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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22832
ALLIED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
MARYLAND 52-1081052
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
1919 PENNSYLVANIA AVENUE NW 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 28, 2000 was approximately
$1,137,232,000 based upon the last sale price for the registrant's common stock
on that date. As of March 28, 2000 there were 68,628,044 shares of the
registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1999 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2000 are incorporated by reference
into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF THE COMPANY
BUSINESS
We are principally a lender to and investor in private companies in a variety of
different industries and in diverse geographic locations throughout the United
States. We have been investing in growing businesses for over 40 years and have
financed thousands of private companies nationwide. Our investment activity is
focused in three areas:
- - private finance
- - commercial real estate finance, including the purchase of CMBS, and
- - Allied Capital Express -- small business and commercial real estate loans of
up to $3 million originated for sale.
Our investment portfolio consists primarily of long-term unsecured loans with
equity features, commercial mortgage-backed securities, commercial mortgage
loans and small senior loans, including SBA 7(a) guaranteed loans. At December
31, 1999, our investment portfolio totaled $1.2 billion representing 641
borrower relationships in 38 states and the District of Columbia. The Company's
investment objective is to achieve current income and capital gains.
PRIVATE FINANCE
We provide long-term debt and equity financing to private companies nationwide.
Our 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.
Our private financing is generally used to fund growth, buyouts, note purchases,
acquisitions, recapitalizations, and bridge financings. We generally invest in
private companies though, from time to time, we may invest in undervalued public
companies that lack access to public capital and whose securities may not be
marginable. We target two types of companies when seeking new investments. The
first type of company we seek 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 our investment objective. The second type of
company we seek is an emerging company in a growing industry that is positioned
for significant growth. We have spent over 40 years refining our highly
selective investment discipline, which is founded on seeking portfolio companies
having key characteristics and targeting specific industries.
We originate investments generally ranging in size from $5 million to $30
million, and in 1999 our average investment size was approximately $12.4
million. Our 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 98% of the investments in the private finance
portfolio have fixed rates of interest. Our private finance investments
typically include equity features, such as warrants or options to buy a minority
interest in the portfolio company. We also make preferred and common equity
investments, particularly when we see unique opportunities to profit from the
growth of an emerging company. At December 31, 1999, 87% of the private finance
portfolio consisted of debt securities, and 13% consisted of equity securities.
Our 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.
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Capital providers for the finance of private companies can be generally
categorized as shown in the diagram below:
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<S> <C> <C> <C> <C> <C> <C>
CAPITAL PROVIDER Banks Commercial Insurance Allied Capital Private Private
Finance Companies/ Mezzanine Equity
Companies High Yield Funds Funds
Market
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PRIMARY Senior, short- Asset-based Large > $30 Unsecured Unsecured Equity
BUSINESS term debt lending million long-term debt long-term debt
FOCUS credits with equity with equity
upside upside
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TYPICAL PRICING LIBOR+ [graphic of arrow stretching between 'LIBOR+' and '30%+'] 30%+
SPECTRUM*
</TABLE>
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* 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 we do. We generally do not compete with banks, commercial finance
companies, or the insurance company/high yield market. Instead, we compete
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. We believe that
we have key structural and operational advantages when compared to private
mezzanine funds.
Our scale of operations, equity capital base, and successful track record as a
private finance investor has enabled us to borrow long-term capital to leverage
our returns on our common equity. Therefore, our access to debt capital reduces
our 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. Our lower cost of capital gives us a pricing
advantage when competing for new investments. In addition, the perpetual nature
of our corporate structure enables us to be a better long-term partner for our
portfolio companies than a traditional mezzanine fund, which typically has a
finite life.
We estimate that we fund only 2% of all the private finance investments that we
review. When assessing a prospective investment, we look for a company that has
achieved, or has the potential to achieve, market leadership in a niche,
critical mass, and a sustainable cash flow. We also look for companies that,
because of their industry and business plan, can demonstrate minimal
vulnerability to changes in economic cycles. Since our debt securities are
primarily unsecured in nature, we look for companies in industries that are
non-cyclical, cash flow intensive, and can demonstrate a high return on their
invested capital. We generally do 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. We generally target
and do not target the following industries, though we will consider investments
in any industry 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
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Business services
Telecommunications
Broadcasting
Education
Healthcare
Consumer products
Light industrial products
INDUSTRIES NOT TARGETED
CYCLICAL/CAPITAL INTENSIVE/
LOW RETURN ON CAPITAL
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Heavy manufacturing
Natural resources
Commodity retail
Low value-add distribution
Agriculture
Transportation
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Another critical element of our 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 our private financings were completed in conjunction
with private equity firms, which provided capital that is junior to ours. We
believe strong equity sponsorship significantly strengthens our position as a
long-term lender. A strong equity sponsor provides not only strong equity
capital beneath our investment, but also provides a reliable source of
additional equity capital if the portfolio company requires additional
financing. Private equity sponsors also help us confirm our own due diligence
findings when assessing a new investment opportunity, and they provide
assistance and leadership to the portfolio company's management team throughout
our investment period.
The typical private finance structure focuses, first and foremost, on the
protection of our investment principal. Our 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 our interests in the transaction. The warrants we receive with our debt
securities generally require only a minimal cost to exercise, and thus as the
portfolio company appreciates in value, we achieve additional investment return
from this equity interest. We seek to achieve additional investment returns of
up to 1000 basis points from the appreciation and sale of our warrants.
Generally, our warrants expire five years after the related debt is repaid. The
warrants typically include registration rights, which allow us 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
our equity position after a specified period of time at a formula price or at
its fair market value. Most of the gains we realize from our warrant portfolio
arise as a result of the sale of the portfolio company to another business, or
through a recapitalization. Historically, we have not been dependent on the
public equity markets for the sale of our warrant positions.
We hold a portion of our private finance investments in a wholly owned
subsidiary, Allied Investment Corporation. Allied Investment is a BDC and is
licensed and regulated by the Small Business Administration to operate as a
small business investment company ("SBIC"). See "Certain Government Regulations"
below for further information about SBIC regulation.
COMMERCIAL REAL ESTATE FINANCE
COMMERCIAL MORTGAGE LOANS. We have been a commercial real estate lender for
many years, and maintain a commercial mortgage loan portfolio. During 1998, we
significantly reduced our middle-market commercial real estate lending
activities, because we 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 our
shareholders. We, however, continue 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, we combined our small
real estate lending with our SBA lending activity to form Allied Capital
Express, which is discussed below.
We continue to seek unique opportunities for commercial mortgage loans for our
portfolio when our risk/return objectives can be achieved. These loans are
generally priced at higher fixed interest rates and include subordinated real
estate loans. Subordinated loans are priced similarly to our private finance
loans and may be accompanied by an equity interest in the real estate or in the
underlying business. We derive income from the interest charged on the
commercial mortgage loan portfolio through contractual interest and amortization
of discounts.
We compete with banks, real estate conduits, equity and mortgage real estate
investment trusts ("REITs") and other lenders for the commercial mortgage loans
we originate for investment. We believe we have earned a reputation in the
commercial real estate finance market as a specialist in credits that require
more difficult structuring or underwriting techniques, and that we compete
successfully in this niche.
During 1999, we sold a significant portion of our lower yielding commercial
mortgage loan portfolio, and redeployed the proceeds into higher yielding
investments. We may continue to sell loans from this portfolio during 2000.
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COMMERCIAL MORTGAGE-BACKED SECURITIES. The same pricing pressures that caused
us to reduce our 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 us to acquire newly issued, non-investment grade commercial
mortgage-backed securities ("Purchased CMBS") at significant discounts from the
face amount of the bonds and at attractive yields.
As an investor, we believe that Purchased CMBS has attractive risk/return
characteristics. The Purchased CMBS in which we invest are non-investment grade,
which means that nationally recognized statistical rating organizations rate
them below the top four investment-grade rating categories (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 we invest are secured by mortgage loans with real estate
collateral. Our 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. We acquire our Purchased CMBS on the initial
issuance of the CMBS bond offering, and are 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%.
Our 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. We find the yields for Purchased CMBS very attractive given their
collateral protection.
We believe this risk/return dynamic exists in this market today because there
are significant barriers to entry as a non-investment grade CMBS investor.
First, non-investment grade CMBS are long-term investments and require long-term
investment capital. Our capital structure, which is in excess of 50% equity
capital, is well suited for this asset class. Second, when we purchase CMBS on
an initial issuance, we re-underwrite every mortgage loan in the underlying
collateral pool, and we meet with the issuer to discuss the nature and type of
loans we will accept into the pool. We have significant commercial mortgage loan
underwriting expertise, both in terms of the number of professionals we employ
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, we recognize 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. We invest 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, our CMBS tranches receive principal payments
only after the securities that are senior to our securities are repaid. Thus, if
losses are incurred in the underlying mortgage loan collateral pool, we would
experience these losses.
To mitigate this risk, we perform extensive due diligence prior to an investment
in Purchased CMBS. When we evaluate a CMBS investment, we use the same
underwriting procedures and criteria for the mortgage loans in the collateral
pool as we do for all of the loans we originate. These underwriting procedures
and criteria are described in detail below. We will only invest in CMBS when we
believe, as a result of our underwriting procedures, that the underlying
mortgage pool adequately secures our position. Our portfolio of CMBS is secured
by more than 2,000 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 1999 Annual Report to Shareholders for a summary of the loan
to value ratios and debt service coverage ratios of the mortgage loans securing
our Purchased CMBS investments.
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Our Purchased CMBS activity complements our private finance activity because it
provides a steady stream of recurring interest income. In order to maintain a
balanced investment portfolio, we expect to limit our Purchased CMBS activity on
a proportional basis as our private finance portfolio grows.
ALLIED CAPITAL EXPRESS
We originate small business and commercial real estate loans, primarily for
sale, under the brand name "Allied Capital Express." The loans we originate 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 sold to banks and other financial institutions
for premiums ranging from 5% to 10% of the loan amount sold. We 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. We
began using a separate brand name for these smaller loans in the second quarter
of 1999, to distinguish this program from our core private finance activity and
avoid confusion in the market place. Allied Capital Express provides a steady
stream of premium income to the Company with minimal capital employed, and thus
complements our other portfolio activities.
Many of the loans originated under the Allied Capital Express brand name are
through our participation in the SBA's 7(a) Guaranteed Loan Program. The SBA
7(a) program is estimated to provide approximately $10 billion to small
businesses on an annual basis. One of our subsidiaries 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) program, we extend
senior secured loans that are partially guaranteed by the SBA. Our 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. We focus our 7(a) loan origination activity on loans
secured by commercial real estate assets. We are a Preferred Lender and we
operate in 20 SBA-designated markets throughout the United States. We have
Allied Capital Express offices in seven locations.
In 1999, we began an initiative to increase the growth and profitability of
Allied Capital Express. We developed technology to streamline the closing
process and reduce cycle times for transactions. We strengthened our sales force
and increased our loan sale network. We also began a process to migrate the
application process to the Internet to increase our loan origination activity.
We intend to continue with all aspects of this initiative throughout 2000.
Our 7(a) loans typically range in size from $250,000 to $1 million. The SBA
guarantees 80% of any qualified loan up to $100,000 regardless of maturity, and
75% of any qualified loan over $100,000 regardless of maturity, to a maximum
guarantee of $750,000 for any one borrower. SBA regulations define qualified
small businesses generally as businesses with (1) no more than $5 million in
annual sales or (2) no more than 500 employees. The SBA stipulates that loans
used to acquire real estate may have a maximum maturity of 25 years; loans used
to purchase machinery and equipment may have a maximum maturity of 15 years;
loans used for working capital may have a maximum maturity of seven years.
We generally price our 7(a) loans with variable interest rates typically ranging
from 1.75% to 2.75% over the prime rate, adjusted monthly. Approximately 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. We routinely
sell the guaranteed portion of our 7(a) loans in the well-established secondary
market of banks and other institutional buyers. We earn 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. We
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, we entered into an agreement with a commercial paper
conduit to sell up to 90% of the unguaranteed interests in our 7(a) loans. We
retain a servicing spread of approximately 3.75% on the unguaranteed interests
sold. We continue to service 100% of each 7(a) loan we originate.
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In addition to 7(a) loans, we originate small commercial real estate loans for
sale 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 we can receive premiums for the sale of
these loans to banks and other financial institutions. Our net premium on these
loan sales is generally up to 10% of the loan balance sold.
INVESTMENT ADVISORY SERVICES
We are a registered investment adviser, pursuant to the Investment Advisers Act
of 1940, and have certain investment advisory agreements to manage private
investment funds. The revenue generated from these agreements is not material to
the Company's operations.
LOAN SOURCING
Over the last two years, we have significantly increased the scope of our sales
and marketing activity by opening new regional offices and increasing our sales
and marketing staff. To source new investment opportunities, we work with
thousands of intermediaries including:
- - regional and boutique investment banks;
- - private mezzanine and equity investors;
- - business and mortgage brokers;
- - national retail financial services companies; and
- - banks, law firms and accountants.
We believe that our experience and reputation provide a competitive advantage in
originating new investments. We have established an extensive network of
investment referral relationships over our 41-year history. We are recognized as
a pioneer in the private finance industry, and have developed a reputation in
the commercial real estate finance market for our ability to finance complex
transactions.
For Allied Capital Express activities, we continue to build our network of
Internet relationships to direct traffic to our web site,
AlliedCapitalExpress.com, which we believe will increase our business
opportunities. We have entered into a strategic relationship with an online loan
broker and plan to enter into similar agreements with other small business
portals and online intermediaries throughout 2000.
INVESTMENT APPROVAL AND UNDERWRITING PROCEDURES
In assessing new investment opportunities, we maintain conservative credit
standards based on our 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 our credit-oriented culture has resulted in a record of minimal
realized losses.
PRIVATE FINANCE. We generally require that the companies in which we invest
demonstrate strong market position, sales growth, positive cash flow, and
profitability, as discussed above. We emphasize the quality of management, and
seek experienced entrepreneurs with a management track record, relevant industry
experience and a significant equity stake in the business. In a typical private
financing, we thoroughly review, analyze and substantiate, through due
diligence, the business plan and operations of the potential portfolio company.
We perform financial due diligence, often with assistance of an accounting firm;
perform operational due diligence, often with the assistance of an industry
consultant; study the industry and competitive landscape; and conduct numerous
reference checks with current and former employees, customers, suppliers and
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 our most senior private finance professionals and chaired by our Chairman and
Chief Executive Officer. The private finance approval process benefits from the
experience of the investment committee members and from the
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experience of our other investment professionals who together with the committee
members, on average, have over eleven years of professional experience. For
every transaction of $10 million or greater, we also require approval from the
executive committee of the board of directors 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. We receive extensive packages of information regarding the
mortgage loans comprising a CMBS pool. We work with the issuer, the investment
bank, and the rating agencies in performing our diligence on a CMBS purchase.
The typical CMBS purchase takes between two to three months to complete because
of the breadth and depth of our diligence procedures. We re-underwrite all of
the underlying commercial mortgage loans securing the CMBS. We challenge the
estimate of underwriteable cash flow and challenge necessary carve-outs, such as
replacement reserves. We study the trends of the industry and geographic
location of each property, and independently assess our own estimate of the
anticipated cash flow over the period of the loan. Our loan officers physically
inspect most of the collateral properties, and assess appraised values based on
our own opinion of comparable market values.
Based on the findings of our diligence procedures, we may reject certain
mortgage loans from inclusion in the pool. We then formulate our negotiated
purchase price and discount to achieve an effective yield on our investment over
a ten-year period to approximate 13% to 16%. In computing this estimated yield,
we assume a 1% loss rate 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 board of directors. The investment committee for CMBS transactions
consists of our most senior commercial real estate professionals and is chaired
by our Chairman and Chief Executive Officer.
COMMERCIAL REAL ESTATE FINANCE. When we evaluate commercial mortgage loans, we
generally receive an initial package of information that typically includes
underwriting information that was developed by the borrower. 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. Our 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. We also study trends in the borrower's industry and in real estate
values in the borrower's geographic region. Our loan officers 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 Company's 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. We generally follow the same
underwriting procedures and criteria for 7(a) loans as we do for our 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.
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PORTFOLIO MANAGEMENT
PORTFOLIO DIVERSITY. We monitor the portfolio to maintain both industry and
geographic diversity. We currently do not have a policy with respect to
"concentrating" (i.e., investing 25% or more of our total assets) in any
industry or group of industries and currently our portfolio is not concentrated.
We may or may not concentrate in any industry or group of industries in the
future.
LOAN SERVICING. Our 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, our staff is responsible for special servicing activities including
delinquency monitoring and collection, workout administration and management of
foreclosed assets.
PORTFOLIO MONITORING AND VALUATION
We use a grading system in order to help us monitor the credit quality of our
portfolio and the potential for capital gains. The grading system assigns grades
to investments from 1 to 5, and the portfolio was graded at December 31, 1999 as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
PORTFOLIO AT OF TOTAL
GRADE DESCRIPTION VALUE PORTFOLIO
- ----- ----------- ------------- ----------
(IN MILLIONS)
<C> <S> <C> <C>
1 Probable capital gain....................................... $ 156.0 12.7%
2 Performing security......................................... 1,002.9 81.7%
Close monitoring -- no loss of principal or interest
3 expected.................................................... 22.5 1.8%
4 Workout -- Some loss of interest expected................... 32.2 2.6%
5 Workout -- Some loss of principal expected.................. 14.9 1.2%
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$1,228.5 100.0%
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</TABLE>
The 1940 Act requires that the board of directors value each asset in the
portfolio on a quarterly basis. We are not permitted to have a general loan loss
reserve, but instead must value each specific investment. We have a written
valuation policy that governs the valuation of our assets, and we follow a
consistent valuation process quarterly. In valuing each individual investment,
we consider the financial performance of each portfolio company, loan payment
histories, indications of potential equity realization events, current
collateral values and determine whether the value of the asset should be
increased through unrealized appreciation or decreased through unrealized
depreciation. After each investment professional has made his or her
determination of value, members of senior management review the valuations.
These valuations are then presented to the board of directors for review and
approval.
As a general rule, we do not value our 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
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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 our
private equity valuation. Equity securities in public companies that carry
certain restrictions on sale are generally valued at a discount from the public
market value of the securities. Restricted and unrestricted publicly traded
stocks may also be valued at discounts due to the size of our investment,
restrictions on trading or market liquidity concerns.
We monitor loan delinquencies weekly. The following outlines the treatment of
each delinquency category:
30 DAYS PAST DUE Our loan servicing staff monitors loans and contacts
borrowers for collection.
60 DAYS PAST DUE We generally transfer loans to professionals responsible
for special servicing activity for monitoring,
collection and development of a workout plan, if
necessary.
90 DAYS PAST DUE Our 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, we place such loans on non-accrual status and
the loan is an active workout.
INVESTMENT GAINS AND LOSSES
As an investor focused primarily on debt investments, our investment decisions
are based on credit dynamics. Our underwriting focuses on the preservation of
principal, and we will pursue every available means to recover our capital
investment. As a result of this investment discipline and credit culture, we
have a history of low levels of loan losses, and have a demonstrated track
record of successfully resolving troubled credit situations with minimal losses.
In fact, we have historically experienced a loss rate that has averaged less
than 1% of total assets annually over the last five, ten and twenty years. Our
realized gains from the sale of our equity interests have historically exceeded
losses, as is reflected in the chart below.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Realized gains........................... $ 31,536 $ 25,757 $ 15,804 $ 30,417 $ 16,679
Realized losses.......................... $ (6,145) $ (3,216) $ (5,100) $(11,262) $ (4,679)
Net realized gains....................... $ 25,391 $ 22,541 $ 10,704 $ 19,155 $ 12,000
Total assets............................. $1,290,038 $856,079 $807,775 $713,360 $605,434
Realized losses/Total assets............. 0.5% 0.4% 0.6% 1.6% 0.8%
</TABLE>
EMPLOYEES
At December 31, 1999, we employed 129 individuals including investment
professionals, operations professionals and administrative staff. The majority
of these individuals are located in the Washington, DC office. We believe that
our relations with employees are excellent.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally
summarizes certain regulations.
BUSINESS DEVELOPMENT COMPANY ("BDC"). A business development company is defined
and regulated by the Investment Company Act of 1940. It is a unique kind of
investment company that 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
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liquidity of a publicly traded stock, while sharing in the possible benefits, if
any, of investing in privately owned growth companies.
As a BDC, we may not acquire any asset other than "Qualifying Assets" unless, at
the time it makes the acquisition, our Qualifying Assets represent at least 70%
of the value of our total assets (the "70% test"). The principal categories of
Qualifying Assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering,
the issuer of which is an eligible portfolio company. An eligible
portfolio company is defined to include any issuer that (a) is
organized and has its principal place of business in the United States,
(b) is not an investment company other than an SBIC wholly owned by a
BDC (our investments in Allied Investment, Allied SBLC and certain
other subsidiaries generally are Qualifying Assets), and (c) does not
have any class of publicly traded securities with respect to which a
broker may extend margin credit;
(2) Securities received in exchange for or distributed with respect to
securities described in (1) above or pursuant to the exercise of
options, warrants, or rights relating to such securities; and
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act), maturing in one year
or less from the time of investment.
To include certain securities described above as Qualifying Assets for the
purpose of the 70% test, a BDC must make available to the issuer of those
securities significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans to a portfolio
company. We will provide managerial assistance on a continuing basis to any
portfolio company that requests it, whether or not difficulties are perceived.
As a BDC, the Company is entitled to issue senior securities in the form of
stock or senior securities representing indebtedness, as long as each class of
senior security has an asset coverage of at least 200% immediately after each
such issuance. This limitation is not applicable to borrowings by our SBIC or
SBLC subsidiaries, and therefore any borrowings by these subsidiaries are not
included in this asset coverage test. See "Risk Factors."
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a BDC unless authorized by vote of a "majority of the
outstanding voting securities," as defined in the 1940 Act, of our shares. Since
we made our BDC election, we have not made any substantial change in the nature
of our business.
REGULATED INVESTMENT COMPANY ("RIC"). Our status as a RIC enables us to avoid
the cost of federal and state taxation, and as a result achieve pre-tax
investment returns. We believe that this tax advantage enables us to achieve
strong equity returns without having to aggressively leverage our balance sheet.
In order to qualify as a RIC, the Company must, among other things:
(1) Derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale of stock
or other securities or other income derived with respect to its
business of investing in such stock or securities.
(2) Diversify its holdings so that
(a) at least 50% of the value of the Company's assets consists of cash,
cash items, U.S. government securities, securities of other RICS and
other securities if such other securities of any one issuer do not
represent more than 5% of the Company's assets and 10% of the
outstanding voting securities of the issuer, and
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(b) no more than 25% of the value of the Company's assets are invested
in securities (other than U.S. government securities) of one issuer,
or of two or more issuers that are controlled by the Company.
(3) Distribute at least 90% of its "investment company taxable income" each
tax year to its shareholders. In addition, if a RIC distributes in a
timely manner (or treats as "deemed distributed") 98% of its capital
gain net income for each one year period ending on December 31 and
distributes 98% of its ordinary income for each calendar year, it will
not be subject to the 4% nondeductible federal excise tax on certain
undistributed income of RICs.
SBA REGULATIONS. Allied Investment is an SBIC and Allied SBLC is an SBLC.
SBIC REGULATIONS. Allied Investment, a wholly owned subsidiary of the Company,
is licensed by the SBA as an SBIC under Section 301(c) of the Small Business
Investment Act of 1958, as amended (the "1958 Act"), and has elected to be
regulated as a BDC.
SBICs are authorized to stimulate the flow of private equity capital to eligible
small businesses. Under present SBA regulations, eligible small businesses
include businesses that have a net worth not exceeding $18 million and have
average annual fully taxed net income not exceeding $6 million for the most
recent two fiscal years. In addition, an SBIC must devote 20% of its investment
activity to "smaller" concerns as defined by the SBA. A smaller concern is one
that has a net worth not exceeding $6 million and has average annual fully taxed
net income not exceeding $2 million for the most recent two fiscal years. SBA
regulations also provide alternative size standard criteria to determine
eligibility, which depend on the industry in which the business is engaged and
are based on such factors as the number of employees and gross sales. According
to SBA regulations, SBICs may make long-term loans to small businesses, invest
in the equity securities of such businesses, and provide them with consulting
and advisory services. Allied Investment provides long-term loans to qualifying
small businesses; equity investments and consulting and advisory services are
typically provided only in connection with such loans.
Allied Investment is periodically examined and audited by the SBA staff to
determine its compliance with SBIC regulations.
Allied Investment has the opportunity to sell to the SBA subordinated debentures
with a maturity of up to ten years, up to an aggregate principal amount of $101
million. This limit generally applies to all financial assistance provided by
the SBA to any licensee and its "associates," as that term is defined in SBA
regulations. Historically, an SBIC was also eligible to sell preferred stock to
the SBA. Allied Investment had received $62.7 million of subordinated debentures
and $7.0 million of preferred stock investments from the SBA at December 31,
1999; as a result of the $101 million limit, the Company is limited on its
ability to apply for additional financing from the SBA. Interest rates on the
SBA debentures currently outstanding have a weighted average interest cost of
8.0%.
At December 31, 1999, we had an outstanding commitment from the SBA to purchase
up to $12.0 million in additional SBIC debentures, which was borrowed in January
2000.
SBLC REGULATIONS. Allied SBLC is licensed to operate as an SBLC and is
periodically examined and audited by the SBA staff for purposes of determining
compliance with SBA regulations, including its participation in the Preferred
Lenders Program. See SBA 7(a) Lending, above.
FORWARD-LOOKING STATEMENTS
You should read the information contained in this Form 10-K in conjunction with
the Company's 1999 Consolidated Financial Statements and Notes thereto contained
in the Company's 1999 Annual Report to Shareholders. The 1999 Annual Report to
Shareholders and this Form 10-K contain certain forward-looking statements.
These statements include management's plans and objectives for future operations
and financial objectives, loan portfolio growth and availability of funds. There
are inherent uncertainties in predicting future results and conditions, and
certain factors could cause actual results and conditions to
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<PAGE> 13
differ materially from those projected in these forward-looking statements.
These factors are described in the "Risk Factors" section below. Other factors
that could cause actual results to differ materially include the uncertainties
of economic, competitive and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond our control. Although we believe that the assumptions underlying the
forward-looking statements included or incorporated by reference in this
document are reasonable, any of the assumptions could be inaccurate and
therefore, we cannot assure you that the forward-looking statements included or
incorporated by reference in this document will prove to be accurate. Therefore,
you should not regard the inclusion of this information as an assurance that the
Company's plans and objectives will be achieved.
RISK FACTORS
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK
Our portfolio consists primarily of long-term loans to and investments in
private companies. There is generally no publicly available information about
these companies, and we rely significantly on the diligence of our employees and
agents to obtain information in connection with the Company'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.
Investments in private businesses, therefore, involve a high degree of business
and financial risk, which can result in substantial losses and accordingly
should be considered speculative.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS
We primarily invest in and lend 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. We
make unsecured, subordinated loans or invest in equity securities, which may
involve a higher degree of repayment risk.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID
We acquire most of our investments directly from private companies. The majority
of the investments in our portfolio will be subject to restrictions on resale or
otherwise have no established trading market. The illiquidity of most of our
portfolio may adversely affect our ability to dispose of loans and securities at
times when it may be advantageous for us to liquidate such investments.
WE INVEST IN NON-INVESTMENT GRADE CMBS
The commercial mortgage-backed securities ("CMBS") in which we invest are
non-investment grade, which means that nationally recognized statistical rating
organizations rate them below the top four investment-grade rating categories
(e.g., "AAA" through "BBB"). Non-investment grade securities usually provide a
higher yield than do investment-grade bonds, but with the higher return comes
greater risk. Non-investment grade securities are considered speculative, and
their capacity to pay principal and interest in accordance with the terms of
their issue is not ensured. Therefore, the non-investment grade CMBS tend to be
less liquid, may have a higher risk of default and may be more difficult to
value.
OUR PORTFOLIO IS RECORDED AT FAIR VALUE AS DETERMINED BY THE BOARD OF DIRECTORS
Pursuant to the requirements of the Investment Company Act of 1940 ("1940 Act"),
the Board of Directors is required to value each asset quarterly, and we are
required to carry our 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 we make investments, our 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, we are not permitted to provide a general reserve for anticipated loan
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losses; we are instead required by the 1940 Act to specifically value each
individual investment and record an unrealized loss for an asset that we believe
has become impaired. We adjust quarterly the valuation of our portfolio to
reflect the Board of Directors' estimate of the current realizable value of each
investment in our portfolio. Without a readily ascertainable market value, the
estimated value of our portfolio of loans and equity securities may differ
significantly from the values that would be placed on the portfolio if there
existed a ready market for the loans and equity securities. Any changes in
estimated value are recorded in the Company's statement of operations as "Net
unrealized gains (losses)."
WE BORROW MONEY WHICH MAY INCREASE THE RISK OF INVESTING IN OUR COMPANY
We borrow from, and issue senior debt securities to, banks, insurance companies
and other lenders. Lenders of these senior securities have fixed dollar claims
on our consolidated assets that are superior to the claims of our 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 our securities. If the value of our consolidated assets increases,
then leveraging would cause the net asset value attributable to the Company's
common stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments, and, if asset coverage for a
class of senior security representing indebtedness declines to less than 200%,
we may be required to sell a portion of our investments when it is
disadvantageous to do so. Leverage is generally considered a speculative
investment technique.
As of December 31, 1999, the Company's asset coverage for indebtedness was 228%.
Our ability to achieve our investment objective may depend in part on our
continued ability to maintain a leveraged capital structure by borrowing from
banks or other lenders on favorable terms. There can be no assurance that we
will be able to maintain such leverage.
At December 31, 1999, the Company had $592.9 million of outstanding
indebtedness, bearing a weighted annual interest cost of 7.9%. In order for us
to cover annual interest payments on indebtedness, we must achieve annual
returns on our portfolio of at least 3.7%.
CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL
Because we borrow money to make investments, our income is dependent upon the
difference between the rate at which we borrow funds and the rate at which we
invest these funds. In periods of sharply rising interest rates, our cost of
funds would increase, which would reduce our portfolio income before net
realized and unrealized gains. However, there would be no effect on the return,
if any, that could be generated from our equity interests. We use a combination
of long-term and short-term borrowings and equity capital to finance our
investing activities. Investments originated for sale generally carry variable
rates and are financed with short-term variable rate debt. Our long-term
fixed-rate investments are financed with long-term fixed-rate debt and equity.
We may use interest rate risk management techniques in an effort to limit our
exposure to interest rate fluctuations. Such techniques may include various
interest rate hedging activities to the extent permitted by the 1940 Act. There
can be no assurance that a significant change in market interest rates will not
have a material adverse effect on our portfolio income.
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL CAPITAL
We will continue to need capital to fund incremental growth in our investments.
Historically, we have borrowed from financial institutions and have issued
equity securities. A reduction in the availability of funds from financial
institutions could limit our ability to grow. We must distribute at least 90% of
our taxable net operating income excluding net realized long-term capital gains
to our stockholders to maintain
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our regulated investment company ("RIC") status. As a result such earnings will
not be available to fund investment originations. We expect to continue to
borrow from financial institutions and sell additional equity securities. If we
fail to obtain funds from such sources or from other sources to fund our
investments, it could limit our ability to grow, which could have a material
adverse effect on the value of the Company's common stock. In addition, as a
business development company ("BDC"), we are generally required to maintain a
ratio of at least 200% of total assets to total borrowings, which may restrict
our ability to borrow in certain circumstances.
OUR PORTFOLIO MAY NOT PRODUCE CAPITAL GAINS
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. We cannot be sure that our
portfolio will generate a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS AND
INCOME AVAILABLE FOR DIVIDENDS
We have operated the Company so as to qualify to be taxed as a RIC under
Subchapter M of the Code. If we meet certain diversification and distribution
requirements, the Company qualifies for pass-through tax treatment. The Company
would cease to qualify for pass-through tax treatment if it were unable to
comply with these requirements, or if it ceased to qualify as a BDC under the
1940 Act. We also could be subject to a 4% excise tax (and, in certain cases,
corporate level income tax) if we fail to make certain distributions. If the
Company fails to qualify as a RIC, the Company would become subject to federal
income tax as if it were an ordinary corporation, which would substantially
reduce our net assets and the amount of income available for distribution to our
shareholders.
WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES
We compete for investments with many other companies and individuals, some of
whom have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT
We are regulated by the Commission and the SBA. In addition, changes in the laws
or regulations that govern BDCs, RICs, real estate investment trusts ("REITs"),
SBICs and SBLCs may significantly affect our business. Laws and regulations may
be changed from time to time, and the interpretations of the relevant laws and
regulations also are subject to change. Any change in the law or regulations
that govern our business could have a material impact on the Company or its
operations.
QUARTERLY RESULTS MAY FLUCTUATE
The Company's quarterly operating results could fluctuate due to a number of
factors. These factors 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 we encounter competition in our markets and general economic
conditions. As a result of these factors, you should not rely on quarterly
results to be indicative of the Company's performance in future quarters.
ITEM 2. PROPERTIES
Our principal offices are located on the third floor of 1919 Pennsylvania
Avenue, N.W., Washington, DC, in the heart of Washington's business and
financial district. Our lease for approximately 32,000 square feet
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of office space at that location expires in July 2008. That office is equipped
with an integrated network of computers for word processing, financial analysis,
accounting and loan servicing. We believe our office space is suitable for our
needs for the foreseeable future. The Company also maintains eleven offices
throughout the United States and an office in Frankfurt, Germany.
ITEM 3. LEGAL PROCEEDINGS
We are a party to certain lawsuits in the normal course of our business. While
the outcome of these legal proceedings cannot at this time be predicted with
certainty, we do not expect that these actions will have a material effect upon
our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the executive
officers of the Company as of March 24, 2000, as well as certain other
information with respect to those persons. Periods of employment by the Company
include periods of employment by predecessor companies prior to the 1997 merger.
William L. Walton, age 50, has been the Chairman, Chief Executive Officer and
President of the Company since 1997. Mr. Walton was President of Allied Capital
Corporation II from 1996 to 1997. Mr. Walton is a director of Nobel Learning
Communities, Inc. (a portfolio company) and Riggs National Corporation. Mr.
Walton was co-founder and CEO of Success Lab, Inc. (children's educational
services) from 1993 to 1996, and founder and CEO of Language Odyssey
(educational publishing and services) from 1992 to 1996. Mr. Walton was Managing
Director of Butler Capital Corporation from 1987 to 1991.
Philip A. McNeill, age 40, Managing Director, has been employed by the Company
since 1993 and is responsible for co-managing the Company's private finance
group. Before joining the Company, 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, age 47, Managing Director, has been employed by the Company
since 1991 and manages the Company's real estate finance group. He has more than
22 years of experience in commercial finance and real estate lending and
management. Prior to joining the Company, 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.
Joan M. Sweeney, age 40, Managing Director, has been employed by the Company
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 Company's small business lending operations through
Allied Capital Express. Prior to joining the Company, 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 SEC
Division of Enforcement in the late 1980s.
G. Cabell Williams, III, age 45, Managing Director, has been employed by the
Company since 1981, and is responsible for co-managing the operations of the
Company's private finance group. He has over 19 years of private finance
experience, and has structured numerous types of private debt and equity finance
transactions. Mr. Williams has served in many capacities during his tenure with
the Company.
