Company Stock Options,
the date of grant, vesting schedules and exercise price of all such Company
Stock Options. All outstanding shares of Company Common Stock are duly
authorized and are validly issued, fully paid and non-assessable and free of
preemptive rights. All Company Convertible Debentures were issued in compliance
with the Securities Act.
SECTION 4.6 OPTIONS AND OTHER STOCK RIGHTS. Except as set forth in Section
4.6 of the Company Disclosure Schedule, there is no (i) outstanding option,
warrant, call, unsatisfied preemptive right or other agreement of any kind
binding upon the Company to purchase or otherwise to receive from the Company
any of the outstanding, authorized but unissued, unauthorized or treasury shares
of Company Common Stock or any other security of the Company, (ii) outstanding
security of any kind binding upon the Company convertible into any security of
the Company, and (iii) outstanding contract or other agreement binding upon the
Company or any of its Subsidiaries to purchase, redeem or otherwise acquire any
outstanding shares of Company Common Stock or any other security of the Company.
SECTION 4.7 SUBSIDIARIES. (a) Section 4.7 of the Company Disclosure
Schedule sets forth (i) the name of each Subsidiary of the Company; (ii) the
name of each corporation, limited liability company, partnership, joint venture
or other entity (other than such Subsidiaries) in which the Company or any of
its Subsidiaries has, or pursuant to any agreement has the right or obligation
to acquire at any time by any means, directly or indirectly, an equity interest
or investment; (iii) in the case of each such corporations described in clauses
(i) and (ii) above, (A) the jurisdiction of incorporation and (B) the
capitalization thereof and the percentage of each class of capital stock
(including any rights, options or warrants outstanding or other agreements to
acquire shares of capital stock) and issuance of outstanding debt owned by the
Company or any of it Subsidiaries and by any other Person.
(b) Except as set forth in Section 4.7(b) of the Company Disclosure
Schedule, each Subsidiary of the Company listed in Section 4.7(a) of the
Company Disclosure Schedule has been duly organized, is validly existing
and in good standing under the laws of the jurisdiction of its
organization, has the corporate power and authority to own and lease its
properties and to conduct its business and is duly registered, qualified
and authorized to transact business and is in good standing in each
jurisdiction in which the conduct of its business or the nature of its
properties requires such registration, qualification or authorization,
except where the failure to be so qualified would not reasonably be
expected to have a Company Material Adverse Effect. All of the issued and
outstanding equity or other participating interests of each Subsidiary have
been duly authorized and validly
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issued, are fully paid and nonassessable, and, to the extent owned by the
Company as indicated in Section 4.7 of the Company Disclosure Schedule, are
owned free and clear of any mortgage, pledge, lien, encumbrance, security
interest, claim or equity, except as set forth in Section 4.7 of the
Company Disclosure Schedule.
(c) As of the date hereof, excluding assets acquired as a result of
loan foreclosures and receivables on assets acquired as a result of loan
foreclosures and except as listed in Section 4.7 or Section 4.17 of the
Company Disclosure Schedule, the Company has not made any investments in,
and does not own any securities of or other interests in, any other Person.
SECTION 4.8 CORPORATE RECORDS. The Company has heretofore delivered to
Parent true and complete copies of the minute books of the Company and each of
its Subsidiaries for the five years prior to the date hereof through and
including the date hereof, all as in effect on the date hereof. The minute books
of the Company and its Subsidiaries reflect all actions taken at all meetings
and consents in lieu of meetings of stockholders, and all actions taken at all
meetings and consents in lieu of meetings of the Company's or each of its
Subsidiaries' Board of Directors and all committees thereof.
SECTION 4.9 INFORMATION IN DISCLOSURE DOCUMENTS. None of the information
with respect to the Company and its Subsidiaries to be included in (i) the joint
prospectus/proxy statement of the Company and Parent (the "Proxy Statement")
required to be mailed to the stockholders of the Company in connection with the
Merger and (ii) the Registration Statement to be filed with the Commission by
Parent on Form N-14 under the Securities Act for the purpose of registering the
shares of Parent Common Stock to be issued in the Merger (the "Registration
Statement") will, in the case of the Proxy Statement or any amendments or
supplements thereto, at the time of the mailing of the Proxy Statement and any
amendments or supplements thereto, and at the time of the Company Meeting, or,
in the case of the Registration Statement, at the time it becomes effective and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that this provision shall not
apply to statements or omissions in the Registration Statement or Proxy
Statement based upon information furnished by Parent for use therein. The Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder. No representation or
warranty made by the Company contained in this Agreement and no statement
contained in any certificate delivered pursuant to Article VII or any exhibit to
this Agreement and the Company Disclosure Schedule, as the same may be amended
pursuant to the provisions hereof, contains any untrue statement of a material
fact or omits or will omit to state a material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
SECTION 4.10 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) The Company and its
Subsidiaries have to the Company's Knowledge filed and will file with the SEC
all forms, reports, schedules, statements, exhibits and other documents
(collectively, the "Company SEC Documents") required to be filed on or before
the date hereof or the Closing Date, respectively, by it under the Securities
Act or the Exchange Act. The Company has furnished or made available to Parent
true and correct copies of all Company SEC Documents filed by the Company and
its Subsidiaries since July 1, 1998 and will promptly furnish to Parent any
other Company SEC Document filed by or on behalf of the Company with the SEC
from the date hereof to the Closing Date. At the time filed, the Company SEC
Documents filed by the Company and its Subsidiaries since July 1, 1998 (i) did
not contain any untrue statement of a
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material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading and (ii) complied in all material
respects with the applicable requirements of the Securities Act or Exchange Act,
as the case may be.
(b) The audited consolidated financial statements of the Company and
its Subsidiaries for the three years ended June 30, 2000, together with the
reports and opinions thereon of Richard A. Eisner & Company LLP (the
"Company Audited Financial Statements"), which are included in the Company
SEC Documents and have previously been delivered to Parent and the
unaudited consolidated financial statements of the Company and its
Subsidiaries for the three months ended September 30, 2000 (the "Company
Interim Financial Statements"), which will be included in the Company SEC
Documents and will be delivered to Parent as soon as they are filed, are
collectively referred to herein as the "Company Financial Statements". The
Company Financial Statements comply as to form in all material respects
with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto; and fairly present, in all
material respects, on a consolidated basis, the financial position of the
Company at, and the results of its operations for, each of the periods then
ended and were prepared in conformity with GAAP applied on a consistent
basis, except as otherwise disclosed therein and, subject, in the case of
the Company Interim Financial Statements, to normal recurring year-end
adjustments, the absence of footnote disclosures, and any other adjustments
described therein.
SECTION 4.11 LIABILITIES. To the Company's Knowledge, the Company and its
Subsidiaries do not have any direct or indirect liability, contingent or
otherwise, that is required by GAAP to be reflected or reserved for on the
financial statements of the Company (collectively, the "Liabilities"), that was
not adequately reflected or reserved against on the Company Audited Financial
Statements for the 12-month period ended June 30, 2000 or on the Company Interim
Financial Statements for the three-month period ended September 30, 2000, other
than (i) liabilities set forth in Section 4.11 of the Company Disclosure
Schedule, (ii) liabilities incurred in the ordinary course of business since
June 30, 2000 consistent with past practices, or (iii) liabilities permitted by
this Agreement to be incurred in connection with the transactions contemplated
by this Agreement.
SECTION 4.12 NO COMPANY MATERIAL ADVERSE EFFECT. Except as disclosed in
Section 4.12 of the Company Disclosure Schedule, since July 1, 2000, there has
not been any change, event, occurrence or state of facts that has caused, or
would reasonably be expected to cause, a Company Material Adverse Effect.
SECTION 4.13 COMPLIANCE WITH LAWS. To the Company's Knowledge, except as
disclosed in Section 4.13 of the Company Disclosure Schedule, neither the
Company nor its Subsidiaries are in violation in any material respect of any
applicable order, judgment, injunction, award or decree, law, ordinance or
regulation or any other requirement of any Governmental Entity applicable to the
Company or any of its businesses. Neither the Company or its Subsidiaries
received notice that any such material violation has been alleged or is being
investigated. This Section 4.13 shall not apply to Taxes.
SECTION 4.14 PERMITS. To the Company's Knowledge, except as set forth in
Section 4.14 of the Company Disclosure Schedule, (i) the Company and its
Subsidiaries have obtained all Permits that are necessary for the ownership and
conduct of their respective businesses as presently conducted or currently
proposed to be conducted, other than any Permits, the absence of which would
not, individually or in the aggregate, have a Company Material
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Adverse Effect; (ii) to the Company's Knowledge, such Permits are in full force
and effect and are sufficient for the ownership and conduct of such businesses
as presently conducted or currently proposed to be conducted; no violations
exist or have been recorded in respect of any material Permit; and (iii) no
proceeding is pending or, to the Knowledge of the Company or its Subsidiaries,
threatened, that would suspend, revoke or limit any material Permit.
SECTION 4.15 ACTIONS AND PROCEEDINGS. Except as disclosed in Section 4.15
of the Company Disclosure Schedule or the Company SEC Documents, there are no
outstanding orders, judgments, injunctions, awards or decrees of any
Governmental Entity against or involving the Company, any of its Subsidiaries or
any of its or their directors, officers or employees (in their capacities as
such). Except as disclosed in Section 4.15 of the Company Disclosure Schedule or
the Company SEC Documents, as of the date of this Agreement there is no claim,
action, suit, litigation, legal, administrative or arbitration proceeding,
whether formal or informal (including, without limitation, any claim or notice
of intent to institute any matter) (a "Proceeding"), which is pending or, to the
Company's Knowledge, threatened against or involving the Company, any of its
Subsidiaries or any of its or their directors, officers or employees (in their
capacities as such) or properties, capital stock or assets.
SECTION 4.16 CONTRACTS AND OTHER AGREEMENTS. (a) Other than (1) contracts
and other agreements disclosed in Section 4.16 of the Company Disclosure
Schedule or (2) contracts between the Company and its direct or indirect wholly
owned Subsidiaries or between the Company's direct or indirect wholly owned
Subsidiaries, none of the Company or any of its Subsidiaries is a party to or
bound by any:
(i) contracts and other agreements with, or loans to, any current or
former officer, director, employee, consultant, agent or other
representative of the Company or its Subsidiaries, or any current
stockholder of the Company, or any affiliate (excluding the Company
and its Subsidiaries) or Family Member of the foregoing persons,
other than pursuant to Plans described in Section 4.23 of the
Company Disclosure Schedule;
(ii) contracts and other agreements with any labor union or association
representing any employee;
(iii) contracts and other agreements for the purchase or sale of
equipment or services, which involve the receipt or payment by the
Company or its Subsidiaries of an amount in excess of $20,000 per
month (in the aggregate in the case of any related series of
contracts and other agreements);
(iv) contracts and other agreements for the sale of any of the assets or
properties of the Company or its Subsidiaries or for the grant to
any person of any preferential rights to purchase any of the assets
or properties of the Company or its Subsidiaries, which involve the
receipt or payment by the Company or its Subsidiaries of an amount
in excess of $20,000 (in the aggregate in the case of any related
series of contracts and other agreements);
(v) contracts and other agreements calling for an aggregate purchase
price or payments in any one year of more than $100,000 payable by
the Company or its Subsidiaries in any one case (in the aggregate in
the case of any related series of contracts and other agreements);
(vi) contracts and other agreements, whether or not currently in effect,
relating to the acquisition by the Company or its Subsidiaries of
any business of, or the
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disposition of any business involving the Company or its
Subsidiaries to, any other person;
(vii) contracts relating to the disposition or acquisition of any
investment or of any interest in any person, which involved the
receipt or payment by the Company or its Subsidiaries of an amount
in excess of $20,000 (in the aggregate in the case of any related
series of contracts and other agreements);
(viii) joint venture and similar agreements which would involve the
receipt or payment by the Company or its Subsidiaries of an amount
in excess of $50,000 (in the aggregate in the case of any related
series of contracts or other agreements);
(ix) contracts and other agreements, whether or not currently in effect,
under which the Company or its Subsidiaries agreed to indemnify any
party or to share tax liability of any party, which could involve
the payment by the Company or its Subsidiaries of an amount in
excess of $20,000 (in the aggregate in the case of any related
series of contracts or other agreements);
(x) contracts and other agreements containing covenants of the Company
or its Subsidiaries, or, to the Company's Knowledge, its officers,
directors or employees, not to compete in or solicit employees in
any line of business or with any person in any geographical area or
covenants of any other person not to compete with or solicit
employees from the Company in any line of business or in any
geographical area;
(xi) contracts and other agreements relating to any loan or other
extension of credit by the Company or its Subsidiaries to a
stockholder, officer or director of the Company or its Subsidiaries
or from a stockholder of the Company to the Company;
(xii) contracts and other agreements relating to the borrowing of money
by, or indebtedness of, the Company or its Subsidiaries or the
direct or indirect guaranty by the Company or its Subsidiaries of
any obligation or indebtedness of any other person or Governmental
Entity (other than any accounts receivable or accounts payable of
the Company or its Subsidiaries), including, without limitation,
any (a) agreement or arrangement relating to the maintenance of
compensating balances, (b) agreement or arrangement with respect to
lines of credit, (c) agreement to advance or supply funds to any
other person other than in the ordinary course of business, (d)
agreement to pay for property, products or services of any other
person even if such property, products or services are not
conveyed, delivered or rendered, (e) keep-well, make-whole or
maintenance of working capital or earnings or similar agreement,
and (f) guaranty with respect to any lease or other similar
periodic payments to be made by any such person;
(xiii) contracts and other agreements relating to the provision by or to
the Company or its Subsidiaries of third party management or
administration services, which involve the receipt or payment by
the Company or its Subsidiaries of an amount in excess of $50,000
(in the aggregate in the case of any related series of contracts
and other agreements);
(xiv) each lease of personal property which requires annual lease payments
in excess of $50,000 and each Lease;
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(xv) contracts and other agreements pursuant to which the Company or any
of its Subsidiaries obtains or grants insurance or reinsurance;
(xvi) contracts and other agreements between the Company or its
Subsidiaries and any Governmental Entity;
(xvii) contracts and other agreements which require payments generated by
a change in control of the Company; and
(xviii) contracts and other agreements, whether or not currently in effect,
relating to disposal of any controlled or hazardous substance or
waste.
(b) Each such contract and other agreement is valid, in full force and
effect and binding upon the Company and its Subsidiaries, except for
failures to be in full force and effect that would not, individually or in
the aggregate, have a Company Material Adverse Effect and, to the Company's
Knowledge, the other parties thereto in accordance with its terms, and
neither the Company nor any of its Subsidiaries is in default under any of
them, except for defaults that would not, individually or in the aggregate,
have a Company Material Adverse Effect, and the Company has no Knowledge of
any threat of cancellation or termination thereunder, nor will the
consummation of the transactions contemplated by this Agreement result in a
default under any such contract or other agreement or the right to
terminate such contract or other agreement, except for cancellations,
terminations, defaults, or rights to terminate that would not, individually
or in the aggregate, have a Company Material Adverse Effect. No Permits or
other documents or agreements with, or issued by or filed with, any person,
have been granted to any other person that provide the right to use any
real or tangible personal property comprising any portion of the assets of
the Company except for grants that would not, individually or in the
aggregate, have a Company Material Adverse Effect. Neither the Company nor
any of its Subsidiaries is a party to any contract, commitment, arrangement
or agreement which would, following the Closing, restrain or restrict
Parent or any affiliate of Parent, from operating the business of the
Company in the manner in which it is currently operated, except for
contracts, commitments, arrangements or agreement that would not
individually or in the aggregate, have a Company Material Adverse Effect.
SECTION 4.17 LOAN PORTFOLIOS. The Company's and its Subsidiaries'
outstanding loan portfolios were originated or acquired in the ordinary course
of business, and a true and complete list of such portfolios, as of the date
hereof, with information included thereon as to the principal terms of, interest
rate, and maturity date thereof, as of such date, is listed in Section 4.17 of
the Company Disclosure Schedule, provided that such Section shall not include
loans that are written off. Except as disclosed in Section 4.17 of the Company
Disclosure Schedule, to the Company's Knowledge, as of September 30, 2000, none
of the loans included in such portfolios is in default in the payment of
principal or interest or materially impaired. All loans included in such
portfolio comply with all laws and regulations of each of the states to which
the Company is subject thereto except for noncompliances that would not,
individually or in the aggregate, have a Company Material Adverse Effect.
SECTION 4.18 REAL PROPERTY. (a) Section 4.18 of the Company Disclosure
Schedule sets forth (i) a list and summary description of all leases, subleases,
licenses, occupancy agreements or other agreements, written and oral, together
with any amendments or modifications thereto (each a "Lease" and collectively,
the "Leases") with respect to (A) all real property leased by the Company or its
Subsidiaries (whether as lessor or lessee and including those in the names of
nominees or other entities) and used or occupied in connection with the business
of the
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Company or its Subsidiaries (the "Leased Real Property") and (B) all real
property leased or subleased by the Company or its Subsidiaries, as lessor or
sublessor, to third parties (such Section 4.18 of the Company Disclosure
Schedule to include the date of each Lease, the address of the respective Leased
Real Property, the amount of square feet of such Leased Real Property, the Lease
term commencement date, the Lease term expiration date, any renewal options and
any early termination provisions in each case with respect to each portion of
the Leased Real Property); and (ii) a list and summary description of all real
property owned by the Company or its Subsidiaries (the "Owned Real Property").
(b) Each Lease is, with respect to the Company and its Subsidiaries,
in full force and effect, and to the Company's Knowledge, is in full force
and effect with respect to each other party thereto except for failures to
be in full force and effect that would not, individually or in the
aggregate, have a Company Material Adverse Effect. The Company and each of
its Subsidiaries have performed all obligations required to be performed by
it to date under, and is not in default in respect of, any Lease, and no
event has occurred which, with due notice or lapse of time or both, would
constitute such a default by the Company or its Subsidiaries, except for
defaults that would not, individually or in the aggregate, have a Company
Material Adverse Effect. To the Knowledge of the Company, there is no
default asserted thereunder by any other party thereto, except for defaults
that would not, individually or in the aggregate, have a Company Material
Adverse Effect. All material rentals and other payments due under each such
Lease have been duly paid.
(c) The Company's or its Subsidiaries', as the case may be, title to
the Owned Real Property and improvements thereon is as set forth on Section
4.18(c) of the Company Disclosure Schedule, subject only to the title
exceptions specified therein. None of the Owned Real Property is subject to
any right or option of any other person, to purchase or otherwise obtain
title to such property. No person other than the Company or its
Subsidiaries, as the case may be, has any right to use, occupy or lease all
or any portion of the Owned Real Property except for rights that would not,
individually or in the aggregate, result in a Company Material Adverse
Effect.
(d) The Company has not received any notice of any violation of any
applicable building, zoning, land use or other similar statutes, laws,
ordinances, regulations, permits or other requirements (including, without
limitation, the Americans with Disabilities Act) in respect of the Leased
Real Properties, which has not been heretofore remedied, and there does not
exist any such violations which, individually or in the aggregate, could
have a Company Material Adverse Effect. The Company has not received any
notice that any operations on or uses of the Leased Real Properties
constitute non-conforming uses under any applicable building, zoning, land
use or other similar statutes, laws, ordinances, regulations, permits or
other requirements which would result, individually or in the aggregate, in
a Company Material Adverse Effect. The Company has no Knowledge of nor has
received any notice (other than published notice not actually received) of
any pending or contemplated rezoning proceeding affecting the Leased Real
Properties which would, individually or in the aggregate, result in a
Company Material Adverse Effect.
(e) Neither the Company nor any of its Subsidiaries has received
notice from any insurance carrier regarding defects or inadequacies in the
Leased Real Properties, which, if not corrected, would result in
termination of the Company's or its Subsidiaries' insurance coverage
therefor or an increase in the cost thereof which defects, inadequacies or
terminations would result, individually or in the aggregate, in a Company
Material Adverse Effect.
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(f) To the Knowledge of the Company, there is no pending or
threatened: (i) condemnation of any part of the Leased Real Properties by
any Governmental Entity; (ii) special assessment against any part of the
Leased Real Properties; or (iii) litigation against the Company or any of
its Subsidiaries for breach of any restrictive covenant affecting any part
of the Leased Real Properties which in the case of each of clauses (i),
(ii) and (iii) would result, individually or in the aggregate, in a Company
Material Adverse Effect.
(g) The improvements at the Leased Real Properties are in good
condition and repair, ordinary wear and tear excepted, and have not
suffered any casualty or other damage which has not been repaired which
would result, individually or in the aggregate, in a Company Material
Adverse Effect.
(h) Neither the Company nor any of its Subsidiaries own any real
property other than foreclosed real property as set forth in Schedule 4.18
of the Company Disclosure Schedule.
SECTION 4.19 INTELLECTUAL PROPERTY. (a) The Company and its Subsidiaries
own or otherwise possess all rights as are necessary to use, all patents (and
applications therefor), patent rights and disclosures, trademarks, trademark
rights, service marks, service mark rights, trade names, trade name rights,
registered copyrights (and applications therefore), process know-how,
inventions, discoveries, systems, scientific, technical, engineering and
marketing data, technology, trade secrets software programs and codes (both
source and object), formulae and techniques used in or necessary for the conduct
of its business and other proprietary information except as would not,
individually or in the aggregate, have a Company Material Adverse Effect
(collectively, the "Intellectual Property Rights"). Section 4.19 of the Company
Disclosure Schedule sets forth a true and complete list of the Company's and its
Subsidiaries' material Intellectual Property Rights.
(b) To the Company's Knowledge, neither the Company or any of its
Subsidiaries has received notice or otherwise has reason to know of any
conflict or alleged conflict with the rights of others pertaining to the
Intellectual Property Rights. To the Company's Knowledge, the businesses of
the Company and its Subsidiaries, as presently conducted, do not infringe
upon or violate any intellectual property rights of others. The Company and
its Subsidiaries have the unrestricted right to use, free and clear of any
rights or claims of others, all trade secrets, processes, customer lists
and other rights incident to its businesses as now conducted other than
restrictions that would not, individually or in the aggregate, have a
Company Material Adverse Effect.
(c) Neither the Company nor any of its Subsidiaries is currently
obligated or under any existing liability to make royalty or other payments
to any owner of, licensor of, or other claimant to, any patent, trademark,
service names, trade names, copyrights, or other intangible asset, with
respect to the use thereof or in connection with the conduct of its
business as now conducted or otherwise except for obligations or
liabilities that would not, individually or in the aggregate, have a
Company Material Adverse Effect. To the Company's Knowledge, no employee of
the Company or its Subsidiaries has violated any employment agreement or
proprietary information agreement which he had with a previous employer or
any patent policy of such employer, or is a party to or threatened by any
litigation concerning any patents, trademarks, trade secrets, service
names, trade names, copyrights, licenses and the like except for violations
that would not result in a Company Material Adverse Effect.
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SECTION 4.20 RECEIVABLES. All accounts receivable and vendor receivables
which exceed $200,000 for a single receivable reflected in the Company Interim
Financial Statements, and all accounts receivable and vendor receivables which
exceed $200,000 for a single receivable arising subsequent to September 30,
2000, represent bona fide transactions that have arisen in the ordinary course
of business and are valid and existing.
SECTION 4.21 BANKING. Section 4.21 of the Company Disclosure Schedule
contains a complete list of all of the bank accounts and lines of credit owned
or used by the Company and its Subsidiaries, and the names of all persons with
authority to withdraw funds from, or execute drafts or checks on, each such
account.
SECTION 4.22 LIENS. Except as set forth in Section 4.22 of the Company
Disclosure Schedule, the Company and its Subsidiaries have good title to all of
its respective assets and properties, in each case free and clear of any lien or
other encumbrance, except for (i) liens or other encumbrances securing taxes,
assessments, governmental charges or levies, or the claims of materialmen,
carriers, landlords and like persons, all of which are not yet delinquent or
which are being contested in good faith or (ii) liens or other encumbrances of a
character that do not materially detract from the value of the property subject
thereto or impair the use of or the access to the property subject thereto, or
impair the operation of the Company or its Subsidiaries or detract from its
business.
SECTION 4.23 EMPLOYEE BENEFIT PLANS. (a) Section 4.23(a) of the Company
Disclosure Schedule sets forth all "employee benefit plans", as defined in
Section 3(3) of ERISA, and all severance pay, sick leave, vacation pay,
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options, hospitalization insurance, medical insurance, life
insurance, scholarships or tuition reimbursement plans or agreements, maintained
by the Company or to which the Company has any liability (contingent or
otherwise) thereunder for current or former employees of the Company. Each of
the employee benefit plans, practices and arrangements set forth in Section 4.23
of the Company Disclosure Schedule shall hereafter be referred to as a "Plan"
(or "Plans" as the context may require).
(b) None of the Plans is a "multiemployer plan," as defined in Section
3(37) of ERISA or a "defined benefit plan," as defined in Section 3(35) of
ERISA.
(c) Each of the Plans that is intended to qualify under Section 401(a)
of the Code, and the trusts maintained pursuant thereto, has been
determined to be exempt from federal income taxation under Section 501 of
the Code by the IRS (or remain within the remedial amendment period for
obtaining an initial determination of exemption from tax), and nothing has
occurred with respect to the operation of any such Plan which could cause
the loss of such qualification or exemption and thereby result in a Company
Material Adverse Effect.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under
the Plans or by law to any funds or trusts established thereunder or in
connection therewith have been made by the due date thereof (including any
valid extensions), except for any failure to contribute that would not,
individually or in the aggregate, have a Company Material Adverse Effect.
(e) Intentionally Omitted.
(f) True, correct and complete copies of the following documents, with
respect to each of the Plans, have been delivered to Parent by the Company:
(i) the most recent plan document and related trust documents, and
amendments thereto; (ii) the most recent IRS
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Forms 5500; (iii) the last IRS determination letter; and (iv) the most
recent summary plan descriptions.
(g) To the Company's Knowledge, there are no pending actions, claims
or lawsuits which have been asserted or instituted against the Plans, the
assets of any of the trusts under such plans or the plan sponsor or the
plan administrator, or against any fiduciary of the Plans with respect to
the operation of such Plans (other than routine benefit claims or actions
seeking qualified domestic relations orders), nor does the Company have
Knowledge of any threatened claim or lawsuit.
(h) To the Company's Knowledge, the Plans have in all material
respects been maintained in accordance with their terms and with all
provisions of ERISA and the Code (including applicable regulations
thereunder) and other applicable federal and state laws and regulations,
and the Company has not engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or 4975 of the Code that would result in
liability to the Company or Parent. To the Company's Knowledge, no
fiduciary has any liability for breach of fiduciary duty or any other
failure to act or comply in connection with the administration or
investment of the assets of any Plan.
(i) None of the Plans provide retiree life or retiree health benefits
coverage except as may be required under applicable state law, Section
4980B of the Code or Section 601 of ERISA or at the expense of the
participant or the participant's beneficiary or death benefits under the
Company's retirement plan.
(j) Except pursuant to the Employment Agreements or pursuant to
Section 6.18 and except as disclosed in Section 4.23(i) of the Company
Disclosure Schedule, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will (i)
result in any payment becoming due to any employee (current, former or
retired) of the Company, (ii) increase any benefits otherwise payable under
any Plan or (iii) result in the acceleration of the time of payment or
vesting of any benefits under any Plan.
SECTION 4.24 EMPLOYEE RELATIONS. (a) The Company and its Subsidiaries are
in compliance with all laws regarding employment, wages, hours, equal
opportunity and collective bargaining, except for non-compliances that would
not, individually or in the aggregate, have a Company Material Adverse Effect.
To the Company's Knowledge, (i) neither the Company nor any of its Subsidiaries
is engaged in any unfair labor practice or discriminatory employment practice,
(ii) no complaint of any such practice against the Company or its Subsidiaries
has been filed or threatened to be filed with or by the National Labor Relations
Board, the Equal Employment Opportunity Commission or any other administrative
agency, federal or state, that regulates labor or employment practices, and
(iii) no grievance has been filed or, threatened to be filed, against the
Company or its Subsidiaries by any employee pursuant to any collective
bargaining or other employment agreement to which the Company is a party or is
bound. The Company and its Subsidiaries are in compliance with all applicable
foreign, federal, state and local laws and regulations regarding occupational
safety and health standards, except for non-compliances that would not,
individually or in the aggregate, have a Company Material Adverse Effect, and
has received no complaints from any foreign, federal, state or local agency or
regulatory body alleging violations of any such laws and regulations.
(b) Except as set forth in Section 4.24(b) of the Company Disclosure
Schedule, the employment of all persons employed by the Company and its
Subsidiaries is terminable at will. To the Company's Knowledge, all
employees of the Company and its Subsidiaries are
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either United States citizens or resident aliens specifically authorized to
engage in employment in the United States in accordance with all applicable
laws.
SECTION 4.25 INSURANCE. Section 4.25 of the Company Disclosure Schedule
sets forth a list of all policies or binders of errors and omissions, fire,
liability, product liability, workmen's compensation, vehicular and other
insurance (excluding Plans) held by or on behalf of the Company or its
Subsidiaries (collectively, the "Insurance Policies"). Such Insurance Policies
are in full force and effect. In addition, Section 4.25 of the Company
Disclosure Schedule sets forth in respect of the Insurance Policies (i) a
description of occurrences reported involving amounts in excess of $10,000 and
(ii) the aggregate amount paid out under each such policy during the period from
July 1, 1999 through the date hereof. There have been no disputes regarding
denial or nonpayment of claims under any Insurance Policy since July 1, 1999,
other than routine disputes under Insurance Policy coverage provided under the
Plans.
SECTION 4.26 OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS. Section 4.26 of
the Company Disclosure Schedule sets forth (i) the name of each officer and
director of the Company or its Subsidiaries and the amount of compensation paid
during fiscal 2000 and the amount reasonably expected to be paid during fiscal
2001, (ii) the name of each other employee or class of employees of the Company
or its Subsidiaries who either (x) received compensation in fiscal 2000 in
excess of $100,000 or (y) is anticipated to receive, based on current
compensation levels, compensation in fiscal 2001 in excess of $100,000,
indicating the amount of such compensation for such persons for fiscal 2000 and
fiscal 2001; and (iii) a list of all employees employed by the Company at
September 30, 2000. Except as disclosed in Section 4.26 of the Company
Disclosure Schedule, the Company or any of its Subsidiaries does not employ any
individual as a consultant, whose employment cannot be terminated on not less
than 30 days' notice without penalty.
SECTION 4.27 TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES. Except
as disclosed in Section 4.27 of the Company Disclosure Schedule or in the
Company SEC Documents, since July 1, 1999, there have been no transactions
between the Company and any director, officer, employee, stockholder or other
affiliate of the Company or loans, guarantees or pledges to, by or for the
Company from, to, by or for any of such persons. Since July 1, 1999, other than
as disclosed in the Company SEC Documents or in Section 4.27 of the Company
Disclosure Schedule, none of the officers, directors or employees of the
Company, or any spouse or relative of any of such persons, has been a director
or officer of, or has had any direct or indirect interest in, any person or
business enterprise which during such period has been a supplier, customer or
sales agent of the Company or has competed with or been engaged in any business
of the kind being conducted by the Company.