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Penni F. Roll, age 34, Principal and Chief Financial Officer, has been employed
by the Company since 1995. Ms. Roll is responsible for the Company's financial
management and reporting, accounting, loan servicing, special servicing,
portfolio monitoring and regulatory compliance activities. Prior to joining the
Company, she spent seven years in the financial services practice at KPMG Peat
Marwick, including serving as a Manager from 1993 to 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this Item is incorporated herein by reference to the
"Stockholder Information" and to the "Selected Consolidated Financial Data"
section of the Company's Annual Report to Shareholders for the year ended
December 31, 1999 (the "1999 Annual Report") as well as Note 12, "Dividends and
Distributions" from the Company's 1999 Notes to the Consolidated Financial
Statements. The quarterly stock prices quoted therein represent interdealer
quotations and do not include markups, markdowns, or commissions and may not
necessarily represent actual transactions. During 1999, the Company issued a
total of 232,845 shares of common stock pursuant to a dividend reinvestment
plan. This plan is not registered and relies on an exemption from registration
in the Securities Act of 1933. The Company also issued 83,333 unregistered
shares during 1998. In addition, during 1999, the Company issued a total of
8,658,690 registered shares pursuant to a shelf registration statement on file
with the Commission. See Note 7, "Shareholders' Equity" for additional
information.
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this Item is incorporated herein by reference to the
table in the "Selected Consolidated Financial Data" Section of the 1999 Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information in response to this Item is incorporated herein by reference to the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's business activities contain elements of risk. The Company
considers the principal types of market risk to be interest rate risk and
valuation risk. The Company considers the management of risk essential to
conducting its businesses and to maintaining profitability. Accordingly, the
Company's risk management systems and procedures are designed to identify and
analyze the Company's risks, to set appropriate policies and limits and to
continually monitor these risks and limits by means of reliable administrative
and information systems and other policies and programs.
The Company manages its market risk by maintaining a portfolio of equity
interests that is diverse by industry, geographic area, property type, size of
individual investment and borrower. The Company does not have a significant
exposure to public market price fluctuations as the Company primarily invests in
private business enterprises. Since there is typically no public market for the
equity interests of the companies in which the Company invests, the valuation of
the equity interests in the Company's portfolio is subject to the estimate of
the Company's Board of Directors. In the absence of a readily ascertainable
market value, the estimated value of the Company's portfolio of equity interests
may differ significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in estimated
value are recorded in the Company's statement of operations as "Net unrealized
gains (losses)." Each hypothetical 1% increase or decrease in value of the
Company's portfolio of equity interests of $87.3 million at December 31, 1999
would have resulted in unrealized gains or losses and would have increased or
decreased net income in 1999 by less than 1%.
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The Company's sensitivity to changes in interest rates is regularly monitored
and analyzed by measuring the characteristics of assets and liabilities. The
Company utilizes various methods to assess interest rate risk in terms of the
potential effect on interest income net of interest expense, the value of net
assets and the value at risk in an effort to ensure that the Company is
insulated from any significant adverse effects from changes in interest rates.
Based on the model used for the sensitivity of interest income net of interest
expense, if the balance sheet were to remain constant and no actions were taken
to alter the existing interest rate sensitivity, a hypothetical immediate 100
basis point change in interest rates would have affected net income by less than
1% over a six month horizon. Although management believes that this measure is
indicative of the Company's sensitivity to interest rate changes, it does not
adjust for potential changes in credit quality, size and composition of the
balance sheet and other business developments that could affect net income.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information in response to this Item is incorporated by reference to the
Consolidated Financial Statements, Notes thereto, and Report of Independent
Public Accountants thereon contained in the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated by reference to the
identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's definitive proxy statement in
connection with its 1999 Annual Meeting of Shareholders, scheduled to be held on
May 9, 2000 (the "2000 Proxy Statement"), and from "Additional Item" in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated by reference to the
subsections captioned "Compensation of Executive Officers and Directors" of the
2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to the
subsection captioned "Security Ownership of Management and Certain Beneficial
Owners" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to the section
captioned "Certain Transactions" of the 2000 Proxy Statement.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
from the Consolidated Financial Statements, Notes thereto and Report of
Independent Public Accountants thereon contained in the Company's 1999
Annual Report, filed herewith.
Consolidated Balance Sheet as of December 31, 1999 and 1998.
Consolidated Statement of Operations for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1999, 1998 and 1997.
Consolidated Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statement of Investments as of December 31, 1999.
Notes to Consolidated Financial Statements.
B. The Report of Independent Public Accountants from Arthur Andersen
LLP is incorporated by reference to the Report of Independent Public
Accountants contained in the Company's 1999 Annual Report filed herewith.
2. No financial statement schedules are filed herewith because (i)
such schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.
3. The following exhibits are filed herewith or incorporated by
reference as set forth below:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(ii)(2) Articles of Merger.
3(iii)* Bylaws.
4.1(6) Specimen certificate of the Company's Common stock, par
value $0.0001 per share. See exhibits 3(i), 3(ii) and 3(iii)
for other instruments defining the rights of security
holders.
4.2(4) Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
5 Not applicable.
9 Not applicable.
10.1(11) Credit Agreement dated as of March 9, 1999 between the
Company, as borrower, each of the financial institutions
initially a signatory thereto, as Lenders, and Nationsbank,
N.A., as administrative agent, Nationsbanc Montgomery
Securities LLC, as sole lead arranger and sole book manager,
First Union National Bank, as syndication agent, BankBoston,
N.A., as documentation agent, Riggs Bank, N.A., as managing
agent, and Chevy Chase Bank, F.S.B. and Credit Lyonnais New
York Branch, as co-agents.
10.1a(12) First Amendment to Credit Agreement dated May 7, 1999.
10.1b* Second Amendment to Credit Agreement dated January 18, 2000.
10.1c* Third Amendment to Credit Agreement dated March 17, 2000.
10.2(8) Note Agreement dated as of April 30, 1998.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.3(5) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
10.4(12) Note Agreement dated as of May 1, 1999.
10.4a* Note Agreement dated as of November 15, 1999.
10.5(14) Second Amended and Restated Master Loan & Security Agreement
dated October 28, 1999 between the Company and Morgan
Stanley Mortgage Capital, Inc.
10.6(6) Sale and Servicing Agreement dated as of January 1, 1998
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and the Company and LaSalle National
Bank Inc. and ABN AMRO Bank N.V.
10.7(6) Indenture dated as of January 1, 1998 between Allied Capital
Commercial Mortgage Trust 1998-1 and LaSalle National Bank.
10.8(6) Amended and Restated Trust Agreement dated January 1, 1998
between Allied Capital CMT, Inc., LaSalle National Bank Inc.
and Wilmington Trust Company.
10.9(6) Guaranty dated as of January 1, 1998 by the Company.
10.10(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
10.10a(7) First Amendment to the Company's Employee Stock Ownership
Plan dated April 30, 1998.
10.10b(14) Termination Amendment to the Allied Capital Employee Stock
Ownership Plan effective December 31, 1999.
10.11(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
10.12(9) Stock Option Plan.
10.12a(13) Allied Capital 401(k) Plan dated September 1, 1999.
10.13a(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
10.13b(6) Form of Custody Agreement with La Salle National Bank.
10.18(3) Dividend Reinvestment Plan.
11 Statement regarding computation of per share earnings is
incorporated by reference to Note 8 to the Company's Notes
to the Consolidated Financial Statements contained in the
Company's 1999 Annual Report filed as Exhibit 13 herewith.
13* Excerpts from the 1999 Annual Report to Shareholders.
21 Subsidiaries of the Company and jurisdiction of
incorporation/organization:
Allied Investment Corporation Maryland
Allied Capital SBLC Corporation Maryland
Allied Capital REIT, Inc. Maryland
Allied Capital Holdings LLC Delaware
Allied Capital Beteiligungsberatung GmbH Germany
23* Consent of Arthur Andersen LLP, independent public
accountants.
27* Financial Data Schedule
</TABLE>
--------------------
* Filed herewith.
(1) Incorporated by reference to exhibit 3(i) with Allied Lending's Annual
Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated by reference from Appendix B to the Company's
registration statement on Form N-14 filed on the Company's behalf with
the Commission on September 26, 1997 (File No. 333-36459).
20
<PAGE> 21
(3) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(4) Incorporated by reference to the exhibit of the same name filed with
Allied I's Annual Report on Form 10-K for the year ended December 31,
1996.
(5) Incorporated by reference to Exhibit f.7 of Allied I's Pre-Effective
Amendment No. 2 filed with the registration statement on Form N-2 on
January 24, 1996 (File No. 33-64629). Assignment to Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(6) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on May 5, 1998 (File No. 333-51899).
(7) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998.
(8) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
(9) Incorporated by reference to Exhibit 4 of the Allied Capital
Corporation Stock Option Plan registration statement on Form S-8,
filed on behalf of such Plan on February 3, 1998 (File No. 333-45525).
(10) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
(11) Incorporated by reference to Exhibit f.2.a with the Company'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
the Company'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 with
the Company's Post-Effective Amendment No. 1 to Form N-2 (File No.
333-84973) on November 19, 1999.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 28, 2000.
/s/ WILLIAM L. WALTON
--------------------------------------
William L. Walton
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
TITLE
SIGNATURE (CAPACITY) DATE
--------- ---------- ----
<S> <C> <C>
/s/ WILLIAM L. WALTON Chairman, President, and March 28, 2000
- -------------------------------------------------------- Chief Executive Officer
William L. Walton
/s/ BROOKS H. BROWNE Director March 28, 2000
- --------------------------------------------------------
Brooks H. Browne
/s/ JOHN D. FIRESTONE Director March 28, 2000
- --------------------------------------------------------
John D. Firestone
/s/ ANTHONY T. GARCIA Director March 28, 2000
- --------------------------------------------------------
Anthony T. Garcia
/s/ LAWRENCE I. HEBERT Director March 28, 2000
- --------------------------------------------------------
Lawrence I. Hebert
/s/ JOHN I. LEAHY Director March 28, 2000
- --------------------------------------------------------
John I. Leahy
/s/ ROBERT E. LONG Director March 28, 2000
- --------------------------------------------------------
Robert E. Long
/s/ WARREN K. MONTOURI Director March 28, 2000
- --------------------------------------------------------
Warren K. Montouri
/s/ GUY T. STEUART II Director March 28, 2000
- --------------------------------------------------------
Guy T. Steuart II
/s/ T. MURRAY TOOMEY Director March 28, 2000
- --------------------------------------------------------
T. Murray Toomey
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
TITLE
SIGNATURE (CAPACITY) DATE
--------- ---------- ----
<S> <C> <C>
/s/ LAURA W. VAN ROIJEN Director March 28, 2000
- --------------------------------------------------------
Laura W. van Roijen
/s/ GEORGE C. WILLIAMS, JR. Director March 28, 2000
- --------------------------------------------------------
George C. Williams, Jr.
/s/ PENNI F. ROLL Principal and Chief March 28, 2000
- -------------------------------------------------------- Financial Officer
Penni F. Roll (Principal Financial and
Accounting Officer)
</TABLE>
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3(iii) Bylaws.
10.1b Second Amendment to Credit Agreement dated January 18, 2000.
10.1c Third Amendment to Credit Agreement dated March 17, 2000.
10.4a Note Agreement dated as of November 15, 1999.
13 Excerpts from the 1999 Annual Report to Shareholders.
23 Consent of Arthur Andersen LLP, independent public
accountants
27 Financial Data Schedule
</TABLE>
24
<PAGE> 1
-----------------------------
ALLIED CAPITAL CORPORATION
(a Maryland corporation)
------------
BYLAWS
------------
As adopted by the Sole Director on
September 12, 1990, as amended by the Sole
Stockholder on August 8, 1991 and March 24, 1992,
and as amended by the Board of Directors on
November 12, 1993, August 12, 1994, November 9,
1995, May 12, 1997, August 14, 1997, December
12, 1997,January 8, 1998, May 14, 1998, and
December 17, 1999.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I OFFICES..............................................................................................................1
Section 1. Office...................................................................................................1
Section 2. Additional Offices.......................................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS.............................................................................................1
Section 1. Time and Place...........................................................................................1
Section 2. Annual Meeting...........................................................................................1
Section 3. Notice of Annual Meeting.................................................................................1
Section 4. Special Meetings.........................................................................................1
Section 5. Notice of Special Meeting................................................................................2
Section 7. Presiding Officer........................................................................................2
Section 8. Quorum. Adjournments....................................................................................2
Section 9. Voting...................................................................................................3
Section 10. Action by Consent.......................................................................................3
ARTICLE III DIRECTORS...........................................................................................................3
Section 1. General Powers; Number; Tenure...........................................................................3
Section 2. Matters for Which Action of the Entire Board is Required.................................................4
Section 3. Vacancies................................................................................................4
Section 4. Removal; Resignation.....................................................................................5
Section 5. Place of Meetings........................................................................................5
Section 6. Annual Meeting...........................................................................................5
Section 7. Regular Meetings.........................................................................................5
Section 8. Special Meetings.........................................................................................5
Section 9. Quorum; Adjournments.....................................................................................5
Section 10. Compensation............................................................................................6
Section 11. Action by Consent.......................................................................................6
Section 12. Meetings by Telephone or Similar Communications.........................................................6
ARTICLE IV COMMITTEES...........................................................................................................6
Section 1. Executive Committee......................................................................................6
Section 2. Nominating Committee.....................................................................................6
Section 3. Compensation Committee...................................................................................7
Section 4. Audit Committee..........................................................................................7
Section 5. Advisory Committee.......................................................................................7
Section 6. Other Committees.........................................................................................8
Section 7. Procedure; Notice; Meetings..............................................................................8
Section 8. Quorum; Vote.............................................................................................8
Section 9. Appointments; Vacancies; Changes; Discharges.............................................................8
Section 10. Tenure..................................................................................................8
Section 11. Compensation............................................................................................9
Section 12. Action by Consent.......................................................................................9
Section 13. Meetings by Telephone or Similar Communications.........................................................9
ARTICLE V NOTICES..............................................................................................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 1. Form; Delivery...........................................................................................9
Section 2. Waiver...................................................................................................9
ARTICLE VI OFFICERS............................................................................................................10
Section 1. Designations............................................................................................10
Section 2. Term of Office; Removal.................................................................................10
Section 3. Compensation............................................................................................10
Section 4. The Chairman of the Board...............................................................................10
Section 5. The President...........................................................................................11
Section 6. The Managing Directors..................................................................................11
Section 7. Principals..............................................................................................12
Section 8. Vice Presidents.........................................................................................12
Section 9. The Secretary...........................................................................................12
Section 10. The Assistant Secretary................................................................................13
Section 11. Associates..............................................................................................13
Section 12. The Treasurer..........................................................................................13
Section 13. The Assistant Treasurer................................................................................13
ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.......................................................13
Section 1. Generally...............................................................................................14
Section 2. Limitation for Disabling Conduct........................................................................14
Section 3. Advisory Committee Members..............................................................................16
ARTICLE VIII STOCK CERTIFICATES................................................................................................16
Section 1. Form of Signatures; Statements..........................................................................16
Section 2. Registration of Transfer................................................................................17
Section 3. Registered Stockholders.................................................................................17
Section 4. Location of Stock Ledger................................................................................18
Section 5. Record Date.............................................................................................18
Section 6. Lost, Stolen or Destroyed Certificates..................................................................18
ARTICLE IX GENERAL PROVISIONS..................................................................................................19
Section 1. Dividends...............................................................................................19
Section 2. Reserves................................................................................................19
Section 3. Fiscal Year.............................................................................................19
Section 4. Seal....................................................................................................19
ARTICLE X AMENDMENTS..........................................................................................................19
CERTIFICATE....................................................................................................................19
</TABLE>
ii
<PAGE> 4
BYLAWS
ARTICLE I
OFFICES
Section 1. Office. The principal office of the Corporation shall be
the offices of The Prentice-Hall Corporation System, Maryland, which is located
at 11 East Chase Street, Baltimore, Maryland 21202. The Corporation also shall
have an office at 1919 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Section 2. Additional Offices. The Corporation may also have offices
at such other places, both within and without the State of Maryland, as the
Board of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place. Meetings of stockholders for any purpose
may be held at such time and place in the United States as the Board of
Directors may fix from time to time and as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders shall be
held during the month of May in each year on a date and at the time set by the
Board of Directors. At the Annual Meeting, the stockholders shall elect a Board
of Directors and transact such other business as may properly be brought before
the meeting.
Section 3. Notice of Annual Meeting. Written notice of the annual
meeting, stating the place, date and time thereof, shall be given by the
Secretary of the Corporation to each stockholder entitled to vote at such
meeting or to notice thereof not less than 10 (unless a longer period is
required by law) nor more than 90 days prior to the meeting.
Section 4. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by the Chairman of the Board or the
President and shall be called by the Chairman of the Board, the President or the
Secretary at the request in writing of a majority of the Board of Directors.
Unless otherwise prescribed by statute or by the Articles of Incorporation, and
except as expressly set forth below, the Secretary shall call a Special Meeting
at the request in writing of stockholders entitled to cast not less than a
majority of all the votes entitled to be cast at such meeting. Such request by
stockholders shall state the purpose or purposes of such meeting and
1
<PAGE> 5
the matters to be acted on thereat. If the request is made by a majority of the
stockholders entitled to cast votes at a meeting, the Secretary shall inform
such stockholders of the reasonably estimated cost of preparing and mailing such
notice of the meeting, and, upon payment to the Corporation of such costs by
such stockholders, the Secretary shall give notice stating the purpose or
purposes of the meeting, as required by these Bylaws, to all stockholders
entitled to notice of such meeting.
Section 5. Notice of Special Meeting. Written notice of a special
meeting, stating the place, date and time thereof and the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting or to notice thereof not less than 10 (unless a longer
period is required by law) nor more than 90 days prior to the meeting.
Section 6. Presiding Officer. Meetings of stockholders shall be
presided over by the Chairman of the Board or, if he or she is not present, by
the President, or, if he or she is not present, by a Managing Director, or, if
he or she is not present, by such person as may have been chosen by the Board of
Directors, or if none of such persons is present, by a chairman to be chosen by
the stockholders owning a majority of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote at the meeting and who
are present in person or represented by proxy. The Secretary of the Corporation,
or, if he or she is not present, an Assistant Secretary, or, if he or she is not
present, such person as may be chosen by the Board of Directors, or if none of
such persons is present, then such person as may be chosen by the stockholders
owning a majority of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote at the meeting and who are present in person or
represented by proxy shall act as secretary of the meeting.
Section 7. Quorum. Adjournments. The presence in person or by proxy
of stockholders entitled to cast a majority of the votes thereat shall be
necessary to, and shall constitute a quorum for, the transaction of business at
all meetings of the stockholders, except as otherwise provided by statute or by
the Articles of Incorporation. If, however, a quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken, until a quorum shall be present or represented. Even if a
quorum shall be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time for good
cause, without notice of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, until a date which
is not more than 30 days after the date of the original meeting. At any such
adjourned meeting, at which a quorum shall be present in person or represented
by proxy, any business may be transacted which might have been transacted at the
meeting as originally called. If the adjournment is for more than 30 days, or,
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting or entitled to notice thereof.
2
<PAGE> 6
Section 8. Voting.
(a) At any meeting of stockholders, every stockholder
having the right to vote shall be entitled to vote in person or by proxy.
Except as otherwise provided by law or the Articles of Incorporation, each
stockholder of record shall be entitled to one vote for each share of capital
stock registered in his, her or its name on the books of the Corporation, on
each matter submitted to a vote at a meeting of stockholders, except that no
stockholder shall be entitled to vote in respect of any shares of capital stock
if any installment payable thereon is overdue and unpaid.
(b) Except as otherwise provided by law or the
Articles of Incorporation, a majority of the votes cast at a meeting of
stockholders at which a quorum is present, shall be sufficient to take or
authorize action upon any matter which may properly come before such meeting.
Section 9. Action by Consent. Any action required or permitted to be
taken by law or the Articles of Incorporation at any meeting of stockholders may
be taken without a meeting, without prior notice and without a vote, if a
written consent, setting forth such action, is signed by all the stockholders
entitled to vote on the subject matter thereof and any other stockholders
entitled to notice of a meeting of stockholders (but not to vote thereat) have
waived in writing any rights which they may have to dissent from such action,
and such consent and waiver are filed with the records of stockholders'
meetings.
ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business and affairs
of the Corporation shall be managed under the direction of its Board of
Directors, which may exercise all powers of the Corporation and perform all
lawful acts and things which are not by law, the Articles of Incorporation or
these Bylaws directed or required to be exercised or performed by, or are
conferred upon or reserved to, the stockholders. The number of directors shall
be that provided in the Articles of Incorporation until increased or decreased
pursuant to the following provisions, but shall never be greater than fifteen or
fewer than three unless otherwise permitted by law. A majority of the entire
Board of Directors may, at any time and from time to time, increase or decrease
the number of directors of the Corporation as set forth in the Articles of
Incorporation or these Bylaws, subject to the foregoing limitation. The tenure
of office of a director shall not be affected by any decrease in the number of
directors so made by the Board.
3
<PAGE> 7
The directors shall be elected by a majority of all the votes cast at the annual
meeting of the stockholders, except as provided in Section 3 of this Article.
The directors elected at the 1998 annual meeting of the stockholders, and
thereafter, other than those who may be elected by the holders of any series of
preferred stock of the Corporation, shall be classified, with respect to the
term for which they severally hold office, into three classes, as nearly equal
in number as possible. The initial Class I directors shall hold office for a
term expiring at the annual meeting of the stockholders held in the first year
following the year of their election. The initial Class II directors shall hold
office for a term expiring at the annual meeting of the stockholders held in the
second year following the year of their election. The initial Class III
directors shall hold office for a term expiring at the annual meeting of the
stockholders held in the third year following the year of their election. At
each annual meeting of the stockholders commencing with the 1999 annual meeting,
the successor or successors of the class of directors whose term expires at that
meeting (other than directors elected by the holders of any series of preferred
stock) shall hold office for a term expiring at the annual meeting of the
stockholders held in the third year following the year of their election. The
directors elected to each class (other than directors elected by any series of
preferred stock) shall hold office until their successors are duly elected and
qualify or until their earlier resignation or removal. Directors need not be
stockholders.
Section 2. Matters for Which Action of the Entire Board is Required.
Notwithstanding anything to the contrary in these Bylaws, the following actions
shall require the approval by the affirmative vote of a majority of the entire
Board of Directors:
(a) appointing any director to a committee of the
Board of Directors pursuant to Article IV of these Bylaws;
(b) appointing any employee, officer, or director of
the Corporation, or any person who is to become an employee, officer, or
director of the Corporation, to serve as an officer above the level of
principal; and
(c) altering, amending or repealing these Bylaws or
adopting new bylaws.
Section 3. Vacancies. Any vacancy occurring in the Board of Directors
for any cause other than by reason of an increase in the number of directors
may, unless otherwise provided in these Bylaws, be filled by a majority of the
remaining members of the Board of Directors, although such majority is less than
a quorum. Any vacancy occurring by reason of an increase in the number of the
directors may, unless otherwise provided in these Bylaws, be filled by action of
a majority of the directors constituting the entire Board of Directors. A
director elected by the Board of Directors to fill a vacancy shall be elected to
hold office until the next annual meeting of the stockholders or until his or
her successor is elected and shall qualify. If there are no directors in office,
any officer or stockholder may call a special meeting of stockholders in
accordance with the provisions of the Articles of Incorporation or these Bylaws,
at which meeting such vacancies shall be filled.
4
<PAGE> 8
Section 4. Removal; Resignation.
(a) Except as otherwise provided by law or the
Articles of Incorporation, at any meeting of stockholders at which a quorum is
present, the stockholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any director or
directors from office with or without cause and may elect a successor or
successors to fill any resulting vacancy or vacancies for the unexpired terms of
any removed director or directors.
(b) Any director may resign at any time by giving
written notice to the Board of Directors, the Chairman of the Board, the
President or the Secretary of the Corporation. Unless otherwise specified in
such written notice, a resignation shall take effect upon delivery thereof to
the Board of Directors or the designated officer. It shall not be necessary for
a resignation to be accepted before it becomes effective.
Section 5. Place of Meetings. The Board of Directors may hold
meetings, annual, regular or special, either within or without the State of
Maryland.
Section 6. Annual Meeting. The annual meeting of each newly elected
Board of Directors shall be held immediately following the annual meeting of
stockholders, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present.
Section 7. Regular Meetings. Additional regular meetings of the Board
of Directors may be held without notice, at such time and place as may from time
to time be determined by the Board of Directors.
Section 8. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President on at
least two days' notice to each director, if such notice is delivered personally
or sent by messenger, telegram, telecopy, facsimile transmission, or mail.
Special meetings shall be called by the Chairman of the Board, the President or
the Secretary in like manner and on like notice on the written request of two or
more of the number of directors then in office. Except as otherwise provided by
law, the Articles of Incorporation or Article X of these Bylaws, any such notice
need not state the purpose or purposes of such meeting.
Section 9. Quorum; Adjournments. At all meetings of the Board of
Directors, a majority of the number of directors then in office shall constitute
a quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by law,
the Articles of Incorporation or these Bylaws. If a quorum is not present at any
meeting of the Board of Directors, the directors present may adjourn the meeting
from time to time until a quorum shall be the act of the Board of Directors,
except as may be otherwise specifically provided by law, the Articles of
Incorporation or these Bylaws. If a quorum is not present at any meeting of the
Board of Directors, the directors present may adjourn the meeting from time to
time until a quorum
5
<PAGE> 9
shall be present, provided that an announcement is made at such meeting, and
notice is provided to any directors not present at such meeting, of the time
and place of the next meeting.
Section 10. Compensation. Directors shall be entitled to such
compensation for their services as directors and to such reimbursement for any
reasonable expenses incurred in attending directors' meetings as may from time
to time be fixed by the Board of Directors. The compensation of directors (if
any) may be on such basis as is determined by the Board of Directors. Any
director may waive compensation for any meeting. Any director receiving
compensation under these provisions shall not be barred from serving the
Corporation in any other capacity and receiving compensation and reimbursement
for reasonable expenses for such other services.
Section 11. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
a written consent to such action is signed by all members of the Board of
Directors and such written consent is filed with the minutes of the proceedings
of the Board (except for those instances where the Investment Company Act of
1940 (the "1940 Act") requires action be taken by the Corporation's Board of
Directors in person, including without limitation the selection of independent
auditors and the approval of an Investment Agreement.).
Section 12. Meetings by Telephone or Similar Communications. The
Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment by means of which all directors
participating in the meeting can hear each other at the same time, and
participation by such means shall be conclusively deemed to constitute presence
in person at such meeting (except for those instances where the 1940 Act
requires actions be taken by the Corporation's Board of Directors in person,
including without limitation the selection of independent auditors and the
approval of an Investment Agreement.).
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint an
Executive Committee consisting of not fewer than three members, one of whom
shall be designated as Chairman of the Executive Committee. The Chairman of the
Board and the President shall be elected members of the Executive Committee. The
Executive Committee shall have and may exercise those rights, powers and
authority of the Board of Directors as may from time to time be granted to it by
the Board of Directors subject to any limitations imposed by law and may
authorize the seal of the Corporation to be affixed to all papers which may
require the same.
Section 2. Nominating Committee. The Board of Directors shall appoint
a Nominating Committee consisting of not fewer than three members, one of whom
shall be designated as
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Chairman of the Nominating Committee. A majority of members of the Nominating
Committee shall not be officers of the Corporation. The Nominating Committee
shall have and may exercise those rights, powers and authority of the Board of
Directors as may from time to time be granted to it by the Board of Directors;
provided, however, that in addition to any such rights, powers or authority, the
Nominating Committee shall have the exclusive right to recommend candidates for
election as directors to the Board of Directors.
Section 3. Compensation Committee. The Board of Directors may appoint
from its membership a Compensation Committee consisting of not fewer than three
members, one of whom shall be designated as Chairman of the Compensation
Committee. None of the members of the Compensation Committee shall be officers
of the Corporation. The Compensation Committee shall have and may exercise those
rights, powers and authority of the Board of Directors as may from time to time
be granted to it by the Board of Directors.
Section 4. Audit Committee. The Board of Directors may appoint from
its membership an Audit Committee consisting of not fewer than three members,
one of whom shall be designated as Chairman of the Audit Committee. A majority
of members of the Audit Committee shall not be officers of the Corporation. The
Audit Committee shall have and may exercise those rights, powers and authority
of the Board of Directors as may from time to time be granted to it by the Board
of Directors; provided, however, that in addition to any such rights, powers or
authority, the Audit Committee shall: (i) issue instructions to and receive
reports from outside accounting firms and to serve as the liaison between the
Corporation and the said firms; and (ii) review all potential
conflict-of-interest situations arising in respect of the Corporation's affairs
and involving the Corporation's affiliates or employees, and to make a report,
verbal or written, to the full Board of Directors with recommendations for their
resolutions.
Section 5. Advisory Committee.
(a) The Board of Directors may appoint individuals of
its selection to an Advisory Committee to assist the Board of Directors in the
conduct of its duties and responsibilities. The Advisory Committee may meet in
conjunction with meetings of the Board of Directors and shall serve as advisers
and counselors to the Board of Directors as the members thereof shall determine
best serves the Corporation's interests.
(b) The Board of Directors, by resolutions adopted by
a majority of the whole Board, may appoint an Advisory Committee complying with
the terms of Section 2(a)(1) of the 1940 Act and the regulations promulgated
thereunder, to provide advice and counsel in respect to investment and loan
transactions entered or contemplated by the Corporation or its subsidiaries. The
Advisory Committee may be composed of up to five persons, who shall not be
directors, officers, employees or agents of the Corporation or any subsidiary or
investment adviser thereof. Advisory Committee members shall be entitled to
indemnification under Article VII below. The Advisory Committee and its members
will have no voting power and no authority, as agent or otherwise, to act on
behalf of the Corporation, in respect of any matter; and directors shall be
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under no obligation to accept or reject any particular item of advice or counsel
provided thereby. The Advisory Committee may be invited to hold meetings jointly
with meetings of directors. Any one or more members of the Advisory Committee
may be invited to attend meetings of the directors and may be offered access to
the same information and materials otherwise provided only to directors. The
Advisory Committee may render its advice in written or verbal form, and the same
may or may not be recorded.
Section 6. Other Committees. The Board of Directors, by resolutions
adopted by a majority of the entire Board, may appoint a committee or
committees, as it shall deem advisable and impose upon such committee or
committees such functions and duties, and grant such rights, powers and
authority, as the Board of Directors shall prescribe (except the power to
declare dividends or distributions on stock, to issue stock except to the extent
permitted by law, to recommend to stockholders any action requiring
stockholders' approval, to amend these Bylaws or to approve any merger or share
exchange which does not require stockholders' approval).
Section 7. Procedure; Notice; Meetings. Each committee shall fix its
own rules of procedure and shall meet at such times and at such place or places
as may be provided by such rules or as the members of such committee shall
provide. Committee meetings may be called by the Chairman of the Board, the
President, the Chairman of the Committee, if any, or any two or more committee
members on at least twenty-four (24) hours notice, if such notice is delivered
personally or sent by messenger, telegram, telecopy, facsimile transmission, or
mail. Each committee shall keep regular minutes of its meetings and deliver such
minutes to the Board of Directors. The Chairman of each committee, or, in his or
her absence, a member of such committee chosen by a majority of the members of
such committee present, shall preside at the meetings of such committee, and
another member thereof, or any other person, chosen by such committee shall act
as Secretary of such committee, or in the capacity of Secretary for purposes of
such meeting.
Section 8. Quorum; Vote. With respect to each committee, a majority
of its members shall constitute a quorum for the transaction of business, and
the affirmative vote of a majority of the members thereof shall be required for
any action of such committee.
Section 9. Appointments; Vacancies; Changes; Discharges. The Board of
Directors shall have the exclusive power at any time, through the approval by
the affirmative vote of a majority of the entire Board of Directors, to appoint
directors to, fill vacancies in, change the membership of, or discharge any
committee.
Section 10. Tenure. Each member of a committee shall continue as a
member thereof until the expiration of his or her term as a director, or his or
her earlier resignation as a member of such committee or as a director, unless
sooner removed as a member of such committee by a vote of a majority of the
entire Board of Directors or as a director in accordance with these Bylaws.
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Section 11. Compensation. Members of any committee shall be entitled
to such compensation for their services as members of any such committee and to
such reimbursement for any reasonable expenses incurred in attending committee
meetings as may from time to time be fixed by the Board of Directors. The
compensation (if any) of members of any committee may be on such basis as is
determined by the Board of Directors. Any member may waive compensation for any
meeting. Any committee member receiving compensation under these provisions
shall not be barred from serving the Corporation in any other capacity and from
receiving compensation and reimbursement of reasonable expenses for such other
services.
Section 12. Action by Consent. Any action required or permitted to be
taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if a written consent to such action is signed by all members
of the committee and such written consent is filed with the minutes of its
proceedings.
Section 13. Meetings by Telephone or Similar Communications. The
members of any committee which is designated by the Board of Directors may
participate in a meeting of such committee by means of a conference telephone or
similar communications equipment by means of which all members participating in
the meeting can hear each other at the same time, and participation by such
means shall be conclusively deemed to constitute presence in person at such
meeting.
ARTICLE V
NOTICES
Section 1. Form; Delivery. Whenever, under the provisions of law, the
Articles of Incorporation or these Bylaws, notice is required to be given to any
director or stockholder, it shall not be construed to mean exclusively personal
notice unless otherwise specifically provided, but such notice may be given in
writing, by mail, addressed to such director or stockholder, provided, in the
case of a stockholder, such notice is addressed to his, her or its post office
address as such address appears on the records of the Corporation, with postage
thereon prepaid. Any such notice shall be deemed to have been given at the time
it is deposited in the United States mail. Notice to a director also may be
given personally or sent by messenger, telegram, telecopy or facsimile
transmission.
Section 2. Waiver. Whenever any notice is required to be given under
the provisions of law, the Articles of Incorporation or these Bylaws, a written
waiver thereof, signed by the person or persons entitled to said notice and
filed with the records of the meeting, whether before or after the time stated
therein, shall be conclusively deemed to be equivalent to such notice. In
addition, any stockholder who attends a meeting of stockholders in person, or is
represented at such meeting by proxy, without protesting at the commencement of
the meeting the lack of notice thereof to him or her, or any director who
attends a meeting of the Board of Directors
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without protesting at the commencement of the meeting such lack of notice, shall
be conclusively deemed to have waived notice of such meeting.
ARTICLE VI
OFFICERS
Section 1. Designations. From and after the date of adoption of these
Bylaws, the officers of the Corporation shall be a Chairman of the Board,
President, Secretary and Treasurer. The officers of the Corporation also may
include one or more Managing Directors, Principals, Vice Presidents, Associates
and such other officers and/or agents as deemed necessary or appropriate,
provided, however, that a person may hold the position of Associate without
being designated an officer of the Corporation. All officers of the Corporation
shall exercise such powers and perform such duties as shall from time to time be
determined by the Board of Directors and permitted by law or these Bylaws. Any
number of offices may be held by the same person, unless the Articles of
Incorporation or these Bylaws otherwise provide, and no person shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law, the Articles of Incorporation or these Bylaws to
be executed, acknowledged or verified by two or more officers. The offices of
President and Secretary shall not be held by the same person.
Section 2. Term of Office; Removal. The Board of Directors shall
choose a Chairman of the Board, President and one or more Managing Directors.