SECTION 4.28 OPERATIONS OF THE COMPANY. Except as disclosed in Section
4.16 or 4.28 of the Company Disclosure Schedule and except as may result from
the transactions contemplated by this Agreement, since July 1, 2000, the Company
has not:
(i) amended its certificate of incorporation or by-laws or merged with or
into or consolidated with any other Person, subdivided or in any way
reclassified any shares of its capital stock or changed or agreed to
change in any manner the rights of its outstanding capital stock or
the character of its business;
(ii) (A) issued or sold or purchased, or issued options or rights to
subscribe to, or entered into any contracts or commitments to issue
or sell or purchase, any shares of its capital stock or any of its
bonds, notes, debentures or other evidences of indebtedness or (B)
modified the terms of its options, rights or any contracts or
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commitments to issue or sell or purchase any shares of its capital
stock or any of its bonds, notes, debentures or other evidences of
indebtedness;
(iii) entered into or amended any agreement with any labor union or
association representing any employee, or, except for Plans referred
to in Section 4.23 of the Company Disclosure Schedule, made any wage
or salary increase or bonus, or increase in any other direct or
indirect compensation, for or to any of its officers, directors,
employees, individuals who are consultants, agents or other
representatives in each case in excess of $10,000 for any such
individual, or commitment or agreement to make or pay the same;
(iv) except in the ordinary course of business consistent with past
practice, declared or made any Distributions to any stockholder or
made any direct or indirect redemption, retirement, purchase or other
acquisition of any shares of its capital stock;
(v) made any change in its accounting methods or practices or made any
change in depreciation or amortization policies, except as required
by law or GAAP;
(vi) made any loan or advance to its stockholders or to any of the
directors, officers or employees of the Company, consultants, agents
or other representatives, or otherwise than in the ordinary course of
business made any other loan or advance;
(vii) except in the ordinary course of business consistent with past
practice, (A) entered into any Lease; (B) sold, abandoned or made
any other disposition of any of its assets or properties; (C)
granted or suffered any lien or other encumbrance on any of its
assets or properties; (D) entered into or amended any contract or
other agreement to which it is a party, or by or to which it or its
assets or properties are bound or subject which if existing on the
date hereof would need to be disclosed in Section 4.16 of the
Company Disclosure Schedule;
(viii) made or entered into any agreement to make any acquisition of all or
a substantial part of the assets, properties, securities or business
of any other person;
(ix) paid, directly or indirectly, any of its Liabilities before the same
became due in accordance with its terms or otherwise than in the
ordinary course of business;
(x) terminated or failed to renew, or received any written threat (that
was not subsequently withdrawn) to terminate or fail to renew, any
contract or other agreement that is or was material to the assets,
liabilities, properties, business, operations, condition (financial
or otherwise), operations or prospects of the Company;
(xi) made any revaluation of any assets or write-down of the value of any
loans or receivables of the Company in excess of $50,000;
(xii) except in the ordinary course of business consistent with past
practice, accelerated the collection, or sale to third parties, of
any receivables of the Company, or delayed the payment of any
payables of the Company;
(xiii) entered into any other contract or other agreement or other
transaction that obligates the Company to pay an amount in excess of
$50,000, which contract is not terminable by the Company upon not
more than 30 days' notice; or
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(xiv) suffered any damage, destruction or loss, whether covered by
insurance or not, which has had or could have a Company Material
Adverse Effect.
SECTION 4.29 BROKERAGE. Except for Josephthal & Co., Inc., no broker,
agent or finder has acted, directly or indirectly, for the Company or, to the
Knowledge of the Company, any of the Company stockholders, nor has the Company
or, to the Knowledge of the Company, any of the Company stockholders, incurred
any obligation to pay any brokerage fee, agent's commission or finder's fee or
other commission in connection with the transactions contemplated by this
Agreement. The Company has furnished to Parent a copy of any engagement letter
relating to such broker, agent or finder.
SECTION 4.30 TAXES. (a) The Company and, as applicable, each of its
Subsidiaries (i) have duly and timely filed (or there have been filed on their
behalf) all material Tax Returns required to be filed (after taking into account
all available extensions), (ii) have timely paid or adequately provided for in
accordance with GAAP all Taxes due in respect of the periods covered by such Tax
Returns, and (iii) have withheld and, if due, paid all Taxes required to have
been withheld and, if due, paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party,
except, in each case, where the failure so to file, pay or provide, or withhold
and pay would not, individually or in the aggregate, have a Company Material
Adverse Effect.
(b) Except as set forth in Section 4.30 of the Company Disclosure
Schedule, as of the date of this Agreement (i) no material claim for
assessment or collection of Taxes is presently being asserted against the
Company or its Subsidiaries, (ii) neither the Company nor any of its
Subsidiaries is a party to any pending action, proceeding, or investigation
by any governmental taxing authority relating to a material Tax, and (iii)
the Company does not have Knowledge of any such threatened action,
proceeding or investigation.
(c) Except as set forth in Section 4.30 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is, or has ever
been, a party to or bound by any tax indemnity agreement, tax sharing
agreement, tax allocation agreement or similar allocation agreement or
similar contract or arrangement.
(d) Except as set forth in Section 4.30 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has requested any
extension of time within which to file any income Tax Return which return
has not since been filed, nor has the Company or any of its Subsidiaries
waived the running of any statute of limitations with respect to any income
Taxes.
(e) Except as set forth in Section 4.30(e) of the Company Disclosure
Schedule, the Company has delivered to Parent true and correct copies of
all filed income Tax Returns (including information returns and Forms 1120)
of the Company and its Subsidiaries which refer to any period of time from
January 1, 1995 through the date of this Agreement or to any event which
occurred during that period of time. Neither the Company nor any of its
Subsidiaries has filed an election under Section 341(f) of the Code that is
applicable to the Company, any of its Subsidiaries or any asset held by the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has agreed, or is required, to make any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise. Neither the Company nor any of its Subsidiaries is subject to or
a member of any joint venture, partnership or other arrangement or contract
which is treated as a partnership for federal income tax purposes. The
Company has not been a United States real property holding corporation
within the meaning of
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Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(f) Section 4.30 of the Company Disclosure Schedule lists each state
in which the Company and its Subsidiaries are required to file Tax Returns.
No written claim has been made after January 1, 1995 by any authority in a
jurisdiction where the Company or any of its Subsidiaries does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
SECTION 4.31 ENVIRONMENTAL LAWS. Except as disclosed in the Company SEC
Documents or as set forth in Section 4.31 of the Company Disclosure Schedule:
(a) The Company and its Subsidiaries (i) are in compliance in all
material respects with all Environmental Laws; (ii) have obtained and
currently maintain in full force and effect all Environmental Permits, the
failure to obtain or maintain would, individually or in the aggregate, have
a Company Material Adverse Effect; and (iii) are in compliance with all
terms and conditions of such Environmental Permits except for
noncompliances that would not, individually or in the aggregate, have a
Company Material Adverse Effect.
(b) To the Company's Knowledge, no event has occurred which, upon the
passage of time, the giving of notice, or failure to act would reasonably
be expected to give rise to material liability to the Company or any of its
Subsidiaries under any Environmental Law.
(c) To the Company's Knowledge, no Hazardous Material has been
released, spilled, discharged, dumped, disposed of, or otherwise come to be
located in, at or beneath any of the Owned Real Property or the Leased Real
Property or any properties or assets formerly owned, operated or otherwise
controlled by the Company or its Subsidiaries and used in the conduct of
the Company's and its Subsidiaries' businesses (i) in material violation of
any Environmental Law, or (ii) in such manner as would reasonably be
expected to cause a material environmental liability of the Company or its
Subsidiaries.
(d) To the Company's Knowledge, there are no: (i) aboveground or
underground storage tanks or surface impoundments containing Hazardous
Materials; (ii) asbestos containing materials or (iii) PCBs or
PCB-containing equipment, located within any portion of the Owned Real
Property or the Leased Real Property, the presence which individually or in
the aggregate could have a Company Material Adverse Effect.
(e) To the Company's Knowledge, no liens have been placed upon any
Owned Real Property or Leased Real Property in connection with any actual
or alleged liability under any Environmental Law.
(f) There is no pending or, to the Knowledge of the Company,
threatened, material claim, litigation or administrative proceeding against
the Company arising under any Environmental Law;
(g) Neither the Company nor any of its Subsidiaries has received any
notice, claim, demand, suit or request for information from any
Governmental Entity or private entity with respect to any liability or
alleged liability under any Environmental Law which is outstanding and if
adversely decided could reasonably be expected to result in the Company
incurring material liability under Environmental Laws, nor, to the
Knowledge of the Company, has any other entity whose liability therefor, in
whole or in part, may be attributed to the Company or any of its
Subsidiaries, received such notice, claim, demand, suit or request for
information. Neither the Company nor any of its Subsidiaries, nor, to the
Company's Knowledge, any prior owner or operator of the Leased Real
Property has
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generated, disposed of, or arranged for the disposal of any Hazardous
Material except in material compliance with Environmental Law.
(h) Neither the Company nor any of its Subsidiaries has, and, to the
Knowledge of the Company, no other entity whose liability therefor, in
whole or in part, may be attributed to the Company or its Subsidiaries,
disposed of any Hazardous Material at any location which is identified on
the current or proposed (i) National Priorities List under 40 C.F.R. 300
Appendix B or (ii) CERCLIS, in each case except as would not, individually
or in the aggregate, have a Company Material Adverse Effect.
(i) The Company has made available to Parent all material
environmental studies and reports pertaining to the Owned Real Property or
the Leased Real Property, the operations conducted thereon that are in the
Company's possession.
SECTION 4.32 COMPANY ACTION. The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that the Merger is advisable and fair and in the best interests
of the Company and its stockholders, (b) approved the Merger in accordance with
the applicable provisions of the Delaware Corporation Law and (c) recommended
the approval of this Agreement and the Merger by the holders of the Company
Common Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the Company Meeting.
SECTION 4.33 OPINION OF FINANCIAL ADVISOR. The Board of Directors of the
Company has received, on the date of this Agreement, the oral opinion of Ryan,
Beck & Co., Inc., to be confirmed in writing, to the effect that, as of such
date and subject to the assumptions and qualifications contained therein, the
Exchange Ratio in the Merger is fair to the holders of the Company Common Stock
from a financial point of view. A copy of the written opinion of Ryan, Beck &
Co., Inc. will be delivered to Parent as soon as practicable after the date of
this Agreement.
SECTION 4.34 CANCELLATION OF CERTAIN AGREEMENTS. Except as set forth in
Section 4.34 of the Company Disclosure Schedule, the Company has terminated each
of the agreements referred to therein, without any payment of consideration in
any form by the Company and without further obligation under such agreement or
arising from such termination, provided that such termination may be contingent
on the consummation of the Merger so long as the Company does not make any
further payment of consideration in any form while this Agreement is in effect,
and provided further that nothing in this Section 4.34 shall preclude the
Company from paying any consideration under any such agreement to the extent
earned prior to the date hereof in accordance with the terms of such agreement.
SECTION 4.35 STATUS OF CERTAIN EMPLOYMENT AGREEMENTS. The Company has
provided to Parent a true and correct copy of the employment agreement between
the Company or one of its Subsidiaries, as applicable, and each person listed in
Section 4.35 of the Company Disclosure Schedule, and each such agreement is as
of the date of this Agreement in full force and effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company that, except as set
forth in the disclosure schedule attached hereto (the "Parent Disclosure
Schedule"), which Parent
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Disclosure Schedule and shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article V:
SECTION 5.1 EXECUTION AND DELIVERY. Each of Parent and Sub has the
corporate power and authority to enter into this Agreement and each other
agreement, document or instrument contemplated hereby or to be delivered in
connection herewith to which such person is a party (the "Parent Documents") and
to carry out its respective obligations hereunder and thereunder. The execution,
delivery and performance by Parent and Sub of this Agreement and the Parent
Documents to which it is a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Parent and Sub, as applicable (and, in the case of this Agreement,
by the Board of Directors of Sub and by Parent as the sole stockholder of Sub).
This Agreement constitutes the valid and binding obligation of Parent and Sub
and the Parent Documents will constitute the valid and binding obligations of
Parent and Sub, when executed by such person, in each case, enforceable in
accordance with their respective terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. No other corporate
proceedings on the part of Parent or Sub are necessary to authorize this
Agreement or the Parent Documents and the transactions contemplated hereby and
thereby.
SECTION 5.2 CONSENTS AND APPROVALS. The execution and delivery by Parent
and Sub of this Agreement and the Parent Documents to which such person is a
party, the performance by Parent and Sub of their respective obligations
hereunder and thereunder and the consummation by Parent and Sub of the
transactions contemplated hereby and thereby do not require Parent or Sub to
obtain any consent, approval or action of, or make any filing or registration
with or give any notice to, any Governmental Entity, other than (i) in
connection, or in compliance, with the provisions of the H-S-R Act, the
Securities Act, the Exchange Act, the 1940 Act and the corporation, securities
or blue sky laws or regulations of various states, all of which will be duly
obtained or made, as the case may be, on or prior to the Closing, and will be in
full force and effect on the Closing Date, (ii) the approval of the SBA, (iii)
the filing of the Certificate of Merger with the Secretary of State of Delaware
and (iv) as to which the failure to so obtain, file or register would not have a
material adverse effect on the funding, management, business, properties,
assets, condition (financial or otherwise), liabilities, or operations of Parent
and its Subsidiaries, taken as a whole, or adversely affect the consummation of
the transactions contemplated hereby in any material respect, but excluding
therefrom any such change, effect, event, occurrence or state of facts resulting
from or arising in connection with (A) changes or conditions generally affecting
the industries in which Parent or its Subsidiaries operate, except to the extent
the changes or conditions referred to in this Clause (A) affect the funding of
the Parent and its Subsidiaries or (B) this Agreement, the transactions
contemplated hereby or the announcement thereof (a "Parent Material Adverse
Effect").
SECTION 5.3 NO BREACH. Except for filings, notices, consents and approvals
as may be required by Delaware Corporation Law, the Securities Act, the Exchange
Act and the 1940 Act, the execution, delivery and performance by Parent and Sub
of this Agreement and the Parent Documents to which either is a party and the
consummation of the transactions contemplated hereby and thereby in accordance
with the terms and conditions hereof and thereof will not (i) violate any
provision of the Certificate of Incorporation or By-Laws of Parent or Sub; (ii)
violate, conflict with or result in the breach of any of the terms of, result in
any modification of the effect of, otherwise give any other contracting party
the right to terminate,
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or constitute (or with notice or lapse of time or both, constitute) a default
under, any contract or other agreement or instrument to which Parent or any of
its Subsidiaries is a party or by or to which the assets or properties of Parent
or any of its Subsidiaries may be bound or subject; (iii) violate any order,
judgment, injunction, award or decree of any Governmental Entity against, or
binding upon, or any agreement with, or condition imposed by, any Governmental
Entity, binding upon Parent or any of its Subsidiaries, or upon the securities,
assets or business of Parent or any of its Subsidiaries; (iv) violate any
statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to Parent or any of its Subsidiaries, or to the securities,
assets or business of Parent or any of its Subsidiaries; (v) result in the
creation or imposition of any lien or other encumbrance or the acceleration of
any indebtedness or other obligation of Parent or any of its Subsidiaries; or
(vi) result in the breach of any of the terms or conditions of, constitute a
default under, or otherwise cause an impairment of, any Permit of Parent or any
of its Subsidiaries; except in the case of (ii) through (vi) for violations,
conflicts, breaches, defaults, modifications, impairments, liens or other
encumbrances that would not, individually or in the aggregate, have a Parent
Material Adverse Effect.
SECTION 5.4 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) Parent has filed to
Parent's Knowledge, and will file with the SEC all forms, reports, schedules,
statements, exhibits and other documents (collectively, the "Parent SEC
Documents") required to be filed on or before the date hereof or the Closing
Date, respectively, by it under the Securities Act or the Exchange Act. Parent
has furnished or made available to the Company true and correct copies of all
Parent SEC Documents filed by Parent since January 1, 1999 and will promptly
furnish to the Company any other Parent SEC Document filed by or on behalf of
Parent with the SEC from the date hereof to the Closing Date. At the time filed,
the Parent SEC Documents filed by Parent since January 1, 1999 (i) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (ii) complied in all material respects with the applicable
requirements of the Securities Act or Exchange Act, as the case may be.
(b) The audited consolidated financial statements of Parent for the
period from January 1, 1999 to December 31, 1999, together with the report
and opinion thereon of Arthur Andersen LLP which are included in the Parent
SEC Documents and have previously been delivered to the Company and the
unaudited consolidated financial statements of Parent as of and for the
nine months ended September 30, 2000 (the "Parent Interim Financial
Statements"), which will be included in the Parent SEC Documents and will
be delivered to the Company as soon as they are filed, are collectively
referred to herein as the "Parent Financial Statements". The Parent
Financial Statements comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto; and fairly present, in all material
respects, on a consolidated basis, the financial position of Parent at, and
the results of its operations for, each of the periods then ended and were
prepared in conformity with GAAP applied on a consistent basis, except as
otherwise disclosed therein and, subject, in the case of the Parent Interim
Financial Statements, to normal recurring year-end adjustments, the absence
of footnote disclosures, and any other adjustments described therein.
SECTION 5.5 SHARES OF PARENT COMMON STOCK. The shares of Parent Common
Stock will, when issued and delivered to the Company stockholders pursuant to
Section 3.1(a), be duly authorized, validly issued, fully paid, non-assessable,
and free of all liens and other encumbrances of any kind or nature whatsoever.
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SECTION 5.6 ORGANIZATION, STANDING AND AUTHORITY OF PARENT AND SUB. Each of
Parent and Sub is a corporation duly organized, validly existing and in good
standing under the laws of Maryland (in the case of Parent) or Delaware (in the
case of Sub), and has all requisite power and authority to own, lease and
operate its assets, properties and businesses and to carry on its businesses as
now being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of such activities make such qualification necessary, except
where the failure to so qualify would not, individually or in the aggregate,
have a Parent Material Adverse Effect. Sub has not engaged in any business
(other than certain organizational matters) since the date of its incorporation.
The copies of the Certificate of Incorporation and By-Laws of Parent and Sub
included as part of Section 5.6 of the Parent Disclosure Schedule constitute
accurate and complete copies of such organizational instruments and accurately
reflect all amendments thereto through the date hereof.
SECTION 5.7 CAPITALIZATION. (a) The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock, par value $0.0001 per
share. As of October 27, 2000, there were 81,014,451 shares of Parent Common
Stock outstanding and there have been no material changes in such numbers
through the date hereof. As of the date hereof, there are no bonds, debentures,
notes or other indebtedness issued or outstanding having the right to vote on
any matters on which Parent's stockholders may vote. All outstanding shares of
Parent Common Stock are duly authorized and are validly issued, fully paid and
nonassessable.
(b) The authorized capital stock of Sub consists of 1,000 shares of
Sub Common Stock, all of which are duly authorized, validly issued, fully
paid and nonassessable.
SECTION 5.8 BROKERAGE. Other than Jolson Merchant Partners, no broker,
agent or finder has acted, directly or indirectly, for Parent or Sub, nor have
Parent and Sub incurred any obligation to pay any brokerage fees, agent's
commissions or finder's fee or commission in connection with the transactions
contemplated by this Agreement.
SECTION 5.9 INFORMATION IN DISCLOSURE DOCUMENTS. None of the information
supplied by Parent or Sub for inclusion in the Registration Statement and the
Proxy Statement will, in the case of the Proxy Statement or any amendments or
supplements thereto, at the time of the mailing of the Proxy Statement and any
amendments or supplements thereto, or, in the case of the Registration
Statement, at the time it becomes effective and at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that this provision shall not apply to statements
or omissions in the Registration Statement or Proxy Statement based upon
information furnished by the Company for use therein. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act, and the rules and regulations promulgated thereunder. The Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder. No representation or
warranty made by Parent contained in this Agreement and no statement contained
in any certificate delivered pursuant to Article VII or any exhibit to this
Agreement and the Parent Disclosure Schedule, contains any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading.
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SECTION 5.10 NO MATERIAL ADVERSE CHANGE. Since January 1, 2000, there has
not been any change, event, occurrence or state of facts that has caused, or
would reasonably be expected to cause, a Parent Material Adverse Effect.
SECTION 5.11 SUB ACTION. The Board of Directors of Sub (at a meeting duly
called and held) has by the requisite vote of all directors present approved the
Merger in accordance with the provisions of Section 251 of the Delaware
Corporation Law. The sole stockholder of Sub has taken all actions necessary to
adopt the Merger.
SECTION 5.12 OPTIONS AND OTHER STOCK RIGHTS. Except for options to
purchase Parent Common Stock outstanding under Parent's Amended Stock Option
Plan, as amended to date, there is no (i) outstanding option, warrant, call,
unsatisfied preemptive right or other agreement of any kind to purchase or
otherwise to receive from Parent any of the outstanding, authorized but
unissued, unauthorized or treasury shares of Parent Common Stock, Parent
Preferred Stock or any other security of the Parent, (ii) outstanding security
of any kind convertible into any security of Parent, and (iii) outstanding
contract or other agreement to purchase, redeem or otherwise acquire any
outstanding shares of Parent Common Stock, Parent Preferred Stock or any other
security of Parent.
SECTION 5.13 TAX INFORMATION IN DISCLOSURE DOCUMENTS. (a) Parent and, as
applicable, each of its Subsidiaries (i) have duly and timely filed (or there
have been filed on their behalf) all material Tax Returns required to be filed
(after taking into account all available extensions), (ii) have timely paid or
adequately provided for in accordance with GAAP all Taxes due in respect of the
periods covered by such Tax Returns, and (iii) have withheld, and if due, paid
all Taxes required to be withheld, and if due, paid in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder or
other third party, except, in each case, where the failure so to file, pay or
provide, or withhold and pay would not, individually or in the aggregate, have a
Parent Material Adverse Effect.
(b) As of the date of this Agreement (i) no material claim for
assessment or collection of Taxes is presently being asserted against the
Parent or its Subsidiaries, (ii) neither the Parent nor any of its
Subsidiaries is a party to any pending action, proceeding, or investigation
by any governmental taxing authority relating to a material Tax, and (iii)
the Parent does not have Knowledge of any such threatened action,
proceeding or investigation.
SECTION 5.14 LIABILITIES. To Parent's Knowledge, neither Parent nor any of
its Subsidiaries has any liabilities or obligations of any nature, whether or
not accrued, contingent or otherwise that is required by GAAP to be reflected or
reserved for on the financial statements of the Parent, except (a) liabilities
or obligations disclosed or reserved against in the unaudited consolidated
interim financial statements of Parent as of and for the nine months ended
September 30, 2000 included in Parent SEC Documents or disclosed in the
footnotes thereto or in the footnotes to the audited consolidated financial
statements of Parent as of and for the fiscal year ended December 31, 1999
included in Parent SEC Documents or otherwise disclosed in Parent's 1999 Form
10-K or in Parent's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, and (b) liabilities or obligations which do not,
individually or in the aggregate, have a Parent Material Adverse Effect.
SECTION 5.15 COMPLIANCE WITH LAWS. To Parent's Knowledge, Parent is not in
violation of any applicable order, judgment, injunction, award or decree, law,
ordinance or regulation or any other requirement of any Governmental Entity
applicable to Parent or any of its
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businesses; Parent has not received notice that any such material violation has
been alleged or is being investigated.
SECTION 5.16 PERMITS. To Parent's Knowledge, Parent has obtained all
Permits that are necessary for the ownership and conduct of its businesses as
presently conducted or currently proposed to be conducted, other than any
Permits, the absence of which would not, individually or in the aggregate, have
a Parent Material Adverse Effect; such Permits are in full force and effect and
are sufficient for the ownership and conduct of such businesses as presently
conducted or currently proposed to be conducted; to Parent's Knowledge, no
violations exist or have been recorded in respect of any material Permit; and no
proceeding is pending or, to the Knowledge of Parent, threatened, that would
suspend, revoke or limit any Permit.
SECTION 5.17 ACTIONS AND PROCEEDINGS. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against or
involving Parent or any of its directors, officers or employees (in their
capacities as such). Except as disclosed in the Parent SEC Documents, as of the
date of this Agreement there is no Proceeding which is pending or, to Parent's
Knowledge, threatened against or involving Parent, any of its Subsidiaries, or
any of their directors, officers or employees (in their capacities as such) or
properties, capital stock or assets, except where the failure of any of the
foregoing to be true does not individually or in the aggregate have a Parent
Material Adverse Effect on Parent.
SECTION 5.18 LOAN PORTFOLIO. Parent's loan portfolio was acquired in the
ordinary course of business. All loans included in such portfolio comply with
all laws and regulations of each of the states to which Parent is subject
relating thereto except for noncompliances that would not, individually or in
the aggregate, have a Parent Material Adverse Effect.
SECTION 5.19 NO PRIOR ACTIVITIES. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby, Sub has
neither incurred any obligation or liability nor engaged in any business or
activity of any type or kind or entered into any agreement or arrangement with
any person.
ARTICLE VI
COVENANTS AND AGREEMENTS
Each of Parent, Sub and the Company (as applicable) covenant and agree as
follows:
SECTION 6.1 CONDUCT OF BUSINESS. (a) Prior to the Effective Time, except as
set forth in Section 6.1 of the Company Disclosure Schedule or unless Parent
shall otherwise agree in writing:
(i) The Company shall and, shall cause its Subsidiaries to, carry on their
respective business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall use
its reasonable efforts to preserve and cause its Subsidiaries to
preserve intact their present business organizations, keep available
the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time, except such
impairment as would not, individually or in the aggregate, have a
Company Material Adverse Effect. The Company shall and shall cause its
Subsidiaries to (i) maintain insurance coverages and their books,
accounts and records in the usual
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manner consistent with prior practices; (ii) comply in all material
respects with all laws, ordinances and regulations of Governmental
Entities applicable to the Company and its Subsidiaries; (iii)
maintain and keep their properties and equipment in good repair,
working order and condition, ordinary wear and tear excepted; and (iv)
perform in all material respects its obligations under all contracts
and commitments to which it is a party or by which it is bound, in
each case other than where the failure to so maintain, comply or
perform, either individually or in the aggregate, would result in a
Company Material Adverse Effect.
(ii) The Company shall not and shall cause its Subsidiaries not to
undertake any of the actions specified in Section 4.28; provided that
this Section 6.1(a)(ii) shall not prohibit the Company or any of its
Subsidiaries from (A) revaluing or writing down any loan or receivable
as required by any Governmental Entity or in accordance with GAAP or
(B) making or committing to make loans in the ordinary course of
business consistent with past practice.
(b) Neither Parent, Sub nor the Company shall take or cause to be
taken any action or omit to take any action, whether before or after the
Effective Time, and Parent and Sub have not taken any action or omitted to
take any action, in each case which would disqualify the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code. The
Company, on the one hand, and Parent and Sub, on the other hand, shall
execute and deliver to legal counsel to the Company and Parent certificates
substantially in the form of Exhibits 6.1(b)-1 and 6.1(b)-2, respectively,
at such time or times as reasonably requested by such legal counsel in
connection with the delivery of opinions in accordance with Sections 8.7
and 9.3 hereof, or as required in connection with any filings with the SEC,
and the Company and Parent shall each provide a copy thereof to the other
parties hereto. The parties agree to make such changes to the certificates
as they reasonably agree are necessary in connection with the delivery of
such opinions. Prior to the Effective Time, none of the Company, Parent or
Sub shall take or cause to be taken any action that would cause to be
untrue (or fail to take or cause not to be taken any action that would
cause to be untrue) any of the representations in Exhibits 6.1(b)-1 or
6.1(b)-2.
(c) Prior to the Effective Time, unless the Company shall otherwise
consent in writing (which shall not be unreasonably withheld), Parent shall
in all material respects carry on its respective businesses in the usual,
regular and ordinary course, provided, that for purposes of this Section
6.1(c), "ordinary course" shall mean any activities or business related,
directly or indirectly, to lending, financing, leasing and the like.
SECTION 6.2 LITIGATION INVOLVING THE COMPANY. Prior to the Closing Date,
the Company shall notify Parent of any actions or proceedings of the type
required to be described in Sections 4.15, 4.30 or 4.31 that are threatened or
commenced against the Company, any of its Subsidiaries, or against any officer
or director, property or asset of the Company, or with respect to the Company's
affairs, promptly upon the Company becoming aware thereof, and of any requests
of the Company or, to the Knowledge of the Company, any Company stockholder, for
additional information or documentary materials by any Governmental Entity in
connection with the transactions contemplated hereby promptly upon the Company
becoming aware thereof. As to compliance with such requests for such
information, the Company shall consult with and obtain the consent of Parent,
which consent shall not be withheld unreasonably; provided that such consent
shall be unnecessary where such information is required by law to be provided.
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SECTION 6.3 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES OF
THE PARTIES. From the date hereof through the Closing Date, (a) the Company
shall use all reasonable efforts to conduct its affairs in such a manner so
that, except as otherwise contemplated or permitted by this Agreement, the
representations and warranties of the Company contained in Article IV shall
continue to be true and correct in all material respects (or in all respects in
the case of any representation or warranty which refers to a Company Material
Adverse Effect or otherwise includes a concept of materiality) on and as of the
Closing Date as if made on and as of the Closing Date, except that any such
representations and warranties that are given as of a particular date and relate
solely to a particular date or period shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty which
refers to a Company Material Adverse Effect or otherwise includes a concept of
materiality) as of such date or period; (b) Parent and Sub shall use their
respective reasonable efforts to conduct their affairs in such a manner so that,
except as otherwise contemplated or permitted by this Agreement, the
representations and warranties contained in Article V shall continue to be true
and correct in all material respects (or in all respects in the case of any
representation or warranty which refers to a Parent Material Adverse Effect or
otherwise includes a concept of materiality) on and as of the Closing Date as if
made on and as of the Closing Date, except that any such representations and
warranties that are given as of a particular date and relate solely to a
particular date or period shall be true and correct in all material respects (or
in all respects in the case of any representation or warranty which refers to a
Parent Material Adverse Effect or otherwise includes a concept of materiality)
as of such date or period; (c) the Company shall promptly notify Parent and Sub
of any event, condition or circumstance occurring from the date hereof through
the Closing Date of which the Company becomes aware that would cause any
material revisions to the Company Disclosure Schedule provided by the Company
pursuant to this Agreement, or that would constitute a violation or breach of
this Agreement by the Company; and (d) Parent and Sub shall promptly notify the
Company of any event, condition or circumstance occurring from the date hereof
through the Closing Date of which it becomes aware that would cause any material
revisions to the Parent Disclosure Schedule provided by Parent or Sub pursuant
to this Agreement, or that would constitute a violation or breach of this
Agreement by Parent or Sub. No such notification shall be deemed an amendment to
the Disclosure Schedules to this Agreement, except as otherwise provided by this
Agreement.
SECTION 6.4 CORPORATE EXAMINATIONS AND INVESTIGATIONS;
CONFIDENTIALITY. (a) The Company shall cooperate with Parent as Parent shall
reasonably request in connection with the Parent's due diligence review of the
Company, to the extent necessary to confirm the accuracy of the Company's
representations and warranties. Notwithstanding the foregoing, Parent will not
contact, in connection with the transactions contemplated by the Agreement, any
customers, suppliers or employees of the Company without obtaining the prior
consent of the Company, which consent shall not be unreasonably withheld.
(b) If this Agreement terminates, the Confidentiality Agreement shall
remain in full force and effect in accordance with its terms. If this
Agreement is not terminated, the Confidentiality Agreement shall expire and
be of no further force or effect following the Effective Time.
SECTION 6.5 INDEMNIFICATION OF COMPANY OFFICERS AND DIRECTORS. (a) Parent
agrees, for a period of six years following the Effective Time, not to amend the
indemnification provisions set forth in the Certificate of Incorporation or
By-Laws of the Surviving Corporation in a manner that would adversely affect the
rights of the Company's officers, directors and employees to indemnification
thereunder and agrees to cause the Surviving Corporation to
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fulfill and honor such obligations to the maximum extent permitted by law;
provided, however, that nothing in this Section 6.5 shall prevent Parent from
effecting any merger, reorganization or consolidation of the Surviving
Corporation, provided that, Parent agrees to satisfy any amounts that would have
been payable by the Surviving Corporation (or any successor) and that were not
otherwise paid pursuant to the indemnification provisions set forth in the
Certificate of Incorporation or By-Laws of the Surviving Corporation for a
period commencing at the Effective Time and continuing six years thereafter.
(b) Parent shall cause to be maintained, for a period of not less than
six (6) years after the Effective Time, all of Company's and its
Subsidiaries' current directors' and officers' insurance and
indemnification policies to the extent that such policies provide coverage
for events occurring prior to the Effective Time (collectively, the "D&O
Insurance") for all current or former directors, officers or employees of
the Company or its Subsidiaries; provided, however, that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, and
shall, if the existing D&O Insurance expires or is terminated or canceled
during such six (6) year period, cause comparable coverage to be provided
under any policy maintained for the benefit of the directors, officers and
employees of Parent or any of its Subsidiaries; and provided, further, that
(i) the issuer thereof shall have a claims-paying rating at least equal to
the issuer of the existing D&O Insurance; and (ii) the terms thereof shall
be no less advantageous to the directors, officers and employees of Company
and its Subsidiaries than the existing D&O Insurance.
SECTION 6.6 REGISTRATION STATEMENT/PROXY STATEMENT. As promptly as
practicable after the execution of this Agreement, the Company and Parent shall
prepare and file with the SEC preliminary proxy materials which shall constitute
the preliminary Proxy Statement and a preliminary prospectus with respect to the
Parent Common Stock to be issued in connection with the Merger. As promptly as
practicable after comments are received from the SEC with respect to the
preliminary proxy materials and after the furnishing by the Company and Parent
of all information required to be contained therein, the Company shall file with
the SEC the definitive Proxy Statement and Parent shall file with the SEC the
definitive Proxy Statement and the Registration Statement and Parent and the
Company shall use all reasonable efforts to cause the Registration Statement to
become effective as soon thereafter as practicable.
SECTION 6.7 COMPLIANCE WITH THE SECURITIES ACT. (a) Prior to the Effective
Time the Company shall deliver to Parent a list of names and addresses of each
person who, in the Company's reasonable judgment, is an affiliate within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act (the "Affiliates").