The Chairman, President and any Managing Director shall have the authority to
appoint a Secretary, Treasurer, and one or more Principals, Vice Presidents
and/or Associates who are officers of the Corporation, and such other officers
and agents as they shall deem necessary or appropriate. The officers of the
Corporation shall hold office until their successors are chosen and shall
qualify or until any such officer's resignation. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors then in office when, in their
judgment, the best interests of the Corporation will be served thereby. Any
officer appointed other than by the Board of Directors may be removed by the
Board of Directors or the Chairman of the Board at any time. Such removal by the
Board or by the Chairman shall not prejudice the contractual rights, if any, of
the person so removed. Any vacancy occurring in any office of the Corporation
may be filled for the unexpired portion of the term by the Board of Directors,
where such office was held by an officer elected or appointed by the Board, or
by the Chairman, the President and any Managing Director, where such office was
held by their appointee.
Section 3. Compensation. The salaries of all officers of the
Corporation (if any) shall be fixed from time to time by the Board of Directors
and no officer shall be prevented from receiving such salary by reason of the
fact that he or she is also a director of the Corporation.
Section 4. The Chairman of the Board. The Chairman of the Board shall
be the chief executive officer of the Corporation and shall be responsible for
the overall strategic direction of
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the Corporation and, subject to the direction of the Board of Directors, shall
perform such executive, supervisory and management functions and duties as may
be assigned to him or her from time to time by the Board. He or she shall, if
present, preside at all meetings of the stockholders and of the Board of
Directors. The Chairman of the Board may execute in the corporate name all
appropriate deeds, mortgages, bonds, contracts or other instruments requiring a
seal, under the Seal of the Corporation, except in cases where such execution
shall be expressly delegated to another by the Board of Directors. The Chairman
of the Board shall be a member of the Executive Committee and an ex-officio
member of each standing committee.
Section 5. The President. The President, subject to the direction of
the Board of Directors and reporting to the Chairman of the Board, shall have
general charge of the business, affairs and property of the Corporation and
general supervision over its officers and agents. In general, he or she shall
perform all duties incident to the office of President, and shall see that all
orders and resolutions of the Board of Directors are carried into effect. In the
absence of the Chairman of the Board, the President shall preside at all
meetings of the stockholders and of the Board of Directors. The President shall
be a member of the Executive Committee and an ex-officio member of each standing
committee. Unless otherwise prescribed by the Board of Directors, the President
shall have full power and authority on behalf of the Corporation to attend, act
and vote at any meeting of stockholders of other corporations in which the
Corporation may hold securities. At such meeting, the President shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities which the Corporation might have possessed and exercised if it had
been present. The President may execute in the Corporate name all deeds of real
property, and all mortgages, bonds and similar instruments and agreements
whereby any person is investing or lending funds in or to the Corporation, and
may execute in the Corporate name any agreement or other document necessary or
convenient for the origination, purchase, amendment, servicing, collection, sale
or other liquidation of any portfolio investment or loan of the Corporation of
any type or form, except in cases in which the signing or execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
Section 6. The Managing Directors. The Managing Directors, subject to
the direction of the Board of Directors and reporting to the Chairman of the
Board and President, shall assist in the general charge of the business of the
Corporation and general supervision over its officers and agents. In the absence
of the Chairman of the Board or President, at the direction of the Board of
Directors, a Managing Director may preside at all meetings of the stockholders
and of the Board of Directors. Unless otherwise prescribed by the Chairman of
the Board or President, the Managing Directors shall have full power and
authority on behalf of the Corporation to attend, act and vote at any meeting of
stockholders of other corporations in which the Corporation may hold securities.
At such meeting, the Managing Director shall possess and may exercise any and
all rights and powers incident to the ownership of such securities which the
Corporation might have possessed and exercised if it had been present. Any
Managing Director may execute in the Corporate name any agreement or other
document necessary or convenient
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for the origination, purchase, amendment, servicing, collection, sale or other
liquidation of any portfolio investment or loan of the Corporation of any type
or form, except in cases in which the signing or execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. At the direction of the Chairman of the Board or the President,
the Managing Director may execute in the Corporate name all deeds of real
property, and all mortgages, bonds and similar instruments and agreements
whereby any person is investing or lending funds in or to the Corporation,
except in cases in which the signing or execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation. The Board of Directors may from time to time confer like powers and
authority upon any other person or persons.
Section 7. Principals. The Principals, if any, shall, in the absence
of the President and all Managing Directors or in the event of the disabilities
of all such persons, perform the duties and exercise the powers of the President
or a Managing Director and shall generally assist the President and any and all
Managing Directors and perform such other duties and have such other powers as
may from time to time be prescribed by the Board of Directors. Unless otherwise
prescribed by the Chairman of the Board or President, the Principal shall have
full power and authority on behalf of the Corporation to attend, act and vote at
any meeting of stockholders of other corporations in which the Corporation may
hold securities. At such meeting, the Principal shall possess and may exercise
any and all rights and powers incident to the ownership of such securities which
the Corporation might have possessed and exercised if it had been present. Any
Principal may execute in the Corporate name any agreement or other document
necessary or convenient for the origination, purchase, amendment, servicing,
collection, sale or other liquidation of any portfolio investment or loan of the
Corporation of any type or form, except in cases in which the signing or
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation. The Board of Directors may from time
to time confer like powers and authority upon any other person or persons.
Section 8. Vice Presidents. The Vice Presidents, if any, shall
generally assist the President and any and all Managing Directors and/or the
Principals as directed by such officers and perform such other duties and have
such other powers as may from time to time be prescribed by the Board of
Directors.
Section 9. The Secretary. The Secretary shall attend all meetings of
the Board of Directors and meetings of the stockholders and record all votes and
the proceedings of the meetings in a book to be kept for that purpose and shall
perform like duties for the Executive Committee or other committees, if
required. He or she shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may from time to time be prescribed by the Board of
Directors, Chairman of the Board or the President, under whose supervision he or
she shall act; provided, however, that in addition to any such duties, the
Secretary shall: (i) provide each director with a copy of the Bylaws of the
Corporation upon his or her election as a director; and (ii) upon any amendment
to
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these Bylaws, provide each director with a copy of the Bylaws, as amended,
promptly after such Bylaws have been approved by the Board of Directors. The
Secretary shall have custody of the seal of the Corporation, and he or she, or
an Assistant Secretary, shall have authority to affix the same to any instrument
requiring it, and, when so affixed, the seal may be attested by his or her
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing thereof by his or her signature.
Section 10. The Assistant Secretary. The Assistant Secretary, if any
(or, in the event there be more than one, the Assistant Secretaries in the order
designated, or, in the absence of any designation, in the order of their
election), shall, in the absence of the Secretary or in the event of his or her
disability, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 11. Associates. The Associates who are designated officers of
the Corporation, if any, shall assist the President, any and all Managing
Directors, Principals, and Vice Presidents of the Corporation as directed by
such officers and perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors.
Section 12. The Treasurer. The Treasurer shall have the custody of
the corporate funds and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may from
time to time be designated by the Board of Directors. He or she shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, the President and the Board of Directors, at regular meetings of the
Board of Directors, or whenever the Board of Directors may require it, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation.
Section 13. The Assistant Treasurer. The Assistant Treasurer, if any
(or in the event there shall be more than one, the Assistant Treasurers in the
order designated, or, in the absence of any designation, in the order of their
election), shall, in the absence of the Treasurer or in the event of his or her
disability, perform the duties and exercise the powers of the Treasurer and
shall perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
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Section 1. Generally. Reference is made to Section 2-418 (and any
other relevant provisions) of the Corporations and Associations Article of the
Annotated Code of Maryland (1993), as amended. Particular reference is made to
the class of persons (hereinafter called "Indemnitees") who may be indemnified
by a Maryland corporation pursuant to the provisions of such Section 2-418,
namely, any entity (including the Corporation's investment adviser) or person
(or the heirs, executors or administrators of such person) who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, manager, partner, officer, trustee,
employee, agent or any similar title of another corporation, partnership, joint
venture, trust or other enterprise or employee benefit plan.
(a) The Corporation shall (and is hereby obligated
to) indemnify the Indemnitees, and each of them, ineach and every situation
where the Corporation is obligated to make such indemnification pursuant to the
aforesaid statutory provisions or pursuant to the Articles of Incorporation.
(b) The Corporation shall indemnify the Indemnitees,
and each of them, in each and every situation where, under the aforesaid
statutory provisions, the Corporation is not obligated, but is nevertheless
permitted or empowered, to make such indemnification, if the Board of Directors
determines that such Indemnitee acted in good faith and in a manner such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Corporation, and, in the case of any criminal action or proceeding, that
such Indemnitee had no reasonable cause to believe that such Indemnitee's
conduct was unlawful.
Section 2. Limitation for Disabling Conduct.
(a) Notwithstanding anything to the contrary in
Section 1 hereof, the Corporation may not indemnify any director or officer of
the Corporation against any liability, nor shall any director or officer of the
Corporation be exculpated from any liability, to the Corporation or its
stockholders to which such director or officer might otherwise be subject by
reason of "disabling conduct," as hereinafter defined. Accordingly, each
determination with respect to the permissibility of indemnification of a
director or officer of the Corporation because such director or officer has met
the applicable standard of conduct shall include a determination that the
liability for which such indemnification is sought did not arise by reason of
such person's disabling conduct. The determination required by this Subsection
2(a) may be based on:
(i) a final decision on the merits by a court or
other body before whom the action, suit or proceeding was brought that the
person to be indemnified was not liable by reason of disabling conduct, or
(ii) in the absence of such a decision, a
reasonable determination, based on a review of the facts, that the person to be
indemnified was not liable by reason of such
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person's disabling conduct by: (A) the vote of a majority of a quorum of
directors who are disinterested, non-party directors; or (B) an independent
legal counsel in a written opinion. In making such determination, such
disinterested, non-party directors or independent legal counsel, as the case may
be, may deem the dismissal for insufficiency of evidence of any disabling
conduct of either a court action or an administrative proceeding against a
person to be indemnified to provide reasonable assurance that such person was
not liable by reason of disabling conduct.
(b) For the purpose of this Section:
(i) "disabling conduct" of a director or officer
shall mean such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office or any
other conduct prohibited under Section 17(h) of the 1940 Act or any other
applicable securities laws;
(ii) "disinterested, non-party director" shall
mean a director of the Corporation who is neither an "interested person" of the
Corporation as defined in Section 2(a)(19) of the 1940 Act nor a party to the
action, suit or proceeding in connection with which indemnification is sought;
(iii) "independent legal counsel" shall mean a
member of the Bar of the State of Maryland who is not, and for at least two (2)
years prior to his or her engagement to render the opinion in question has not
been, employed or retained by the Corporation, by any investment adviser to or
principal underwriter for the Corporation, or by any person affiliated with any
of the foregoing; and
(iv) "the Corporation" shall include, in addition
to the resulting Corporation, any constituent Corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents.
(c) The Corporation may purchase insurance to cover
the payment of costs incurred in performing the Corporation's obligations under
Section 1 hereof, but it is understood that no insurance may be obtained for the
purpose of indemnifying any disabling conduct.
(d) The Corporation may advance legal fees and other
expenses pursuant to the indemnification rights set forth in Section 1 hereof so
long as, in addition to the other requirements therefor, the Corporation either:
(i) obtains security for the advance from the
Indemnitee;
(ii) obtains insurance against losses arising by
reason of lawful advances; or
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(iii) it shall be determined, pursuant to the
means set forth in Section 2(a)(ii) hereof, that there is reason to believe that
the Indemnitee ultimately will be found entitled to indemnification.
Section 3. Advisory Committee Members. The Corporation shall
indemnify any person appointed to any Advisory Committee pursuant to Article IV,
Section 5 hereof (or the heirs, executors, or administrators of such person) who
was or is a party or is threatened to be made a party to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was a member of the Advisory Committee of this Corporation, if the Board of
Directors determines that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interest of the
Corporation, and in the case of any criminal action or proceeding, that such
person had no reasonable cause to believe that such person's conduct was
unlawful.
ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form of Signatures; Statements.
(a) Except as provided in Section 1(b) of this Article,
shares of the Corporation's capital stock shall be issued without certificates.
At the time of issuance or transfer of such uncertificated shares, the
Corporation shall send the stockholder a written statement identifying: (1) the
Corporation as the issuer of the stock; (2) the name of the stockholder or other
person to whom it is issued; and (3) the class of stock and the number of shares
represented by such statement. If the Corporation has authority at the time of
such issuance or transfer to issue stock of more than one class, the written
statement shall also include a full statement or summary of: (1) the
designations and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the stock of each class which the Corporation is
authorized to issue; and (2) if the Corporation is authorized at the time of
such issuance or transfer to issue any preferred or special class in series, (i)
the differences in the relative rights and preferences between the shares of
each series to the extent they have been set, and (ii) the authority of the
Board of Directors to set the relative rights and preferences of subsequent
series. Notwithstanding the immediately preceding sentence, the written
statement may, in lieu of including the information referred to therein, state
that the Corporation will furnish a full statement of such information to any
stockholder on request and without charge. If the Corporation imposes a
restriction on transferability of such uncertificated shares, the written
statement shall also: (1) contain a full statement of the restriction; or (2)
state that the Corporation will furnish information about the restriction to the
stockholder on request and without charge.
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(b) Notwithstanding Section 1(a) of this Article,
every stockholder in the Corporation shall, upon request duly made to the
Corporation or any transfer agent of the Corporation, be entitled to have a
certificate, signed by the Chairman of the Board or the President or a Managing
Director or a Principal and countersigned by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation,
exhibiting the number and class (and series, if any) of shares owned by him, her
or it, and bearing the seal of the Corporation. Such signatures and seal may be
facsimile transmission. In case any officer who has signed, or whose facsimile
signature was placed on, a certificate shall have ceased to be such officer
before such certificate is issued, it may nevertheless be issued by the
Corporation with the same effect as if he or she were such officer at the date
of its issue.
(c) Every certificate representing stock issued by
the Corporation, if it is authorized to issue stock of more than one class,
shall set forth upon the face or back of the certificate, a full statement or
summary of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemptions of the stock of each class which the
Corporation is authorized to issue and, if the Corporation is authorized to
issue any preferred or special class of stock in series, the differences in the
relative rights and preferences between the shares of each series to the extent
they have been set and the authority of the Board of Directors to set the
relative rights and preferences of subsequent series. In lieu of such full
statement or summary, there may be set forth upon the face or back of each
certificate a statement that the Corporation will furnish to the stockholder,
upon request and without charge, a full statement of such information.
(d) Every certificate representing shares which are
restricted as to transferability by the Corporation shall either (i) set forth
on the face or back of the certificate a full statement of such restriction or
(ii) state that the Corporation will furnish to the stockholder, upon request
and without charge, information about the restriction.
Section 2. Registration of Transfer. Upon surrender to the
Corporation or any transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, or upon presentation to the Corporation or any transfer
agent of the Corporation of an instruction with a request to register transfer
of uncertificated shares, it shall be the duty of the Corporation or its
transfer agent, if it is satisfied that all terms and conditions of the Articles
of Incorporation, of the Bylaws and of applicable law regarding the transfer of
shares have been fulfilled, to record the transaction upon its books, to issue a
new certificate to the person entitled thereto upon request for such
certificate, and to cancel the old certificate, if any.
Section 3. Registered Stockholders.
(a) Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person who
is registered on its books as the owner of shares of its capital stock to
receive dividends or other distributions, to vote as such owner, and to hold
17
<PAGE> 21
liable for calls and assessments a person who is registered on its books as the
owner of shares of its capital stock. The Corporation shall not be bound to
recognize any equitable or legal claim to or interest in such shares on the part
of any other person except that the Board of Directors may adopt by resolution a
procedure by which a stockholder may certify in writing to the Corporation that
any shares of its capital stock registered in the name of such stockholder are
held for the account of a specified person other than such stockholder are held
for the account of a specified person other than such stockholder.
(b) If a stockholder desires that notices and/or
dividends shall be sent to a name or address other than the name or address
appearing on the stock ledger maintained by the Corporation (or by the transfer
agent or registrar, if any), such stockholder shall have the duty to notify the
Corporation (or the transfer agent or registrar, if any), in writing, of such
desire. Such written notice shall specify the alternate name or address to be
used.
Section 4. Location of Stock Ledger. A copy of the Corporation's
stock ledger containing (i) the name and address of each stockholder, and (ii)
the number and shares of stock of each class which the stockholder holds shall
be maintained at the Corporation's office located at 1919 Pennsylvania Avenue,
N.W., Washington, DC 20006.
Section 5. Record Date. In order that the Corporation may determine
the stockholders of record who are entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or the allotment of any rights, or to make a
determination with respect to stockholders of record for any other proper
purpose, the Board of Directors may, in advance, fix a date as the record date
for any such determination or meeting. Such date shall not be more than 90 nor
less than 10 days before the date of any such meeting, nor more than 90 days
prior to the date any other determination is made with respect to stockholders.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting taken
pursuant to Section 7 of Article II; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 6. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct that a new certificate be issued in place of any
certificate theretofore issued by the Corporation which is claimed to have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate to be lost, stolen or destroyed. When
authorizing such issuance of a new certificate, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate to advertise the same in
such manner as it shall require and/or to give the Corporation a bond in such
sum or other security in such form, as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
claimed to have been lost, stolen or destroyed.
18
<PAGE> 22
ARTICLE IX
GENERAL PROVISIONS
Section 1. Dividends. Except as otherwise provided by law or the
Articles of Incorporation, dividends upon the outstanding capital stock of the
Corporation may be declared by the Board of Directors at any annual, regular or
special meeting, and may be paid in cash, in property or in shares of the
Corporation's capital stock.
Section 2. Reserves. The Board of Directors shall have full power,
subject to the provisions of law and the Articles of Incorporation, to determine
whether any, and, if so, what part, of the funds legally available for the
payment of dividends shall be declared as dividends and paid to the stockholders
of the Corporation. The Board of Directors, in its sole discretion, may fix a
sum which may be set aside or reserved over and above the paid-in capital of the
Corporation for working capital or as a reserve for any proper purpose, and may,
from time to time, increase, diminish or vary such fund or funds.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
as determined from time to time by the Board of Directors.
Section 4. Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its incorporation and the words "Corporate
Seal" and "Maryland."
ARTICLE X
AMENDMENTS
The Board of Directors shall have the power to make, alter, amend and
repeal these Bylaws, and to adopt new bylaws, by an affirmative vote of a
majority of the entire Board of Directors, provided that notice of the proposal
to make, alter, amend or repeal these Bylaws, or to adopt new bylaws, was
included in the notice of the meeting of the Board of Directors at which such
action takes place.
19
<PAGE> 1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT") is entered
into as of January 18, 2000, by and among ALLIED CAPITAL CORPORATION, a
corporation organized under the laws of the State of Maryland ("BORROWER"),
U.S. BANK NATIONAL ASSOCIATION ("U.S. BANK"), and BANK OF AMERICA, N.A. (f/k/a
Bank of America National Trust and Savings Association, successor by merger to
Bank of America, N.A., f/k/a NationsBank, N.A.), as Administrative Agent (in
such capacity, the "Administrative Agent") for the Lenders under the Credit
Agreement (hereinafter defined).
R E C I T A L S
A. Borrower, Administrative Agent, and certain other Agents and
Lenders are parties to that certain Credit Agreement dated as of March 9, 1999
(with the Effective Date being March 10, 1999), as amended by that certain
First Amendment to Credit Agreement dated as of May 7, 1999 (the "CREDIT
AGREEMENT"). Unless otherwise indicated herein, all terms used with their
initial letter capitalized are used herein with their meaning as defined in the
Credit Agreement; all Section references are to Sections in the Credit
Agreement; and all Paragraph references are to Paragraphs in this Amendment.
B. Pursuant to SECTION 2.12, Borrower has requested an increase in the
aggregate Commitments under the Agreement, by requesting U.S. Bank to become a
Lender with a Commitment of $20,000,000 (the new Commitment referred to herein
as the "SUPPLEMENTAL COMMITMENT").
C. Subject to and upon the following terms and conditions, U.S. Bank
has agreed to the Supplemental Commitment, and Administrative Agent has agreed
to the addition of U.S. Bank as a new Lender.
D. Accordingly, in accordance with the requirements of SECTIONS 2.12
and 12.5 and subject to and upon the following terms and conditions, Borrower,
Administrative Agent, and U.S. Bank are entering into this Amendment (i) to add
U.S. Bank as a "Lender" with a Commitment of $20,000,000 as a new Lender,
pursuant to SECTION 2.12 of the Credit Agreement, and (ii) to amend SCHEDULE 2
to the Credit Agreement to reflect the Supplemental Commitment.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, U.S. Bank, and Administrative Agent agree, as follows:
PARAGRAPH 1. AMENDMENTS TO CREDIT AGREEMENT.
1.1 SUPPLEMENTAL COMMITMENT AND CONSENT TO NEW LENDER.
(a) Pursuant to SECTION 2.12, effective on and after the
Amendment Effective Date (hereinafter defined), U.S. Bank agrees to be a
new Lender having the Commitment set forth opposite its name on ANNEX A
hereto. Accordingly, each Lender's Commitment Percentage shall be
recalculated to reflect the new proportionate share of the revised total
Commitments as stated on ANNEX A hereto.
(b) Furthermore, to the extent any Revolving Loans are
outstanding on the Amendment Effective Date (excluding any Loans made on
such date), then on such date, U.S. Bank shall pay to Administrative
Agent (for ratable distribution to the other Lenders) an amount equal to
its pro rata share of the Revolving Loans then outstanding, which are
deemed assumed and purchased from the
<PAGE> 2
other Lenders. All such payments shall reduce the outstanding principal
balance of the Revolving Notes of each Lender receiving such payments and
shall represent Revolving Loans to Borrower by U.S. Bank. U.S. Bank
shall be entitled to share ratably in interest accruing in accordance
with the Loan Documents.
(c) To the extent a payment contemplated in PARAGRAPH 1.1(b), if
any, occurs on a date other than the last day of any Interest Period for
any outstanding Eurodollar Loans, Borrower agrees to pay to each Lender
(upon the request of each such Lender) the amounts required by SECTION
4.5(a) in connection therewith.
(d) On the Amendment Effective Date, U.S. Bank shall be entitled
to the rights and benefits and subject to the duties of a Lender under
the Loan Documents.
(e) By execution hereof, Administrative Agent and Borrower
consent to the addition of U.S. Bank as a "LENDER" under the Loan
Documents.
1.2 DEFINITIONS AND TERMS. On and after the Amendment Effective Date
(hereinafter defined), (i) each reference to "Lender" or "Lenders" in the
Credit Agreement and the related Loan Documents shall include U.S. Bank, and
(ii) each reference to SCHEDULE 2 shall be to the Second Revised SCHEDULE 2 as
set forth on ANNEX A, as the same may hereafter be amended or modified in
accordance with the Loan Documents.
1.3 CONFIRMATIONS AND AGREEMENTS OF U.S. BANK. U.S. Bank severally
(a) confirms that it has received a copy of the Credit Agreement, together with
copies of the consolidated and consolidating balance sheets of Borrower and its
Consolidated Subsidiaries most recently delivered under the Credit Agreement
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this Amendment, including,
without limitation, the transaction contemplated in this PARAGRAPH 1; (b)
agrees that it will, independently and without reliance upon the Administrative
Agent or any Lender, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Credit Agreement; (c) appoints and
authorizes Administrative Agent to take such action as "Administrative Agent"
on its behalf and to exercise such powers and discretion under the Credit
Agreement as are delegated to Administrative Agent by the terms thereof,
together with such powers and discretion as are reasonably incidental thereto;
(d) agrees that it will perform in accordance with their terms all of the
obligations that by the terms of the Credit Agreement are required to be
performed by it as a Lender; and (e) shall deliver to Administrative Agent any
U.S. Internal Revenue Service or other forms required under SECTION 4.6 of the
Credit Agreement.
1.4 NOTES. On the Amendment Effective Date (hereinafter defined),
Borrower shall execute and deliver to U.S. Bank a Revolving Note reflecting the
respective Commitment of such Lender, after giving effect to the Supplemental
Commitment contemplated and effected in accordance with PARAGRAPH 1.
PARAGRAPH 2. AMENDMENT EFFECTIVE DATE. This Amendment shall be binding upon
U.S. Bank, Administrative Agent, Borrower, and each other Lender on the last
day (the "AMENDMENT EFFECTIVE DATE") upon which (a) counterparts of this
Amendment shall have been executed and delivered to Administrative Agent by
Borrower, Administrative Agent, and U.S. Bank, or when Administrative Agent
shall have received, telecopied, telexed, or other evidence satisfactory to it
that all such parties have executed and are delivering to Administrative Agent
counterparts thereof; (b) the Note is executed by Borrower and delivered in
accordance with PARAGRAPH 1.4 hereof; (c) to the extent required by PARAGRAPH
1.1(b), all assumptions and related payments have been made by U.S. Bank to
Administrative Agent; (d) Borrower shall have paid to Administrative Agent (for
distribution to U.S. Bank) the respective upfront fees payable to U.S.
2
<PAGE> 3
Bank as indicated on ANNEX A; and (e) Borrower shall have delivered to
Administrative Agent copies (certified by the Secretary or Assistant Secretary
of Borrower) of all corporate action taken by Borrower to authorize the
execution, delivery, and performance of this Amendment, and any related Debt
incurrence.
PARAGRAPH 3. REPRESENTATIONS AND WARRANTIES. As a material inducement to U.S.
Bank and Administrative Agent to execute and deliver this Amendment, Borrower
hereby represents and warrants to U.S. Bank, the other Lenders, and
Administrative Agent (with the knowledge and intent that such parties are
relying upon the same in entering into this Amendment) the following: (a) the
representations and warranties in the Credit Agreement and in all other Loan
Documents are true and correct on the date hereof in all material respects, as
though made on the date hereof, except to the extent that such representations
and warranties expressly relate solely to an earlier date (in which case such
representations and warranties shall have been true and accurate as of such
earlier date); (b) no Default or Event of Default exists under the Loan
Documents or will exist after giving effect to the transactions contemplated by
this Amendment; and (c) this Amendment has been duly authorized and approved by
all necessary corporate action and requires the consent of no other Person, and
upon execution and delivery, this Amendment shall be binding and enforceable
against Borrower in accordance with its terms.
PARAGRAPH 4. MISCELLANEOUS.
4.1 EFFECT ON LOAN DOCUMENTS. The Credit Agreement and all related
Loan Documents shall remain unchanged and in full force and effect, except as
provided in this Amendment, and are hereby ratified and confirmed. On and
after the Amendment Effective Date, all references to the "Credit Agreement" or
the "Agreement" shall be to the Credit Agreement as herein amended. The
execution, delivery, and effectiveness of this Amendment shall not, except as
expressly provided herein, operate as a waiver of any rights of the Lenders
under the Credit Agreement or any Loan Documents, nor constitute a waiver under
the Credit Agreement or any other provision of the Loan Documents.
4.2 REFERENCE TO MISCELLANEOUS PROVISIONS. This Amendment and the
other documents delivered pursuant to this Amendment are part of the Loan
Documents referred to in the Credit Agreement, and the provisions relating to
Loan Documents set forth in SECTION 12 are incorporated herein by reference the
same as if set forth herein verbatim.
4.3 COSTS AND EXPENSES. Borrower agrees to pay promptly the
reasonable fees and expenses of counsel to Administrative Agent for services
rendered in connection with the preparation, negotiation, reproduction,
execution, and delivery of this Amendment.
4.4 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes, and all of which constitute, collectively, one agreement; but, in
making proof of this Amendment, it shall not be necessary to produce or account
for more than one such counterpart. It is not necessary that all parties
execute the same counterpart so long as identical counterparts are executed by
Borrower, U.S. Bank, and Administrative Agent.
4.5 ENTIRETY. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
4.6 PARTIES. This Amendment binds and inures to Borrower,
Administrative Agent, U.S. Bank, the other Lenders, and their respective
successors and assigns.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in
multiple counterparts as of the respective dates indicated on each signature
page hereof, but effective as of the Amendment Effective Date.
REMAINDER OF THIS PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE TO FOLLOW.
4
<PAGE> 5
Signature Page to that certain Second Amendment to Credit Agreement dated
as of January 18, 2000 amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999 among
Allied Capital Corporation, as Borrower, Bank of America, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
ALLIED CAPITAL CORPORATION, as Borrower
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 6
Signature Page to that certain Second Amendment to Credit Agreement dated
as of January 18, 2000 amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999 among
Allied Capital Corporation, as Borrower, Bank of America, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
BANK OF AMERICA, N.A.,
as Administrative Agent and a Lender
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 7
Signature Page to that certain Second Amendment to Credit Agreement dated
as of January 18, 2000 amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999 among
Allied Capital Corporation, as Borrower, Bank of America, N.A., as
Administrative Agent, and certain other Agents and Lenders named therein.
U.S. BANK NATIONAL ASSOCIATION, as a new
Lender
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 8
ANNEX A
SECOND REVISED SCHEDULE 2
<TABLE>
<CAPTION>
=================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
=================================================================================================
<S> <C> <C> <C>
Bank of America, N.A. $52,500,000.00 14.583333% $131,250.00
Financial Services
901 Main Street, 66th Floor
Dallas, Texas 75202-3748
Attn: Shelly K. Harper
Tel: 214-209-0567
Fax: 214-209-0604
Email: [email protected]
- -------------------------------------------------------------------------------------------------
FleetBoston, N.A. $50,000,000.00 13.888889% $125,000.00
100 Federal Street
Mail Stop 01-10-08
Boston, MA 02110
Attn: Robert Storer
Tel: 617-434-3737
Fax: 617-434-1537
Email: [email protected]
- -------------------------------------------------------------------------------------------------
First Union National Bank $50,000,000.00 13.888889% $125,000.00
One First Union Center, NC0610
301 South College Street
Charlotte, NC 28288
Attn: Raj Shah
Tel: 704-374-6230
Fax: 704-383-7611
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Riggs Bank N.A. $50,000,000.00 13.888889% $125,000.00
808 17th Street NW
10th Floor
Washington, DC 20006
Attn: David Olson
Tel: 202-835-5105
Fax: 202-835-5977
Email: [email protected]
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
=================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
=================================================================================================
<S> <C> <C> <C>
Chevy Chase Bank, F.S.B. $30,000,000.00 8.333333% $60,000.00
8401 Connecticut Avenue
9th Floor
Chevy Chase, MD 20815
Attn: Rich Amador
Tel: 301-986-7139
Fax: 301-986-7038
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Credit Lyonnais New York Branch $30,000,000.00 8.333333% $60,000.00
1301 Avenue of the Americas
12th Floor
New York, NY 10019
Attn: W. Jay Buckley
Tel: 212-261-7340
Fax: 212-261-3401
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Branch Banking & Trust Co. $30,000,000.00 8.333333% $60,000.00
110 S. Stratford Road
Suite 301
Winston-Salem, NC 27104
Attn: Cory Boyte
Tel: 336-733-3259
Fax: 336-733-3254
Email: [email protected]
- -------------------------------------------------------------------------------------------------
LaSalle National Bank $20,000,000.00 5.555556% $30,000.00
135 South LaSalle Street
Suite 362
Chicago, IL 60603
Attn: David H. Sherer
Tel: 312-904-2722
Fax: 312-904-2982
Email: [email protected]
- -------------------------------------------------------------------------------------------------
United Bank $20,000,000.00 5.555556% $30,000.00
2071 Chain Bridge Road
Vienna, VA 22182
Attn: Keith Harding
Tel: 703-442-7154
Fax: 703-448-7126
Email: [email protected]
- -------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
=================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
=================================================================================================
<S> <C> <C> <C>
U.S. Bank National Association $20,000,000.00 5.555556% $17,137.00
One Illinois Center, Suite 3000
Mail Drop ILIC3000
111 East Wacker Drive
Chicago, IL 60601
Attn: R. Michael Newton
Tel: 312-228-9405
Fax: 312-228-9402
Email: [email protected]
- -------------------------------------------------------------------------------------------------
Firstrust Bank $ 7,500,000.00 2.083333% $9,375.00
15 E. Ridge Pike
Conshohocken, PA 19428
Attn: John P. Hollingsworth
Tel: 610-238-5030
Fax: 610-238-5066
Email: [email protected]
=================================================================================================
Totals $360,000,000.00 100.000000% $772,762.00
=================================================================================================
</TABLE>
3
<PAGE> 1
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT") is entered into
as of March 17, 2000, by and among ALLIED CAPITAL CORPORATION, a corporation
organized under the laws of the State of Maryland ("BORROWER"), MERCANTILE-SAFE
DEPOSIT & TRUST COMPANY ("MERCANTILE"), DEUTSCHE BANK AG, NEW YORK BRANCH
("DEUTSCHE BANK," and Mercantile being individually referred to as a "RELEVANT
LENDER" and collectively as the "RELEVANT LENDERS"), and BANK OF AMERICA, N.A.,
as Administrative Agent (in such capacity, the "ADMINISTRATIVE AGENT") for the
Lenders under the Credit Agreement (hereinafter defined).
R E C I T A L S
A. Borrower, Administrative Agent, and certain other Agents and Lenders
are parties to that certain Credit Agreement dated as of March 9, 1999 (with the
Effective Date being March 10, 1999), as amended by that certain First Amendment
to the Credit Agreement dated as of May 7, 1999, and as amended by that certain
Second Amendment to the Credit Agreement dated as of January 18, 2000 (the
"CREDIT AGREEMENT"). Unless otherwise indicated herein, all terms used with
their initial letter capitalized are used herein with their meaning as defined
in the Credit Agreement; all Section references are to Sections in the Credit
Agreement; and all Paragraph references are to Paragraphs in this Amendment.
B. Pursuant to SECTION 2.12, Borrower has requested an increase in the
aggregate Commitments under the Agreement, by requesting: (i) Mercantile to
become a Lender with a Commitment of $20,000,000, and (ii) Deutsche Bank to
become a Lender with a Commitment of $20,000,000 (the new Commitments referenced
in ITEMS (i) and (ii) above herein referred to as the "SUPPLEMENTAL
COMMITMENTS").
C. Subject to and upon the following terms and conditions, Mercantile
and Deutsche Bank have agreed to the Supplemental Commitments, and
Administrative Agent has agreed to the addition of Mercantile and Deutsche Bank
as new Lenders.
D. Accordingly, in accordance with the requirements of SECTIONS 2.12
and 12.5 and subject to and upon the following terms and conditions, Borrower,
Administrative Agent, Mercantile, and Deutsche Bank are entering into this
Amendment (i) to add Mercantile as a "Lender" with a Commitment of $20,000,000
as a new Lender, pursuant to SECTION 2.12 of the Credit Agreement, (ii) to add
Deutsche Bank as a "Lender" with a Commitment of $20,000,000 as a new Lender,
pursuant to SECTION 2.12 of the Credit Agreement, and (iii) to amend SCHEDULE 2
to the Credit Agreement to reflect the Supplemental Commitments.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, Relevant Lenders, and Administrative Agent agree, as
follows:
PARAGRAPH 1. AMENDMENTS TO CREDIT AGREEMENT.
1.1 SUPPLEMENTAL COMMITMENTS AND CONSENT TO NEW LENDERS.
(a) Pursuant to SECTION 2.12, effective on and after the
Amendment Effective Date (hereinafter defined), (i) Mercantile agrees to
be a new Lender having the Commitment set forth opposite its name on
ANNEX A hereto, and (ii) Deutsche Bank agrees to be a new Lender having
the
<PAGE> 2
Commitment set forth opposite its name on ANNEX A hereto. Accordingly,
each Lender's Commitment Percentage shall be recalculated to reflect the
new proportionate share of the revised total Commitments as stated on
ANNEX A hereto.