(b) The Company shall use its reasonable efforts to obtain a written
agreement from each person who is identified as a possible Affiliate
pursuant to clause (a) above, in the form previously approved by the
parties and attached hereto as Exhibit 6.7(b), that he or she will not
offer to sell, sell or otherwise dispose of any of the Parent Common Stock
issued to him or her pursuant to the Merger, except in compliance with Rule
145 or another exemption from the registration requirements of the
Securities Act. The Company shall deliver such written agreements to Parent
on or prior to the Effective Time.
SECTION 6.8 NASDAQ LISTING. Parent shall use its reasonable efforts to
list on the Nasdaq National Market, the Parent Common Stock to be issued
pursuant to the Merger.
SECTION 6.9 ACQUISITION PROPOSALS. (a) The Company agrees that neither it
nor any of its Subsidiaries, nor any of the officers and directors of any of
them shall, and that it shall direct and use its reasonable efforts to cause its
and its Subsidiaries' employees, agents and
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representatives (including any investment banker, attorney or accountant
retained by them or any of their Subsidiaries) not to, directly or indirectly,
initiate, solicit or encourage any inquiries or the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation or
similar transaction, or any purchase of all or 10% or more of the assets or any
equity securities of the Company or any of its Subsidiaries (any such proposal
or offer being hereinafter referred to as an "Acquisition Proposal"), it being
understood that any such activities engaged in prior to the date of this
Agreement do not violate this Section 6.9. The Company further agrees that from
and after the date hereof neither it nor any of its Subsidiaries nor any of the
officers and directors of any of them shall, and that it shall direct and use
its reasonable efforts to cause its and its Subsidiaries' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by them or any of their Subsidiaries) not to, directly or indirectly,
knowingly engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise knowingly facilitate any effort or attempt to
make or implement an Acquisition Proposal; provided, however, that nothing
contained in this Agreement shall prevent the Company or its Board of Directors
from (A) complying with Rules 14d-9 and 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal; (B) providing information in response to
a request therefor by a Person who has made a bona fide written Acquisition
Proposal that was not solicited in violation of this Section 6.9(a) if the Board
of Directors receives from the Person so requesting such information an executed
confidentiality agreement on terms substantially similar to those contained in
the Confidentiality Agreement; (C) engaging in any negotiations or discussions
with any person who has made an unsolicited bona fide written Acquisition
Proposal that was not solicited in violation of this Section 6.9(a); or (D)
recommending such an Acquisition Proposal to the shareholders of the Company, if
and only to the extent that, (i) in each such case referred to in clause (B),
(C) or (D) above, the Board of Directors of the Company determines in good faith
after consultation with outside legal counsel that such action is consistent
with its directors' fiduciary duties under applicable law and (ii) in each case
referred to in clause (C) or (D) above, the Board of Directors of the Company
determines in good faith (after consultation with its financial advisor) that
such Acquisition Proposal would, if consummated, result in a transaction or a
combination of transactions more favorable to the Company's shareholders from a
financial point of view than the transactions contemplated by this Agreement
(any such more favorable Acquisition Proposal being referred to in this
Agreement as a "Superior Proposal"). The Company agrees that it will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal. The Company agrees that it will take the necessary steps
to promptly inform the individuals or entities referred to in the first sentence
hereof of the obligations undertaken in this Section 6.9. The Company agrees
that it will notify Parent by the end of the next business day following receipt
if any such inquiries, proposals or offers relating to an Acquisition Proposal
are received by, any such information is requested from, or any such discussions
or negotiations are sought to be initiated or continued with, any of its
representatives indicating, in connection with such notice, the name of such
person (unless disclosure of such name is precluded by the terms of the proposal
or offer in question) and the material terms and conditions of any proposals or
offers and thereafter shall keep Parent informed, on a current basis, on the
status and terms of any such proposals or offers and the status of any such
discussions or negotiations. The Company also agrees that it will promptly
request each Person that has heretofore executed a confidentiality agreement in
connection with its consideration of acquiring it or any of its Subsidiaries to
return or destroy all confidential information heretofore furnished to such
Person by or on behalf of it or any of its Subsidiaries.
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(b) Notwithstanding anything in this Section 6.9 to the contrary, if,
at any time prior to obtaining the Company stockholders' approval of the
Merger, the Company's Board of Directors determines in good faith, on the
basis of the advice of its financial advisors and outside counsel, in
response to an Acquisition Proposal that did not result from a breach of
Section 6.9(a), that such proposal is a Superior Proposal, the Company or
its Board of Directors may terminate this Agreement if, and only if, the
Company shall substantially concurrently with such termination enter into a
definitive agreement containing the terms of a Superior Proposal; provided,
however, that the Company shall not terminate this Agreement pursuant to
this sentence, and any purported termination pursuant to this sentence
shall be void and of no force or effect, unless the Company shall have
complied with (i) all the provisions of this Section 6.9, including the
notification provisions in this Section 6.9, (ii) the following proviso,
and (iii) the payment of the termination fee described in Section 12.2(b)
prior to or concurrently with such termination; and provided further,
however, that the Company shall not exercise its right to terminate this
Agreement pursuant to this Section 6.9 until after five Business Days
following Parent's receipt of written notice (a "Notice of Superior
Proposal") advising Parent that the Company's Board of Directors has
received such a Superior Proposal and that such Board of Directors will,
subject to any action taken by Parent pursuant to this sentence, cause the
Company to accept such Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and (unless disclosure of such name is
precluded by the terms of the proposal or offer in question) identifying
the person making such Superior Proposal (it being understood and agreed
that any amendment to the price or any other material term of such a
Superior Proposal shall require an additional Notice of Superior Proposal
and a new five Business Day period).
SECTION 6.10 PARENT AND SUB APPROVALS. Parent and Sub shall take all
reasonable steps necessary or appropriate to obtain as promptly as practicable
all necessary approvals, authorizations and consents of any person or
Governmental Entity required to be obtained by Parent and Sub to consummate the
transactions contemplated hereby, and will cooperate with the Company in seeking
to obtain all such approvals, authorizations and consents. Parent and Sub shall
use all reasonable efforts to provide such information to such persons, bodies
and authorities as such persons, bodies or authorities or the Company may
reasonably request.
SECTION 6.11 COMPANY APPROVALS. The Company shall take all reasonable
steps necessary or appropriate to obtain as promptly as practicable all
necessary approvals, authorizations and consents of any third party or
Governmental Entity required to be obtained by the Company to consummate the
transactions contemplated hereby and will cooperate with Parent in seeking to
obtain all such approvals, authorizations and consents. The Company shall use
all reasonable efforts to provide such information to such persons, bodies and
authorities as such persons, bodies and authorities or Parent may reasonably
request.
SECTION 6.12 NOMINATION TO SURVIVING COMPANY BOARD. Promptly after the
Effective Time, Parent shall cause Mr. Robert Tannenhauser and one additional
individual designated by him to be nominated and elected as director of the
Surviving Corporation.
SECTION 6.13 EXPENSES. Except as otherwise specifically provided herein,
Parent, Sub and the Company shall bear their respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the transactions contemplated hereby, including, without limitation, all fees
and expenses of investment bankers, agents, representatives, counsel and
accountants. In any action, suit or proceeding under or to enforce any provision
of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorney's fees and other out-of-pocket expenses from the losing
party.
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SECTION 6.14 FURTHER ASSURANCES. (a) Each of Parent, Sub and the Company
shall execute such documents and other papers and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof and
the transactions contemplated hereby. Each of Parent, Sub and the Company shall
use all reasonable efforts to cause all actions to effectuate the Closing for
which such party is responsible under this Agreement to be taken as promptly as
practicable, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals (including, but not limited to, if applicable,
filings under the H-S-R Act and with all applicable Governmental Entities) and
to lift any injunction or other legal bar to the Merger (and, in each case, to
proceed with the Merger as expeditiously as possible). Notwithstanding the
foregoing, there shall be no action required to be taken and no action will be
taken in order to consummate and make effective the transactions contemplated by
this Agreement if such action, either alone or together with another action,
would result in a Company Material Adverse Effect or a Parent Material Adverse
Effect.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the
proper officers and/or directors of Parent and the Surviving Corporation
shall take all such necessary action.
(c) The Company shall cure, or cause to be cured, any defects or
noncompliances in its Subsidiaries' organization or qualification as
identified in Section 4.7(b) of the Company Disclosure Schedule.
SECTION 6.15 HART-SCOTT-RODINO. Each of the Company and Parent (i) shall
use their reasonable efforts to file, and to cause their "ultimate parent
entities" to file, as soon as practicable a "Notification and Report Form For
Certain Mergers and Acquisitions" under the H-S-R Act with respect to the Merger
and the transactions contemplated hereby, (ii) shall take all other actions as
may be necessary, desirable or convenient to obtain the required approval under
the H-S-R Act and (iii) will comply at the earliest practicable date with any
request for additional information received by it from the FTC or Justice
pursuant to the H-S-R Act.
SECTION 6.16 SBA APPROVAL. Each of the Company and Parent (i) shall use
its reasonable efforts, and shall take all actions as may be necessary,
desirable or convenient, to obtain the approval of the SBA with respect to the
Merger and the transactions contemplated hereby and (ii) will comply at the
earliest practicable date with any request for additional information received
by it from the SBA.
SECTION 6.17 UPDATING SCHEDULES. In connection with the Closing, Parent,
Sub and the Company will, promptly upon becoming aware of any fact requiring
supplementation or amendment of the Schedules, supplement or amend the various
Schedules to this Agreement to reflect any matter which, if existing, occurring
or known on the date of this Agreement, would have been required to be set forth
or described in such Schedules which was or has been rendered inaccurate
thereby. No such supplement or amendment to the Schedules shall have any effect
for the purpose of determining satisfaction of the conditions set forth in
Articles VII, VIII and IX hereof, or the compliance by any party hereto with its
covenants and agreements set forth herein.
SECTION 6.18 EMPLOYEE BENEFITS. (a) Effective at the Effective Time, the
Surviving Corporation shall establish a nonqualified deferred compensation plan
(the "Surviving Corporation Plan") covering employees of the Surviving
Corporation who remain as employees of the Company at the Effective Time and
who, as of the Effective Time, held options to purchase shares of Company Common
Stock, which options were not vested as of the Effective Time (the "Unvested
Options"). Under the Surviving Corporation Plan, each
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covered employee shall have an account to which will be credited a number of
shares of Parent Common Stock (including fractional shares thereof). The number
of shares of Parent Common Stock credited to a covered employee's account shall
be equal to (1) the product of (x) the difference between $3.50 per share and
the exercise price per share of the covered employee's Unvested Options
multiplied by (y) the number of Unvested Options held by such employee, divided
by (2) $19.39. In addition, the amount of any dividends paid on shares of Parent
Common Stock equal to shares of Parent Common Stock credited to a covered
employee's plan account shall be credited to that account. Shares and
accumulated dividends shall be paid to covered employees in accordance with the
vesting schedule to be established under the Surviving Corporation Plan (which
vesting schedule shall be no less favorable to the covered employee than the
schedule under his or her Unvested Options) or, pursuant to the separate
election of each covered employee with respect to the period after vesting,
payment may be deferred until a date or event specified by such employee or
allocated to a type of investment fund specified by such employee. In exchange
for the credits made under the Surviving Corporation Plan, the covered employees
shall surrender all rights to any Unvested Options. A copy of the Surviving
Corporation Plan shall be provided to the Company prior to the Closing Date.
(b) The Company shall use all reasonable efforts to cause the holders
of each Unvested Option to surrender all of the Unvested Options to the
Company for cancellation prior to the Effective Time; provided, however,
that the Unvested Options shall not be deemed canceled until the holders
thereof have been credited shares of Parent Common Stock under the
Surviving Corporation Plan in accordance with Section 6.18(a) after the
Effective Time.
SECTION 6.19 COMPANY RECAPITALIZATION. The Company shall use all
reasonable efforts to consummate the Company Recapitalization, subsequent to the
consummation of the Futuronics Merger and immediately prior to the Effective
Time, including the obtaining of the necessary consents of the Company's
stockholders thereto.
ARTICLE VII
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION
TO EFFECT THE MERGER
The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing of the following
conditions, any one or more of which may be waived by them, to the extent
permitted by law:
SECTION 7.1 COMPANY STOCKHOLDER APPROVAL. This Agreement and the
transactions contemplated hereby shall have been approved and adopted by the
requisite vote of the Company's stockholders.
SECTION 7.2 LISTING OF SHARES. The shares of Parent Common Stock issuable
in the Merger shall have been approved for listing on the Nasdaq National
Market.
SECTION 7.3 HART-SCOTT-RODINO. All applicable waiting periods with respect
to any "Notification and Report Form For Certain Mergers and Acquisitions"
required to be filed by Parent, the Company or any of their "ultimate parent
entities" in compliance with the H-S-R Act in connection with the transactions
contemplated hereby shall have passed, or early termination of such waiting
periods shall have been granted.
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SECTION 7.4 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act. No stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC and remain in effect.
SECTION 7.5 SBA APPROVAL. The SBA shall have approved the Merger, this
Agreement and the transactions contemplated hereby; provided, that if such
approval is subject to any conditions, such conditions shall be reasonably
acceptable to Parent and shall not prevent the continued operation of Company
substantially as currently conducted.
SECTION 7.6 LITIGATION. No action, suit or proceeding shall have been
instituted and be continuing or be threatened by any Governmental Entity to
restrain, modify or prevent the carrying out of the transactions contemplated
hereby and no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal or
regulatory restraint or prohibition preventing the consummation of the Merger or
limiting or restricting Parent's conduct or operation of the business of the
Company after the Merger shall have been issued.
SECTION 7.7 FUTURONICS MERGER; COMPANY RECAPITALIZATION. The Futuronics
Merger and the Company Recapitalization shall have been consummated no later
than the Effective Time of the Merger.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF
PARENT AND SUB TO EFFECT THE MERGER
The obligation of Parent and Sub to effect the Merger shall be subject to
the satisfaction on or prior to the Closing of the following additional
conditions, any one or more of which may be waived by them, to the extent
permitted by law:
SECTION 8.1 REPRESENTATIONS AND COVENANTS. The representations and
warranties of the Company contained in this Agreement (including those contained
in the Company Disclosure Schedule, as the same may be amended from time to time
pursuant to the provisions hereof) shall be true and correct on and as of the
Closing Date with the same force and effect as though made on and as of the
Closing Date, (except that any such representations and warranties that are
given as of a particular date and relate solely to a particular date or period
shall be true and correct as of such date or period), except where the failure
of such representations and warranties to be true and correct (without giving
effect to any materiality or Company Material Adverse Effect limitations
therein) would not have, and could not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. The Company
and the Company stockholders who are parties to the Voting Agreement, shall have
performed and complied, respectively, in all material respects with all
covenants and agreements required by this Agreement and the Voting Agreement to
be performed or complied with by the Company or such Company stockholders on or
prior to the Closing Date. The Company shall have delivered to Parent and Sub
certificates, dated the Closing Date, and signed by an Executive Officer of the
Company to the foregoing effect.
SECTION 8.2 ABSENCE OF MATERIAL ADVERSE CHANGE. Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that
has caused or would reasonably be expected to cause a Company Material Adverse
Effect.
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SECTION 8.3 RECEIPT OF AGREEMENTS. On the date hereof, Parent shall have
received executed originals of (i) the Voting Agreement and (ii) the Agreements
with Specified Shareholders. On or prior to the Closing Date, Parent shall have
received executed originals of each of the Employment Agreements.
SECTION 8.4 EXERCISE AND CONVERSION OF VESTED STOCK OPTIONS AND
WARRANTS. All vested Company Stock Options and all Company Warrants shall have
been fully exercised for the purchase of Company Common Stock.
SECTION 8.5 UNVESTED OPTIONS. All Unvested Options shall have been
surrendered and canceled pursuant to Section 6.18.
SECTION 8.6 CONVERTIBLE DEBENTURES. Not more than $250,000 in aggregate
principal amount of Company Convertible Debentures shall be outstanding
immediately prior to the Effective Time.
SECTION 8.7 TAX OPINION. Parent shall have received the opinion, based on
the representations of the Company, Parent and Sub, (which representations shall
be in substantially the form attached hereto as Exhibits 6.1(b)-1 and 6.1(b)-2
respectively), of Sutherland Asbill & Brennan LLP, counsel to Parent and Sub
(or, if such counsel does not render such opinion, such other counsel as shall
be reasonably acceptable to Parent) to the effect that the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code and
such opinion shall not have been withdrawn or modified in any material respect.
Parent may not waive this condition without the consent of the Company.