(b) Furthermore, to the extent any Revolving Loans are
outstanding on the Amendment Effective Date (excluding any Loans made on
such date), then on such date, each Relevant Lender shall pay to
Administrative Agent (for ratable distribution to the other Lenders) an
amount equal to its pro rata share of the Revolving Loans then
outstanding, which are deemed assumed and purchased from the other
Lenders. All such payments shall reduce the outstanding principal balance
of the Revolving Notes of each Lender receiving such payments and shall
represent Revolving Loans to Borrower by the appropriate Relevant Lender.
The Relevant Lenders shall be entitled to share ratably in interest
accruing in accordance with the Loan Documents.
(c) To the extent a payment contemplated in PARAGRAPH 1.1(b), if
any, occurs on a date other than the last day of any Interest Period for
any outstanding Eurodollar Loans, Borrower agrees to pay to each Lender
(upon the request of each such Lender) the amounts required by SECTION
4.5(a) in connection therewith.
(d) On the Amendment Effective Date, each Relevant Lender shall
be entitled to the rights and benefits and subject to the duties of a
Lender under the Loan Documents.
(e) By execution hereof, Administrative Agent and Borrower
consent to the addition of Mercantile and Deutsche Bank each as a "LENDER"
under the Loan Documents.
1.2 DEFINITIONS AND TERMS. On and after the Amendment Effective Date
(hereinafter defined), (i) each reference to "Lender" or "Lenders" in the Credit
Agreement and the related Loan Documents shall include Mercantile and Deutsche
Bank, and (ii) each reference to SCHEDULE 2 shall be to the THIRD REVISED
SCHEDULE 2 as set forth on ANNEX A, as the same may hereafter be amended or
modified in accordance with the Loan Documents.
1.3 CONFIRMATIONS AND AGREEMENTS OF RELEVANT LENDERS. Each Relevant
Lender severally (a) confirms that it has received a copy of the Credit
Agreement, together with copies of the consolidated and consolidating balance
sheets of Borrower and its Consolidated Subsidiaries most recently delivered
under the Credit Agreement and such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
this Amendment, including, without limitation, the transaction contemplated in
this PARAGRAPH 1; (b) agrees that it will, independently and without reliance
upon the Administrative Agent or any Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement; (c)
appoints and authorizes Administrative Agent to take such action as
"Administrative Agent" on its behalf and to exercise such powers and discretion
under the Credit Agreement as are delegated to Administrative Agent by the terms
thereof, together with such powers and discretion as are reasonably incidental
thereto; (d) agrees that it will perform in accordance with their terms all of
the obligations that by the terms of the Credit Agreement are required to be
performed by it as a Lender; and (e) shall deliver to Administrative Agent any
U.S. Internal Revenue Service or other forms required under SECTION 4.6 of the
Credit Agreement.
2
<PAGE> 3
1.4 NOTES. On the Amendment Effective Date (hereinafter defined),
Borrower shall execute and deliver to each Relevant Lender a Revolving Note
reflecting the respective Commitment of each such Lender, after giving effect to
the Supplemental Commitments contemplated and effected in accordance with
PARAGRAPH 1.
PARAGRAPH 2. AMENDMENT EFFECTIVE DATE. This Amendment shall be binding upon
each Relevant Lender, Administrative Agent, Borrower, and each other Lender on
the last day (the "AMENDMENT EFFECTIVE DATE") upon which (a) counterparts of
this Amendment shall have been executed and delivered to Administrative Agent by
Borrower, Administrative Agent, and each Relevant Lender, or when Administrative
Agent shall have received, telecopied, telexed, or other evidence satisfactory
to it that all such parties have executed and are delivering to Administrative
Agent counterparts thereof; (b) the Notes are executed by Borrower and delivered
in accordance with PARAGRAPH 1.4 hereof; (c) to the extent required by PARAGRAPH
1.1(b), all assumptions and related payments have been made by the Relevant
Lenders to Administrative Agent; (d) Borrower shall have paid to Administrative
Agent (for distribution to Relevant Lenders) the respective upfront fees payable
to each Relevant Lender as indicated on ANNEX A; and (e) Borrower shall have
delivered to Administrative Agent copies (certified by the Secretary or
Assistant Secretary of Borrower) of all corporate action taken by Borrower to
authorize the execution, delivery, and performance of this Amendment, and any
related Debt incurrence.
PARAGRAPH 3. REPRESENTATIONS AND WARRANTIES. As a material inducement to each
Relevant Lender and Administrative Agent to execute and deliver this Amendment,
Borrower hereby represents and warrants to each Relevant Lender, the other
Lenders, and Administrative Agent (with the knowledge and intent that such
parties are relying upon the same in entering into this Amendment) the
following: (a) the representations and warranties in the Credit Agreement and in
all other Loan Documents are true and correct on the date hereof in all material
respects, as though made on the date hereof, except to the extent that such
representations and warranties expressly relate solely to an earlier date (in
which case such representations and warranties shall have been true and accurate
as of such earlier date); (b) no Default or Event of Default exists under the
Loan Documents or will exist after giving effect to the transactions
contemplated by this Amendment; and (c) this Amendment has been duly authorized
and approved by all necessary corporate action and requires the consent of no
other Person, and upon execution and delivery, this Amendment shall be binding
and enforceable against Borrower in accordance with its terms.
PARAGRAPH 4. MISCELLANEOUS.
4.1 EFFECT ON LOAN DOCUMENTS. The Credit Agreement and all related
Loan Documents shall remain unchanged and in full force and effect, except as
provided in this Amendment, and are hereby ratified and confirmed. On and after
the Amendment Effective Date, all references to the "Credit Agreement" or the
"Agreement" shall be to the Credit Agreement as herein amended. The execution,
delivery, and effectiveness of this Amendment shall not, except as expressly
provided herein, operate as a waiver of any rights of the Lenders under the
Credit Agreement or any Loan Documents, nor constitute a waiver under the Credit
Agreement or any other provision of the Loan Documents.
4.2 REFERENCE TO MISCELLANEOUS PROVISIONS. This Amendment and the
other documents delivered pursuant to this Amendment are part of the Loan
Documents referred to in the Credit Agreement, and the provisions relating to
Loan Documents set forth in SECTION 12 are incorporated herein by reference the
same as if set forth herein verbatim.
3
<PAGE> 4
4.3 COSTS AND EXPENSES. Borrower agrees to pay promptly the reasonable
fees and expenses of counsel to Administrative Agent for services rendered in
connection with the preparation, negotiation, reproduction, execution, and
delivery of this Amendment.
4.4 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original for all
purposes, and all of which constitute, collectively, one agreement; but, in
making proof of this Amendment, it shall not be necessary to produce or account
for more than one such counterpart. It is not necessary that all parties execute
the same counterpart so long as identical counterparts are executed by Borrower,
each Relevant Lender, and Administrative Agent.
4.5 ENTIRETY. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
4.6 PARTIES. This Amendment binds and inures to Borrower,
Administrative Agent, Relevant Lenders, the other Lenders, and their respective
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in
multiple counterparts as of the respective dates indicated on each signature
page hereof, but effective as of the Amendment Effective Date.
REMAINDER OF THIS PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE TO FOLLOW.
4
<PAGE> 5
Signature Page to that certain Third Amendment to Credit Agreement dated
as of March 17, 2000, amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999, and as
amended by that certain Second Amendment to Credit Agreement dated as of January
18, 2000, among Allied Capital Corporation, as Borrower, Bank of America, N.A.,
as Administrative Agent, and certain other Agents and Lenders named therein.
ALLIED CAPITAL CORPORATION, as Borrower
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 6
Signature Page to that certain Third Amendment to Credit Agreement dated
as of March 17, 2000, amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999, and as
amended by that certain Second Amendment to Credit Agreement dated as of January
18, 2000, among Allied Capital Corporation, as Borrower, Bank of America, N.A.,
as Administrative Agent, and certain other Agents and Lenders named therein.
BANK OF AMERICA, N.A.,
as Administrative Agent and a Lender
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 7
Signature Page to that certain Third Amendment to Credit Agreement dated
as of March 17, 2000, amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999, and as
amended by that certain Second Amendment to Credit Agreement dated as of January
18, 2000, among Allied Capital Corporation, as Borrower, Bank of America, N.A.,
as Administrative Agent, and certain other Agents and Lenders named therein.
MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY, as a Relevant Lender
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 8
Signature Page to that certain Third Amendment to Credit Agreement dated
as of March 17, 2000, amending that certain Credit Agreement dated as of March
9, 1999 (with the Effective Date being March 10, 1999), as amended by that
certain First Amendment to Credit Agreement dated as of May 7, 1999, and as
amended by that certain Second Amendment to Credit Agreement dated as of January
18, 2000, among Allied Capital Corporation, as Borrower, Bank of America, N.A.,
as Administrative Agent, and certain other Agents and Lenders named therein.
DEUTSCHE BANK AG, NEW YORK BRANCH, as
a Relevant Lender
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
By
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE> 9
ANNEX A
THIRD REVISED SCHEDULE 2
<TABLE>
<CAPTION>
===================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
===================================================================================================
<S> <C> <C> <C>
Bank of America, N.A. $52,500,000.00 13.125000% $131,250.00
Financial Services
901 Main Street, 66th Floor
Dallas, Texas 75202-3748
Attn: Shelly K. Harper
Tel: 214-209-0567
Fax: 214-209-0604
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
FleetBoston, N.A. $50,000,000.00 12.500000% $125,000.00
100 Federal Street
Mail Stop 01-10-08
Boston, MA 02110
Attn: Robert Storer
Tel: 617-434-3737
Fax: 617-434-1537
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
First Union National Bank $50,000,000.00 12.500000% $125,000.00
One First Union Center, NC0610
301 South College Street
Charlotte, NC 28288
Attn: Raj Shah
Tel: 704-374-6230
Fax: 704-383-7611
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
Riggs Bank N.A. $50,000,000.00 12.500000% $125,000.00
808 17th Street NW
10th Floor
Washington, DC 20006
Attn: David Olson
Tel: 202-835-5105
Fax: 202-835-5977
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
===================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
===================================================================================================
<S> <C> <C> <C>
Chevy Chase Bank, F.S.B. $30,000,000.00 7.500000% $60,000.00
8401 Connecticut Avenue
9th Floor
Chevy Chase, MD 20815
Attn: Rich Amador
Tel: 301-986-7139
Fax: 301-986-7038
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
Credit Lyonnais New York Branch $30,000,000.00 7.500000% $60,000.00
1301 Avenue of the Americas
12th Floor
New York, NY 10019
Attn: W. Jay Buckley
Tel: 212-261-7340
Fax: 212-261-3401
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
Branch Banking & Trust Co. $30,000,000.00 7.500000% $60,000.00
110 S. Stratford Road
Suite 301
Winston-Salem, NC 27104
Attn: Cory Boyte
Tel: 336-733-3259
Fax: 336-733-3254
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
Deutsche Bank AG, New York Branch $20,000,000.00 5.000000% $14,713.00
31 W. 52nd Street
New York, NY 10019
Attn: Elizabeth Zieglmeier
Tel: 212-469-8124
Fax: 212-469-8346
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
LaSalle National Bank $20,000,000.00 5.000000% $30,000.00
135 South LaSalle Street
Suite 362
Chicago, IL 60603
Attn: David H. Sherer
Tel: 312-904-2722
Fax: 312-904-2982
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 11
<TABLE>
<CAPTION>
===================================================================================================
REVOLVING
FACILITY COMMITMENT UPFRONT
NAME AND ADDRESS OF LENDERS COMMITTED PERCENTAGE FEE
SUMS
===================================================================================================
<S> <C> <C> <C>
Mercantile-Safe Deposit & Trust Company $20,000,000.00 5.000000% $14,713.00
2 Hopkins Plaza
P.O. Box 1477
Baltimore, MD 21203
Attn: James D. Witty
Tel: 410-237-5373
Fax: 410-237-5703
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
United Bank $20,000,000.00 5.000000% $30,000.00
2071 Chain Bridge Road
Vienna, VA 22182
Attn: Keith Harding
Tel: 703-442-7154
Fax: 703-448-7126
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
U.S. Bank National Association $20,000,000.00 5.000000% $17,137.00
One Illinois Center, Suite 3000
Mail Drop ILIC3000
111 East Wacker Drive
Chicago, IL 60601
Attn: R. Michael Newton
Tel: 312-228-9405
Fax: 312-228-9402
Email: [email protected]
- ---------------------------------------------------------------------------------------------------
Firstrust Bank $ 7,500,000.00 1.875000% $9,375.00
15 E. Ridge Pike
Conshohocken, PA 19428
Attn: John P. Hollingsworth
Tel: 610-238-5030
Fax: 610-238-5066
Email: [email protected]
===================================================================================================
Totals $400,000,000.00 100.000000% $802,188.00
===================================================================================================
</TABLE>
3
<PAGE> 1
EXHIBIT 10.4a
================================================================================
ALLIED CAPITAL CORPORATION
NOTE AGREEMENT
Dated as of November 15, 1999
Re: $102,000,000 8.51% Senior Notes due November 15, 2004
================================================================================
<PAGE> 2
TABLE OF CONTENTS
(Not a part of the Agreement)
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C>
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.......................................................1
Section 1.1. Description of Notes......................................................................1
Section 1.2. Commitment, Closing Date..................................................................1
SECTION 2. PAYMENT OF NOTES..........................................................................2
Section 2.1. Required Payments.........................................................................2
Section 2.2. Optional Prepayment with Premium..........................................................2
Section 2.3. Notice of Optional Prepayments............................................................2
Section 2.4. Application of Prepayments................................................................2
Section 2.5. Direct Payment............................................................................2
SECTION 3. REPRESENTATIONS...........................................................................3
Section 3.1. Representations of the Company............................................................3
Section 3.2. Representations of the Purchasers.........................................................3
SECTION 4. CLOSING CONDITIONS........................................................................4
Section 4.1. Conditions................................................................................4
Section 4.2. Waiver of Conditions......................................................................6
SECTION 5. COVENANTS.................................................................................6
Section 5.1. Corporate Existence, Etc..................................................................6
Section 5.2. Insurance.................................................................................6
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with
Laws...................................................................................6
Section 5.4. Maintenance, Etc..........................................................................7
Section 5.5. Nature of Business........................................................................7
Section 5.6. Capital Maintenance.......................................................................7
Section 5.7. Interest Charges Coverage Ratio...........................................................7
Section 5.8. Limitations on Debt; Interest Rate Swaps..................................................7
Section 5.9. Limitation on Liens.......................................................................8
Section 5.10. Restricted Payments......................................................................10
Section 5.11. Mergers, Consolidations and Sales of Assets..............................................10
Section 5.12. Repurchase of Notes......................................................................13
Section 5.13. Transactions with Affiliates.............................................................13
Section 5.14. Termination of Pension Plans.............................................................13
Section 5.15. Reports and Rights of Inspection.........................................................13
Section 5.16. Year 2000 Compliance.....................................................................16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR..................................................16
Section 6.1. Events of Default........................................................................16
Section 6.2. Notice to Holders........................................................................17
Section 6.3. Acceleration of Maturities...............................................................17
Section 6.4. Rescission of Acceleration...............................................................18
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.........................................................19
Section 7.1. Consent Required.........................................................................19
Section 7.2. Solicitation of Holders..................................................................19
Section 7.3. Effect of Amendment or Waiver............................................................19
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS.................................................19
Section 8.1. Definitions..............................................................................19
Section 8.2. Accounting Principles....................................................................29
Section 8.3. Directly or Indirectly...................................................................29
SECTION 9. MISCELLANEOUS............................................................................29
Section 9.1. Registered Notes.........................................................................29
Section 9.2. Exchange of Notes........................................................................30
Section 9.3. Loss, Theft, Etc. of Notes...............................................................30
Section 9.4. Expenses, Stamp Tax Indemnity............................................................30
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative........................................31
Section 9.6. Notices..................................................................................31
Section 9.7. Successors and Assigns...................................................................31
Section 9.8. Survival of Covenants and Representations................................................31
Section 9.9. Severability.............................................................................32
Section 9.10. Governing Law............................................................................32
Section 9.11. Captions.................................................................................32
Signature....................................................................................................33
</TABLE>
Attachments to Note Agreement:
Schedule I - Names and Addresses of Purchasers
Exhibit A - Form of 8.51% Senior Note due November 15, 2004
Exhibit B - Representations and Warranties
Exhibit C - Form of Opinion of Special Counsel to the Purchaser
Exhibit D - Form of Opinion of Counsel to the Company
-ii-
<PAGE> 4
ALLIED CAPITAL CORPORATION
NOTE AGREEMENT
Re:$102,000,000 8.51% Senior Notes due November 15, 2004
Dated as of
November 15, 1999
To the Purchasers named
on Schedule I to this Agreement
Ladies and Gentlemen:
The undersigned, ALLIED CAPITAL CORPORATION (the "Company"), a Maryland
corporation, hereby agrees with the Purchasers named on Schedule I to this
Agreement (the "Purchasers") as follows:
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.
Section 1.1. Description of Notes. The Company will authorize the issue and
sale of $102,000,000 8.51% Senior Notes due November 15, 2004 (the "Notes" such
term to include any such notes issued in substitution therefor pursuant to
SECTION 9 of this Agreement). The Notes shall be substantially in the form set
out in Exhibit A, with such changes therefrom, if any, as may be approved by the
Purchasers and the Company. Interest on the Notes shall be computed on the basis
of a 360-day year of twelve 30-day months. The Notes are not subject to
prepayment or redemption at the option of the Company prior to their expressed
maturity dates except on the terms and conditions and in the amounts and with
the premium, if any, set forth in SECTION 2 of this Agreement.
Section 1.2. Commitment, Closing Date. Subject to the terms and conditions
hereof and on the basis of the representations and warranties hereinafter set
forth, the Company agrees to issue and sell to each Purchaser, and such
Purchaser agrees to purchase from the Company, Notes in the principal amount set
forth opposite such Purchaser's name on Schedule I hereto at a price equal to
the principal amount thereof on November 15, 1999 (the "Closing Date"); provided
that the Closing Date may be postponed to such other date (but not more than ten
days after the originally scheduled Closing Date) as shall mutually be agreed
upon by the Company and the Purchasers scheduled to purchase the Notes on the
Closing Date. Delivery of the Notes will be made at the offices of Chapman and
Cutler, 111 West Monroe Street, Chicago, Illinois 60603. On the Closing Date,
the Company will deliver to each Purchaser the Notes to be
<PAGE> 5
Allied Capital Corporation Note Agreement
purchased by such Purchaser in the form of a single Note (or such greater number
of Notes in denominations of at least $500,000 as such Purchaser may request)
dated the Closing Date and registered in such Purchaser's name (or in the name
of such Purchaser's nominee), against delivery by such Purchaser to the Company
or its order of immediately available funds in the amount of the purchase price
therefor by wire transfer via Fedwire of immediately available funds for the
account of the Company to Account Number 3918973064 at Bank of America,
Bethesda, Maryland, (ABA #052-001-633).
SECTION 2. PAYMENT OF NOTES.
Section 2.1. Required Payments. The entire principal amount of the Notes
shall become due and payable on November 15, 2004.
Section 2.2. Optional Prepayment with Premium. In addition to the payments
required by SECTION 2.1, upon compliance with SECTION 2.3 the Company shall have
the privilege, at any time and from time to time, of prepaying the outstanding
Notes, either in whole or in part (but if in part then in a minimum principal
amount of $1,000,000) by payment of the principal amount of the Notes, or
portion thereof to be prepaid, and accrued interest thereon to the date of such
prepayment, together with a premium equal to the Make-Whole Amount, determined
as of two Business Days prior to the date of such prepayment pursuant to this
SECTION 2.2.
Section 2.3. Notice of Optional Prepayments. The Company will give notice
of any prepayment of the Notes pursuant to SECTION 2.2 to each holder thereof
not less than 30 days nor more than 60 days before the date fixed for such
optional prepayment specifying (i) such date, (ii) the principal amount of the
holder's Notes to be prepaid on such date, (iii) that a premium may be payable,
(iv) the date when such premium will be calculated, (v) the estimated premium
and (vi) the accrued interest applicable to the prepayment. Notice of prepayment
having been so given, the aggregate principal amount of the Notes specified in
such notice, together with accrued interest thereon and the premium, if any,
payable with respect thereto shall become due and payable on the prepayment date
specified in said notice. Not later than two Business Days prior to the
prepayment date specified in such notice, the Company shall provide each holder
of a Note written notice of the premium, if any, payable in connection with such
prepayment and, whether or not any premium is payable, a reasonably detailed
computation of the Make-Whole Amount (which calculation shall be reasonably
satisfactory to each Holder of the Notes to be prepaid).
Section 2.4. Application of Prepayments. All partial prepayments pursuant
to SECTION 2.2 shall be applied on all outstanding Notes ratably in accordance
with the unpaid principal amounts thereof.
Section 2.5. Direct Payment. Notwithstanding anything to the contrary
contained in this Agreement or the Notes, in the case of any Note owned by any
Holder that is a Purchaser or any other Institutional Holder which has given
written notice to the Company requesting that the provisions of this SECTION 2.5
shall apply, the Company will punctually pay when due the principal thereof,
interest thereon and premium, if any, due with respect to said principal,
without any presentment thereof, directly to such Holder at its address set
forth in Schedule I hereto or such
-2-
<PAGE> 6
Allied Capital Corporation Note Agreement
other address as such Holder may from time to time designate in writing to the
Company or, if a bank account with a United States bank is so designated for
such Holder on Schedule I hereto the Company will make such payments in
immediately available funds to such bank account, marked for attention as
indicated, or in such other manner or to such other account in any United States
bank as such Holder may from time to time direct in writing.
SECTION 3. REPRESENTATIONS.
Section 3.1. Representations of the Company. The Company represents and
warrants that all representations and warranties set forth in Exhibit B are true
and correct as of the date hereof and are incorporated herein by reference with
the same force and effect as though herein set forth in full.
Section 3.2. Representations of the Purchasers. Each Purchaser represents,
and in entering into this Agreement the Company understands, that such Purchaser
is acquiring the Notes in a private placement for the purpose of investment and
not with a view to the distribution thereof, and that such Purchaser has no
present intention of selling, negotiating or otherwise disposing of the Notes;
it being understood, however, that the disposition of such Purchaser's property
shall at all times be and remain within its control. Each Purchaser represents
that it is an institutional "accredited investor" within the meaning of Rule 501
of Regulation D as promulgated under the Securities Act of 1933 and at least one
of the following statements is an accurate representation as to each source of
funds (a "Source") to be used by it to pay the purchase price of the Notes to be
purchased by it hereunder:
(a) the Source is an "insurance company general account" within the
meaning of Department of Labor Prohibited Transaction Exemption ("PTE")
95-60 (issued July 12, 1995) and there is no employee benefit plan,
treating as a single plan all plans maintained by the same employer (or
affiliate thereof as defined in Section V(a)(1) of PTE 95-60) or employee
organization, with respect to which the amount of the general account
reserves and liabilities for all contracts held by or on behalf of such
plan exceeds ten percent (10%) of the total reserves and liabilities of
such general account (exclusive of separate account liabilities) plus
surplus, as set forth in the NAIC Annual Statement filed with such
Purchaser's state of domicile; or
(b) the Source is either (i) an insurance company pooled separate
account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii)
a bank collective investment fund, within the meaning of the PTE 91-38
(issued July 12, 1991) and, except as such Purchaser has disclosed to the
Company in writing pursuant to this paragraph (b), no employee benefit plan
or group of plans maintained by the same employer or employee organization
beneficially owns more than 10% of all assets allocated to such pooled
separate account or collective investment fund; or
(c) the Source constitutes assets of an "investment fund" (within the
meaning of Part V of the QPAM Exemption) managed by a "qualified
professional asset manager" or "QPAM" (within the meaning of Part V of the
QPAM Exemption), no employee benefit plan's assets that are included in
such investment fund, when combined
-3-
<PAGE> 7
Allied Capital Corporation Note Agreement
with the assets of all other employee benefit plans established or
maintained by the same employer or by an affiliate (within the meaning of
Section V(c)(1) of the QPAM Exemption) of such employer or by the same
employee organization and managed by such QPAM, exceed 20% of the total
client assets managed by such QPAM, the conditions of Part I(c) and (g) of
the QPAM Exemption are satisfied, neither the QPAM nor a person controlling
or controlled by the QPAM (applying the definition of "control" in Section
V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and
(i) the identity of such QPAM and (ii) the names of all employee benefit
plans whose assets are included in such investment fund have been disclosed
to the Company in writing pursuant to this paragraph (c); or
(d) the Source is a governmental plan; or
(e) the Source is one or more employee benefit plans, or a separate
account or trust fund comprised of one or more employee benefit plans, each
of which has been identified to the Company in writing pursuant to this
paragraph (e); or
(f) the Source does not include assets of any employee benefit plan,
other than a plan exempt from the coverage of ERISA.
If any Purchaser or any subsequent transferee of the Notes indicates that such
Purchaser or such transferee is relying on any representation contained in
paragraphs (b), (c) or (e) above, the Company shall deliver on the date of
Closing and on the date of any applicable transfer a certificate, which shall
either state that (i) it is neither a party in interest nor a "disqualified
person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan
identified pursuant to paragraphs (b) or (e) above, or (ii) with respect to any
plan, identified pursuant to paragraph (c) above, neither it nor any "affiliate"
(as defined in Section V(c) of the QPAM Exemption) has at such time, and during
the immediately preceding one year, exercised the authority to appoint or
terminate said QPAM as manager of any plan identified in writing pursuant to
paragraph (c) above or to negotiate the terms of said QPAM's management
agreement on behalf of any such identified plan.
As used in this SECTION 3.2, the terms "employee benefit plan," "governmental
plan," "party in interest" and "separate account" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
SECTION 4. CLOSING CONDITIONS.
Section 4.1. Conditions. The obligation of each Purchaser to purchase the
Notes on the Closing Date shall be subject to the performance by the Company of
its agreements hereunder which by the terms hereof are to be performed at or
prior to the time of delivery of the Notes and to the following further
conditions precedent:
(a) Closing Certificates. On the Closing Date such Purchaser shall
have received a certificate dated the Closing Date, signed by the President
or a Vice President or a Managing Director or a Principal of the Company,
the truth and accuracy of which
-4-
<PAGE> 8
Allied Capital Corporation Note Agreement
shall be a condition to such Purchaser's obligation to purchase the Notes
proposed to be sold to such Purchaser on the Closing Date and to the effect
that (i) the representations and warranties of the Company set forth in
Exhibit B hereto are true and correct on and with respect to the Closing
Date, (ii) the Company has performed all of its obligations hereunder which
are to be performed on or prior to the Closing Date, and (iii) no Default
or Event of Default has occurred and is continuing.
(b) Legal Opinions. Such Purchaser shall have received from Chapman
and Cutler, who are acting as special counsel to the Purchasers in this
transaction, and from Sutherland Asbill & Brennan LLP, counsel for the
Company, their respective opinions dated the Closing Date, in form and
substance satisfactory to such Purchaser, and covering the matters set
forth in Exhibits C and D, respectively, hereto.
(c) Purchase Permitted By Applicable Law, Etc. On the Closing Date,
each purchase of Notes shall (a) be permitted by the laws and regulations
of each jurisdiction to which such Purchaser is subject, without recourse
to provisions (such as Section 1405(a)(8) of the New York Insurance Law)
permitting limited investments by insurance companies without restriction
as to the character of the particular investment, (b) not violate any
applicable law or regulation (including, without limitation, Regulation U,
T or X of the Board of Governors of the Federal Reserve System) and (c) not
subject any Purchaser to any tax, penalty or liability under or pursuant to
any applicable law or regulation, which law or regulation was not in effect
on the date hereof. If requested by any Purchaser, such Purchaser shall
have received an officer's certificate certifying as to such matters of
fact as such Purchaser may reasonably specify to enable such Purchaser to
determine whether such purchase is so permitted.
(d) Sale of Other Notes. The Company shall have consummated the sale
of the entire principal amount of the Notes scheduled to be sold on the
Closing Date as specified in Schedule I.
(e) Private Placement Number. A Private Placement Number issued by
S&P's CUSIP Service Bureau (in cooperation with the Securities Valuation
Office of the National Association of Insurance Commissioners) shall have
been obtained for the Notes.
(f) Satisfactory Proceedings. All proceedings taken in connection with
the transactions contemplated by this Agreement, and all documents
necessary to the consummation thereof, shall be satisfactory in form and
substance to such Purchaser and such Purchaser's special counsel, and such
Purchaser shall have received a copy (executed or certified as may be
appropriate) of all legal documents or proceedings taken in connection with
the consummation of said transactions.
Section 4.2. Waiver of Conditions. If on the Closing Date the Company fails
to tender to any Purchaser the Notes to be issued to such Purchaser on such date
or if the conditions specified in SECTION 4.1 have not been fulfilled, such
Purchaser may thereupon elect to be relieved of all further obligations under
this Agreement. Without limiting the foregoing, if the conditions specified in
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Allied Capital Corporation Note Agreement
SECTION 4.1 have not been fulfilled, such Purchaser may waive compliance by the
Company with any such condition to such extent as such Purchaser may in its sole
discretion determine. Nothing in this SECTION 4.2 shall operate to relieve the
Company of any of its obligations hereunder or to waive any Purchaser's rights
against the Company.
SECTION 5. COVENANTS.
From and after the Closing Date and continuing so long as any amount
remains unpaid on any Note:
Section 5.1. Corporate Existence, Etc. The Company will preserve and keep
in full force and effect, and will cause each Consolidated Subsidiary to keep in
full force and effect, its corporate existence and all registrations, licenses,
permits and governmental approvals necessary to the proper conduct of its
business except, in the case of a Consolidated Subsidiary, where the failure to
do so would not have a Material Adverse Effect on the Company or its
Consolidated Subsidiaries; provided, however, that the foregoing shall not
prevent any transaction permitted by SECTION 5.11.
Section 5.2. Insurance. The Company will maintain, and will cause each
Consolidated Subsidiary to maintain, insurance coverage by financially sound and
reputable insurers in such forms and amounts and against such risks as are
customary for corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties.
Section 5.3. Taxes, Claims for Labor and Materials, Compliance with Laws.
The Company will promptly pay and discharge, and will cause each Consolidated
Subsidiary to pay and discharge, all lawful taxes, assessments and governmental
charges or levies imposed upon the Company or such Consolidated Subsidiary,
respectively, or upon or in respect of all or any part of the property or
business of the Company or such Consolidated Subsidiary, all trade accounts
payable in accordance with usual and customary business terms, and all claims
for work, labor or materials, which if unpaid might become a Lien upon any
property of the Company or such Consolidated Subsidiary; provided, however, that
the Company or such Consolidated Subsidiary shall not be required to pay any
such tax, assessment, charge, levy, account payable or claim if (i) the
validity, applicability or amount thereof is being contested in good faith by
appropriate actions or proceedings which will prevent the forfeiture or sale of
any property of the Company or such Consolidated Subsidiary or any material
interference with the use thereof by the Company or such Consolidated
Subsidiary, and (ii) the Company or such Consolidated Subsidiary shall set aside
on its books, reserves deemed by it to be adequate with respect thereto. The
Company will promptly comply and will cause each Consolidated Subsidiary to
promptly comply with all laws, ordinances or governmental rules and regulations
to which it is subject including, without limitation, the Occupational Safety
and Health Act of 1970, as amended, ERISA and all laws, ordinances, governmental
rules and regulations relating to environmental protection in all applicable
jurisdictions, the violation of which could have a Material Adverse Effect on
the Company and its Consolidated Subsidiaries or would result in any Lien not
permitted under SECTION 5.9.
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Section 5.4. Maintenance, Etc. The Company will maintain, preserve and
keep, and will cause each Consolidated Subsidiary to maintain, preserve and
keep, its properties which are used in the conduct of its business (whether
owned in fee or a leasehold interest) in good repair and working order, ordinary
wear and tear excepted, and from time to time will make all necessary repairs,
replacements and renewals as the Company may determine to be appropriate to the
conduct of its business.
Section 5.5. Nature of Business. Neither the Company nor any Consolidated
Subsidiary will engage in any business if, as a result, the general nature of
the business, taken on a consolidated basis, which would then be engaged in by
the Company and its Consolidated Subsidiaries would be substantially changed
from the general nature of the business engaged in by the Company and its
Consolidated Subsidiaries on the date of this Agreement as described in the
Memorandum.
Section 5.6. Capital Maintenance. The Company shall at all times maintain
Consolidated Shareholders Equity in an amount not less than (i) $375,000,000
plus (ii) 75% of the Net Proceeds of all Equity Issuances effected by the
Company or any of its Consolidated Subsidiaries at any time after September 30,
1998 (excluding the Net Proceeds of any Equity Issuance by a Consolidated
Subsidiary to a Consolidated Subsidiary or to the Company).
Section 5.7. Interest Charges Coverage Ratio. The Company shall maintain
the ratio of Adjusted EBIT to Interest Expense of the Company and its
Consolidated Subsidiaries, determined on a consolidated basis as of the last day
of each fiscal quarter for the period of four consecutive fiscal quarters ending
on such day, at not less than 1.8 to 1.
Section 5.8. Limitations on Debt; Interest Rate Swaps. (a) The Company will
have on the last day of each quarterly fiscal period a ratio of Consolidated
Debt to Consolidated Shareholders' Equity not exceeding 1.5 to 1.
(b) The Company will not at any time permit the aggregate principal amount
of Priority Debt to exceed 25% of Consolidated Shareholders' Equity; provided
that in the case of any determination of Priority Debt made prior to April 30,
2001, outstanding Indebtedness secured by Real Estate Assets in an aggregate
principal amount of up to $100,000,000 shall be excluded from Priority Debt.
(c) The Company will not at any time permit the Asset Coverage Ratio to be
less than 2 to 1.
(d) The Company will not permit any Consolidated Subsidiary to enter into
any Subsidiary Bank Guaranty or Subsidiary Existing Note Guaranty, unless the
Company shall first furnish to each Holder of the Notes (i) an unconditional
Subsidiary Note Guaranty, (ii) an Intercreditor Agreement, and (iii) an opinion
of counsel to the effect that such Subsidiary Note Guaranty has been duly
authorized, executed and delivered by such Consolidated Subsidiary and
constitutes the legal, valid and binding obligation of such Consolidated
Subsidiary, enforceable against such Consolidated Subsidiary in accordance with
the terms thereof, and covering such
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Allied Capital Corporation Note Agreement
other matters as the Holders of 51% or more of the principal amount of the Notes
at the time outstanding may reasonably request.
(e) The Company will not and will not permit any Consolidated Subsidiary to
enter into any Interest Rate Swap except in the ordinary course of business
pursuant to transactions that are entered into for bona fide purposes of
managing the Company's interest rate risk and not for speculation.
Section 5.9. Limitation on Liens. The Company will not, and will not permit
any Consolidated Subsidiary to, create or incur, or suffer to be incurred or to
exist, any Lien on its or their property or assets, whether now owned or
hereafter acquired, or upon any income or profits therefrom, or transfer any
property for the purpose of subjecting the same to the payment of obligations in
priority to the payment of its or their general creditors, or acquire or agree
to acquire any property or assets upon conditional sales agreements or other
title retention devices, except:
(a) Liens for property taxes and assessments or governmental charges
or levies and Liens securing claims or demands of mechanics and
materialmen, provided payment thereof is not at the time required by
SECTION 5.3;
(b) Liens of or resulting from any judgment or award, the time for the
appeal or petition for rehearing of which shall not have expired, or in
respect of which the Company or a Consolidated Subsidiary shall at any time
in good faith be prosecuting an appeal or proceeding for a review and in
respect of which a stay of execution pending such appeal or proceeding for
review shall have been secured;
(c) Liens incidental to the conduct of business or the ownership of
properties and assets (including Liens in connection with the making of
loans to customers, worker's compensation, unemployment insurance and other
like laws, warehousemen's and attorneys' liens and statutory landlords'
liens) and Liens to secure the performance of bids, tenders or trade
contracts, or to secure statutory obligations, surety or appeal bonds or
other Liens of like general nature incurred in the ordinary course of
business and not in connection with (i) the borrowing of money or (ii)
obligations pursuant to ERISA, provided in each case, the obligation
secured is not overdue or, if overdue, is being contested in good faith by
appropriate actions or proceedings;
(d) minor survey exceptions or minor encumbrances, easements or
reservations, or rights of others for rights-of-way, utilities and other
similar purposes, or zoning or other restrictions as to the use of real
properties, which are necessary for the conduct of the activities of the
Company and its Consolidated Subsidiaries or which customarily exist on
properties of corporations engaged in similar activities and similarly
situated and which do not in any event materially impair their use in the
operation of the business of the Company and its Consolidated Subsidiaries;
(e) Liens securing Indebtedness of a Consolidated Subsidiary to the
Company or to another Wholly-owned Consolidated Subsidiary;
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Allied Capital Corporation Note Agreement
(f) Liens existing as of September 30, 1999 and reflected on Annex B
to Exhibit B hereto;
(g) Liens incurred after the Closing Date given to secure the payment
of the purchase price or cost of construction incurred in connection with
the acquisition of, or improvements to, fixed assets useful and intended to
be used in carrying on the business of the Company or a Consolidated
Subsidiary, including Liens existing on such assets at the time of
acquisition thereof or at the time of acquisition by the Company or a
Consolidated Subsidiary of any business entity then owning such assets,
whether or not such existing Liens were given to secure the payment of the
purchase price of the assets to which they attach so long as they were not
incurred, extended or renewed in contemplation of such acquisition,
provided that (i) the Lien shall attach solely to the assets acquired or
purchased, (ii) the Lien (other than Liens that are existing on such assets
at the time of acquisition thereof and that are permitted as aforesaid)
shall have been created or incurred within 180 days of the date of
acquisition of such fixed assets, except in the case of construction or
acquisition of improvements to real estate, the land on which such
improvements are located shall not be required to have been acquired within
such 180 period; (iii) at the time of acquisition of such assets, the
aggregate amount remaining unpaid on all Indebtedness secured by Liens on
such assets whether or not assumed by the Company or a Consolidated
Subsidiary shall not exceed an amount equal to 80% (or 100% in the case of
Capitalized Leases) of the lesser of the total purchase price or fair
market value at the time of acquisition of such assets (as determined in
good faith by the Board of Directors of the Company), and (iv) all
Indebtedness secured by such Liens shall be permitted hereunder;
(h) Liens on Real Estate Assets securing Non-Recourse Indebtedness;
provided that such Non-Recourse Indebtedness shall be permitted within the
limitations of SECTION 5.8; and
(i) Liens securing Indebtedness under Mortgage Repurchase Facilities
or Interest Rate Swaps; provided that (i) the Lien of any such Mortgage
Repurchase Facility shall extend only to the Commercial Mortgage Loans
which are financed or refinanced under such Mortgage Repurchase Facility
and the Related Collateral, (ii) the aggregate advances under such Mortgage
Repurchase Facility shall not exceed 80% of the aggregate unpaid principal
amount of the Commercial Mortgage Loans securing such Mortgage Repurchase
Facility, (iii) the Lien securing any Interest Rate Swap shall extend only
to Commercial Mortgage Loans and Related Collateral, and (iv) all such
Indebtedness shall be permitted within the limitations of SECTION 5.8.
The Company will not, and will not permit any Consolidated Subsidiary to,
directly or indirectly, create, incur, assume or permit to exist (upon the
happening of a contingency or otherwise) any Lien on or with respect to any
property which secures Debt outstanding under the Bank Credit Agreement or the
Existing Note Agreements, unless the Company makes, or causes to be made,
effective provision whereby the Notes will be equally and ratably secured with
any and all other obligations thereby secured; provided that such security is
granted pursuant to an
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Allied Capital Corporation Note Agreement
agreement reasonably satisfactory to the Holders of 51% or more of the principal
amount of the Notes at the time outstanding.
Section 5.10. Restricted Payments. The Company will not except as
hereinafter provided:
(a) Declare or pay any dividends, either in cash or property, on any
shares of its capital stock of any class (except dividends or other
distributions payable solely in shares of capital stock of the Company);
(b) Directly or indirectly, or through any Subsidiary, purchase,
redeem or retire any shares of its capital stock of any class or any
warrants, rights or options to purchase or acquire any shares of its
capital stock (other than in exchange for or out of the net cash proceeds
to the Company from the substantially concurrent issue or sale of other
shares of capital stock of the Company or warrants, rights or options to
purchase or acquire any shares of its capital stock); or
(c) Make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock;
(such declarations or payments of dividends, purchases, redemptions or
retirements of capital stock and warrants, rights or options and all such other
payments or distributions being herein collectively called "Restricted
Payments"), if after giving effect thereto (i) an Event of Default described in
paragraph (a) or (b) of SECTION 6.1 shall exist, (ii) as the result of an
occurrence of any other Event of Default described in SECTION 6.1 the Notes
shall have been accelerated under SECTION 6.3 or (iii) the Company would not be
in compliance with the limitations of SECTION 5.8.
The Company will not declare any regular quarterly dividend which
constitutes a Restricted Payment payable more than 60 days after the date of
declaration thereof; provided that any year-end extra dividend which constitutes
a Restricted Payment shall not be payable more than 120 days after the date of
declaration thereof.
For the purposes of this SECTION 5.10, the amount of any Restricted Payment
declared, paid or distributed in property shall be deemed to be the greater of
the book value or fair market value (as determined in good faith by the Board of
Directors of the Company) of such property at the time of the making of the
Restricted Payment in question.
Section 5.11. Mergers, Consolidations and Sales of Assets. (a) The Company
will not, and will not permit any Consolidated Subsidiary to, consolidate with
or be a party to a merger with any other Person or dispose of all or a
substantial part of the assets of the Company and its Consolidated Subsidiaries;
provided that:
(1) any Consolidated Subsidiary may merge or consolidate with or into,
sell, lease or otherwise dispose of all or a substantial part of its assets
to the Company or any Wholly-owned Subsidiary so long as (A) (i) in any
merger or consolidation involving the Company, the Company shall be the
surviving or continuing corporation and (ii) in any merger or consolidation
involving a Wholly-owned Subsidiary (and not the Company), a
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Allied Capital Corporation Note Agreement
Wholly-owned Subsidiary shall be the surviving or continuing corporation,
and (B) at the time of such consolidation or merger and immediately after
giving effect thereto, no Default or Event of Default would exist;
(2) the Company may consolidate or merge with or into any other
corporation if (i) the corporation which results from such consolidation or
merger (the "surviving corporation") is organized under the laws of any
state of the United States or the District of Columbia, (ii) the due and
punctual payment of the principal of and premium, if any, and interest on
all of the Notes, according to their tenor, and the due and punctual
performance and observation of all of the covenants in the Notes and this
Agreement, to be performed or observed by the Company are expressly assumed
in writing by the surviving corporation and the surviving corporation shall
furnish to the holders of the Notes an opinion of counsel reasonably
satisfactory to the holder or holders of 51% or more of the principal
amount of the Notes at the time outstanding to the effect that the
instrument of assumption has been duly authorized, executed and delivered
and constitutes the legal, valid and binding contract and agreement of the
surviving corporation enforceable in accordance with its terms, except as
enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles, and (iii)
at the time of such consolidation or merger and immediately after giving
effect thereto and to the incurrence of any Debt assumed or incurred in
connection therewith, (x) the aggregate amount of outstanding Consolidated
Debt and Priority Debt of the surviving corporation would be permitted by
the terms of SECTION 5.8 as of the last day of the fiscal quarter
immediately preceding the date of such consolidation or merger, and (y) no
Default or Event of Default would exist; and
(3) the Company and any Consolidated Subsidiary may, sell, transfer or
otherwise dispose of all or any part of its Investments in the ordinary
course of business including, without limitation, in securitization
transactions.
(b) The Company will not permit any Consolidated Subsidiary to issue any
Voting Stock of such Consolidated Subsidiary except to satisfy the rights of
minority shareholders to receive issuances of stock which are non-dilutive to
the Company and/or any Consolidated Subsidiary; provided that the foregoing
restrictions do not apply to issuances to the Company or to a Wholly-owned
Subsidiary or the issuance of directors' qualifying shares.
(c) The Company will not sell, transfer or otherwise dispose of stock or
Debt of any Consolidated Subsidiary (except issuance of directors' qualifying
shares and sales, transfers and dispositions of all the stock of a special
purpose Consolidated Subsidiary for consideration if (x) substantially all the
assets of such Consolidated Subsidiary constitute Investments and (y) the sale,
transfer or disposition of all such Investments for substantially the same
consideration would be permitted by SECTION 5.11(a)(3)) and will not permit any
Consolidated Subsidiary to sell, transfer or otherwise dispose of stock
(otherwise than by purchase or redemption of preferred stock) of a Consolidated
Subsidiary or Debt of any other Consolidated Subsidiary (except issuances to the
Company or to a Wholly-owned Subsidiary or issuance of directors' qualifying
shares); provided that the foregoing restrictions do not apply if the following
conditions are met:
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Allied Capital Corporation Note Agreement
(1) all shares of stock and all Debt of such Consolidated Subsidiary
held by the Company and its Subsidiaries shall be sold simultaneously;
(2) in the opinion of the Company's Board of Directors:
(i) such sale of stock or Debt is in the best interests of the
Company; and
(ii) the consideration paid for such stock and Debt is deemed
adequate and satisfactory.
(3) the Consolidated Subsidiary being disposed of shall not have any
continuing investment in the Company or any Consolidated Subsidiary that is
not being disposed of simultaneously; and
(4) such sale or disposition does not involve a substantial part of
assets of the Company and its Consolidated Subsidiaries.
As used in this SECTION 5.11, a sale of assets will be deemed a
"substantial part" of the assets of the Company and its Consolidated
Subsidiaries if (i) the Book Value of such assets sold in a given fiscal year
(except those sold in the ordinary course of business) exceeds 15% of the
Consolidated Total Assets of the Company and its Consolidated Subsidiaries
determined at the close of the immediately preceding fiscal year, or (ii) the
operations of such assets sold (except those sold in the ordinary course of
business) generated 15% or more of the consolidated operating profit of the
Company and its Consolidated Subsidiaries during the immediately preceding
fiscal year; provided, however, that for purposes of the foregoing calculation,
there shall not be included any assets if a portion of the proceeds of such
assets equal to the aggregate Book Value thereof immediately prior to such sale
was or is applied within 365 days of the date of sale of such assets to either
(A) the acquisition of Investments useful and intended to be used in the
operation of the business of the Company and its Consolidated Subsidiaries and
having a fair market value (as determined in good faith by the Board of
Directors of the Company) at least equal to the Book Value of the assets so
disposed of, or (B) the prepayment at any applicable prepayment premium, on a
pro rata basis, of Senior Funded Debt of the Company. It is understood and
agreed by the Company that any such proceeds paid and applied to the prepayment
of the Notes as hereinabove provided shall be prepaid as and to the extent
provided in SECTION 2.2.
Section 5.12. Repurchase of Notes. Neither the Company nor any Consolidated
Subsidiary or Affiliate, directly or indirectly, may repurchase or make any
offer to repurchase any Notes unless an offer has been made to repurchase Notes,
pro rata, from all holders of the Notes at the same time and upon the same
terms. In case the Company repurchases or otherwise acquires any Notes, such
Notes shall immediately thereafter be canceled and no Notes shall be issued in
substitution therefor. Without limiting the foregoing, upon the repurchase or
other acquisition of any Notes by the Company, any Consolidated Subsidiary or
any Affiliate, such Notes shall no longer be outstanding for purposes of any
section of this Agreement relating to the
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Allied Capital Corporation Note Agreement
taking by the holders of the Notes of any actions with respect hereto, including
without limitation, SECTION 6.3, SECTION 6.4 and SECTION 7.1.
Section 5.13. Transactions with Affiliates. The Company will not, and will
not permit any Consolidated Subsidiary to, enter into or be a party to any
transaction or arrangement with any Affiliate (including, without limitation,
the purchase from, sale to or exchange of property with, or the rendering of any
service by or for, any Affiliate), except transactions in the ordinary course of
and pursuant to the reasonable requirements of the Company's or such
Consolidated Subsidiary's business and upon fair and reasonable terms no less
favorable to the Company or such Consolidated Subsidiary than would be obtained
in a comparable arm's-length transaction with a Person other than an Affiliate.
Section 5.14. Termination of Pension Plans. The Company will not, and will
not permit any Consolidated Subsidiary to, withdraw from any Multiemployer Plan
to which it may hereafter contribute or permit any employee benefit plan
hereafter maintained by it to be terminated if such withdrawal or termination
could result in withdrawal liability (as described in Part 1 of Subtitle E of
Title IV of ERISA) or the imposition of a Lien on any property of the Company or
any Consolidated Subsidiary pursuant to Section 4068 of ERISA.
Section 5.15. Reports and Rights of Inspection. The Company will keep, and
will cause each Consolidated Subsidiary to keep, proper books of record and
account in which full and correct entries will be made of all dealings or
transactions of, or in relation to, the business and affairs of the Company or
such Consolidated Subsidiary, in accordance with GAAP consistently applied
(except for changes disclosed in the financial statements furnished to the
Holders pursuant to this SECTION 5.15 and concurred with by the independent
public accountants referred to in SECTION 5.15(b) hereof), and will furnish to
each Institutional Holder of the then outstanding Notes (in duplicate if so
specified below or otherwise requested):
(a) Quarterly Statements. As soon as available and in any event within
45 days after the end of each quarterly fiscal period (except the last) of
each fiscal year, copies of:
(1) consolidated balance sheets of the Company and its
Consolidated Subsidiaries as of the close of such quarterly fiscal
period, setting forth in comparative form the consolidated figures for
the fiscal year then most recently ended,
(2) consolidated statements of operations of the Company and its
Consolidated Subsidiaries for such quarterly fiscal period and for the
portion of the fiscal year ending with such quarterly fiscal period,
in each case setting forth in comparative form the consolidated
figures for the corresponding periods of the preceding fiscal year,
and
(3) consolidated statements of changes in net assets and cash
flows of the Company and its Consolidated Subsidiaries for the portion
of the fiscal year
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Allied Capital Corporation Note Agreement
ending with such quarterly fiscal period, setting forth in comparative
form the consolidated figures for the corresponding period of the
preceding fiscal year,
all in reasonable detail and certified as complete and correct by a Senior
Financial Officer of the Company;
(b) Annual Statements. As soon as available and in any event within 90
days after the close of each fiscal year, copies of:
(1) consolidated and consolidating balance sheets of the Company
and its Consolidated Subsidiaries as of the close of such fiscal year,
(2) consolidated and consolidating statements of operations,
changes in net assets and cash flows, and
(3) consolidated statement of investments
setting forth in comparative form the consolidated figures for the
preceding fiscal year (except in the case of such statement of investments)
and in each case all in reasonable detail and accompanied by a report
thereon of a firm of independent public accountants of recognized national
standing selected by the Company to the effect that the consolidated
financial statements present fairly, in all material respects, the
consolidated financial position of the Company and its Consolidated
Subsidiaries as of the end of the fiscal year being reported on and the
consolidated results of their operations, changes in net assets and cash
flows for said year in conformity with GAAP and that the examination of
such accountants in connection with such financial statements has been
conducted in accordance with generally accepted auditing standards and
included such tests of the accounting records and such other auditing
procedures as said accountants deemed necessary in the circumstances;
(c) Audit Reports. Promptly upon receipt thereof, one copy of each
interim or special audit made by independent accountants of the books of
the Company or any Consolidated Subsidiary and any management letter
received from such accountants;
(d) SEC and Other Reports. Promptly upon their becoming available, one
copy of each financial statement, report, notice, press releases or proxy
statement sent by the Company to stockholders generally and of each regular
or periodic report, and any registration statement or prospectus filed by
the Company with any securities exchange or the Securities and Exchange
Commission or any successor agency, and copies of any orders in any
proceedings to which the Company or any Consolidated Subsidiary is a party,
issued by any governmental agency, Federal or state, having jurisdiction
over the Company or any of its Consolidated Subsidiaries;
(e) ERISA Reports. Promptly upon the occurrence thereof, written
notice of (i) a Reportable Event with respect to any Plan hereafter
maintained by the Company or any ERISA Affiliate; (ii) the institution of
any steps by the Company, any ERISA
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Allied Capital Corporation Note Agreement
Affiliate, the PBGC or any other person to terminate any such Plan; (iii)
the institution of any steps by the Company or any ERISA Affiliate to
withdraw from any such Plan; (iv) a non-exempt "prohibited transaction"
within the meaning of Section 406 of ERISA in connection with any such
Plan; (v) any material contingent liability of the Company or any
Consolidated Subsidiary with respect to any post-retirement welfare
liability hereafter existing; or (vi) the taking of any action by, or the
threatening of the taking of any action by, the Internal Revenue Service,
the Department of Labor or the PBGC with respect to any of the foregoing;
(f) Officer's Certificates. Within the periods provided in paragraphs
(a) and (b) above, a certificate of a Senior Financial Officer of the
Company stating that such officer has reviewed the provisions of this
Agreement and setting forth: (i) the information and computations (in
sufficient detail) required in order to establish whether the Company was
in compliance with the requirements of SECTION 5.6 through SECTION 5.11 at
the end of the period covered by the financial statements then being
furnished and (ii) whether there existed as of the date of such financial
statements and whether, to the best of such officer's knowledge, there
exists on the date of the certificate or existed at any time during the
period covered by such financial statements any Default or Event of Default
and, if any such condition or event exists on the date of the certificate,
specifying the nature and period of existence thereof and the action the
Company is taking and proposes to take with respect thereto;
(g) Accountant's Certificates. Within the period provided in paragraph
(b) above, a certificate of the accountants who render an opinion with
respect to such financial statements acknowledging that the Company was in
compliance with the financial covenants of SECTION 5.6, SECTION 5.7 and
SECTION 5.8(a), (b) and (c), and setting forth the procedures used to make
such determination; and
(h) Requested Information. With reasonable promptness, such other data
and information as any Holder or any such Institutional Holder may
reasonably request.
Without limiting the foregoing, the Company will permit each Institutional
Holder of the then outstanding Notes (or such Persons as such Holder may
designate), to visit and inspect, under the Company's guidance, any of the
properties of the Company or any Consolidated Subsidiary, to examine all of
their books of account, records, reports and other papers, to make copies and
extracts therefrom and to discuss their respective affairs, finances and
accounts with their respective officers, employees, and independent public
accountants (and by this provision the Company authorizes said accountants to
discuss with such Holder the finances and affairs of the Company and its
Consolidated Subsidiaries) all at such reasonable times and as often as may be
reasonably requested. Any visitation shall be at the sole expense of such
Institutional Holder, unless a Default or Event of Default shall have occurred
and be continuing or the Holder of any Note or of any other evidence of
Indebtedness of the Company or any Consolidated Subsidiary gives any written
notice or takes any other action with respect to a claimed default, in which
case, any such visitation or inspection shall be at the sole expense of the
Company.
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Allied Capital Corporation Note Agreement
Section 5.16. Year 2000 Compliance. The Company will promptly notify each
Institutional Holder in the event the Company discovers or determines that any
computer application (including those of its suppliers and vendors) that is
material to its or any of its Subsidiaries' business and operations will not be
Year 2000 Compliant on a timely basis, except to the extent that such failure
could not reasonably be expected to have a Material Adverse Effect.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 6.1. Events of Default. Any one or more of the following shall
constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest on any Note when
the same shall have become due and such default shall continue for more
than five Business Days; or
(b) Default shall occur in the making of any payment of the principal
of any Note or premium, if any, thereon at the expressed or any accelerated
maturity date or at any date fixed for prepayment; or
(c) Default shall be made in the payment when due (whether by lapse of
time, by declaration, by call for redemption or otherwise) of the principal
of or interest on any Consolidated Debt (other than the Notes) of the
Company or any Consolidated Subsidiary having an aggregate unpaid principal
amount in excess of $5,000,000 and such default shall continue beyond the
period of grace, if any, allowed with respect thereto; or
(d) Default or the happening of any event shall occur under any
indenture, agreement or other instrument under which Consolidated Debt of
the Company or any Consolidated Subsidiary having an aggregate unpaid
principal amount in excess of $5,000,000 may be issued and such default or
event shall continue for a period of time sufficient to permit the
acceleration of the maturity of such Consolidated Debt or the Company or a
Consolidated Subsidiary has become obligated to purchase such Consolidated
Debt or one or more Persons have the right to require the Company or any
Consolidated Subsidiary to purchase such Consolidated Debt; or
(e) Default shall occur in the observance or performance of any
covenant or agreement contained in SECTION 5.6 through SECTION 5.11 and
such default shall continue for more than five Business Days; or
(f) Default shall occur in the observance or performance of any other
provision of this Agreement which is not remedied within 30 days after the
earlier of (i) the day on which a Senior Financial Officer first obtains
actual personal knowledge of such default, or (ii) the day on which written
notice thereof is given to the Company by the Holder of any Note; or
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Allied Capital Corporation Note Agreement
(g) Any representation or warranty made by the Company herein, or made
by the Company in any statement or certificate furnished by the Company in
connection with the consummation of the issuance and delivery of the Notes
or furnished by the Company pursuant hereto, is untrue in any material
respect as of the date of the issuance or making thereof; or
(h) Final judgment or final judgments for the payment of money
aggregating in excess of $5,000,000 is or are outstanding against the
Company or any Material Subsidiary or against any property or assets of the
Company or any Material Subsidiary and any such final judgment or final
judgments have remained unpaid, unvacated, unbonded or unstayed by appeal
or otherwise for a period of 60 days from the date of its entry; or
(i) A custodian, liquidator, receiver or similar official is appointed
for the Company or any Material Subsidiary or for the major part of its
property and is not discharged within 60 days after such appointment; or
(j) The Company or any Material Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or makes an
assignment for the benefit of creditors, or the Company or any Material
Subsidiary applies for or consents to the appointment of a custodian,
liquidator, trustee or receiver for the Company or such Material Subsidiary
or for the major part of its property; or
(k) Bankruptcy, reorganization, arrangement or insolvency proceedings,
or other proceedings for relief under any bankruptcy or similar law or laws
for the relief of debtors, are instituted by or against the Company or any
Material Subsidiary and, if instituted against the Company or such Material
Subsidiary, are consented to or are not dismissed within 60 days after such
institution.
Section 6.2. Notice to Holders. When any Event of Default described in the
foregoing SECTION 6.1 has occurred, or if the holder of any Note or of any other
evidence of Debt of the Company gives any notice or takes any other action with
respect to a claimed default, the Company agrees to give notice within three
Business Days of such event to all holders of the Notes then outstanding.
Section 6.3. Acceleration of Maturities. When any Event of Default
described in paragraph (a) or (b) of SECTION 6.1 has happened and is continuing,
any Holder of any Note may declare the entire principal and all interest accrued
on such Holder's Notes to be and such Notes shall thereupon become, forthwith
due and payable, without any presentment, demand, protest or other notice of any
kind, all of which are hereby waived. When any Event of Default described in
paragraphs (a) through (i), inclusive, of SECTION 6.1 has happened and is
continuing, the Holder or Holders of 51% or more of the principal amount of
Notes at the time outstanding may, by notice to the Company, declare the entire
principal and all interest accrued on all Notes to be, and all Notes shall
thereupon become, forthwith due and payable, without any presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived.
When any Event of Default described in paragraph (j) or (k) of SECTION 6.1 has
occurred, then all outstanding Notes shall
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Allied Capital Corporation Note Agreement
immediately become due and payable without presentment, demand or notice of any
kind. Upon any Note becoming due and payable as a result of any Event of Default
as aforesaid, the Company will forthwith pay to the Holder of such Note the
entire principal and interest accrued on such Note and (to the extent permitted
by applicable law) an amount as liquidated damages for the loss of the bargain
evidenced hereby (and not as a penalty) equal to the Make-Whole Amount,
determined as of the date on which such Note shall so become due and payable. No
course of dealing on the part of the Holder or Holders of any Notes nor any
delay or failure on the part of any Holder of Notes to exercise any right shall
operate as a waiver of such right or otherwise prejudice such Holder's rights,
powers and remedies. The Company further agrees, to the extent permitted by law,
to pay to the Holder or Holders of the Notes all costs and expenses incurred by
them in the collection of any Notes upon any default hereunder or thereon,
including reasonable compensation to such Holder's or Holders' attorneys for all
services rendered in connection therewith.
Section 6.4. Rescission of Acceleration. The provisions of SECTION 6.3 are
subject to the condition that if the principal of and accrued interest on all or
any outstanding Notes have been declared immediately due and payable by reason
of the occurrence of any Event of Default described in paragraphs (a) through
(i), inclusive, of SECTION 6.1, the holders of 66-2/3% in aggregate principal
amount of the Notes then outstanding may, by written instrument filed with the
Company, rescind and annul such declaration and the consequences thereof,
provided that at the time such declaration is annulled and rescinded:
(a) no judgment or decree has been entered for the payment of any
monies due pursuant to the Notes or this Agreement;
(b) all arrears of interest upon all the Notes and all other sums
payable under the Notes and under this Agreement (except any principal,
interest or premium on the Notes which has become due and payable solely by
reason of such declaration under SECTION 6.3) shall have been duly paid;
and
(c) each and every other Default and Event of Default shall have been
made good, cured or waived pursuant to SECTION 7.1;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent Default or Event of Default or impair any right consequent
thereto.
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.
Section 7.1. Consent Required. Any term, covenant, agreement or condition
of this Agreement may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively), if the Company has obtained the consent in
writing of the Holders of at least 66-2/3% in aggregate principal amount of
outstanding Notes; provided that without the written consent of the Holders of
all of the Notes then outstanding, no such amendment or waiver shall be
effective (i) which will change the time of payment of the principal of or the
interest on any Note or change the principal amount thereof or change the rate
of interest thereon or the method of computation of
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Allied Capital Corporation Note Agreement
the Make-Whole Amount, or (ii) which will change any of the provisions with
respect to optional prepayments or (iii) which will change the percentage of
holders of the Notes required to consent to any such amendment or waiver of any
of the provisions of this SECTION 7 or SECTION 6.
Section 7.2. Solicitation of Holders. So long as there are any Notes
outstanding, the Company will not solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement or the Notes unless each Holder of Notes (irrespective of the amount
of Notes then owned by it) shall be informed thereof by the Company and shall be
afforded the opportunity of considering the same and shall be supplied by the
Company with sufficient information to enable it to make an informed decision
with respect thereto. The Company will not, directly or indirectly, pay or cause
to be paid any remuneration, whether by way of supplemental or additional
interest, fee or otherwise, to any Holder of Notes as consideration for or as an
inducement to entering into by any holder of Notes of any waiver or amendment of
any of the terms and provisions of this Agreement or the Notes unless such
remuneration is concurrently paid on the same terms, ratably to each Holder of
Notes then outstanding even if such Holder did not consent to such waiver or
amendment.
Section 7.3. Effect of Amendment or Waiver. Any such amendment or waiver
shall apply equally to all of the Holders of the Notes and shall be binding upon
them, upon each future holder of any Note and upon the Company, whether or not
such Note shall have been marked to indicate such amendment or waiver. No such
amendment or waiver shall extend to or affect any obligation not expressly
amended or waived or impair any right consequent thereon.
SECTION 8. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 8.1. Definitions. Unless the context otherwise requires, the terms
hereinafter set forth when used herein shall have the following meanings and the
following definitions shall be equally applicable to both the singular and
plural forms of any of the terms herein defined:
"Adjusted EBIT" means, for any period with respect to the Company and its
Consolidated Subsidiaries on a consolidated basis, income after deduction of all
expenses and other proper charges other than taxes and Interest Expense, all as
determined in accordance with GAAP.
"Affiliate" shall mean any Person (other than a Consolidated Subsidiary)
which (i) directly or indirectly, or through one or more intermediaries
controls, or is controlled by, or is under common control with, the Company,
(ii) which beneficially owns or holds 5% or more of any class of the Voting
Stock of the Company or (iii) 5% or more of the Voting Stock (or in the case of
a Person which is not a corporation, 5% or more of the equity interest) of which
is beneficially owned by the Company or a Subsidiary. The term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of Voting Stock, by contract or otherwise, other than by investment
advisory contracts entered into in the ordinary course of business of the
Company or a Subsidiary of the Company.
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Allied Capital Corporation Note Agreement
"Asset Coverage Ratio" shall mean on a consolidated basis for the Company
and its Consolidated Subsidiaries the ratio which the value of total assets,
less all liabilities and indebtedness not represented by senior securities (all
as determined pursuant to the Investment Company Act and any orders of the
Securities and Exchange Commission issued to the Company thereunder), bears to
the aggregate amount of senior securities representing indebtedness of the
Company and its Consolidated Subsidiaries
"Bank Credit Agreement" means the Credit Agreement between the Banks and
the Company dated as of March 9, 1999, as amended from time to time, pursuant to
which the Banks have extended credit to the Company, and any renewals,
extensions or replacements thereof.
"Banks" means the banks or financial institutions which are party to the
Bank Credit Agreement from time to time.
"Book Value" means, with respect to any asset at any time, the value
thereof as the same would be reflected on a consolidated balance sheet of the
Company and its Consolidated Subsidiaries as at such time prepared in accordance
with GAAP.
"Business Day" shall mean (a) for the purposes of computation of the
Make-Whole Amount only, any day of the week (excluding Saturday or Sunday) on
which banks in New York, New York are not obligated by law to close, and (b) for
the purposes of any other provision of this Agreement any day of the week
(excluding Saturday or Sunday) on which banks in Washington, D.C. and New York,
New York are not obligated by law to close.
"Capitalized Lease" shall mean any lease the obligation for Rentals with
respect to which is required to be capitalized on a consolidated balance sheet
of the lessee and its subsidiaries in accordance with GAAP.
"Capitalized Rentals" of any Person shall mean as of the date of any
determination thereof the amount at which the aggregate Rentals due and to
become due under all Capitalized Leases under which such Person is a lessee
would be reflected as a liability on a consolidated balance sheet of such
Person.
"Code" shall mean the Internal Revenue Code of 1986, as amended and the
rules and regulations promulgated thereunder.
"Commercial Mortgage Loan" means a loan secured by a Lien on improved real
estate used for commercial purposes.
"Consolidated Debt" shall mean as of the date of any determination thereof,
the aggregate unpaid amount of all Debt of the Company and its Consolidated
Subsidiaries determined on a consolidated basis in accordance with GAAP.
"Consolidated Shareholders' Equity" as of the date of determination
thereof, shall mean the total shareholders' equity of the Company and its
Consolidated Subsidiaries as the same would appear on a consolidated balance
sheet of the Company and its Consolidated Subsidiaries
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Allied Capital Corporation Note Agreement
prepared as of such date in accordance with GAAP, including, in any case, common
stock of the Company (valued at cost) held in the Allied Capital Corporation
Deferred Compensation Trust and Permitted Preferred Stock of the Company and its
Consolidated Subsidiaries but excluding any stock, common or preferred, not both
issued and outstanding.
"Consolidated Subsidiary" shall mean any Subsidiary which is required to be
consolidated on financial statements of the Company prepared in accordance with
GAAP.
"Consolidated Total Assets" shall mean total assets of the Company and its
Consolidated Subsidiaries on a consolidated basis.
"Debt" means, with respect to any Person, without duplication,
(a) its liabilities for borrowed money;
(b) its liabilities for the deferred purchase price of property
acquired by such Person (excluding accounts payable arising in the ordinary
course of business but including, without limitation, all liabilities
created or arising under any conditional sale or other title retention
agreement with respect to any such property);
(c) its Capitalized Rentals;
(d) all liabilities for borrowed money secured by any Lien with
respect to any property owned by such Person (whether or not it has assumed
or otherwise become liable for such liabilities); and
(e) any Guaranty of such Person with respect to liabilities of a type
described in any of clauses (a) through (d) hereof.
Debt of any Person shall include all obligations of such Person of the character
described in clauses (a) through (e) to the extent such Person remains legally
liable in respect thereof notwithstanding that any such obligation is deemed to
be extinguished under GAAP.
"Default" shall mean any event or condition the occurrence of which would,
with the lapse of time or the giving of notice, or both, constitute an Event of
Default.
"Equity Issuance" means any issuance or sale by a Person of its capital
stock or other similar equity security, or any warrants, options or similar
rights to acquire, or securities convertible into or exchangeable for, such
capital stock or other similar equity security.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
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Allied Capital Corporation Note Agreement
"ERISA Affiliate" shall mean any corporation, trade or business that is,
along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in SECTION 6.1.
"Existing Notes" means the notes issued by the Company pursuant to the
Existing Note Agreements.
"Existing Note Agreements" means (i) the Note Agreement dated as of April
30, 1998, among the Company and the Purchasers named therein, pursuant to which
the Company has issued its $140,000,000 7.055% Senior Notes, Series A, due May
30, 2003, its $30,000,000 7.168% Senior Notes, Series B, due May 30, 2005, and
its $10,000,000 9.530% Senior Notes, Series C, due May 30, 2005, and any
replacement or renewal thereof and (ii) the Note Agreement dated as of May 1,
1999 among the Company and the Purchasers named therein, pursuant to which the
Company has issued its $112,000,000 7.39% Senior Notes, Series A due May 1, 2004
and $25,000,000 7.49% Senior Notes, Series B due May 1, 2006 and any replacement
or renewal thereof.
"GAAP" shall mean generally accepted accounting principles at the time in
the United States.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, (iii) to lease property or to purchase Securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this Agreement, a
Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
Indebtedness equal to the principal amount of such Indebtedness for borrowed
money which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"Holder" shall mean any Person which is, at the time of reference, the
registered Holder of any Note.
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Allied Capital Corporation Note Agreement
"Indebtedness" with respect to any Person means, at any time, without
duplication,
(a) its liabilities for borrowed money and its redemption obligations
in respect of mandatorily redeemable preferred stock;
(b) its liabilities for the deferred purchase price of property
acquired by such Person (excluding accounts payable arising in the ordinary
course of business but including all liabilities created or arising under
any conditional sale or other title retention agreement with respect to any
such property);
(c) all liabilities appearing on its balance sheet in accordance with
GAAP in respect of Capitalized Leases;
(d) all liabilities for borrowed money secured by any Lien with
respect to any property owned by such Person (whether or not it has assumed
or otherwise become liable for such liabilities);
(e) all its liabilities in respect of unreimbursed drawings under
letters of credit or instruments serving a similar function issued or
accepted for its account by banks and other financial institutions (whether
or not representing obligations for borrowed money);
(f) Interest Rate Swaps of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type
described in any of clauses (a) through (f) hereof.
Indebtedness of any Person shall include all obligations of such Person of
the character described in clauses (a) through (g) to the extent such Person
remains legally liable in respect thereof notwithstanding that any such
obligation is deemed to be extinguished under GAAP.
"Institutional Holder" shall mean any insurance company, bank, savings and
loan association, trust company, investment company, charitable foundation,
employee benefit plan (as defined in ERISA) or other institutional investor or
financial institution which is not principally engaged, or as one of its
important activities, in the business of making small business investments of
the type made by the Company.