SECTION 8.8 CLOSING CONDITIONS. Documentation or other information shall
have been received in a form reasonably satisfactory to Parent and Sub which
evidences that the conditions set forth in this Article VIII have been
satisfied.
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO EFFECT THE MERGER
The obligation of the Company to effect the Merger shall be subject to the
satisfaction on or prior to the Closing of the following additional conditions,
any one or more of which may be waived by the Company, to the extent permitted
by law:
SECTION 9.1 REPRESENTATIONS AND COVENANTS. The representations and
warranties of Parent and Sub contained in this Agreement (including those
contained in the Parent Disclosure Schedule, as the same may be amended from
time to time pursuant to the provisions hereof) shall be true and correct on and
as of the Closing Date with the same force and effect as though made on and as
of the Closing Date, (except that any such representations and warranties that
are given as of a particular date and relate solely to a particular date or
period shall be true and correct as of such date or period), except where the
failure of such representations and warranties to be true and correct (without
giving effect to any materiality or Parent Material Adverse Effect limitations
therein) would not have, and could not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. Parent and
Sub shall have performed and complied in all material respects with all
covenants and agreements required by this Agreement to be performed or complied
with by Parent or Sub on or prior to the Closing Date. Parent and Sub shall have
delivered to the Company certificates of an Executive Officer of Parent and Sub,
dated the Closing Date, to the foregoing effect.
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SECTION 9.2 ABSENCE OF MATERIAL ADVERSE CHANGE. Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that
has caused or would reasonably be expected to cause a Parent Material Adverse
Effect.
SECTION 9.3 TAX OPINION. The Company shall have received the opinion of
Weil, Gotshal & Manges LLP, counsel to the Company (or, if such counsel does not
render such opinion, such other counsel as shall be reasonably acceptable to the
Company), based on the representations of the Company, Parent and Sub, (which
representations shall be in substantially the form attached hereto as Exhibits
6.1(b)-1 and 6.1(b)-2 respectively), to the effect that the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code and
such opinion shall not have been withdrawn or modified in any material respect.
The Company may not waive this condition without the consent of Parent.
SECTION 9.4 CLOSING CONDITIONS. Documentation or other information shall
have been received in a form reasonably satisfactory to the Company which
evidences that the conditions set forth in this Article IX have been satisfied.
ARTICLE X
CLOSING
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place at the offices of Sutherland Asbill & Brennan LLP,
1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004, at 10:00 a.m. local time
on the Closing Date or at such other time and place as the parties may mutually
agree.
ARTICLE XI
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
SECTION 11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Notwithstanding any right of Parent and Sub to investigate fully the
affairs of the Company, or any right of the Company to investigate fully the
accuracy of the representations and warranties of Parent and Sub, and
notwithstanding any knowledge of facts determined or determinable by Parent, Sub
or the Company, as the case may be, pursuant to such investigation or right of
investigation, Parent, Sub and the Company, as the case may be, have the right
to rely fully upon the representations, warranties, covenants and agreements of
the Company, Parent and Sub, as the case may be, contained in this Agreement. No
representations, warranties, covenants or agreements in this Agreement, except
the covenants and agreements contained in Articles III, XIII and XIV and
Sections 4.29, 5.8, 6.1(b), 6.5, 6.12, 6.13 and 6.18, shall survive the
Effective Time.
ARTICLE XII
TERMINATION OF AGREEMENT
SECTION 12.1 TERMINATION. This Agreement may be terminated prior to the
Closing as follows:
(a) by either Parent or the Company if the Merger shall not have been
consummated on or before April 30, 2001;
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(b) by the Company if any of the conditions specified in Article VII
or IX have not been met or waived by the Company at such time as any such
condition is no longer capable of satisfaction;
(c) by Parent if any of the conditions specified in Article VII or
VIII have not been met or waived by Parent at such time as any such
condition is no longer capable of satisfaction;
(d) by Parent if the Company or the Company stockholders who are
parties to the Voting Agreement shall have breached any of their respective
obligations under Article VI of this Agreement or the Voting Agreement in
any material respect and such breach continues for a period of ten days
after the receipt of notice of the breach from Parent;
(e) by the Company if Parent or Sub shall have breached any of their
respective obligations under Article VI of this Agreement in any material
respect and such breach continues for a period of ten days after the
receipt of notice of the breach from the Company;
(f) by the Company if its Board of Directors, in the exercise of its
fiduciary duties, accepts an Acquisition Proposal in accordance with
Section 6.9;
(g) at any time on or prior to the Closing Date, by mutual written
consent of Parent, Sub and the Company.
SECTION 12.2 EFFECT OF TERMINATION. (a) Subject to Section 12.2(b), if
this Agreement is terminated and the transactions contemplated hereby are not
consummated as described above, this Agreement shall become void and be of no
further force and effect and there shall be no obligation on the part of Parent,
Sub or the Company, except for the provisions of this Agreement relating to the
obligations of parties under Sections 6.4(b), 6.13, 12.1 and 12.2(b) and
Articles XIII and XIV. None of the parties hereto shall have any liability in
respect to a termination of this Agreement prior to Closing, except to the
extent that termination results from the intentional, willful or knowing
violation of the representations, warranties, covenants or agreements of such
party under this Agreement and except as provided in Section 12.2(b) hereof.
(b) In the event that this Agreement is terminated by the Company
pursuant to Section 12.1(f), then the Company shall, promptly, but in no
event later than one Business Day after the date of such termination, pay
to the Parent a termination fee of $2,750,000 (the "Termination Fee")
payable by wire transfer of same day funds.
ARTICLE XIII
DEFINITIONS
SECTION 13.1 DEFINITIONS. The following terms when used in this Agreement
shall have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 6.9.
"affiliate" (or "affiliates" as the context may require), with respect to
any person, means any other person controlling, controlled by or under common
control with such person.
"Affiliates" has the meaning set forth in Section 6.7(a).
"Agreement" has the meaning set forth in the preamble.
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"Agreements with Specified Shareholders" means agreements between Parent
and each of the Named Persons pursuant to which such persons agree to certain
restrictions on their ability to transfer Parent Common Stock received in the
Merger for a specified period after the Effective Time.
"Business Day" means any day other than a Saturday or a Sunday, or a day on
which banking institutions in the State of New York are obligated by law or
executive order to close.
"Canceled Company Stock" has the meaning set forth in Section 3.1(d).
"CERCLA" shall mean the Comprehensive Environmental Response Compensation
and Liability Act, 42 U.S.C. (S)(S) 9601 et seq. as amended.
"Certificates" has the meaning set forth in Section 3.2(a).
"Closing" has the meaning set forth in Article X.
"Closing Date" means (a) the day on which the last of all conditions to the
consummation of the transactions contemplated hereby (other than conditions
which contemplate only delivery or filing of one or more documents
contemporaneously with the Closing) have been satisfied or waived, or (b) such
other date as the parties hereto agree in writing.
"Code" has the meaning set forth in the recitals.
"Company" has the meaning set forth in the preamble.
"Company Audited Financial Statements" has the meaning provided in Section
4.10.
"Company Class B Stock" means Class B common stock, par value $0.01 per
share, of the Company created pursuant to the Company Recapitalization and
having powers and rights identical to the Company Common Stock and voting
together with the Company Common Stock as a single class.
"Company Common Stock" means, the common stock of the Company, having a par
value of $.01 (one cent) per share.
"Company Convertible Debentures" means the Company's 9% Convertible
Subordinated Notes Due 2003, Conversion Price $2.75 Per Share and the Company's
9 1/4% Convertible Subordinated Notes Due 2001, Conversion Price $2.00 Per
Share.
"Company Disclosure Schedule" has the meaning set forth in the preamble to
Article IV.
"Company Documents" has the meaning set forth in Section 4.1.
"Company Financial Statements" has the meaning set forth in Section 4.10.
"Company Interim Financial Statements" has the meaning set forth in Section
4.10.
"Company Material Adverse Effect" has the meaning set forth in Section 4.3.
"Company Meeting" has the meaning set forth in Section 3.6.
"Company Recapitalization" means a recapitalization of the Company
immediately prior to the Effective Time, pursuant to which (A) the Company Class
B Stock will be created, (B) each share of Company Common Stock held by
Futuronics will be exchanged for one share of Company Class B Stock, and (C) a
number of shares of Company Common Stock (the "Executive Shares") equal to 5.1
percent of the total number of shares of Company
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Common Stock outstanding immediately prior to the Company Recapitalization shall
be exchanged with certain individuals for a corresponding number of shares of
Company Class B Stock as follows: (i) a number of shares of Company Common Stock
held by Robert F. Tannenhauser equal to 72.2 percent of the Executive Shares
will be exchanged for a corresponding number of shares of Company Class B Stock,
(ii) a number of shares of Company Common Stock held by Peter D. Blanck equal to
10.3 percent of the Executive Shares will be exchanged for a corresponding
number of shares of Company Class B Stock, (iii) a number of shares of Company
Common Stock held by Richard Blanck equal to 10.3 percent of the Executive
Shares will be exchanged for a corresponding number of shares of Company Class B
Stock and (iv) a number of shares of Company Common Stock held by Jennifer
M.Goldstein equal to 7.2 percent of the Executive Shares will be exchanged for a
corresponding number of shares of Company Class B Stock.
"Company SEC Documents" has the meaning set forth in Section 4.10.
"Company Stock Option" means any option for the purchase of Company Common
Stock.
"Company Warrant" means any warrant for the purchase of Company Common
Stock.
"Confidentiality Agreement" means the Mutual Nondisclosure Agreement dated
as of August 3, 2000, between Parent and the Company.
"Confirmation" has the meaning set forth in Section 3.1(e).
"contracts and other agreements" mean all contracts, agreements, supply
agreements, undertakings, indentures, notes, bonds, loans, instruments, leases,
mortgages, commitments or other binding arrangements.
"Converting Shareholder" has the meaning set forth in Section 3.2(a).
"Delaware Corporation Law" has the meaning set forth in Section 1.1.
"Distribution" means any distribution of cash, securities or property on or
in respect of the Company Common Stock whether as a dividend or otherwise.
"Effective Time" has the meaning set forth in Section 1.2.
"Employment Agreements" means employment agreements, satisfactory in form
and substance to Parent, between the Surviving Corporation, on the one hand, and
Robert F. Tannenhauser and Jennifer M. Goldstein, respectively, on the other, to
become effective at the Effective Time.
"Environmental Laws" means all applicable federal, state, and local laws,
ordinances, rules, regulations, codes, duties under the common law or orders,
including, without limitation, any requirements imposed under any Permits,
licenses, judgments, decrees, agreements or recorded covenants, conditions,
restrictions or easements, the purpose of which is to protect the environment.
"Environmental Permits" shall mean all Permits, licenses, approvals,
authorizations, consents or registrations required under applicable
Environmental Laws in connection with the ownership, use and/or operation by the
Company or its Subsidiaries of their properties.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the regulations and rulings issued thereunder.
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"Exchange Agent" has the meaning set forth in Section 3.2(a).
"Exchange Ratio" has the meaning set forth in Section 3.1(a)(1).
"Executive Officers" means, as to Parent and the Company, respectively, its
chairman of the board, its president, any vice president (executive, senior or
other), secretary, treasurer or chief financial officer, if any, or any other
officer or employee having supervisory responsibility for a principal business
function.
"Family Member" means, with respect to any person, a parent, spouse,
sibling or lineal descendent of such person.
"FTC" means the Federal Trade Commission or any successor agency or
department.
"Futuronics" means Futuronics Corporation, a New York corporation.
"Futuronics Acquisition Co." means Allied Capital F Sub Corporation, a New
York corporation and a wholly owned subsidiary of Parent.
"Futuronics Merger" means the merger of Futuronics Acquisition Co. with and
into Futuronics upon the terms and subject to the conditions set forth in the
Futuronics Merger Agreement.
"Futuronics Merger Agreement" means the Agreement and Plan of Merger, dated
as of even date herewith, by and among Parent, Futuronics Acquisition Co. and
Futuronics.
"GAAP" means generally accepted accounting principles in the United States
of America from time to time in effect.
"Governmental Entities" means (a) any international, foreign, federal,
state, county, local or municipal government or administrative agency or
political subdivision thereof, (b) any governmental agency, authority, board,
bureau, commission, department or instrumentality, (c) any court or
administrative tribunal, (d) any non-governmental agency, tribunal or entity
that is vested by a governmental agency with applicable jurisdiction, or (e) any
arbitration tribunal or other non-governmental authority with applicable
jurisdiction.
"Hazardous Materials" means (i) any substance or material regulated or
identified as hazardous, toxic, pollutant or contaminant under Environmental
Laws, including gasoline, diesel fuel or other petroleum hydrocarbons, PCBs or
asbestos; or (ii) any pollutant, toxic substance, or contaminant.
"H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Insurance Policies" has the meaning set forth in Section 4.25.
"Intellectual Property Rights" has the meaning set forth in Section
4.19(a).
"IRS" means the Internal Revenue Service or any successor agency or
department.
"Knowledge of Company" or "of which Company is aware" or words of similar
import shall be deemed to mean the actual knowledge of the following
individuals: Robert F. Tannenhauser, Jennifer M. Goldstein, Leonard Rudolph,
David I. Redlener and Louis M. Hafkin.
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"Knowledge of Parent" or "of which Parent is aware" or words of similar
import shall be deemed to mean the actual knowledge of the following
individuals: William L. Walton, Joan M. Sweeney, and Penni F. Roll.
"Justice" means the Antitrust Division of the Department of Justice or any
successor agency or department.
"Leased Real Property" has the meaning set forth in Section 4.18(a).
"Leases" has the meaning set forth in Section 4.18(a).
"Liabilities" has the meaning set forth in Section 4.11.
"lien or other encumbrance" (or "liens or other encumbrances" or "liens or
other encumbrance" or "lien or other encumbrances" as the context may require or
any similar formulation) means any lien, claim, pledge, mortgage, assessment,
security interest, charge, option, right of first refusal, easement, servitude,
adverse claim, transfer restriction under any stockholder or similar agreement
or other encumbrance of any kind.
"Merger" has the meaning set forth in the recitals.
"Named Persons" means each of Robert F. Tannenhauser, Carol Tannenhauser,
David Tannenhauser, Emily Tannenhauser, Peter D. Blanck, Richard Blanck,
Jennifer M. Goldstein, Diane Rosenfeld, R. Matthew McGee and Futuronics.
"1940 Act" shall mean the Investment Company Act of 1940, as amended, and
the regulations and rulings issued thereunder.
"Notice of Superior Proposal" has the meaning set forth in Section 6.9(b).
"Owned Real Property" has the meaning set forth in Section 4.18
"Parent" has the meaning set forth in the preamble.
"Parent Common Stock" means the common stock, par value $0.0001 per share,
of Parent.
"Parent Disclosure Schedule" has the meaning set forth in the preamble to
Article V.
"Parent Documents" has the meaning set forth in Section 5.1.
"Parent Financial Statements" has the meaning set forth in Section 5.4.
"Parent Interim Financial Statements" has the meaning set forth in Section
5.4.
"Parent Material Adverse Effect" has the meaning set forth in Section 5.2.
"Parent SEC Documents" has the meaning set forth in Section 5.4.
"Permits" (or "Permit" as the context may require) mean all licenses,
permits, certificates, certificates of occupancy, orders, approvals,
registrations, authorizations and qualifications with and under all federal,
state, or local or laws.
"person" (or "persons" as the context may require) means any individual,
corporation, limited liability company, partnership, firm, joint venture,
association, joint-stock company, trust, unincorporated organization,
Governmental Entity or other entity.
"Plan" or "Plans" has the meaning set forth in Section 4.23(a).
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"Proceeding" has the meaning set forth in Section 4.15.
"property" (or "properties" as the context may require) means real,
personal or mixed property, tangible or intangible.
"Proxy Statement" has the meaning set forth in Section 4.9.
"Receiving Party" has the meaning set forth in Section 14.1.
"Registration Statement" has the meaning set forth in Section 4.9.
"Releasing Party" has the meaning set forth in Section 14.1.
"SBA" has the meaning set forth in Section 4.2.
"SEC" means the Securities and Exchange Commission or any successor agency
or department.
"Securities Act" means the Securities Act of 1933, as amended, and the
regulations and rulings issued thereunder.
"Share Consideration" has the meaning set forth in Section 3.2(a).
"Sub" has the meaning set forth in the preamble hereof.
"Sub Common Stock" means the common stock, par value $0.01 per share, of
Sub.