"Intercreditor Agreement" means an intercreditor agreement pursuant to
which the Banks, the Holders of the Existing Notes and the Holders of the Notes
have agreed to share payments made by any Consolidated Subsidiary under a
Subsidiary Existing Note Guaranty, a Subsidiary Note Guaranty or a Subsidiary
Bank Guaranty on an equal and ratable basis.
"Interest Expense" means, with respect to a Person and for any period, the
total consolidated interest expense (including, without limitation, capitalized
interest expense and interest expense attributable to Capitalized Leases) of
such Person and in any event shall include all interest expense with respect to
any Debt in respect of which such Person is wholly or partially liable.
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Allied Capital Corporation Note Agreement
"Interest Rate Swap" means a currency swap, an interest rate swap or other
currency or interest rate hedge entered into by the Company or a Consolidated
Subsidiary. For the purposes of this Agreement, the amount of the obligation
under any Interest Rate Swap shall be the amount determined in respect thereof
as of the end of the then most recently ended fiscal quarter of such Person,
based on the assumption that such Interest Rate Swap had terminated at the end
of such fiscal quarter, and in making such determination, if any agreement
relating to such Interest Rate Swap provides for the netting of amounts payable
by and to such Person thereunder or if any such agreement provides for the
simultaneous payment of amounts by and to such Person, then in each such case,
the amount of such obligation shall be the net amount so determined.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended, and all rules and regulations promulgated thereunder.
"Investments" shall mean all investments, in cash or by delivery of
property made, directly or indirectly in any Person, whether by acquisition of
shares of capital stock, Indebtedness or other obligations or Securities or by
loan, advance, capital contribution or otherwise.
"Lien" shall mean any interest in property securing an obligation owed to,
or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property. For the purposes of this
Agreement, the Company or any Consolidated Subsidiary shall be deemed to be the
owner of any property which it has acquired or holds subject to a conditional
sale agreement, Capitalized Lease or other arrangement pursuant to which title
to the property has been retained by or vested in some other Person for security
purposes and such retention or vesting shall constitute a Lien.
"Make-Whole Amount" means, with respect to a Note, an amount equal to the
excess, if any, of the Discounted Value of the Remaining Scheduled Payments with
respect to the Called Principal of the Note over the amount of such Called
Principal, provided that the Make-Whole Amount may in no event be less than
zero. For the purposes of determining the Make-Whole Amount, the following terms
have the following meanings:
"Called Principal" means the principal of any Note that is to be
prepaid pursuant to SECTION 2.2 or has become or is declared to be
immediately due and payable pursuant to SECTION 6.3, as the context
requires.
"Discounted Value" means, with respect to the Called Principal of a
Note, the amount obtained by discounting all Remaining Scheduled Payments
with respect to such Called Principal from their respective scheduled due
dates to the Settlement Date with
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Allied Capital Corporation Note Agreement
respect to such Called Principal, in accordance with accepted financial
practice and at a discount factor (applied on the same periodic basis as
that on which interest on the Notes is payable) equal to the Reinvestment
Yield with respect to such Called Principal.
"Reinvestment Yield" means, with respect to the Called Principal of a
Note, 0.50% over the yield to maturity implied by (i) the yields reported,
as of 10:00 A.M. (New York City time) on the second Business Day preceding
the Settlement Date with respect to such Called Principal, on the display
designated as "PX-1" of the Bloomberg Financial Markets Services Screen (or
such other display as may replace PX-1 of the Bloomberg Financial Markets
Services Screen) for actively traded U.S. Treasury securities having a
maturity equal to the Remaining Average Life of such Called Principal as of
such Settlement Date, or (ii) if such yields are not reported as of such
time or the yields reported as of such time are not ascertainable
(including by way of interpolation), the Treasury Constant Maturity Series
Yields reported, for the latest day for which such yields have been so
reported as of the second Business Day preceding the Settlement Date with
respect to such Called Principal, in Federal Reserve Statistical Release
H.15 (519) (or any comparable successor publication) for actively traded
U.S. Treasury securities having a constant maturity equal to the Remaining
Average Life of such Called Principal as of such Settlement Date. Such
implied yield will be determined, if necessary, by (a) converting U.S.
Treasury bill quotations to bond-equivalent yields in accordance with
accepted financial practice and (b) interpolating linearly between (1) the
actively traded U.S. Treasury security with the maturity closest to and
greater than the Remaining Average Life and (2) the actively traded U.S.
Treasury security with the maturity closest to and less than the Remaining
Average Life.
"Remaining Average Life" means, with respect to any Called Principal,
the number of years (calculated to the nearest one-twelfth year) obtained
by dividing (i) such Called Principal into (ii) the sum of the products
obtained by multiplying (a) the principal component of each Remaining
Scheduled Payment with respect to such Called Principal by (b) the number
of years (calculated to the nearest one-twelfth year) that will elapse
between the Settlement Date with respect to such Called Principal and the
scheduled due date of such Remaining Scheduled Payment.
"Remaining Scheduled Payments" means, with respect to the Called
Principal of a Note, all payments of such Called Principal and interest
thereon that would be due after the Settlement Date with respect to such
Called Principal if no payment of such Called Principal were made prior to
its scheduled due date, provided that if such Settlement Date is not a date
on which interest payments are due to be made under the terms of the Notes,
then the amount of the next succeeding scheduled interest payment will be
reduced by the amount of interest accrued to such Settlement Date and
required to be paid on such Settlement Date pursuant to or SECTION 2.2 or
SECTION 6.3.
"Settlement Date" means, with respect to the Called Principal of a
Note, the date on which such Called Principal is to be prepaid pursuant to
SECTION 2.2 or has become or is declared to be immediately due and payable
pursuant to SECTION 6.3, as the context requires.
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Allied Capital Corporation Note Agreement
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, affairs, financial condition, assets or properties of the
Company and its Consolidated Subsidiaries taken as a whole, or (b) the ability
of the Company to perform its obligations under this Agreement and the Notes, or
(c) the validity or enforceability of this Agreement or the Notes.
"Material Subsidiary" shall mean any Consolidated Subsidiary which has
total assets having a value (determined in accordance with the market valuation
method pursuant to GAAP) greater than or equal to $20,000,000.
"Memorandum" is described in paragraph 5 of Exhibit B hereto.
"Mortgage Repurchase Facility" means financing agreements providing for (i)
the pledge and assignment of Commercial Mortgage Loans owned by the Company and
its Consolidated Subsidiaries as security for loans to the Company and its
Consolidated Subsidiaries, or (ii) the sale of such Commercial Mortgage Loans to
a commercial lender pursuant to an agreement under which such loans shall be
repurchased by the Company or a Consolidated Subsidiary at a future date.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"Net Proceeds" means, with respect to an Equity Issuance by a Person, the
aggregate amount of all cash received by such Person in respect of such Equity
Issuance net of investment banking fees, legal fees, accountants fees,
underwriting discounts and commissions and other customary fees and expenses
actually incurred by such Person in connection with such Equity Issuance.
"Non-Recourse Indebtedness" means Indebtedness secured by Real Estate
Assets if recourse for the payment of such Indebtedness is limited to such Real
Estate Assets.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Preferred Stock" means (i) preferred stock that is issued from
time to time by a Subsidiary to the United States Small Business Administration
having an aggregate stated value not exceeding $7,000,000 at any one time
outstanding or (ii) preferred stock that is issued from time to time by a
Subsidiary for the purpose of qualifying such Subsidiary as a real estate
investment trust under Sections 856 through 860 of the Code and having an
aggregate stated value not exceeding $500,000 at any one time outstanding,
provided that in any event Permitted Preferred Stock shall not include any
Voting Stock.
"Person" shall mean an individual, partnership, limited liability company,
corporation, trust or unincorporated organization, and a government or agency or
political subdivision thereof.
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Allied Capital Corporation Note Agreement
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Priority Debt" means the sum of (i) all Debt of the Company and its
Consolidated Subsidiaries secured by a Lien, and (ii) all unsecured Debt of
Consolidated Subsidiaries (excluding in each case, Debt owing to the Company or
another Consolidated Subsidiary).
"Purchaser" shall have the meaning set forth in SECTION 1.1.
"QPAM Exemption" means Prohibited Transaction Class Exemption 84-14 issued
by the United States Department of Labor.
"Real Estate" means fee ownership or co-ownership of, or leaseholds of,
land or improvements thereon.
"Real Estate Assets" means (i) Real Estate securing Investments made in the
ordinary course of business, (ii) Commercial Mortgage Loans and (iii) Related
Collateral.
"Related Collateral" means, in respect of any Commercial Mortgage Loan: (i)
any and all documents, instruments, agreements, records or other collateral of
any kind evidencing, securing, guaranteeing or otherwise relating to such
Commercial Mortgage Loan, including without limitation all promissory notes or
other negotiable instruments, mortgages, deeds of trust or similar instruments,
assignments of leases or rents or other collateral assignments, financing
statements, guaranties, indemnities, servicing agreements, servicing records,
files, surveys, certificates, affidavits, title abstracts, title insurance
policies and commitments, correspondence, opinions, appraisals, closing
documents, computer programs, computer storage media, data bases, accounting
records and other books and records relating thereto, (ii) any and all mortgage
guaranties and insurance (issued by governmental agencies or otherwise) and
mortgage insurance certificates or other documents evidencing such mortgage
guaranties or insurance relating to any such Commercial Mortgage Loan and all
claims and payments thereunder, (iii) any and all other insurance policies and
insurance proceeds relating to such Commercial Mortgage Loan or the related real
property, (iv) all "general intangibles" as defined in the Uniform Commercial
Code relating to or constituting any and all of the foregoing, and (v) any and
all replacements, substitutions or distributions on or proceeds of any and all
of the foregoing.
"Rentals" shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of the lease or surrender of the
property) payable by the Company or any Consolidated Subsidiary, as lessee or
sublessee under a lease of real or personal property, but shall be exclusive of
any amounts required to be paid by the Company or any Consolidated Subsidiary
(whether or not designated as rents or additional rents) on account of
maintenance, repairs, insurance, taxes and similar charges. Fixed rents under
any so-called "percentage leases" shall be computed solely on the basis of the
minimum rents, if any, required to be paid by the lessee regardless of sales
volume or gross revenues.
-27-
<PAGE> 31
Allied Capital Corporation Note Agreement
"Reportable Event" shall have the same meaning as in ERISA.
"SBA" shall mean the United States Small Business Administration.
"Security" shall have the same meaning as in Section 2(1) of the Securities
Act of 1933, as amended.
"Senior Financial Officer" means the chief financial officer, chief
operating officer, principal accounting officer, treasurer or controller of the
Company.
"Senior Funded Debt" means any Debt of the Company which is classified as
long term debt in accordance with GAAP (including, without limitation, the Bank
Credit Agreement) other than Subordinated Debt.
"Subordinated Debt" means all unsecured Debt of the Company which shall
contain or have applicable thereto subordination provisions providing for the
subordination thereof to other Debt of the Company (including, without
limitation, the obligations of the Company under the Notes).
"Subsidiary" with respect to any Person shall mean (i) any corporation,
partnership, association or other business entity at least 50% of the
outstanding shares of Voting Stock or similar interests of which are owned,
directly or indirectly, by such Person (including, without limitation, any
limited partnership in which such Person, directly or indirectly, shall have at
least a 50% vote on matters as to which limited partners may vote), (ii) any
general or limited partnership of which such Person shall be a general partner
or as to which such Person otherwise shall have unlimited liability, (iii) any
general or limited partnership a general partner of which can be changed or
removed by such Person (other than removals that could be accomplished by
voluntary withdrawal of such general partner only), or (iv) any general or
limited partnership in which (x) the amount represented by such Person's capital
account shall be equal to at least 50% of the aggregate amount represented by
the total of all partners' capital accounts or (y) such Person shall be
allocated at least 50% of the profit (or loss) or distributable cash of the
partnership; provided, however, that the term "Subsidiary", when used in this
Agreement without reference to any particular Person, shall mean a Subsidiary of
the Company.
"Subsidiary Bank Guaranty" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of the Company under the Bank
Credit Agreement.
"Subsidiary Existing Note Guaranty" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of the Company under the
Existing Notes.
"Subsidiary Note Guaranty" means any agreement pursuant to which a
Consolidated Subsidiary has guaranteed the Debt of the Company under the Notes.
"Voting Stock" shall mean Securities of any class or classes, the holders
of which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or Persons performing similar functions).
-28-
<PAGE> 32
Allied Capital Corporation Note Agreement
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares and Permitted Preferred Stock)
shall be owned by the Company and/or one or more of its Wholly-owned
Subsidiaries.
"Year 2000 Compliant" shall have the meaning assigned to it in paragraph 19
of Exhibit B to this Agreement.
"Year 2000 Problem" shall have the meaning assigned to it in paragraph 19
of Exhibit B to this Agreement.
Section 8.2. Accounting Principles. Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP, to
the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
Section 8.3. Directly or Indirectly. Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether the action in question
is taken directly or indirectly by such Person.
SECTION 9. MISCELLANEOUS.
Section 9.1. Registered Notes. The Company shall cause to be kept at the
principal office of the Company a register for the registration and transfer of
the Notes (hereinafter called the "Note Register") and the Company will register
or transfer or cause to be registered or transferred as hereinafter provided any
Note issued pursuant to this Agreement.
At any time and from time to time the registered holder of any Note which
has been duly registered as hereinabove provided may transfer such Note to
another Institutional Holder upon surrender thereof at the principal office of
the Company duly endorsed or accompanied by a written instrument of transfer
duly executed by the registered holder of such Note or its attorney duly
authorized in writing.
The Person in whose name any registered Note shall be registered shall be
deemed and treated as the owner and holder thereof for all purposes of this
Agreement. Payment of or on account of the principal, premium, if any, and
interest on any registered Note shall be made to or upon the written order of
such registered holder.
Section 9.2. Exchange of Notes. At any time and from time to time, upon not
less than ten days' notice to that effect given by the holder of any Note
initially delivered or of any Note substituted therefor pursuant to SECTION 9.1,
this SECTION 9.2 or SECTION 9.3, and, upon surrender of such Note at its office,
the Company will deliver in exchange therefor, without expense to such holder,
except as set forth below, a Note for the same aggregate principal amount as the
then unpaid principal amount of the Note so surrendered, or Notes in the
denomination of $500,000 or any amount in excess thereof as such holder shall
specify, dated as of the date to which interest has been paid on
-29-
<PAGE> 33
Allied Capital Corporation Note Agreement
the Note so surrendered or, if such surrender is prior to the payment of any
interest thereon, then dated as of the date of issue, registered in the name of
such one or more Institutional Holders as may be designated by such holder, and
otherwise of the same form and tenor as the Notes so surrendered for exchange.
The Company may require the payment of a sum sufficient to cover any stamp tax
or governmental charge imposed upon such exchange or transfer.
Section 9.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss, theft or destruction upon delivery of a
bond of indemnity in such form and amount as shall be reasonably satisfactory to
the Company, or in the event of such mutilation upon surrender and cancellation
of the Note, the Company will make and deliver without expense to the holder
thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or
mutilated Note. If the Purchaser or any subsequent Institutional Holder is the
owner of any such lost, stolen or destroyed Note, then the affidavit of an
authorized officer of such owner, setting forth the fact of loss, theft or
destruction and of its ownership of such Note at the time of such loss, theft or
destruction shall be accepted as satisfactory evidence thereof and no further
indemnity shall be required as a condition to the execution and delivery of a
new Note other than the written agreement of such owner to indemnify the
Company.
Section 9.4. Expenses, Stamp Tax Indemnity. Whether or not the transactions
herein contemplated shall be consummated, the Company agrees to pay directly all
of the Purchasers' reasonable out-of-pocket expenses in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby, including but not limited to the reasonable charges and
disbursements of Chapman and Cutler, special counsel to the Purchasers,
duplicating and printing costs and charges for shipping the Notes, adequately
insured to each Purchaser's home office or at such other place as such Purchaser
may designate, the cost of obtaining a Private Placement Number for the Notes
from Standard & Poor's Corporation, and all such reasonable expenses relating to
any amendment, waivers or consents pursuant to the provisions hereof, including,
without limitation, any amendments, waivers, or consents resulting from any
work-out, renegotiation or restructuring relating to the performance by the
Company of its obligations under this Agreement and the Notes. The Company also
agrees that it will pay and save each Purchaser harmless against any and all
liability with respect to stamp and other taxes, if any, which may be payable or
which may be determined to be payable in connection with the execution and
delivery of this Agreement or the Notes, (other than as specified in the last
sentence of SECTION 9.2) whether or not any Notes are then outstanding. The
Company agrees to protect and indemnify each Purchaser against any liability for
any and all brokerage fees and commissions payable or claimed to be payable to
any Person in connection with the transactions contemplated by this Agreement.
Section 9.5. Powers and Rights Not Waived; Remedies Cumulative. No delay or
failure on the part of the holder of any Note in the exercise of any power or
right shall operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other or further exercise thereof, or the
exercise of any other power or right, and the rights and remedies of the holder
of any Note are cumulative to, and are not exclusive of, any rights or remedies
any such holder would otherwise have.
-30-
<PAGE> 34
Allied Capital Corporation Note Agreement
Section 9.6. Notices. All communications provided for hereunder shall be in
writing and, if to a Holder, delivered or mailed prepaid by registered or
certified mail or overnight air courier, or by facsimile communication (with a
confirming copy of any such facsimile communication sent via overnight courier
service), in each case addressed to such Holder at its address appearing on
Schedule I to this Agreement or Allied Capital Corporation Note Agreement
such other address as such Holder may designate to the Company in writing, and
if to the Company delivered or mailed by registered or certified mail or
overnight air courier, or by facsimile communication, to the Company at 1919
Pennsylvania Avenue, N.W., 3rd Floor, Washington, D.C. 20006, Attention: Joan M.
Sweeney or to such other address as the Company may in writing designate to the
Holders; provided, however, that a notice to a Holder by overnight air courier
shall only be effective if delivered to such Holder at a street address
designated for such purpose in Schedule I, and a notice to you by facsimile
communication shall only be effective if made by confirmed transmission to such
Holder at a telephone number designated for such purpose in Schedule I, or, in
either case, as such Holder may designate to the Company in writing.
Section 9.7. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns and shall inure to the benefit of
each Purchaser and to the benefit of its successors and assigns, including each
successive Holder.
Section 9.8. Survival of Covenants and Representations. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement and
the Notes and shall terminate upon payment in full of all amounts due under the
Notes and this Agreement.
Section 9.9. Severability. Should any part of this Agreement for any reason
be declared invalid or unenforceable, such decision shall not affect the
validity or enforceability of any remaining portion, which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or unenforceable portion thereof eliminated and it is hereby declared
the intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 9.10. Governing Law. This Agreement and the Notes issued and sold
hereunder shall be governed by and construed in accordance with New York law.
Section 9.11. Captions. The descriptive headings of the various Sections or
parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
-31-
<PAGE> 35
Allied Capital Corporation Note Agreement
The execution hereof by you shall constitute a contract between us for the
uses and purposes hereinabove set forth, and this Agreement may be executed in
any number of counterparts, each executed counterpart constituting an original
but all together only one agreement.
ALLIED CAPITAL CORPORATION
By
Name:
---------------------------
Title:
--------------------------
Accepted as of November 15, 1999.
[Variation]
By
Name:
---------------------------
Title:
--------------------------
-32-
<PAGE> 36
ALLIED CAPITAL CORPORATION
8.51% Senior Note
Due November 15, 2004
No. R-
----------------, ------
$
ALLIED CAPITAL CORPORATION, a Maryland corporation (the "Company"), for
value received, hereby promises to pay to
or registered assigns
on the fifteenth day of November, 2004
the principal amount of
DOLLARS ($____________)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of 8.51% per annum from the date hereof until maturity, payable
semiannually on the fifteenth day of each May and November in each year
(commencing on the first of such dates after the date hereof) and at maturity.
The Company agrees to pay interest on overdue principal (including any overdue
required or optional prepayment of principal) and premium, if any, and (to the
extent legally enforceable) on any overdue installment of interest, at the rate
of 10.51% per annum after the due date, whether by acceleration or otherwise,
until paid. Both the principal hereof and interest hereon are payable at the
principal office of the Company in Washington, D.C. in coin or currency of the
United States of America which at the time of payment shall be legal tender for
the payment of public and private debts.
This Note is one of the 8.51% Senior Notes due November 15, 2004 (the
"Notes") of the Company in the aggregate principal amount of $102,000,000 issued
under and pursuant to the terms and provisions of the Note Agreement, dated as
of November 15, 1999 (the "Note Agreement"), entered into by the Company with
the Purchasers named therein and this Note and the holder hereof are entitled
with the holders of all other Notes outstanding under the Note Agreement to all
the benefits provided for thereby or referred to therein to the extent provided
in the Note Agreement. Reference is hereby made to the Note Agreement for a
statement of such rights and benefits.
This Note and the other Notes outstanding under the Note Agreement may be
declared due prior to their expressed maturity dates in the events, on the terms
and in the manner and amounts as provided in the Note Agreement.
EXHIBIT A-1
(to Note Agreement)
<PAGE> 37
Allied Capital Corporation Note Agreement
The Notes are not subject to prepayment or redemption at the option of the
Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreement.
This Note is registered on the books of the Company and is transferable
only by surrender thereof at the principal office of the Company duly endorsed
or accompanied by a written instrument of transfer duly executed by the
registered holder of this Note or its attorney duly authorized in writing.
Payment of or on account of principal, premium, if any, and interest on this
Note shall be made only to or upon the order in writing of the registered
holder.
ALLIED CAPITAL CORPORATION
By
Name:
------------------------------
Title:
-----------------------------
A-1-2
<PAGE> 1
[ALLIED CAPITAL CORPORATION LOGO]
1999
[PHOTOS]
PERFECTING THE BUSINESS OF PRIVATE FINANCE
ALLIED CAPITAL CORPORATION o 1999 ANNUAL REPORT
1999
ANNUAL
REPORT
<PAGE> 2
[GRAPHIC] FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
(in thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Total portfolio at value ........................................... $ 1,228,497 $ 807,119
- -------------------------------------------------------------------------------------------------
Total assets ....................................................... $ 1,290,038 $ 856,079
Total debt outstanding ............................................. $ 592,850 $ 334,350
Shareholders' equity ............................................... $ 667,513 $ 491,358
Total interest and related portfolio income ........................ $ 141,140 $ 106,738
Portfolio income before net realized and unrealized gains .......... $ 71,041 $ 55,245
Total net realized and unrealized gains ............................ $ 27,529 $ 23,620
Net increase in net assets resulting from operations ............... $ 98,570 $ 78,078
Basic earnings per common share .................................... $ 1.64 $ 1.50
- -------------------------------------------------------------------------------------------------
Diluted earnings per common share .................................. $ 1.64 $ 1.50
Tax distributions per common share ................................. $ 1.60 $ 1.43
Weighted average common shares outstanding - basic ................. 59,877 51,941
- -------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted ............... 60,044 51,974
</TABLE>
[BAR GRAPH]
Net Increase in Net Assets (NIA)(IN MILLIONS)
<TABLE>
<S> <C> <C> <C> <C>
$60.5 $54.9 $61.3 $78.1 $98.6
1995 1996 1997 1998 1999
</TABLE>
[BAR GRAPH]
Portfolio Income Before Net Realized
and Unrealized Gains (IN MILLIONS)
<TABLE>
<S> <C> <C> <C> <C>
$41.5 $47.6 $46.1 $55.2 $71.0
1995 1996 1997 1998 1999
</TABLE>
Earnings and Dividends Per Share
[LINE GRAPH]
Earnings Dividends
<TABLE>
Earnings Dividends
-------- ---------
<S> <C> <C>
1999 1.64 1.60
1998 1.50 1.43
1997* 1.24 1.20
1996 1.17 1.23
1995 1.37 1.09
</TABLE>
* Excludes Merger-related dividends of approximately $0.51 per share.
[BAR GRAPH]
Investment Originations (IN MILLIONS)
<TABLE>
<S> <C>
1995 $216.2
1996 $283.3
1997 $364.9
1998 $524.5
1999 $751.9
</TABLE>
<PAGE> 3
[GRAPHIC] DEAR FELLOW SHAREHOLDERS
Allied Capital had another record year in 1999. We invested more than $750
million, which grew the investment portfolio 52% to $1.2 billion by year-end.
Earnings increased to $1.64 per share and dividends to shareholders increased to
$1.60 per share.
As an investment company, our purpose is to create shareholder wealth by
delivering steadily increasing earnings and dividends per share, and positioning
the business for capital appreciation. We do this by selectively investing in
high quality private and undervalued public companies that we believe provide
the potential for significant capital gains with little downside risk for our
principal. With the capital markets today dramatically and disproportionately
interested only in pure play "dot coms," we believe it is important to stick to
the investment disciplines that have served us well over the years. We believe
that the Internet revolution is real and transformational, but that the safest
way to invest is in the convergence of the bricks and mortar world and the
Internet. We are identifying already successful companies that stand to benefit
from integrating digital and Internet technologies into their business models.
In addition to financing seasoned market leaders in more mature industries, we
also focus on companies with exceptional growth potential in emerging
industries.
We continue to gain share in the private finance market. During 1999, we
successfully partnered with many of the leading middle-market private equity
firms in the United States. We also formally established a
Telecommunications/New Media group to build on our solid presence in this high
growth industry. We will continue to focus on investment opportunities in
business services, outsourcing and other such industries that are expected to
benefit from changing technologies.
[PHOTOS]
2
<PAGE> 4
- --------------------------------------------------------------------------------
We believe that our greatest strategic advantage is a dynamic and collaborative
investment process, fueled by the talented people of Allied Capital who have
consistently delivered results for shareholders.
- --------------------------------------------------------------------------------
This year we also began to aggressively reengineer our small business finance
group to take advantage of Internet technologies. We are already originating
loans through our web site, AlliedCapitalExpress.com, and we expect substantial
loan origination growth in this area during 2000. Perhaps even more
significantly, we have begun to transform the traditional paper-intensive credit
process into a more fully digital one, which we believe will translate into even
higher returns and greater market share for this business.
Our opportunities to selectively invest in original issue commercial
mortgage-backed securities continued during 1999, and our real estate finance
group successfully exploited this unusual imbalance of supply and demand in the
capital markets by purchasing these investments at significant discounts. These
long-term investments, which are fully collateralized by commercial real estate,
should provide us with a strong stream of portfolio income for years to come.
Our annual report this year features our investment process as we continue to
work at perfecting the business of private finance, and the talented people at
Allied Capital who have consistently delivered results for shareholders. A
disciplined process and exceptional people are the keys to our performance and
we believe that we have these elements firmly in place to drive our future
growth.
/s/ Bill Walton
William L. Walton
Chairman and CEO
[PHOTOS]
3
<PAGE> 5
[GRAPHIC] DELIVERING CONSISTENT INVESTMENT INCOME
HIGHLY SELECTIVE INVESTING
BILLIONS REVIEWED
<TABLE>
HIGHLY SELECTIVE INVESTING
- --------------------------
<S> <C>
billions reviewed $12 billion
millions invested $347 million
</TABLE>
private finance investment activity
- -----------------------------------
DELIVERING CONSISTENT RETURNS, YEAR IN AND YEAR OUT
Through a balanced income stream consisting of reliable recurring interest
income, loan sale premiums and net gains, we are positioned to consistently
deliver increasing dividends to shareholders.
LOAN DIVIDENDS
INTEREST SALE NET TO
INCOME PREMIUM GAINS SHAREHOLDERS
[THIS GRAPHIC DEPICTS THE ELEMENTS OF INCOME -- INTEREST INCOME, LOAN SALE
PREMIUM, AND NET GAINS -- AS THEY FLOW INTO DIVIDENDS TO SHAREHOLDERS.]
<PAGE> 6
Working in
Partnership
PRIVATE FINANCE PORTFOLIO
- ---------------------------------
[GRAPHIC DEPICTS THAT 87% OF THE
PRIVATE FINANCE PORTFOLIO IS
COMPOSED OF DEBT SECURITIES AND
13% REPRESENT EQUITY SECURITIES]
PRIVATE FINANCE MODEL
- ---------------------------------
INTEREST
ON LOAN 14%
GAIN 4%
- ---------------------------------
TOTAL RETURN 18%
Delivering consistent investment income to our shareholders requires a clear
investment strategy and disciplined, deliberate execution. We have perfected our
niche in the business of private finance by combining these elements:
exceptional people working in a tightly knit partnership, a highly selective
investment process, and a carefully crafted investment structure that maximizes
upside while achieving reliable investment income.
The foundation of this business is a talented investment team working in
partnership. Superior investment talent makes a big difference. Our investors'
skills have been developed over many years through an apprenticeship process
where individual investment discipline is honed through mentoring and
experience. We amplify individual skills through partnership. Our skilled
professionals work together to challenge investment decisions, creatively
structure and maximize investment results, and guide our portfolio companies to
success.
The partnership process reinforces our highly selective investment discipline.
We pursue investments that meet certain key criteria and strictly avoid
investments where we perceive unacceptable risk. In more mature industries, we
look for companies that are clear market leaders and evidence consistent
operating results, critical mass, seasoned management, and the potential for
capital appreciation. In emerging industries, we focus on companies with
exceptional growth potential.
Once selected, the destiny of our investment's performance is controlled by a
carefully crafted investment structure. The majority of investments in our
portfolio are designed to require the contractual repayment of a debt obligation
with a high interest rate and provide warrants to purchase equity. Through this
structure, we annually earn reliable interest income while building a stable of
future capital gains.
[PHOTO]
Senior private finance professionals work in partnership to select new
investments.
<PAGE> 7
[LOGO] BUILDING CAPITAL GAINS
<TABLE>
<CAPTION>
A SUPERIOR INVESTMENT MODEL
- -------------------------------------------------------------------------------
<S> <C>
TRADITIONAL LENDER MODEL ALLIED CAPITAL PRIVATE FINANCE MODEL
opportunity for return capped opportunity for return beyond interest
at interest rate
[THE FIRST GRAPH DEPICTS A [THE SECOND GRAPH DEPICTS THE
TRADITIONAL LENDER MODEL WITH ALLIED CAPITAL PRIVATE FINANCE
A TYPICAL INTEREST RATE (9%) MODEL, WITH A TYPICAL INTEREST
AND A BELL CURVE DEPICTING RATE (14%) AND A BELL CURVE
VARIOUS TOTAL RETURNS OF LESS DEPICTING VARIOUS TOTAL RETURNS
THAN 9% CORRELATED TO THE PRIMARILY MORE THAN 14%. IN
PROBABILITY OF THOSE RETURNS. THIS MODEL, ALLIED CAPITAL'S
IN SUCH A MODEL, A LENDER'S OPPORTUNITY FOR RETURN IS BEYOND
OPPORTUNITY FOR RETURN IS THE INTEREST RATE AND INCLUDES
CAPPED AT THEIR INTEREST RATE, THE POTENTIAL FOR CAPITAL GAINS.]
AND ANY LOSSES WILL REDUCE
THIS RETURN.]
</TABLE>
[PHOTO]
Our investment team works closely with portfolio company management teams as we
move toward our exit and ultimate capital gain.
6
<PAGE> 8
Enhancing
Investment
Returns
[ENTERPRISE SOFTWARE LOGO]
[COHR LOGO]
[JACK HENRY & ASSOCIATES INC. LOGO]
[PRECISION INDUSTRIES CO LOGO]
[RADIO ONE LOGO]
[GRANT BROADCASTING SYSTEMS II LOGO]
Building capital gains is an essential part of delivering exceptional total
returns to our shareholders. When we select an investment, in addition to
analyzing its credit merits, we assess its potential to provide a future capital
gain. Our ability to annually realize capital gains has been demonstrated
throughout our history.
We have realized exceptional gains by investing in the leading companies in more
mature industries and also by investing in smaller growth companies in rapidly
emerging or evolving industries. We are constantly looking to invest in dominant
companies in a broad range of industries. The growth industries we are focusing
on in 2000 include telecommunications, business outsourcing and services,
education and healthcare.
We achieve our capital gains through a variety of exit strategies, and quite
often our annual gains are generated through numerous transactions. For example,
in 1999 we had a few large gains such as our exit on the IPO of Radio One, Inc.,
which provided a $10.5 million gain. We also had many smaller gains such as
Enterprise Software, which, upon its acquisition by another company, netted us
an $838,000 gain.
Through our annual harvest of capital gains, we increase our investment returns
for shareholders over and above what we earn in contractual interest. Our
capital gains, net of any investment losses, have added an average of
approximately 5% to our private finance portfolio return for the past 20
years.
TWENTY YEARS OF NET CAPITAL GAINS FOR ALLIED CAPITAL
- --------------------------------------------------------------------------------
year % of Total Assets % of Private Finance Assets
------ ----------------- ---------------------------
1999 1.97% 5.64%
1998 2.64% 3.97%
1997 1.33% 3.80%
1996 3.29% 10.46%
1995 1.98% 5.16%
1994 1.81% 4.60%
1993 1.52% 4.85%
1992 1.44% 4.86%
1991 1.49% 2.45%
1990 0.98% 1.71%
1989 2.16% 4.82%
1988 2.74% 4.39%
1987 5.55% 8.16%
1986 4.70% 7.19%
1985 5.28% 7.70%
1984 5.62% 8.69%
1983 3.13% 4.66%
1982 2.30% 2.81%
1981 0.27% 0.35%
1980 1.01% 1.14%
<PAGE> 9
[LOGO] MANAGING OUR GROWTH
[PHOTO]
Effective deployment of our capital, human resources and technology is an
ongoing focus of our management team.
<TABLE>
<CAPTION>
EFFICIENT REVENUE GENERATION ($ IN MILLIONS)
- ---------------------------------------------------
Revenue* Employees at Year End
<S> <C> <C>
1995 $ 90.1 74
1996 $ 96.7 66
1997 $115.3 80
1998 $130.4 106
1999 $168.7 129
</TABLE>
* Includes portfolio income and net gains.
<TABLE>
<CAPTION>
GROWTH IN EQUITY AND ASSETS ($ IN MILLIONS)
- -------------------------------------------
Equity Assets
<S> <C> <C>
1995 $367.2 $ 605.4
1996 $402.1 $ 713.4
1997 $420.1 $ 807.8
1998 $491.4 $ 856.1
1999 $667.5 $1,290.0
</TABLE>
8
<PAGE> 10
Growing
Through
Talent and
Technology
[ALLIED CAPITAL EXPRESS SMALL BUSINESS LOANS LOGO]
In 1999, we launched AlliedCapitalExpress.com, which has enabled companies like
Awesome Power Boats, Inc. to apply for a loan via our web-based application
process. Just 24 hours later, this MarineCity, Michigan, manufacturer knew the
status of the application, and 35 days later the due diligence was complete and
the loan was funded.
Managing our growth and maximizing the use of our resources--people, capital
and technology--builds our company's value and our shareholders' wealth.
Allied Capital's professional team possesses exceptional breadth and depth of
experience. Our unique workforce enables us to quickly study opportunities as
they arise in the capital markets and act, if appropriate, to seize profits.
Our recent expansion into CMBS investing and our move to Internet loan
origination through Allied Capital Express are two key examples of our ability
to efficiently manage human capital to maximize profitability.
Careful management of our equity and debt capital is also key to our financial
success. We have developed a controlled process of adding new equity capital
only as high return new investment opportunities occur. In addition, we
carefully maintain an appropriate level of debt capital so that we remain
adequately leveraged. Through this well managed process, each new equity dollar
results in accretive growth in per share earnings for all shareholders.
We are actively leveraging our human and capital resources through the
integration of technology in all aspects of our business. We use the power of
the Internet to source loan opportunities and coordinate information flow
between borrowers and regional offices, and throughout the Allied Capital
organization. As we use technology to drive our investment process, we
efficiently manage information to reduce our investment cycle time and thereby
improve our profitability.