"Subsidiaries" (or "Subsidiary" as the context may require), means each
entity as to which a person, directly or indirectly, owns or has the power to
vote, or to exercise a controlling influence with respect to, 50% or more of the
securities of any class of such entity, the holders of which are ordinarily, in
the absence of contingencies, entitled to vote for the election of directors (or
persons performing similar functions) of such entity, provided that, with
respect to Parent, the term "Subsidiary" or "Subsidiaries" shall not include any
person that is not required to be consolidated on consolidated financial
statements of Parent prepared in accordance with GAAP.
"Superior Proposal" has the meaning set forth in Section 6.9.
"Surviving Corporation" has the meaning set forth in Section 1.1.
"Surviving Corporation Plan" has the meaning set forth in Section 6.18.
"Taxes" (or "Tax" as the context may require) means all federal, state,
county, local, foreign and other taxes (including, without limitation, income,
intangibles, premium, excise, sales, use, gross receipts, franchise, ad valorem,
severance, capital levy, transfer, employment and payroll-related, and property
taxes, import duties and other governmental charges and assessments), and
includes interest, additions to tax and penalties with respect thereto.
"Tax Returns" means any return or report relating to Taxes.
"Termination Fee" has the meaning set forth in Section 12.2.
"Voting Agreement" has the meaning set forth in the preamble.
"Unvested Options" has the meaning set forth in Section 6.18.
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ARTICLE XIV
MISCELLANEOUS
SECTION 14.1 PUBLICITY. So long as this Agreement is in effect, prior to
making a press release or other public statement with respect to the
transactions contemplated by this Agreement, any party (a "Releasing Party")
will consult with the other party (the "Receiving Party") and provide such other
party with a draft of such press release, except as may otherwise be required by
law or stock exchange regulations.
SECTION 14.2 PARENT GUARANTY. Parent hereby unconditionally and
irrevocably guarantees the full and timely payment and performance by Sub of its
obligations hereunder.
SECTION 14.3 NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally, sent
by facsimile transmission or sent by certified, registered, express mail or
nationally recognized courier service, postage prepaid. Any such notice shall
deemed given when so delivered personally or successfully sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mails, as follows:
(i) if to Parent or Sub to:
Allied Capital Corporation
1919 Pennsylvania Avenue, 3rd Floor
Washington, D.C. 20006
Attention: Joan M. Sweeney
Telecopy No.: (202) 973-6351
with a concurrent copy to:
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: James D. Darrow
Telecopy No.: (202) 637-3593
(ii) if to the Company to:
BLC Financial Services, Inc.
645 Madison Avenue, 19th Floor
New York, New York 10022
Attention: Robert Tannenhauser
Telecopy No.: (212) 888-3949
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Simeon Gold
Telecopy No.: (212) 310-8007
Any party may by notice given in accordance with this Section 14.3 to the
other parties designate another address or person for receipt of notices
hereunder.
SECTION 14.4 ENTIRE AGREEMENT. This Agreement (including the exhibits and
schedules hereto) and the agreements contemplated hereby, including but not
limited to the Confidenti-
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ality Agreement, contain the entire agreement among the parties with respect to
the subject matter hereof, and supersede all prior agreements, written or oral,
with respect thereto.
SECTION 14.5 WAIVERS AND AMENDMENTS; NON CONTRACTUAL REMEDIES; PRESERVATION
OF REMEDIES; LIABILITY. This Agreement may be amended, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by each of the parties or, in the case of waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and, except as provided
in Section 12.2, are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which any claim of any such inaccuracy or breach is
based may also be the subject matter of any other representation, warranty,
covenant or agreement contained in this Agreement (or in any other agreement
between the parties) as to which there is no inaccuracy or breach. The
limitations on claims set forth in this Section 14.5 and elsewhere in this
Agreement shall not apply in the case of fraud on the part of the Company.
SECTION 14.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 14.7 BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns and heirs and legal representatives. Neither this
Agreement, nor any right hereunder, may be assigned by any party without the
prior written consent of the other party hereto; provided, however, that Parent
may assign its rights (but not its obligations) hereto to its Subsidiaries.
SECTION 14.8 THIRD PARTY BENEFICIARIES. Except for Section 6.1(b) and 6.5,
nothing in this Agreement is intended or shall be construed to give any person,
other than the parties hereto, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
Without limiting the foregoing, no direct or indirect holder of any equity
interests or securities of any party hereto (whether such holder is a limited or
general partner, member, stockholder or otherwise), nor any affiliate of any
party hereto, nor any director, officer, employee, representative, agent or
other controlling person of each of the parties hereto and their respective
affiliates, shall have any liability or obligation arising under this Agreement
or the transaction contemplated hereby, except as may be provided in a separate
written agreement signed by such Person.
SECTION 14.9 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
SECTION 14.10 EXHIBITS AND SCHEDULES. The exhibits and schedules hereto
are a part of this Agreement as if fully set forth herein. All references herein
to Articles, Sections,
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subsections, clauses, exhibits and schedules shall be deemed references to such
parts of this Agreement, unless the context shall otherwise require.
SECTION 14.11 HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
SECTION 14.12 SUBMISSION TO JURISDICTION; VENUE. Any action or proceeding
against any party hereto with respect to this Agreement shall be brought in the
courts of the State of New York or of the United States located in the State of
New York, and, by execution and delivery of this Agreement, each party hereto
hereby irrevocably accepts for itself and in respect of its property, generally
and unconditionally, the jurisdiction of the aforesaid courts. Each party hereto
irrevocably consents to the service of process at any of the aforementioned
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth in Section 14.3, such service to become effective 30 days after such
mailing. Nothing herein shall affect the right of any party hereto to serve
process on any other party hereto in any other manner permitted by law. Each
party hereto irrevocably waives any objection which it may now have or hereafter
have to the laying of venue of any of the aforesaid actions or proceedings
arising out of or in connection with this Agreement brought in the courts
referred to above and hereby further irrevocably waives and agrees not to plead
or claim in any such court that any such action or proceeding brought in any
such court has been brought in an inconvenient forum.
SECTION 14.13 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
SECTION 14.14 SEVERABILITY. If any court of competent jurisdiction
determines that any provision of this Agreement is not enforceable in accordance
with its terms, then such provision shall be deemed to be modified so as to
apply such provision, as modified, to the protection of the legitimate interests
of the parties hereto to the fullest extent legally permissible and shall not
affect the validity or enforceability of the remaining provisions of this
Agreement.
A-45
<PAGE> 229
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
ALLIED CAPITAL CORPORATION
By: /s/ JOAN SWEENEY
---------------------------------------------
Title: Managing Director and Chief Operating
Officer
Name: Joan Sweeney
ALLIED CAPITAL B SUB CORPORATION
By: /s/ JOAN SWEENEY
---------------------------------------------
Title: Managing Director
Name: Joan Sweeney
BLC FINANCIAL SERVICES, INC.
By: /s/ ROBERT TANNENHAUSER
---------------------------------------------
Title: President and Chief Executive Officer
Name: Robert Tannenhauser
A-46
<PAGE> 230
APPENDIX B
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
BLC FINANCIAL SERVICES, INC.,
A DELAWARE CORPORATION
Pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, the undersigned Robert F. Tannenhauser, the President of
BLC Financial Services, Inc. (the "Corporation"), DOES HEREBY CERTIFY:
1. Subsection (a) of Article IV of the Amended and Restated Certificate of
Incorporation is hereby amended and restated in its entirety to read as follows:
"(a) The total number of shares of stock which the Corporation shall have
authority to issue is 35,000,000 shares consisting of (A) two classes of common
stock of which (i) 30,000,000 shares are classified as common stock, $.01 par
value per share and (ii) 5,000,000 shares are classified as Class B common
stock, $.01 par value per share (collectively, the common stock and the Class B
common stock in clauses (i) and (ii) referred to herein as the "Common Stock")
and (B) one class of 2,000,000 shares of Preferred Stock having a par value of
$.01 per share (the "Preferred Stock")."
2. This amendment to the Amended and Restated Certificate of Incorporation
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I hereby sign my name and affirm that the statements
made herein are true under penalty of perjury, this st day of December, 2000.
By:
------------------------------------
Name:
Title:
B-1
<PAGE> 231
[RYAN, BECK & CO. LOGO]
APPENDIX C
[RYAN, BECK & CO.
LOGO]
December 11, 2000
The Board of Directors
BLC Financial Services, Inc.
645 Madison Avenue, 18th Floor
New York, New York 19922
Members of the Board:
You have requested our opinion as investment bankers that the Exchange
Ratio, as hereinafter defined, to be received in the Merger (the "Merger")
between BLC Financial Services, Inc. ("BLC"), a Delaware corporation, and Allied
Capital B Sub Corporation ("Sub"), a Delaware corporation and wholly owned
subsidiary of Allied Capital Corporation ("Allied"), a Maryland corporation,
pursuant to the Agreement and Plan of Merger dated as of October 31, 2000
("Merger Agreement") is fair to the holders of BLC Common Stock from a financial
point of view.
Pursuant to the Merger Agreement, at the Effective Time, Sub shall be
merged with and into BLC and the separate existence of Sub shall cease. Each
share of BLC's issued and outstanding shares of common stock, other than those
shares held by Futuronics Corporation ("Futuronics"), and 5.1% by certain
executives of BLC, will be converted into the right to receive 0.180 shares of
Allied common stock, (the "Exchange Ratio"). The Exchange Ratio applies only to
those shareholders who will not receive Class B Common Stock in the BLC
Recapitalization, as defined in the Merger Agreement.
Ryan, Beck & Co., Inc. as a customary part of its investment banking
business is engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions. In conducting our investigation and analysis of the Merger, we
have met with members of senior management of BLC and Allied to discuss their
respective operations, historical financial statements, strategic plans and
future prospects. We have reviewed and analyzed material prepared in connection
with the Merger, including but not limited to the following: (i) the Merger
Agreement and related documents; (ii) Allied's Annual Report to Shareholders and
Annual Report on Form 10-K for the years ended December 31, 1999, 1998, and
1997, and Allied's Quarterly Reports on Form 10-Q for the periods ended June 30,
2000 and March 31, 2000, and Allied's earnings release for the nine months ended
September 30, 2000; (iii) BLC's Annual Reports to Shareholders on Form 10-K for
the fiscal years ended June 30, 2000, 1999 and 1998 and BLC's Quarterly Reports
on
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<PAGE> 232
Form 10-Q for the periods ended March 31, 2000, December 31, 1999, September 30,
1999; (iv) Allied's Proxy Statement dated October 5, 2000; (v) BLC's Proxy
Statement dated February 23, 2000; (vi) the historical stock prices and trading
volume of Allied's common stock; (vii) the historical stock prices and trading
volume of BLC's common stock; (viii) certain operating and financial information
provided to Ryan, Beck by the management of BLC and Allied relating to its
business and prospects; (ix) the publicly available financial data of specialty
finance companies which Ryan, Beck deemed generally comparable to BLC; and (x)
the terms of recent acquisitions of specialty finance companies which Ryan, Beck
deemed generally comparable in whole or in part to the Allied acquisition of
BLC. We also conducted or reviewed such other studies, analyses, inquiries and
examinations as we deemed appropriate.
While we have taken care in our investigation and analyses, we have relied
upon and assumed the accuracy, completeness and fairness of the financial and
other information provided to us by the respective institutions or which was
publicly available and have not assumed any responsibility for independently
verifying such information. We have also relied upon the management of BLC and
Allied as to the reasonableness and achievability of the financial and operating
forecasts and projections (and the assumptions and bases therefor) provided to
us and in certain instances we have made certain adjustments to such financial
and operating forecasts which in our judgment were appropriate under the
circumstances. In addition, we have assumed with your consent that such
forecasts and projections reflect the best currently available estimates and
judgments of management. Ryan, Beck is not an expert in evaluating loan and
lease portfolios for purposes of assessing the adequacy of the allowances for
losses. Therefore, Ryan, Beck has not assumed any responsibility for making an
independent evaluation of the adequacy of the allowance for loan losses set
forth in the balance sheets of Allied and BLC at June 30, 2000, and Ryan, Beck
assumed such allowances were adequate and complied fully with applicable law,
regulatory policy, and the policies of the Securities and Exchange Commission as
of the date of such financial statements. With respect to Allied, Ryan, Beck is
not an expert in the valuation of private debt and equity investments.
Therefore, Ryan, Beck has not assumed any responsibility for making an
independent valuation or appraisal of the carrying value of such investments. We
also assumed that the Merger in all respects is, and will be consummated, in
compliance with all laws and regulations applicable to Allied and BLC. We have
not made or obtained any independent evaluations or appraisals of the assets and
liabilities of either Allied or BLC or their respective subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate in the circumstances. Our opinion is necessarily based on economic,
market and other conditions and projections as they exist and can be evaluated
on the date hereof. Ryan, Beck did not and does not express any opinion as to
the price or range of prices at which Allied Common Stock might trade subsequent
to the Merger. We were not requested to, and did not, solicit third party
indications of interest in acquiring BLC or in engaging in a business
combination or any other strategic transaction with BLC. Further, we understand
that BLC retained another financial advisor who assisted in the structuring of
this transaction and who also was not requested to and did not solicit third
party indications of interest in acquiring BLC.
We have been retained by the Board of Directors of BLC as an independent
contractor solely to render a fairness opinion in connection with this
transaction with respect to the Merger and will receive a fee for our services.
Ryan Beck has not had an investment banking relationship with Allied and our
research department does not provide published investment analysis on Allied.
Prior to this engagement, Ryan, Beck has had an investment banking
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<PAGE> 233
relationship with BLC and was retained to pursue a private placement of debt
securities. As a result of market conditions such private placement was not
consummated. Ryan, Beck's research department does not provide published
investment analysis on BLC.
In the ordinary course of our business as a broker-dealer, we actively
trade equity securities for our own account and the account of our customers.
Accordingly, we may at any time hold a long or short position in either BLC or
Allied.
Ryan, Beck has been retained by Futuronics, in the separate but related
acquisition of Futuronics by Allied, to opine on the consideration to be
received by Futuronics shareholders. The aggregate merger consideration for all
Futuronics Common Stock shall be $9,083,284.
Our opinion is directed to the Board of Directors of BLC and does not
constitute a recommendation to any shareholder of BLC as to how such shareholder
should vote at any shareholder meeting held in connection with the Merger. Our
opinion may not be used or circulated for any purpose or used in any proxy
statement or relied upon by any person or entity without our prior written
consent. Except that Ryan, Beck consents to the opinion being filed with the
Securities and Exchange Commission and mailed to shareholders as part of the
proxy statement of BLC.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that the Exchange Ratio in the Merger as provided and described in the
Merger Agreement is fair to the holders of BLC common stock from a financial
point of view.
Very truly yours,
Ryan, Beck & Co., Inc.
Ryan, Beck & Co., Inc.
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<PAGE> 234
[RYAN, BECK & CO. LOGO]
APPENDIX D
[RYAN, BECK & CO.
LOGO]
December 11, 2000
The Board of Directors
Futuronics Corporation
3652 Forest Gate Drive, N.E.
Iowa City, Iowa 52240
Members of the Board:
You have requested our opinion as investment bankers that the aggregate
consideration to be received in the merger (the "Merger") between Futuronics
Corporation ("Futuronics") and an acquisition subsidiary of Allied Capital
Corporation ("Allied"), as provided and described in the Agreement and Plan of
Merger dated as of October 31, 2000 (the "Merger Agreement") is fair to the
holders of Futuronics Common Stock from a financial point of view.
Pursuant to the Merger Agreement, at the Effective Time, Allied Capital F
Sub Corporation, a New York corporation and a wholly owned subsidiary of Allied,
shall be merged with and into Futuronics with Futuronics as the surviving
corporation. The aggregate merger consideration for all Futuronics Common Stock
shall be $9,083,284.