Strong management has perfected our business model for private finance, enabling
our mission of continued long-term value creation for shareholders. As our
leadership in the marketplace grows, we are positioned to increase investment
earnings, enhance returns through capital gains, and grow both strong dividends
and share value for our shareholders.
[PHOTO]
We have continuously supported our growth in assets by increasing our talent
base of exceptional professionals.
9
<PAGE> 11
[GRAPHIC] SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest and related portfolio income $141,140 $106,738 $97,405 $84,937 $68,817
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses excluding merger expenses $63,346 $44,444 $46,180 $37,361 $27,274
- -----------------------------------------------------------------------------------------------------------------------
Portfolio income before realized and unrealized gains $71,041 $55,245 $46,066 $47,576 $41,543
- -----------------------------------------------------------------------------------------------------------------------
Net realized gains $25,391 $22,541 $10,704 $19,155 $12,000
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) $2,138 $1,079 $7,209 $(7,412) $9,266
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $98,570 $78,078 $61,304 $54,947 $60,479
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.64 $1.50 $1.24 $1.17 $1.37
- -----------------------------------------------------------------------------------------------------------------------
Dividends per common share (1) $1.60 $1.43 $1.20 $1.23 $1.09
- -----------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 60,044 51,974 49,251 46,733 44,010
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------
Portfolio at value $1,228,497 $807,119 $703,331 $612,411 $532,311
- -----------------------------------------------------------------------------------------------------------------------
Portfolio at cost $1,222,901 $803,479 $697,030 $618,319 $530,807
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,290,038 $856,079 $807,775 $713,360 $605,434
- -----------------------------------------------------------------------------------------------------------------------
Total debt outstanding $592,850 $334,350 $347,663 $274,997 $200,339
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity $667,513 $491,358 $420,060 $402,134 $367,192
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity per common share (NAV) $10.20 $8.79 $8.07 $8.34 $8.26
- -----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 65,414 55,919 52,047 48,238 44,479
- -----------------------------------------------------------------------------------------------------------------------
OTHER DATA
- -----------------------------------------------------------------------------------------------------------------------
New portfolio investments $751,871 $524,530 $364,942 $283,295 $216,175
- -----------------------------------------------------------------------------------------------------------------------
Loan repayments $145,706 $138,081 $233,005 $179,292 $111,731
- -----------------------------------------------------------------------------------------------------------------------
Loan sales (2) $198,368 $81,013 $53,912 $27,715 $29,726
- -----------------------------------------------------------------------------------------------------------------------
Total assets managed at period end $1,577,296 $1,143,548 $935,720 $822,450 $702,567
- -----------------------------------------------------------------------------------------------------------------------
Realized gains $31,536 $25,757 $15,804 $30,417 $16,679
- -----------------------------------------------------------------------------------------------------------------------
Realized losses $(6,145) $(3,216) $(5,100) $(11,262) $(4,679)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Selected Consolidated Financial Data schedule reflects the operations of the
Company with all periods restated as if the Companies had merged as of the
beginning of the earliest period presented.
(1) Dividends for 1997 exclude certain Merger-related dividends. Allied I
distributed $0.34 per common share representing the 844,914 shares of
Allied Lending distributed in conjunction with the Merger. This
distribution resulted in a partial return of capital. Also in conjunction
with the Merger, the Company distributed $0.17 per share representing the
undistributed earnings of the merged companies at December 31, 1997.
(2) Loan sales for 1998 exclude loans sold through securitization in January
1998.
10 ALLIED CAPITAL CORPORATION 1999 ANNUAL REPORT
<PAGE> 12
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this section should be read in conjunction with the
Company's 1999 Consolidated Financial Statements and Notes thereto. In addition,
this Annual Report, which includes Management's Discussion and Analysis,
contains certain forward-looking statements. These statements include the plans
and objectives of management for future operations and financial objectives,
loan portfolio growth and availability of funds. These forward-looking
statements are subject to the inherent uncertainties in predicting future
results and conditions. Certain factors that could cause actual results and
conditions to differ materially from those projected in these forward-looking
statements are set forth below in the Investment Considerations section. Other
factors that could cause actual results to differ materially include the
uncertainties of economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
included herein are reasonable, any of the assumptions could be inaccurate and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Therefore, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
ALLIED CAPITAL CORPORATION 1999 ANNUAL REPORT 11
<PAGE> 13
OVERVIEW
The Company provides capital to small and middle-market companies in a
variety of different industries and in diverse geographic locations. Our lending
and investment activity is focused in three areas:
- Private finance
- Commercial real estate finance, and
- Small business finance originated for sale under our Allied Capital
Express brand name.
[PIE CHARTS]
<TABLE>
<CAPTION>
The Company's portfolio composition at December 31, 1999, 1998 and 1997 was as follows:
COMMERCIAL REAL SMALL BUSINESS
PRIVATE FINANCE ESTATE FINANCE FINANCE
<S> <C> <C> <C>
1999 53% 42% 5%
1998 48% 44% 8%
1997 29% 64% 7%
</TABLE>
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gains earned on the
Company's investment portfolio after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
earned on a loan and the amortization of loan origination points and discounts.
The level of interest income is directly related to the balance of the
investment portfolio multiplied by the weighted average yield on the portfolio.
The Company's ability to generate interest income is dependent on economic,
regulatory and competitive factors that influence interest rates and loan
originations, and the Company's ability to secure financing for its investment
activities.
<PAGE> 14
PORTFOLIO AND INVESTMENT ACTIVITY
Total portfolio investment activity and yields as of and for the years
ended December 31, 1999, 1998 and 1997 were as follows:
TOTAL PORTFOLIO
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Portfolio at Value........................... $1,228.5 $807.1 $703.3
New Investments.............................. $ 751.9 $524.5 $364.9
Repayments................................... $ 145.7 $138.0 $233.0
Sales........................................ $ 198.4 $304.4 $ 53.9
Yield........................................ 13.0% 12.5% 11.7%
</TABLE>
PRIVATE FINANCE
Private finance investment activity and yields as of and for the years
ended December 31, 1999, 1998 and 1997 were as follows:
PRIVATE FINANCE
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Portfolio at Value............................. $647.0 $388.6 $204.7
New Investments................................ $346.7 $236.0 $ 66.7
Repayments..................................... $ 87.5 $ 41.3 $ 66.5
Yield.......................................... 14.2% 14.6% 12.6%
</TABLE>
The private finance portfolio increased 67% and 90% during the years ended
December 31, 1999 and 1998, respectively. The Company's increasing capital base
has enabled it to make larger private finance investments, supporting the
significant increase in originations in 1999 and 1998. During 1999, the Company
originated 27 new private financings with an average investment size of $12.4
million and a weighted average current yield on loans and debt securities of
13.6%. During 1998, the Company originated 22 new private financings with an
average investment size of $10.2 million and a weighted average
<PAGE> 15
current yield on loans and debt securities of 14.0%. The current yield on the
private finance portfolio will fluctuate over time depending on the equity
"kicker" or warrants received with each financing. Private finance investments
are generally structured such that equity kickers may provide an additional
investment return of up to 1,000 basis points.
COMMERCIAL REAL ESTATE FINANCE
Commercial real estate finance investment activity and yields as of and for
the years ended December 31, 1999, 1998 and 1997 were as follows:
COMMERCIAL REAL ESTATE FINANCE
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Portfolio at Value............................. $520.0 $355.0 $451.6
New Investments................................ $288.7 $214.6 $249.0
Repayments..................................... $ 51.5 $ 92.5 $154.5
Sales.......................................... $ 86.1 $256.9 $ 0.0
Yield.......................................... 12.3% 10.4% 11.4%
</TABLE>
The commercial real estate finance portfolio increased 46.5% and decreased
21.4% for the years ended December 31, 1999 and 1998, respectively. During 1999
and 1998, the Company began to migrate its portfolio from investments in lower
yielding commercial real estate loans to higher yielding real estate
investments.
During 1998, the Company reduced its commercial mortgage loan origination
activity for its own portfolio due to declining interest rates and began to sell
its loans to other lenders. Then, beginning in the fourth quarter of 1998, the
Company began to take advantage of a unique market opportunity to acquire
non-investment grade commercial mortgage-backed securities ("CMBS") at
significant discounts from the face amount of the bonds. Turmoil in the CMBS
market created a lack of liquidity for the traditional buyers of non-investment
grade bonds. As a result, yields on these bonds increased to an attractive level
for the Company to purchase the securities. The Company opportunistically
purchased CMBS during 1999 and will continue to do so during 2000 while
maintaining a balanced portfolio. The Company believes that CMBS is an
attractive asset class because of the yields that can be earned on a security
that is fully secured by commercial mortgage loans.
The underlying pool of approximately 2,000 loans that are collateral for
our CMBS have the following ranges of loan to value ("LTV") and debt service
coverage ratios ("DSCR").
<PAGE> 16
CMBS PORTFOLIO BY LTV
<TABLE>
<CAPTION>
LOAN TO VALUE RANGES $ %
-------------------- - ---
(IN MILLIONS)
<S> <C> <C>
Less than 60%....................................... $ 978.4 11%
60 - 65%............................................ 560.7 7%
65 - 70%............................................ 1,406.1 16%
70 - 75%............................................ 2,796.7 32%
75 - 80%............................................ 2,777.4 32%
Greater than 80%.................................... 180.2 2%
-------- ---
$8,699.5 100%
======== ===
Weighted average LTV................................ 70.8%
</TABLE>
CMBS PORTFOLIO BY DSCR
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- - ---
(IN MILLIONS)
<S> <C> <C>
1.00 - 1.25......................................... $1,968.1 23%
1.26 - 1.50......................................... 4,972.8 57%
1.51 - 1.75......................................... 1,146.4 13%
1.76 - 2.00......................................... 343.2 4%
Greater than 2.00................................... 269.0 3%
-------- ---
$8,699.5 100%
======== ===
Weighted average DSCR............................... 1.36
</TABLE>
The increase in the commercial real estate portfolio during 1999 was
primarily due to the purchase of $245.9 million in CMBS with a face value of
$507.9 million and a weighted average yield to maturity of 14.6% after assuming
a 1% loss rate on the underlying collateral mortgage pool. In addition, the
Company sold approximately $86.1 million of commercial mortgage loans with a
weighted average yield of approximately 9.5% and redeployed the proceeds into
higher yielding assets.
The decrease in the commercial real estate portfolio during 1998 was due to
the sale through securitization of approximately $295 million in lower yielding
commercial mortgage loans, and the sale of whole loans to third parties
aggregating approximately $33.5 million.
SMALL BUSINESS FINANCE
During the second quarter of 1999, the Company combined its commercial real
estate loan origination activity with its SBA 7(a) lending activity in order to
increase its loans originated for sale business under the Allied Capital Express
brand name. Through Allied Capital Express, the Company provides small business
and commercial real estate loans up to $3 million. The majority of the loans
originated in this area are originated for sale, generally at premiums of up to
10% of the loan amount.
<PAGE> 17
Allied Capital Express loan activity and yields as of and for the years
ended December 31, 1999, 1998 and 1997 were as follows:
SMALL BUSINESS FINANCE
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Portfolio at Value............................... $ 61.4 $63.6 $47.1
New Investments.................................. $116.5 $73.9 $49.2
Repayments....................................... $ 6.7 $ 4.2 $12.0
Sales............................................ $112.3 $47.5 $53.9
Yield............................................ 11.5% 11.2% 11.4%
</TABLE>
Allied Capital Express loan origination activity for 1999 has increased due
to the opening of new regional office locations and from opportunities created
by the Internet site launched during 1999. Loans in the Allied Capital Express
program are originated for sale; therefore, the increase in loan sales is the
result of the increase in originations. In addition, beginning in 1999, the
Company began to sell 90% of the unguaranteed portion of SBA 7(a) loans through
a structured finance agreement with a commercial paper conduit. In 1999, $36.4
million of unguaranteed portions of SBA 7(a) loans were sold under this
facility. Allied Capital Express targets small commercial real estate loans that
are, in many cases, originated in conjunction with SBA 7(a) loans. SBA 7(a)
loans are originated with variable interest rates priced at spreads ranging from
1.75% to 2.75% over the prime lending rate.
<PAGE> 18
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table summarizes Allied Capital's operating results for the
years ended December 31, 1999, 1998 and 1997:
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PERCENT PERCENT
1999 1998 CHANGE CHANGE 1998 1997 CHANGE CHANGE
-------- -------- -------- ------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest............................. $119,772 $79,921 $39,851 50% $79,921 $86,882 $(6,961) (8%)
Premiums from loan dispositions...... 14,284 5,949 8,335 140% 5,949 7,277 (1,328) (18%)
Post-Merger gain on securitization of
commercial mortgage loans.......... -- 14,812 (14,812) (100%) 14,812 -- 14,812 100%
Investment advisory fees and other
income............................. 7,084 6,056 1,028 17% 6,056 3,246 2,810 87%
-------- ------- ------- ----- ------- ------- ------- -----
Total interest and related
portfolio income............. 141,140 106,738 34,402 32% 106,738 97,405 9,333 10%
-------- ------- ------- ----- ------- ------- ------- -----
EXPENSES
Interest............................. 34,860 20,694 14,166 68% 20,694 26,952 (6,258) (23%)
Employee............................. 16,136 11,829 4,307 36% 11,829 10,258 1,571 15%
Administrative....................... 12,350 11,921 429 4% 11,921 8,970 2,951 33%
Merger............................... -- -- -- -- -- 5,159 (5,159) (100%)
-------- ------- ------- ----- ------- ------- ------- -----
Total operating expenses....... 63,346 44,444 18,902 43% 44,444 51,339 (6,895) (13%)
-------- ------- ------- ----- ------- ------- ------- -----
Formula and cut-off awards........... 6,753 7,049 (296) (4%) 7,049 -- 7,049 100%
-------- ------- ------- ----- ------- ------- ------- -----
Portfolio income before net
realized and unrealized
gains........................ 71,041 55,245 15,796 29% 55,245 46,066 9,179 20%
-------- ------- ------- ----- ------- ------- ------- ----
NET REALIZED AND UNREALIZED GAINS
Net realized gains................... 25,391 22,541 2,850 13% 22,541 10,704 11,837 111%
Net unrealized gains................. 2,138 1,079 1,059 98% 1,079 7,209 (6,130) (85%)
-------- ------- ------- ----- ------- ------- ------- -----
Total net realized and
unrealized gains............. 27,529 23,620 3,909 17% 23,620 17,913 5,707 32%
-------- ------- ------- ----- ------- ------- ------- -----
Income before minority interests and
income taxes......................... 98,570 78,865 19,705 25% 78,865 63,979 14,886 23%
Minority interests..................... -- -- -- -- -- 1,231 (1,231) (100%)
Income tax expense..................... -- 787 (787) (100%) 787 1,444 (657) (45%)
-------- ------- ------- ----- ------- ------- ------- -----
Net increase in net assets resulting
from operations...................... $ 98,570 $78,078 $20,492 26% $78,078 $61,304 $16,774 27%
======== ======= ======= ===== ======= ======= ======= =====
Diluted earnings per share............. $ 1.64 $ 1.50 $ 0.14 9% $ 1.50 $ 1.24 $ 0.26 21%
======== ======= ======= ===== ======= ======= ======= =====
Weighted average shares outstanding --
diluted.............................. 60,044 51,974 8,070 16% 51,974 49,251 2,723 6%
</TABLE>
Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses. NIA as a percentage of average shareholders equity, which is also known
as return on equity, was 17%, 17% and 15% for the years ended December 31, 1999,
1998 and 1997, respectively. NIA, excluding the formula and cut-off award, in
1999 and 1998 as a percentage of average shareholders' equity was 18.6% and
18.8%, respectively.
Total interest and related portfolio income is primarily a function of the
level of interest income earned and the balance of portfolio assets. In
addition, total interest and related portfolio income includes premiums from
loan dispositions, prepayment premiums, and investment advisory fees and other
income.
<PAGE> 19
[3 bar graph]
<TABLE>
<CAPTION>
TOTAL INTEREST AND RELATED PORTFOLIO INCOME
PORTFOLIO INCOME (IN MILLIONS) PORTFOLIO INCOME PER SHARE
<S> <C> <C>
1997 $ 97.4 $1.97
1998 $106.7 $2.05
1999 $141.1 $2.35
</TABLE>
The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 51% to $1,141.2 million at December 31, 1999 from $757.7 million at
December 31, 1998, and increased by 14% during 1998 from $666.5 million at
December 31, 1997. The weighted average yield on the interest bearing
investments in the portfolio at December 31, 1999, 1998 and 1997 was as follows:
[Portfolio graph]
<TABLE>
<CAPTION>
PRIVATE FINANCE COMMERCIAL REAL ESTATE FINANCE SMALL BUSINESS FINANCE TOTAL PORTFOLIO
YIELD ON PORTFOLIO
<S> <C> <C> <C> <C>
1997 12.6% 11.4% 11.4% 11.7%
1998 14.6% 10.4% 11.2% 12.5%
1999 14.2% 12.3% 11.5% 13.0%
</TABLE>
Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $10.5 million, $3.8 million and $3.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively. This premium income results
primarily from the premium paid by purchasers of loans originated through Allied
Capital Express, less the origination commissions associated with the loans
sold. In addition to selling the guaranteed portion of the SBA 7(a) loans, in
1999 the Company began to sell 90% of the unguaranteed portion of SBA 7(a) loans
through a structured finance agreement with a commercial paper conduit. The 176%
increase in premiums from loan sales in 1999 is primarily the result of a
significant increase in the sale of the guaranteed SBA 7(a) loans and
unguaranteed portions of SBA 7(a) loans. SBA 7(a) loan sales were $93.7 million,
$37.0 million and $43.4 million for the years ended December 31, 1999, 1998 and
1997, respectively.
Prepayment premiums were $3.8 million, $2.2 million and $4.1 million for
the years ended December 31, 1999, 1998 and 1997, respectively. While the
scheduled maturities of private finance and commercial real estate loans range
from five to ten years, it is not
<PAGE> 20
unusual for the Company's borrowers to refinance or pay off their debts to the
Company ahead of schedule. Because the Company seeks to finance primarily
seasoned, performing companies, such companies at times can secure lower cost
financing as their balance sheets strengthen, or as more favorable interest
rates become available. Therefore, the Company generally structures its loans to
require a prepayment premium for the first three to five years of the loan.
Total interest and related portfolio income for 1998 includes a one-time
gain on sale of $14.8 million resulting from a commercial mortgage loan
securitization transaction that was completed in January 1998. Excluding the
1998 gain on sale, total interest and related portfolio income increased for the
year ended December 31, 1999 by 53% as compared to the year ended December 31,
1998. The proceeds of $238.4 million from this transaction were used to repay
outstanding debt.
Our operating expenses include interest, employee and administrative
expenses. The Company's single largest expense is interest on indebtedness. The
fluctuations in interest expense during 1999, 1998 and 1997 are attributable to
changes in the level of borrowings by the Company and its subsidiaries under
various notes payable and debentures and revolving credit facilities. The
Company's borrowing activity and weighted average interest cost, including fees
and closing costs, were as follows:
BORROWINGS
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Total Outstanding Debt......................... $592.9 $334.4 $347.7
Average Outstanding Debt....................... $461.5 $261.3 $336.8
Weighted Average Cost.......................... 7.9% 7.5% 7.3%
BDC Asset Coverage*............................ 228% 273% 243%
</TABLE>
- -------------------------
* As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.
Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects the increase
in total employees, combined with wage increases and the experience level of
employees hired. Total employees were 129, 106 and 80 at December 31, 1999, 1998
and 1997, respectively. The Company has been an active recruiter throughout 1999
and 1998 for experienced investment and operational personnel, and the Company
will continue to actively recruit and hire new professionals in 2000 to support
anticipated portfolio growth.
Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses from 1998 to 1999 was primarily the result of increases in costs
associated with the new headquarters and four new regional offices. The increase
in administrative expenses from 1997 to 1998 was partially the result of twelve
full months of costs associated with two new offices that were established in
the third and fourth quarters of 1997.
<PAGE> 21
In 1997, the Company incurred Merger expenses totaling $5.2 million, which
consisted primarily of investment banking fees of $3.1 million, legal fees of
$1.0 million and costs associated with the solicitation of proxies of
approximately $0.6 million.
For the years ended December 31, 1999, 1998 and 1997, employee and
administrative costs as a percentage of total interest and related portfolio
income less interest expense plus net realized and unrealized capital gains was
21%, 22% and 22%, respectively.
The formula and cut-off awards totaled $6.8 million and $7.0 million, or
$0.11 per share and $0.14 per share, for the years ended December 31, 1999 and
1998, respectively.
The formula award expense totaled $6.2 million for each of the years ended
December 31, 1999 and 1998. The formula award was designed as an incentive
compensation program that would replace canceled stock options that were
canceled as a result of the Company's 1997 Merger and would balance share
ownership among key officers. The formula award vests over a three-year period,
on the anniversary date of the Merger, beginning on December 31, 1998. Assuming
all officers who received a formula award remain with the Company over the
vesting period, the Company will expense the remaining formula award of
approximately $6.2 million during 2000.
The cut-off award expense totaled $0.6 million and $0.8 million for the
years ended December 31, 1999 and 1998, respectively. The cut-off award was
designed to cap the appreciated value in unvested options at the Merger
announcement date in order to set the foundation to balance option awards upon
the Merger. The cut-off award will only be payable if the award recipient is
employed by the Company on a future vesting date. Total cut-off award that will
vest in 2000 is estimated at $0.5 million.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and commercial mortgage loans and the
realization of unamortized discount resulting from the sale and early repayment
of private finance and commercial mortgage loans, offset by losses on
investments. Realized gains and losses for the years ended December 31, 1999,
1998 and 1997 were as follows:
NET GAINS
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Realized Gains.................................... $31.5 $25.8 $15.8
Realized Losses................................... (6.1) (3.3) (5.1)
----- ----- -----
Net Realized Gains................................ $25.4 $22.5 $10.7
===== ===== =====
Net Unrealized Gains.............................. $ 2.1 $ 1.1 $ 7.2
===== ===== =====
</TABLE>
Realized gains of $31.5 million during 1999 primarily resulted from
transactions involving six portfolio companies, Radio One, Inc. ($10.5 million),
COHR, Inc. ($5.3 million), Grant Broadcasting Systems II ($5.1 million), Jack
Henry and Associates, Inc. ($3.6 million), Precision Industries Co. ($3.3
million), and Enterprise Software ($0.8 million). The Company reversed
previously recorded unrealized appreciation of $14.6 million when gains were
realized in 1999. Realized gains in 1998 and 1997 resulted primarily from
transactions involving 10 and 6 portfolio companies, respectively.
<PAGE> 22
Realized losses in 1999, 1998 and 1997 represented 0.5%, 0.4 % and 0.6% of
the Company's total assets, respectively. Realized losses of $6.1 million during
1999 resulted primarily from the liquidation of one portfolio investment,
CeraTech Holdings Corporation ($2.5 million). The remaining losses consisted of
several losses of less than $0.5 million each. Losses realized in 1999 had been
recognized in NIA over time as unrealized depreciation when the Company
determined that the respective portfolio security's value had become impaired.
Thus, the Company reversed previously recorded unrealized depreciation totaling
$5.4 million, $3.6 million and $6.7 million when the related losses were
realized in 1999, 1998, and 1997, respectively.
Net unrealized gains for 1999, 1998 and 1997 consisted of valuation changes
resulting from the Board of Directors' valuation of the Company's assets and the
effect of reversals of unrealized appreciation or depreciation resulting from
realized gains or losses. At December 31, 1999, net unrealized appreciation in
the portfolio totaled $4.5 million and was composed of unrealized appreciation
of $32.1 million, resulting primarily from appreciated equity interests in
portfolio companies, and unrealized depreciation of $27.6 million resulting
primarily from underperforming loan and equity interests in the portfolio. At
December 31, 1998 and 1997, net unrealized appreciation in the portfolio totaled
$2.4 million and $1.3 million, respectively, and was composed of unrealized
appreciation of $27.3 million and $19.2 million, and unrealized depreciation of
$24.9 million and $17.9 million, respectively.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value.
At December 31, 1999, the Company's portfolio was graded as follows:
PORTFOLIO BY GRADE
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
- ----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1........................................... $ 156.0 12.7%
2........................................... 1,002.9 81.7%
3........................................... 22.5 1.8%
4........................................... 32.2 2.6%
5........................................... 14.9 1.2%
-------- ------
$1,228.5 100.0%
======== ======
</TABLE>
Grade 5 private finance investments totaled $12.6 million at value at
December 31, 1999, or 1.0% of the Company's total portfolio based on the
valuation of the Board of Directors. The value of these Grade 5 private finance
investments has been reduced from an aggregate cost of $31.3 million in order to
reflect the Company's estimate of the net realizable value of these investments
upon disposition. This reduction in value has been
<PAGE> 23
recorded previously as unrealized depreciation over several years in the
Company's earnings. The Company continues to follow its historical practices of
working with a troubled portfolio company in order to recover the maximum amount
of the Company's investment, but records unrealized depreciation for the
expected full amount of the potential loss when such exposure is identified.
Grade 5 private finance investments at December 31, 1998 and 1997 totaled $6.4
million and $12.9 million at value, or 0.8% and 1.8% of the Company's total
portfolio, respectively.
At December 31, 1999, the credit quality of the Company's CMBS portfolio
remained strong, and delinquencies in the underlying collateral pool were
negligible. The yield used to accrue interest on this portfolio assumes a 1%
loss rate on the entire underlying collateral mortgage pool.
For the total investment portfolio, loans greater than 120 days delinquent
were $18.6 million at value at December 31, 1999, or 1.5% of the total
portfolio. Included in this category are loans valued at $11.7 million that are
fully secured by real estate. Loans greater than 120 days delinquent generally
do not accrue interest. In addition, the Company is not accruing interest on a
$14.2 million investment that was not yet 120 days delinquent at December 31,
1999, but is expected to be in this category in the first quarter of 2000. Loans
greater than 120 days delinquent at December 31, 1998 were $10.4 million at
value, or 1.3% of the total portfolio, which included $6.6 million that were
fully secured by real estate.
Because the Company has elected to be taxed as a regulated investment
company ("RIC") under Subchapter M of the Code, the Company is not taxed on its
investment company taxable income or realized capital gains, to the extent that
such income or gains are distributed, or deemed to be distributed, to
shareholders. Annual tax distributions may differ from NIA for the fiscal year
due to timing differences in the recognition of income and expenses, returns of
capital and net unrealized appreciation or depreciation, which are not included
in taxable income.
In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest and gains from
the sale of securities; (2) meet investment diversification requirements as
defined in the Code; and (3) distribute annually to shareholders at least 90% of
its investment company taxable ordinary income. The Company intends to take all
steps necessary to continue to meet the RIC qualifications. However, there can
be no assurance that the Company will continue to elect or qualify for such
treatment in future years.
The weighted average common shares outstanding used to compute basic
earnings per share were 59.9 million, 51.9 million and 49.2 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The increases in the
weighted average shares reflect the issuance of new shares and the issuance of
shares pursuant to a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 60.0 million, 52.0 million and 49.3 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
<PAGE> 24
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At December 31, 1999, the Company had $18.2 million in cash and cash
equivalents. The Company invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short-term repurchase
agreements fully collateralized by such securities. The Company's objective is
to manage to a low cash balance and fund new originations with its credit
facilities.
DEBT
The Company had outstanding debt at December 31, 1999 as follows:
DEBT
<TABLE>
<CAPTION>
ANNUAL
AMOUNT INTEREST
OUTSTANDING COST*
------------- --------
(IN MILLIONS)
<S> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable............. $419.0 7.7%
SBA debentures................................ 62.7 8.0%
OPIC loan..................................... 5.7 6.6%
------ ----
Total notes payable and debentures.... $487.4 7.7%
====== ====
Revolving credit facilities:
Revolving line of credit...................... $ 82.0 9.3%
Master loan and security agreement............ 23.5 6.9%
------ ----
Total revolving credit facilities..... $105.5 8.8%
------ ----
Total debt............................ $592.9 7.9%
====== ====
</TABLE>
- -------------------------
* The annual interest cost includes the cost of commitment fees and other
facility fees.
UNSECURED LONG-TERM NOTES PAYABLE. The Company has issued long-term debt
to private institutional lenders, primarily insurance companies. The notes have
five- or seven-year maturities. The notes require payment of interest only
semi-annually, and all principal is due upon maturity.
SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
payable to the SBA with terms of ten years. The notes require payment of
interest only semi-annually, and all principal is due upon maturity. The Company
may borrow up to $101 million from the SBA under the SBIC program. At December
31, 1999, the Company had a commitment from the SBA for an additional $12.0
million of debt, which was borrowed in January 2000.
REVOLVING LINE OF CREDIT. The Company has a two-year, $340 million
unsecured revolving line of credit that expires in March 2001. This facility may
be expanded up to $400 million. At the Company's option, the credit facility
bears interest at a rate equal to
<PAGE> 25
(i) the one-month London Inter-Bank Offered Rate ("LIBOR") plus 1.25% or (ii)
the higher of (a) the NationsBank, N.A. prime rate and (b) the Federal Funds
rate plus 0.50%. The credit facility requires monthly payments of interest, and
all principal is due upon maturity. In January 2000, the Company increased its
unsecured revolving line of credit to $360 million and is currently negotiating
to extend the maturity by one year.
MASTER LOAN AND SECURITY AGREEMENT. The Company has a facility to borrow
up to $100 million using certain commercial mortgage loans as collateral. The
agreement generally requires interest-only payments with all principal due at
maturity. The agreement charges interest at LIBOR plus 1.0%. The facility
matures in October 2000.
EQUITY CAPITAL AND DIVIDENDS
The Company raises debt and equity capital for continued investment in
growing businesses. Because the Company is a RIC, it distributes its income and
requires external capital for growth. Because the Company is a business
development company, it is limited in the amount of debt capital it may use to
fund its growth, since it is generally required to maintain a ratio of 200% of
total assets to total borrowings, or approximately 1 to 1 debt to equity
capital.
To support its growth during 1999, the Company raised $168.9 million in new
equity capital primarily through the sale of shares from its shelf registration
statement. At December 31, 1999, total shareholders' equity had increased to
$667.5 million. The Company issues new equity only in cases where attractive
investment opportunities have been identified, thus resulting in accretive
growth for existing shareholders.
The Company's Board has established a dividend policy for 2000 to review
the dividend rate quarterly, and to adjust the quarterly dividend rate
throughout the year as the Company's earnings momentum builds. In 1999, the
Board had established a dividend policy of level quarterly dividends of $0.40
per share, for an annual total distribution of $1.60 per share to approximate
annual taxable income. The Board changed its dividend policy for 2000 because of
the Company's significant portfolio growth and continued growth in ordinary
taxable income.
As a result of growth in ordinary taxable income combined with the
increased size and diversity of the Company's portfolio and its projected future
capital gains, the Company's Board of Directors will continue to evaluate
whether to retain or distribute capital gains as they occur. The new policy will
allow the Company to continue to distribute some capital gains, but will also
allow the Company to retain gains that exceed a normal capital gains
distribution level, and therefore avoid any unusual spike in dividends in any
one year. The new policy also enables the Board to selectively retain gains to
support future growth.
The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowings under short- or long-term credit facilities, through asset sales, or
through obtaining new equity capital. The Company will utilize its short-term
credit facilities only as a means to bridge to long-term financing. The Company
evaluates its interest rate exposure on an ongoing basis. The Company manages
interest rate risk through a diversified borrowing base and a matched-funding
policy. A diversified borrowing base consists of short- and long-term debt with
a variable or fixed rate. The matched-funding policy states that floating rate
assets generally be financed with similar term floating-rate liabilities and
fixed-rate assets
<PAGE> 26
generally be financed with similar term fixed-rate liabilities. To the extent
deemed necessary, the Company may hedge variable and short-term interest rate
exposure through interest rate swaps or other techniques. At December 31, 1999,
the Company's debt to equity ratio was less than 1 to 1. Approximately 82% of
the Company's debt had a fixed interest rate, and the Company's weighted average
cost of funds was 7.9% at December 31, 1999. There are no significant maturities
of long-term debt until 2003. The Company believes that it has access to capital
sufficient to fund its ongoing investment and operating activities, and from
which to pay dividends.
The "Year 2000 problem" refers to the inability of many computers,
computer-based systems, related software, and other electronics to process dates
accurately during the Year 2000 and beyond. The Company's Year 2000 readiness
plan focused on three main areas: the Company's information technology and other
operating systems, critical service providers, and portfolio companies. As of
March 1, 2000, we have not experienced any business disruption as a result of
the Year 2000 problem. Although Year 2000 problems may not become evident until
long after January 1, 2000, based on our Year 2000 readiness and our experience
at the end of 1999 and early 2000, we also do not expect significant Year 2000
related business disruptions in the future.
INVESTMENT CONSIDERATIONS
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our
portfolio consists primarily of long-term loans to and investments in private
companies. There is generally no publicly available information about these
companies, and we rely significantly on the diligence of our employees and
agents to obtain information in connection with the Company'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 effect
the return on, or the recovery of, our investment in such businesses.
Investments in private businesses, therefore, involve a high degree of business
and financial risk, which can result in substantial losses and accordingly
should be considered speculative.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS. We primarily invest in and
lend 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. We make unsecured,
subordinated loans or invest in equity securities, which may involve a higher
degree of repayment risk.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We acquire most of our
investments directly from private companies. The majority of the investments in
our portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of our portfolio may
adversely affect our ability to dispose of loans and securities at times when it
may be advantageous for us to liquidate such investments.
WE INVEST IN NON-INVESTMENT GRADE CMBS. The commercial mortgage-backed
securities ("CMBS") in which we invest are non-investment grade, which means
that nationally recognized statistical rating organizations rate them below the
top four investment-grade rating categories (e.g., "AAA" through "BBB").
Non-investment grade securities usually provide a higher yield than do
investment-grade bonds, but with the
<PAGE> 27
higher return comes greater risk. Non-investment grade securities are considered
speculative, and their capacity to pay principal and interest in accordance with
the terms of their issue is not ensured. Therefore, the non-investment grade
CMBS tend to be less liquid, may have a higher risk of default and may be more
difficult to value.
OUR PORTFOLIO IS RECORDED AT FAIR VALUE AS DETERMINED BY THE BOARD OF
DIRECTORS. Pursuant to the requirements of the Investment Company Act of 1940
("1940 Act"), the Board of Directors is required to value each asset quarterly,
and we are required to carry our 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 we make investments, our 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, we are not permitted to provide a general reserve for anticipated
loan losses; we are instead required by the 1940 Act to specifically value each
individual investment and record an unrealized loss for an asset that we believe
has become impaired. We adjust quarterly the valuation of our portfolio to
reflect the Board of Directors' estimate of the current realizable value of each
investment in our portfolio. Without a readily ascertainable market value, the
estimated value of our portfolio of loans and equity securities may differ
significantly from the values that would be placed on the portfolio if there
existed a ready market for the loans and equity securities. Any changes in
estimated value are recorded in the Company's statement of operations as "Net
unrealized gains (losses)."
WE BORROW MONEY WHICH MAY INCREASE THE RISK OF INVESTING IN OUR COMPANY. We
borrow from, and issue senior debt securities to, banks, insurance companies and
other lenders. Lenders of these senior securities have fixed dollar claims on
our consolidated assets that are superior to the claims of our 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 our securities. If the value of our consolidated assets increases,
then leveraging would cause the net asset value attributable to the Company's
common stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments, and, if asset coverage for a
class of senior security representing indebtedness declines to less than 200%,
we may be required to sell a portion of our investments when it is
disadvantageous to do so. Leverage is generally considered a speculative
investment technique.