Ryan, Beck & Co., Inc. ("Ryan, Beck") as a customary part of its investment
banking business, is engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions. In conducting our investigation and analysis of the Merger, we
have met with members of the board and senior management of Futuronics, BLC
Financial Services, Inc. ("BLC"), and Allied to discuss their respective
operations, historical financial statements, strategic plans and future
prospects. We have reviewed and analyzed material prepared in connection with
the Merger, including but not limited to the following: (i) the Merger Agreement
and related documents; (ii) Allied's Annual Report to Shareholders and Annual
Report on Form 10-K for the years ended December 31, 1999, 1998, and 1997, and
Allied's Quarterly Reports on Form 10-Q for the periods ended September 30,
2000, June 30, 2000 and March 31, 2000; (iii) Allied's Proxy Statement dated
October 5, 2000; (iv) certain operating and financial information provided to
Ryan, Beck by the management of Allied relating to its business and prospects;
(v) Futuronics' unaudited Balance Sheets as of February 29, 2000 and October 30,
2000 and unaudited Income Statement for the eight months ended October 30, 2000;
and (vi) Futuronics' U.S. Corporation Income Tax Returns for the fiscal years
ended February 28, 1997, February 28, 1998 and February 28, 1999. With respect
to the shares of BLC common stock held by Futuronics, which shares represent the
primary assets of Futuronics, we reviewed and analyzed material including but
not limited to the following: (i) BLC's Annual Report to Shareholders and Annual
Report on Form 10-K for the fiscal years ended June 30, 1999, 1998, and 1997,
and BLC's Quarterly Reports on
D-1
<PAGE> 235
Form 10-Q for the periods ended September 30, 2000, March 31, 2000, December 31,
1999, and September 30, 1999; (ii) BLC's Proxy Statement dated February 23,
2000; (iii) the historical stock prices and trading volume of BLC's common
stock; (iv) certain operating and financial information provided to Ryan, Beck
by the management of BLC relating to its business and prospects; (v) the
publicly available financial data of specialty finance companies which Ryan,
Beck deemed comparable to BLC; and (vi) the terms of recent acquisitions of
specialty finance companies which Ryan, Beck deemed generally comparable in
whole or in part to the Allied acquisition of BLC. We also conducted such other
studies, analyses, inquiries and examinations as we deemed appropriate.
While we have taken care in our investigation and analyses, we have relied
upon and assumed the accuracy, completeness and fairness of the financial and
other information provided to us by the respective institutions or which was
publicly available and have not assumed any responsibility for independently
verifying such information. We have also relied upon the management of BLC and
Allied as to the reasonableness and achievability of the financial and operating
forecasts and projections (and the assumptions and bases therefore) provided to
us and in certain instances we have made certain adjustments to such financial
and operating forecasts which in our judgment were appropriate under the
circumstances. In addition, we have assumed with your consent that such
forecasts and projections reflect the best currently available estimates and
judgments of management. Ryan, Beck is not an expert in evaluating loan and
lease portfolios for purposes of assessing the adequacy of the allowances for
losses. Therefore, Ryan, Beck has not assumed any responsibility for making an
independent evaluation of the adequacy of the allowance for loan losses set
forth in the balance sheet of BLC at September 30, 2000, and Ryan, Beck assumed
such allowances were adequate and complied fully with applicable law, regulatory
policy, and the policies of the Securities and Exchange Commission as of the
date of such financial statements. With respect to Allied, Ryan, Beck is not an
expert in the valuation of its private debt and equity investments. Therefore,
Ryan, Beck has not assumed any responsibility for making an independent
valuation or appraisal of the carrying value of such investments. We also
assumed that the Merger in all respects is, and will be consummated, in
compliance with all laws and regulations applicable to Allied, BLC and
Futuronics. We have not made or obtained any independent evaluations or
appraisals of the assets and liabilities of either Allied, BLC, Futuronics or
their respective subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate in the circumstances. Our opinion is necessarily based on economic,
market and other conditions and projections as they exist and can be evaluated
on the date hereof. We were not requested to, and did not, solicit third party
indications of interest in acquiring Futuronics or in engaging in a business
combination or any other strategic transaction with Futuronics.
We have been retained by the Board of Directors of Futuronics as an
independent contractor solely to render a fairness opinion in connection with
this transaction with respect to the Merger and will receive a fee for our
services. Prior to this engagement, Ryan, Beck has not had an investment banking
relationship with Futuronics. Ryan Beck has not had an investment banking
relationship with Allied and our research department does not provide published
investment analysis on Allied or Futuronics.
In the ordinary course of our business as a broker-dealer, we actively
trade equity securities for our own account and the account of our customers.
Accordingly, we may at any time hold a long or short position in either BLC or
Allied.
D-2
<PAGE> 236
Ryan, Beck has been retained by BLC, in the separate but related
acquisition of BLC by Allied, to opine on the exchange ratio to be received by
BLC shareholders. We understand that the exchange ratio to be received by BLC
will be approximately 0.180 Allied share for each share of BLC. Ryan, Beck does
not provide published investment analysis on BLC.
Our opinion is directed to the Board of Directors of Futuronics and does
not constitute a recommendation to any shareholder of Futuronics as to how such
shareholder should vote at any shareholder meeting held in connection with the
Merger. Our opinion may not be used or circulated for any purpose or used in any
proxy statement or relied upon by any person or entity without our prior written
consent. Except that Ryan, Beck consents to the opinion being filed with the
Securities and Exchange Commission and mailed to shareholders as part of the
proxy statement of BLC.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that the aggregate consideration in the Merger as provided and described
in the Merger Agreement is fair to the holders of Futuronics common stock from a
financial point of view.
Very truly yours,
Ryan, Beck & Co., Inc.
Ryan, Beck & Co., Inc.
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<PAGE> 237
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The Annotated Code of Maryland, Corporations and Associations (the
"Maryland Law"), Section 2-418 provides that a Maryland corporation may
indemnify any director of the corporation and any person who, while a director
of the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, made a party to any proceeding by reason of service in
that capacity unless it is established that the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; or the director
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the proceeding, but if the
proceeding was one by or in the right of the corporation, indemnification may
not be made in respect of any proceeding in which the director shall have been
adjudged to be liable to the corporation. Such indemnification may not be made
unless authorized for a specific proceeding after a determination has been made,
in the manner prescribed by the law, that indemnification is permissible in the
circumstances because the director has met the applicable standard of conduct.
On the other hand, the director must be indemnified for expenses if he or she
has been successful in the defense of the proceeding or as otherwise ordered by
a court. The law also prescribes the circumstances under which the corporation
may advance expenses to, or obtain insurance or similar cover for, directors.
The law also provides for comparable indemnification for corporate officers
and agents.
Allied Capital's articles of incorporation 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), provided, however,
that such indemnification is limited by the 1940 Act or by any valid rule,
regulation or order of the Securities and Exchange Commission thereunder. Allied
Capital's bylaws, however, provide that it may not indemnify any director or
officer against liability to Allied Capital 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
Allied Capital pursuant to the provisions described above, or otherwise, Allied
Capital 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 its payment 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
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<PAGE> 238
securities being registered, Allied Capital 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.
Allied Capital carries liability insurance for the benefit of its directors
and officers on a claims-made basis of up to $10,000,000, subject to a $250,000
retention and the other terms thereof.
The Agreement and Plan of Merger (the "Merger Agreement") by and among
Allied Capital Advisers, Allied Capital Corporation, Allied Capital Corporation
II, Allied Capital Lending Corporation and Allied Capital Commercial Corporation
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 the companies noted above other than Allied
Capital Lending Corporation, 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 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.a.1(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
1.a.2(2) Articles of Merger.
2.b.(15) Bylaws.
3.c. Not applicable.
4.a.1 Agreement and Plan of Merger, dated as of October 31, 2000,
by and among Allied Capital Corporation, Allied Capital B
Sub Corporation, and BLC Financial Services, Inc.
(incorporated by reference to Appendix A of this Form N-14)
4.a.2+ Voting and Support Agreement with key shareholders of BLC
dated October 31, 2000.
4.a.3+ Form of Resale Agreement with key shareholders of BLC dated
October 31, 2000.
4.b.1+ Agreement and Plan of Merger, dated as of October 31, 2000,
by and among Allied Capital Corporation and Allied Capital F
Sub Corporation, and Futuronics Corporation.
4.b.2+ Voting and Support Agreement with key shareholders of
Futuronics Corporation dated October 31, 2000.
4.c.+ Form of Employment Agreement.
5.d.(6) Specimen certificate of Allied Capital's Common Stock, par
value $0.0001 per share, the rights of holders of which are
defined in Exhibits 1.a.1, 1.a.2 and 2.b.
6.g. Not applicable.
8.i.1(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
8.i.1a(7) First Amendment to the Allied Capital Corporation Employee
Stock Ownership Plan dated April 30, 1998.
8.i.1b(14) Termination Amendment to the Allied Capital Employee Stock
Ownership Plan effective December 31, 1999.
8.i.2(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
</TABLE>
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<PAGE> 239
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
8.i.3(9) Amended Stock Option Plan.
8.i.4(17) Description of Formula Award and Cut-Off Award Arrangements.
8.i.5(13) Allied Capital 401(k) Plan dated September 1, 1999.
8.i.6(17) Employment Agreement dated June 15, 2000 between Allied
Capital and William L. Walton.
8.i.7(17) Employment Agreement dated June 15, 2000 between Allied
Capital and Joan M. Sweeney.
8.i.8(17) Employment Agreement dated June 15, 2000 between Allied
Capital and G. Cabell Williams III.
9.j.1(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
9.j.2(6) Form of Custody Agreement with LaSalle National Bank.
10.k. Not applicable.
11.l.1* Opinion of Sutherland Asbill & Brennan LLP re: legality.
12.m.1* Opinion of Weil, Gotshal & Manges LLP re: tax matters.
12.m.2* Opinion of Sutherland Asbill & Brennan LLP re: tax matters.
13.e.(3) Dividend Reinvestment Plan.
13.f.1(4) Form of debenture between certain subsidiaries of Allied
Capital and the U.S. Small Business Administration.
13.f.2.a(11) Credit Agreement dated as of March 9, 1999 between Allied
Capital, 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.
13.f.2.b(12) First Amendment to Credit Agreement dated May 7, 1999.
13.f.2.c(15) Second Amendment to Credit Agreement dated January 18, 2000.
13.f.2.d(15) Third Amendment to Credit Agreement dated March 17, 2000.
13.f.2.e(17) Amended and Restated Credit Agreement dated May 17, 2000.
13.f.3(7) Note Agreement dated as of April 30, 1998.
13.f.4(5) Loan Agreement between Allied Capital Corporation (old) and
Overseas Private Investment Corporation, dated April 10,
1995. Letter dated December 11, 1997 evidencing assignment
of Loan Agreement from Allied Capital Corporation (old) to
Allied Capital Corporation.
13.f.5(12) Note Agreement dated as of May 1, 1999.
13.f.6(14) Second Amended and Restated Master Loan & Security Agreement
dated October 28, 1999 between the Company and Morgan
Stanley Mortgage Capital, Inc.
13.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.
13.f.7.b(6) Indenture dated as of January 1, 1998, between the Allied
Capital Commercial Mortgage Trust 1998-1 and LaSalle
National Bank.
13.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.
13.f.7.d(6) Guaranty dated as of January 1, 1998 by the Company.
13.f.8(15) Note Agreement dated as of November 15, 1999.
</TABLE>
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<PAGE> 240
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
13.f.12(18) Auction Rate Reset Note Agreement, dated as of August 31,
2000 between the Company and Intrepid Funding Master Trust,
a Delaware business trust administered by Banc of America
Securities LLC; Forward Issuance Agreement, dated as of
August 31, 2000, between the Company and Banc of America
Securities LLC; Remarketing and Contingency Purchase
Agreement, dated as of August 31, 2000 between the Company
and Banc of America Securities LLC.
13.f.13(19) Note Agreement dated as of October 15, 2000.
14.n.1* Consent of Arthur Andersen LLP, independent public
accountants.
14.n.2 Consent of Sutherland Asbill & Brennan LLP (included in
Exhibit 11.l.1).
14.n.3 Consent of Ryan, Beck & Co., Inc. (included in Appendix C).
14.n.4* Consent of Richard A. Eisner & Company, LLP.
14.n.5 Consent of Sutherland and Asbill & Brennan LLP (included in
Exhibit 12.m.2).
14.n.6 Consent of Weil, Gotshal & Manges LLP. (included in Exhibit
12.m.1)
14.n.7 Consent of Ryan, Beck & Co., Inc. (included in Appendix D).
15.o. Not applicable.
15.p. Not applicable.
15.q. Not applicable.
15.r.(18) Code of Ethics.
17.* Proxy Cards for Special Meeting of BLC shareholders.
</TABLE>
-------------------------
<TABLE>
<C> <S>
* Filed herewith.
+ Filed previously on this registration statement on Form N-14
(File No. 333-49506)
(1) Incorporated by reference to exhibit 3(i) filed with Allied
Capital Lending's Annual Report on Form 10-K for the year
ended December 31, 1996.
(2) Incorporated by reference from Appendix B to Allied
Capital'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 Allied Capital'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 Capital Corporation's (old) 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 Capital Corporation's (old) Pre-Effective Amendment
No. 2 to the registration statement on Form N-2 on January
24, 1996 (File No. 33-64629). Assignment to Allied Capital
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
Allied Capital's registration statement on Form N-2 filed on
Allied Capital'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 Allied Capital'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 Allied Capital's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
(9) Incorporated by reference to Exhibit A of Allied Capital's
definitive proxy materials for the Company's 2000 Annual
Meeting of Stockholders filed with the Commission on March
29, 2000.
(10) Incorporated by reference to the exhibit of the same name
filed with Allied Capital's Annual Report on Form 10-K for
the year ended December 31, 1998.
(11) Incorporated by reference to Exhibit f.2.a with Allied
Capital's registration statement on Form N-2 (File No.
333-75161) filed on March 26, 1999.
(12) Incorporated by reference to the exhibit of the same name
filed with Allied Capital's Quarterly Report on Form 10-Q
for the period ended June 30, 1999.
(13) Incorporated by reference to Exhibit 4.4 of the Allied
Capital 401(k) Plan registration statement on Form S-8,
filed on behalf of such Plan on October 8, 1999 (File No.
333-88681).
(14) Incorporated by reference to the exhibit of the same name
filed on Allied Capital's registration statement on with
Post-Effective Amendment No. 1 to the Form N-2 (333-84973)
filed on November 10, 1999.
(15) Incorporated by reference to the exhibit of the same name
filed with Allied Capital's Annual Report on Form 10-K for
the year ended December 31, 1999.
(16) Incorporated by reference to the exhibit of the same name to
Allied Capital's registration statement on Post Effective
Amendment No. 1 to Form N-2 filed on Allied Capital's behalf
with the Commission on May 9, 2000. (File No. 333-33478).
(17) Incorporated by reference to the exhibit of the same name to
Allied Capital's registration statement on Form N-2 filed on
Allied Capital's behalf with the Commission on August 11,
2000 (File No. 333-43534).
</TABLE>
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<PAGE> 241
<TABLE>
<C> <S>
(18) Incorporated by reference to the exhibit of the same name to
Allied Capital's registration statement on Pre-Effective
Amendment No. 1 to Form N-2 filed on Allied Capital's behalf
with the Commission on September 12, 2000 (File No.
333-43534).
(19) Incorporated by reference to the exhibit of the same to
Allied Capital's Quarterly Report on Form 10-Q for the
period ended September 30, 2000.
</TABLE>
ITEM 17. UNDERTAKINGS.
(1) The Registrant hereby undertakes that:
(a) prior to any public reoffering of the securities registered
through the use of a prospectus which is a part of this registration
statement by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act (17 CFR 230.145), the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(b) every prospectus that is filed under paragraph (a) above will be
filed as a part of an amendment to the registration statement and will not
be used until the amendment is effective, and that, in determining any
liability under the 1933 Act, each post-effective amendment shall be deemed
to be a new registration statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
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<PAGE> 242
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this N-14 to the 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 8(th) day of December, 2000.
ALLIED CAPITAL CORPORATION
By: /s/ WILLIAM L. WALTON
---------------------------------------
William L. Walton
Chief Executive Officer and President
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 December 8, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WILLIAM L. WALTON Chairman of the Board, Chief Executive Officer, and
------------------------------------------ President
William L. Walton
* Director
------------------------------------------
Brooks H. Browne
* Director
------------------------------------------
John D. Firestone
* Director
------------------------------------------
Anthony T. Garcia
* Director
------------------------------------------
Lawrence I. Hebert
* Director
------------------------------------------
John I. Leahy
* Director
------------------------------------------
Robert E. Long
* Director
------------------------------------------
Warren K. Montouri
</TABLE>
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<PAGE> 243
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
------------------------------------------
Guy T. Steuart II
* Director
------------------------------------------
T. Murray Toomey, Esq.
* Director
------------------------------------------
Laura W. van Roijen
* Director
------------------------------------------
George C. Williams, Jr.
/s/ PENNI F. ROLL Executive Vice President and Chief Financial Officer
------------------------------------------ (Principal Financial and Accounting Officer)
Penni F. Roll
</TABLE>
* Signed by William L. Walton pursuant to a power of attorney dated November 6,
2000.
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