As of December 31, 1999, the Company's asset coverage for indebtedness was
228%. Our ability to achieve our investment objective may depend in part on our
continued ability to maintain a leveraged capital structure by borrowing from
banks or other lenders on favorable terms. There can be no assurance that we
will be able to maintain such leverage. At December 31, 1999, the Company had
$592.9 million of outstanding indebtedness, bearing a weighted annual interest
cost of 7.9%. In order for us to cover annual interest payments on indebtedness,
we must achieve annual returns on our portfolio of at least 3.7%.
<PAGE> 28
CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL. Because we
borrow money to make investments, our income is dependent upon the difference
between the rate at which we borrow funds and the rate at which we invest these
funds. In periods of sharply rising interest rates, our cost of funds would
increase, which would reduce our portfolio income before net realized and
unrealized gains. However, there would be no effect on the return, if any, that
could be generated from our equity interests. We use a combination of long-term
and short-term borrowings and equity capital to finance our investing
activities. Investments originated for sale generally carry variable rates and
are financed with short-term variable rate debt. Our long-term fixed-rate
investments are financed with long-term fixed-rate debt and equity. We may use
interest rate risk management techniques in an effort to limit our exposure to
interest rate fluctuations. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act. There can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our portfolio income.
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL
CAPITAL. We will continue to need capital to fund incremental growth in our
investments. Historically, we have borrowed from financial institutions and have
issued equity securities. A reduction in the availability of funds from
financial institutions could limit our ability to grow. We must distribute at
least 90% of our taxable net operating income excluding net realized long-term
capital gains to our stockholders to maintain our regulated investment company
("RIC") status. As a result such earnings will not be available to fund
investment originations. We expect to continue to borrow from financial
institutions and sell additional equity securities. If we fail to obtain funds
from such sources or from other sources to fund our investments, it could limit
our ability to grow, which could have a material adverse effect on the value of
the Company's common stock. In addition, as a business development company
("BDC"), we are generally required to maintain a ratio of at least 200% of total
assets to total borrowings, which may restrict our ability to borrow in certain
circumstances.
OUR PORTFOLIO MAY NOT PRODUCE CAPITAL GAINS. 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. We cannot be sure that our portfolio will generate
a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS
AND INCOME AVAILABLE FOR DIVIDENDS. We have operated the Company so as to
qualify to be taxed as a RIC under Subchapter M of the Code. If we meet certain
diversification and distribution requirements, the Company qualifies for
pass-through tax treatment. The Company would cease to qualify for pass-through
tax treatment if it were unable to comply with these requirements, or if it
ceased to qualify as a BDC under the 1940 Act. We also could be subject to a 4%
excise tax (and, in certain cases, corporate level income tax) if we fail to
make certain distributions. If the Company fails to qualify as a RIC, the
Company would become subject to federal income tax as if it were an ordinary
corporation, which would substantially reduce our net assets and the amount of
income available for distribution to our shareholders.
WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We
compete for investments with many other companies and individuals, some of whom
have greater resources than we do. Increased competition would make it more
difficult for us to
<PAGE> 29
purchase or originate investments at attractive prices. As a result of this
competition, sometimes we may be precluded from making otherwise attractive
investments.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT. We are regulated by the
Commission and the SBA. In addition, changes in the laws or regulations that
govern BDCs, RICs, real estate investment trusts ("REITs"), SBICs and SBLCs may
significantly affect our business. Laws and regulations may be changed from time
to time, and the interpretations of the relevant laws and regulations also are
subject to change. Any change in the law or regulations that govern our business
could have a material impact on the Company or its operations.
QUARTERLY RESULTS MAY FLUCTUATE. The Company's quarterly operating results
could fluctuate due to a number of factors. These factors 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 we encounter competition in our
markets and general economic conditions. As a result of these factors, you
should not rely on quarterly results to be indicative of the Company's
performance in future quarters.
<PAGE> 30
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) ---------- --------
<S> <C> <C>
ASSETS
Portfolio at value:
Private finance (cost: 1999-$639,171;
1998-$382,488)....................................... $ 647,040 $388,554
Commercial real estate finance (cost: 1999-$522,022;
1998-$356,039)....................................... 520,029 354,980
Small business finance (cost: 1999-$61,708;
1998-$64,952)........................................ 61,428 63,585
---------- --------
Total portfolio at value.......................... 1,228,497 807,119
---------- --------
Cash and cash equivalents................................... 18,155 25,075
Other assets................................................ 43,386 23,885
---------- --------
Total assets...................................... $1,290,038 $856,079
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and debentures.......................... $ 487,350 $233,350
Revolving credit facilities........................... 105,500 101,000
Accounts payable and other liabilities................ 22,675 21,671
Dividends and distributions payable................... -- 1,700
---------- --------
Total liabilities................................. 615,525 357,721
---------- --------
Commitments and Contingencies
Preferred stock............................................. 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 65,930,360 and 56,729,502 issued and
outstanding at December 31, 1999 and 1998,
respectively......................................... 6 6
Additional paid-in capital............................ 699,149 526,824
Common stock held in deferred compensation trust
(516,779 shares and 810,456 shares at December 31,
1999 and 1998, respectively)......................... (6,218) (13,190)
Notes receivable from sale of common stock............ (29,461) (23,735)
Net unrealized appreciation on portfolio.............. 4,517 2,380
Distributions in excess of earnings................... (480) (927)
---------- --------
Total shareholders' equity........................ 667,513 491,358
---------- --------
Total liabilities and shareholders' equity........ $1,290,038 $856,079
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- ---------
<S> <C> <C> <C>
Interest and related portfolio income:
Interest.............................................. $119,772 $ 79,921 $86,882
Premiums from loan dispositions....................... 14,284 5,949 7,277
Post-Merger gain on securitization of commercial
mortgage loans...................................... -- 14,812 --
Investment advisory fees and other income............. 7,084 6,056 3,246
-------- -------- -------
Total interest and related portfolio income....... 141,140 106,738 97,405
-------- -------- -------
Expenses:
Interest.............................................. 34,860 20,694 26,952
Employee.............................................. 16,136 11,829 10,258
Administrative........................................ 12,350 11,921 8,970
Merger................................................ -- -- 5,159
-------- -------- -------
Total operating expenses.......................... 63,346 44,444 51,339
-------- -------- -------
Formula and cut-off awards............................ 6,753 7,049 --
-------- -------- -------
Portfolio income before net realized and unrealized gains... 71,041 55,245 46,066
-------- -------- -------
Net realized and unrealized gains:
Net realized gains.................................... 25,391 22,541 10,704
Net unrealized gains.................................. 2,138 1,079 7,209
-------- -------- -------
Total net realized and unrealized gains........... 27,529 23,620 17,913
-------- -------- -------
Income before minority interests and income taxes........... 98,570 78,865 63,979
-------- -------- -------
Minority interests.......................................... -- -- 1,231
Income tax expense.......................................... -- 787 1,444
-------- -------- -------
Net increase in net assets resulting from operations........ $ 98,570 $ 78,078 $61,304
======== ======== =======
Basic earnings per common share............................. $ 1.64 $ 1.50 $ 1.24
======== ======== =======
Diluted earnings per common share........................... $ 1.64 $ 1.50 $ 1.24
======== ======== =======
Weighted average common shares outstanding -- basic......... 59,877 51,941 49,218
======== ======== =======
Weighted average common shares outstanding -- diluted....... 60,044 51,974 49,251
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- --------- ---------
<S> <C> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................ $ 71,041 $ 55,245 $ 46,066
Net realized gains..................................... 25,391 22,541 10,704
Net unrealized gains................................... 2,138 1,079 7,209
Minority interests and income tax expense.............. -- (787) (2,675)
-------- -------- --------
Net increase in net assets resulting from
operations...................................... 98,570 78,078 61,304
-------- -------- --------
Shareholder distributions:
Common stock dividends................................. (97,941) (75,087) (85,678)
Preferred stock dividends.............................. (230) (230) (220)
-------- -------- --------
Net decrease in net assets resulting from
shareholder distributions....................... (98,171) (75,317) (85,898)
-------- -------- --------
Capital share transactions:
Sale of common stock................................... 164,269 69,675 --
Net (increase) decrease in notes receivable from sale
of common stock...................................... (5,725) 5,576 (14,120)
Issuance of common stock upon the exercise of stock
options.............................................. 5,920 221 28,426
Issuance of common stock in lieu of cash
distributions........................................ 4,610 6,184 26,612
Net decrease (increase) in common stock held in
deferred compensation trust.......................... 6,972 (13,190) --
Other.................................................. (290) 71 1,602
-------- -------- --------
Net increase in net assets resulting from capital
share transactions.............................. 175,756 68,537 42,520
-------- -------- --------
Total increase in net assets...................... $176,155 $ 71,298 $ 17,926
======== ======== ========
Net assets at beginning of year............................. $491,358 $420,060 $402,134
-------- -------- --------
Net assets at end of year................................... $667,513 $491,358 $420,060
-------- -------- --------
Net asset value per common share............................ $ 10.20 $ 8.79 $ 8.07
-------- -------- --------
Common shares outstanding at end of year.................... 65,414 55,919 52,047
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
(IN THOUSANDS) --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations..... $ 98,570 $ 78,078 $ 61,304
Adjustments
Net unrealized gains.................................. (2,138) (1,079) (7,209)
Post-Merger gain on securitization of commercial
mortgages........................................... -- (14,812) --
Depreciation and amortization......................... 788 702 450
Amortization of loan discounts and fees............... (10,674) (6,032) (10,804)
Deferred income taxes................................. -- -- 1,087
Minority interests.................................... -- -- 1,231
Changes in other assets and liabilities............... (8,712) 11,998 12,881
--------- --------- ---------
Net cash provided by operating activities........... 77,834 68,855 58,940
--------- --------- ---------
Cash flows from investing activities:
Portfolio investments.................................... (751,871) (524,530) (364,942)
Repayments of investment principal....................... 145,706 138,081 233,005
Proceeds from loan sales................................. 198,368 81,013 53,912
Proceeds from securitization of commercial mortgages..... -- 223,401 --
Net redemption (purchase) of U.S. government
securities............................................ -- 11,091 (10,301)
Collections of notes receivable from sale of common
stock................................................. 195 5,591 6,534
Other investing activities............................... (1,754) (2,539) (182)
--------- --------- ---------
Net cash used in investing activities............... (409,356) (67,892) (81,974)
--------- --------- ---------
Cash flows from financing activities:
Sale of common stock..................................... 164,269 69,896 8,615
Purchase of common stock by deferred compensation
trust................................................. -- (19,431) --
Common dividends and distributions paid.................. (95,031) (69,536) (58,194)
Special undistributed earnings distribution paid......... -- (8,848) --
Preferred stock dividends paid........................... (230) (450) (220)
Net borrowings under (payments on) notes payable and
debentures............................................ 254,000 (69,471) 78,923
Net borrowings under (payments on) revolving lines of
credit................................................ 4,500 56,158 (6,257)
Other financing activities............................... (2,906) (4,643) (1,237)
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 324,602 (46,325) 21,630
--------- --------- ---------
Net decrease in cash and cash equivalents.................. $ (6,920) $ (45,362) $ (1,404)
--------- --------- ---------
Cash and cash equivalents at beginning of year............. $ 25,075 $ 70,437 $ 71,841
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 18,155 $ 25,075 $ 70,437
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,386 $ 13,386
- -----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,618 6,618
Partnership Interest 1,456 2,100
- -----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,905 9,905
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
- -----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 13,370 13,370
Equity Interest 1,500 1,500
- -----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,959 11,959
Warrants 1,180 1,180
- -----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 10,967 10,967
- -----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,491 2,491
Warrants 220 220
- -----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
- -----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 310 310
Warrants 12 212
- -----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,460 3,460
Warrants -- 538
- -----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,957 6,957
Debt Securities 4,942 4,942
Warrants -- --
Options -- --
- -----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,817 5,817
Resources, LLC Options 87 87
- -----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,298 9,298
- -----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
- -----------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 --
- -----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 29
- -----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- --
- -----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
- -----------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,911 8,755
Company, Inc. Debt Securities 786 786
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 35
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
EDM Consulting, LLC Debt Securities $ 1,875 $ 343
Common Stock (100 shares) 250 --
- -----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
- -----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
- -----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
- -----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,825 15,825
Warrants 360 360
- -----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,753 5,753
Warrants 280 3,628
- -----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 12,053 12,053
Warrants 970 970
- -----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,740 30,740
Communications, LLC Options -- 750
- -----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
- -----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,328 1,328
Common Stock (41,644 shares) 214 81
- -----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 108 108
- -----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,742 15,742
Warrants 525 1,000
- -----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
- -----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,526 2,526
Debt Securities 1,733 1,733
Equity Interest 6,867 6,867
Options 1,639 1,639
- -----------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 840
Archery, LLC Convertible Debentures 2,248 2,008
- -----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Debt Securities 5,200 5,200
Warrants 87 5,226
- -----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,177 9,177
Warrants -- 2,500
- -----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (1,000,000 shares) 1,000 1,000
- -----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
- -----------------------------------------------------------------------------------------------------------
J3 Technology Services Corporation Debt Securities 7,841 7,841
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 36
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Jakel, Inc. Loan $ 18,174 $ 18,174
- -----------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,134 2,134
Warrants 74 74
- -----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 3,502 3,502
Warrants 324 4,100
- -----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
- -----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,318 6,318
Warrants 96 600
- -----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,665 7,665
Warrants 348 348
- -----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,439 3,439
Common Stock (64,535 shares) 142 142
- -----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
- -----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred 359 213
Stock (26,000 shares)
- -----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Common Stock (156 shares) 42 3,042
- -----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities 3,793 3,793
Series B Convertible 2,049 2,049
Preferred Stock (227,665 shares)
Warrants 136 136
- -----------------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,938 2,938
- -----------------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, LLC Loan 11,109 11,109
- -----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 7 7
Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
- -----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 13,989 13,989
Warrants 651 651
- -----------------------------------------------------------------------------------------------------------
Net-Tel Communications, Inc. Debt Securities 9,426 9,426
Series B Convertible 5,000 5,000
Preferred Stock (647 shares)
Warrants 500 500
- -----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Inc. (1) Debt Securities 9,492 9,492
Series D Convertible 2,000 2,000
Preferred Stock (265,957 shares)
Warrants 575 575
- -----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 384 384
- -----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,922 10,922
Warrants 900 900
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 37
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Old Mill Holdings, Inc. Debt Securities $ 140 --
- -----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,896 $ 13,896
Warrants 996 996
- -----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,802 23,802
Warrants 826 826
- -----------------------------------------------------------------------------------------------------------
Panera Bread Company (1) Warrants 227 271
- -----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,388 14,388
Redeemable Preferred 850 850
Stock (850 shares)
Convertible Preferred 150 150
Stock (97,411 shares)
Warrants 476 476
- -----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 2,591
Common Stock (208,000 shares) 59 3
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,395 6,395
Warrants 1,050 1,050
- -----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,031 15,031
- -----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,940 3,940
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,978 9,978
Warrants 395 395
- -----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred 993 136
Stock (1,000 shares)
- -----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,140 8,140
Warrants 446 446
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
- -----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,364 6,364
Options 1,000 2,000
- -----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 469 360
Common Stock (6,208 shares) 25 18
- -----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
- -----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Preferred Stock (1,116,902 shares) 3,108 3,108
Warrants 662 662
Options -- --
- -----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,674 11,674
Options 266 266
- -----------------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 13,863 13,863
Warrants 900 900
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 38
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Total Foam, Inc. Debt Securities $ 1,528 $ 135
Common Stock (910 shares) 57 --
- -----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,886 3,886
Warrants 54 54
Equity Interests 500 500
- -----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,938 4,938
Warrants 15 15
- -----------------------------------------------------------------------------------------------------------
Unitel, Inc. Debt Securities 3,694 3,694
Warrants 360 1,010
- -----------------------------------------------------------------------------------------------------------
Wildwood Designs, Inc. Loan 1,167 1,167
- -----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
- -----------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,390 12,390
- -----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 8,000 8,000
Equity Interests 1,700 1,700
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,113 15,113
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 4,100
- -----------------------------------------------------------------------------------------------------------
Total private finance (91 investments) $639,171 $647,040
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
- ------------------------------------------- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial Mortgage Loans Up to 6.99% 5 $ 1,422 $ 1,422
7.00%- 8.99% 15 71,619 71,595
9.00%-10.99% 41 39,415 39,623
11.00%-12.99% 30 25,016 25,175
13.00%-14.99% 12 15,207 15,230
15.00% and above 3 1,088 1,064
- -----------------------------------------------------------------------------------------------
Total commercial mortgage loans 106 153,767 154,109
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 39
<TABLE>
<CAPTION>
DECEMBER 31, 1999
STATED -------------------
INTEREST FACE COST VALUE
-------- ------ ------- ------
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,141 $ 29,141
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,453 35,453
COMM 1999-1 5.7% 105,010 54,166 54,166
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,505 24,505
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,288 44,288
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,115 28,115
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,054 20,054
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,121 20,121
FUNB CMT, Series 1999-C4 6.5% 49,288 21,851 21,851
- --------------------------------------------------------------------------------------------------
Total purchased CMBS $569,234 $ 277,694 $ 277,694
- --------------------------------------------------------------------------------------------------
Residual CMBS 76,374 76,374
- --------------------------------------------------------------------------------------------------
Residual Interest Spread 6,882 5,382
- --------------------------------------------------------------------------------------------------
Real Estate Owned 7,305 6,470
- --------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 522,022 $ 520,029
- --------------------------------------------------------------------------------------------------
Small business finance $ 61,708 $ 61,428
- --------------------------------------------------------------------------------------------------
Total portfolio at value $1,222,901 $1,228,497
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 40
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation has two wholly owned subsidiaries that have
also elected to be regulated as BDCs. Allied Investment Corporation ("Allied
Investment") is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company ("SBIC"). Allied Capital SBLC Corporation
("Allied SBLC") is licensed by the Small Business Administration ("SBA") as a
Small Business Lending Company and is a participant in the SBA Section 7(a)
Guaranteed Loan Program. In addition, the Company has a real estate investment
trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT") and several single-
member limited liability companies established primarily to hold real estate
properties.
Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company."
The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests primarily
in private, small and middle-market companies in a variety of industries and in
diverse geographic locations in the United States.
On December 31, 1997, Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Commercial Corporation, and Allied Capital
Advisers ("Advisers") merged with and into Allied Capital Lending Corporation
("Allied Lending") (each a "Predecessor Company" and collectively the
"Predecessor Companies") in a stock-for-stock exchange (the "Merger").
Immediately following the Merger, Allied Lending changed its name to Allied
Capital Corporation.
The consolidated financial statements reflect the operations of the
Company, with the year ended December 31, 1997 restated as if the Predecessor
Companies had merged as of the beginning of the year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned or majority owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1998 and 1997 balances to conform with
the 1999 financial statement presentation. The consolidated financial statements
for 1997 and prior periods have been restated to include the accounts of the
Predecessor Companies. Transaction fees and expenses related to the Merger were
expensed in the fourth quarter of 1997.
VALUATION OF PORTFOLIO INVESTMENTS
Portfolio assets are carried at fair value as determined by the Board of
Directors under the Company's valuation policy.
<PAGE> 41
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS AND DEBT SECURITIES
The values of loans and debt securities are considered to be amounts that
could be realized in the normal course of business, which generally anticipates
the Company holding the loan to maturity and realizing the face value of the
loan. For loans and debt securities, value normally corresponds to cost unless
the borrower's condition or external factors lead to a determination of value at
a lower amount.
Interest income is recorded on the accrual basis to the extent that such
amounts are expected to be collected. Loan origination fees, original issue
discount and market discount are amortized into interest income using the
effective interest method. Yields on loans and debt securities are computed on
these investments at value.
EQUITY SECURITIES
Equity interests in portfolio companies for which there is no public market
are valued based on various factors including a history of positive cash flow
from operations, the market value of comparable publicly traded companies, and
other pertinent factors such as recent offers to purchase a portfolio company's
securities or other liquidation events. The determined values are generally
discounted to account for liquidity issues and minority control positions.
The Company's equity interests in public companies that carry certain
restrictions on sale are typically valued at a discount from the public market
value of the security at the balance sheet date. Restricted and unrestricted
publicly traded stocks may also be valued at a discount due to the investment
size or market liquidity concerns.
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS")
CMBS consists of purchased commercial mortgage-backed securities
("Purchased CMBS"), residual interest in a mortgage securitization ("Residual
CMBS") and residual interest spread.
PURCHASED CMBS
The Purchased CMBS is carried at fair value. The Company recognizes income
from the amortization of original issue discount using the effective interest
method, using the anticipated yield over the projected life of the investment.
Yields are revised when there are changes in estimates of future credit losses,
actual losses incurred, and actual and estimated prepayment speeds. Changes in
estimated yield are currently recognized as an adjustment to the estimated yield
over the remaining life of the Purchased CMBS. The Company recognizes unrealized
depreciation on its Purchased CMBS whenever it determines that the value of its
Purchased CMBS is less than the cost basis.
RESIDUAL CMBS
The Company values its residual interest in securitization and recognizes
income using the same accounting policies used for the Purchased CMBS.
<PAGE> 42
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RESIDUAL INTEREST SPREAD
Residual interest spread is carried at fair value based on discounted
estimated future cash flows. The Company recognizes income from the residual
interest spread using the effective interest method. At each reporting date, the
effective yield is recalculated and used to recognize income until the next
reporting date.
NET REALIZED AND UNREALIZED GAINS
Realized gains or losses are measured by the difference between the net
proceeds from the sale and the cost basis of the investment without regard to
unrealized gains or losses previously recognized, and include investments
charged off during the year, net of recoveries. Unrealized gains or losses
reflect the change in portfolio investment values during the reporting period.
DEFERRED FINANCING COSTS
Financing costs are based on actual costs incurred in obtaining financing
and are deferred and amortized as part of interest expense over the term of the
related debt instrument.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may or may not use derivative financial instruments to reduce
interest rate risk. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative financial
instrument activities. The Company does not hold or issue derivative financial
instruments for trading purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and all highly liquid
investments with original maturities of three months or less.
DIVIDENDS TO SHAREHOLDERS
Dividends to shareholders are recorded on the record date.
FEDERAL AND STATE INCOME TAXES
The Company and its wholly owned subsidiaries intend to comply with the
requirements of the Internal Revenue Code ("Code") that are applicable to
regulated investment companies ("RIC") and real estate investment trusts
("REIT"). The Company and its wholly owned subsidiaries intend to annually
distribute or retain through a deemed distribution all of their taxable income
to shareholders; therefore, the Company has made no provision for income taxes.
With the exception of Advisers, the Predecessor Companies qualified as a
RIC or a REIT; however, Advisers was a corporation subject to federal and state
income taxes. Income tax expense reported on the consolidated statement of
operations relates to the operations of Advisers for all periods presented.
<PAGE> 43
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PER SHARE INFORMATION
Basic earnings per share is calculated using the weighted average number of
shares outstanding for the period presented. Diluted earnings per share reflects
the potential dilution that could occur if options to issue common stock were
exercised into common stock. Earnings per share is computed after subtracting
dividends on preferred shares.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
NOTE 3. PORTFOLIO
The Company's investment operations are conducted in three primary areas:
private finance, commercial real estate finance, and small business finance.
PRIVATE FINANCE
At December 31, 1999 and 1998, the private finance portfolio consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
-------- -------- ----- -------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans and debt securities............... $578,570 $559,746 14.2% $354,870 $339,163 14.6%
Equity interests........................ 60,601 87,294 27,618 49,391
-------- -------- -------- --------
Total......................... $639,171 $647,040 $382,488 $388,554
======== ======== ======== ========
</TABLE>
Private finance investments are generally structured as loans and debt
securities that carry a relatively high fixed rate of interest, which may be
combined with equity features, such as conversion privileges, or warrants or
options to purchase a portion of the portfolio company's equity at a nominal
price.
Debt securities would typically have a maturity of five to ten years, with
interest-only payments in the early years and payments of both principal and
interest in the later years, although debt maturities and principal amortization
schedules vary.
Equity interests consist primarily of securities issued by privately owned
companies and may be subject to restrictions on their resale or otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.
At December 31, 1999 and 1998, approximately 98% of the Company's private
finance loan portfolio was composed of fixed interest rate loans. At December
31, 1999 and 1998, loans and debt securities with a value of $34,560,000 and
$5,459,000, respectively, were not accruing interest.
<PAGE> 44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic and industry compositions of the private finance portfolio
at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Southeast................................................... 27% 23%
Midwest..................................................... 26 27
Mid-Atlantic................................................ 23 28
West........................................................ 11 11
Northeast................................................... 9 4
International............................................... 4 7
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Business Services........................................... 32% 15%
Consumer Products........................................... 19 25
Telecommunications.......................................... 13 14
Industrial Products......................................... 11 8
Retail...................................................... 8 9
Broadcasting................................................ 6 9
Education................................................... 5 8
Other....................................................... 6 12
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
COMMERCIAL REAL ESTATE FINANCE
At December 31, 1999 and 1998, the commercial real estate finance portfolio
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
-------- -------- ----- -------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans........................... $153,767 $154,109 9.4% $232,745 $233,186 10.4%
CMBS............................ 360,950 359,450 13.5% 115,174 113,674 11.2%
REO............................. 7,305 6,470 8,120 8,120
-------- -------- -------- --------
Total................. $522,022 $520,029 $356,039 $354,980
======== ======== ======== ========
</TABLE>
LOANS
The commercial mortgage loan portfolio contains loans that were originated
by the Company or were purchased from third-party sellers.
At December 31, 1999 and 1998, approximately 81% and 19%, and 68% and 32%
of the Company's commercial mortgage loan portfolio was composed of fixed and
adjustable interest rate
<PAGE> 45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
loans, respectively. As of December 31, 1999 and 1998, loans with a value of
$8,334,000 and $5,436,000, respectively, were not accruing interest.
The geographic composition and the property types securing the commercial
mortgage loan portfolio at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Mid-Atlantic................................................ 32% 37%
Southeast................................................... 31 26
West........................................................ 25 24
Midwest..................................................... 9 9
Northeast................................................... 3 4
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Hospitality................................................. 42% 47%
Office...................................................... 24 20
Retail...................................................... 11 14
Recreation.................................................. 8 7
Other....................................................... 15 12
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
CMBS
At December 31,1999 and 1998, the CMBS portfolio consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
COST VALUE COST VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased CMBS.............................. $277,694 $277,694 $ 32,221 $ 32,221
Residual CMBS............................... 76,374 76,374 70,771 70,771
Residual interest spread.................... 6,882 5,382 12,182 10,682
-------- -------- -------- --------
Total............................. $360,950 $359,450 $115,174 $113,674
======== ======== ======== ========
</TABLE>
PURCHASED CMBS
The Company has Purchased CMBS bonds with a face amount of $569,234,000 and
a cost of $277,694,000, with the difference representing original issue
discount. As of December 31, 1999 and 1998, the estimated yield to maturity on
the Purchased CMBS was approximately 14.6% and 15%, respectively. The Company's
yield on its Purchased CMBS is based upon a number of assumptions that are
subject to certain business and economic uncertainties and contingencies.
Examples include the timing and magnitude of credit losses on the mortgage loans
underlying the Purchased CMBS that are a result of the general condition of the
real estate market (including competition for tenants and their related credit
quality) and changes in market rental rates. At December 31, 1999 and 1998,
<PAGE> 46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
the yield on the Purchased CMBS portfolio was computed assuming a 1% loss
estimate for its entire underlying collateral mortgage pool. As these
uncertainties and contingencies are difficult to predict and are subject to
future events which may alter these assumptions, no assurance can be given that
the anticipated yields to maturity will be achieved.
The non-investment grade and unrated tranches of the Purchased CMBS bonds
are junior in priority for payment of principal to the more senior tranches of
the related commercial securitization. Cash flow from the underlying mortgages
generally is allocated first to the senior tranches, with the most senior
tranches having a priority right to the cash flow. Then, any remaining cash flow
is allocated, generally, among the other tranches in order of their relative
seniority. To the extent there are defaults and unrecoverable losses on the
underlying mortgages resulting in reduced cash flows, the subordinate tranche
will bear this loss first.
The underlying rating classes of the Purchased CMBS is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
PERCENTAGE PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL
-------- ---------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BB........................................... $ 41,091 14.8% $ 4,109 12.8%
BB-.......................................... 46,692 16.8 4,269 13.2
B+........................................... 41,765 15.0 -- --
B............................................ 64,830 23.4 13,133 40.8
B-........................................... 40,995 14.8 4,711 14.6
CCC.......................................... 6,506 2.3 -- --
Unrated...................................... 35,815 12.9 5,999 18.6
-------- ----- ------- -----
Total.............................. $277,694 100.0% $32,221 100.0%
======== ===== ======= =====
</TABLE>
RESIDUAL CMBS AND RESIDUAL INTEREST SPREAD
The Residual CMBS primarily consists of a retained interest from a
post-Merger asset securitization whereby bonds were sold in three classes rated
"AAA," "AA" and "A."
The Company sold $295 million of loans, and received cash proceeds, net of
costs, of approximately $223 million. The Company retained a trust certificate
for its residual interest in the loan pool sold, and will receive interest
income from this Residual CMBS as well as the Residual Interest Spread from the
interest earned on the loans sold less the interest paid on the bonds over the
life of the bonds.
As a result of this securitization, the Company recorded a gain of $14.8
million, net of the costs of the securitization and the cost of settlement of
interest rate swaps. As of December 31, 1999 and 1998, the mortgage loan pool
had an approximate weighted average stated interest rate of 9.3% and 9.4%,
respectively. The three bond classes sold had an aggregate weighted average
interest rate of 6.5% and 6.4% as of December 31, 1999 and 1998, respectively.
The value of the Residual CMBS was determined using a discount rate equal to the
average interest rate of the underlying mortgage loans. The value of the
residual interest spread was determined based on a constant prepayment rate of
7% and a discount rate of 14%.
<PAGE> 47
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS at December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
West........................................................ 32% 18%
Mid-Atlantic................................................ 23 32
Midwest..................................................... 21 20
Southeast................................................... 20 24
Northeast................................................... 4 6
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Retail...................................................... 33% 32%
Housing..................................................... 29 13
Office...................................................... 20 21
Hospitality................................................. 9 23
Other....................................................... 9 11
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
SMALL BUSINESS FINANCE
At December 31,1999 and 1998, the small business finance portfolio
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
7(a) loans...................................... $43,246 $43,000 $57,652 $56,285
Residual interest in loans sold................. 4,036 4,036 -- --
Residual interest spread........................ 14,046 14,046 7,250 7,250
REO............................................. 380 346 50 50
------- ------- ------- -------
Total................................. $61,708 $61,428 $64,952 $63,585
======= ======= ======= =======
</TABLE>
The Company, through its wholly owned subsidiary, Allied SBLC, participates
in the SBA's Section 7(a) Guaranteed Loan Program ("7(a) loans").
Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will
guarantee 80% of any qualified loan up to $100,000 regardless of maturity, and
75% of any such loan over $100,000 regardless of maturity, to a maximum
guarantee of $750,000 for any one borrower. SBA regulations define qualified
small businesses generally as businesses with no more than $5 million in annual
sales or no more than 500 employees.
The Company charges interest on the 7(a) loans at a variable rate,
typically 1.75% to 2.75% above the prime rate, as published in The Wall Street
Journal or other financial newspaper, adjusted monthly. All loans are payable in
equal monthly installments of principal and interest from the date on which the
loan was made to its maturity.
<PAGE> 48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
As permitted by SBA regulations, the Company sells to investors, without
recourse, 100% of the guaranteed portion of its 7(a) loans while retaining the
right to service 100% of such loans. Additionally, the Company sells up to a 90%
interest in the unguaranteed portion of its 7(a) loans through a structured
finance agreement with a commercial paper conduit.
In 1999, the Company sold $36,387,000 of the unguaranteed portion of 7(a)
loans into the facility. The Company received $35,500,000 in proceeds and
retained a subordinated interest valued at $4,036,000. The Company recognized a
premium from the loan sale of $4,106,000, which includes the value of the
retained residual interest spread.
As of December 31, 1999 and 1998, 7(a) loans with a value of $5,562,000 and
$5,806,000, respectively, were not accruing interest.
As of December 31,1999 and 1998, 7(a) loans include a balance of
$7,667,000 and $3,229,000, respectively, that is guaranteed by the SBA.
NOTE 4. DEBT
At December 31, 1999 and 1998, the Company had the following debt:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable......... $419,000 $419,000 $180,000 $180,000
SBA debentures............................ 74,650 62,650 74,650 47,650
OPIC loan................................. 5,700 5,700 5,700 5,700
-------- -------- -------- --------
Total notes payable and
debentures...................... 499,350 487,350 260,350 233,350
======== ======== ======== ========
Revolving credit facilities:
Revolving line of credit.................. 340,000 82,000 200,000 95,000
Master loan and security agreement........ 100,000 23,500 250,000 6,000
-------- -------- -------- --------
Total revolving credit
facilities...................... 440,000 105,500 450,000 101,000
-------- -------- -------- --------
Total..................................... $939,350 $592,850 $710,350 $334,350
======== ======== ======== ========
</TABLE>
NOTES PAYABLE AND DEBENTURES
UNSECURED LONG-TERM NOTES PAYABLE
In June 1998, May 1999 and November 1999, the Company issued unsecured
long-term notes to private institutional investors. The notes require
semi-annual interest payments until maturity and have terms of five or seven
years. The weighted average interest rate on the notes was 7.6% and 7.2% at
December 31, 1999 and 1998, respectively. The notes may be prepaid in whole or
in part together with an interest premium, as stipulated in the note agreement.
<PAGE> 49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
SBA DEBENTURES
At December 31, 1999 and 1998, the Company had debentures payable to the
SBA with terms of ten years and at interest rates ranging from 6.6% to 9.6%. The
debentures require semi-annual interest-only payments with all principal due
upon maturity. The SBA debentures are subject to prepayment penalties if paid
prior to maturity.
Scheduled future maturities of notes payable and debentures at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 17,300
2001........................................................ 9,350
2002........................................................ --
2003........................................................ 140,000
2004........................................................ 221,000
Thereafter.................................................. 99,700
--------
Total............................................. $487,350
========
</TABLE>
REVOLVING CREDIT FACILITIES
REVOLVING LINE OF CREDIT
In May 1999, the Company increased its unsecured revolving line of credit
to $340,000,000 from $315,000,000. The facility bears interest at the London
Interbank Offer Rate ("LIBOR") plus 1.25% and adjusts at the beginning of each
new interest period, usually every thirty days. The interest rates were 7.7% and
6.9% at December 31, 1999 and December 31, 1998, respectively, and the facility
requires a commitment fee equal to 0.25% of the committed amount. The new line
expires in March 2001. The line of credit requires monthly interest payments and
all principal is due upon its expiration. In January 2000, the Company increased
its unsecured revolving line of credit to $360,000,000.
MASTER LOAN AND SECURITY AGREEMENT
The Company has a facility to borrow up to $100,000,000, using certain
commercial mortgage loans as collateral. The Company pledges commercial mortgage
loans as collateral for the facility such that the amount borrowed is
approximately equal to 80% of the value of the collateral pledged. The agreement
generally requires interest-only payments with all principal due at maturity.
Principal may be repaid at any time without penalty. The agreement bears
interest at the one-month LIBOR plus 1.0%, and adjusts daily, or 6.8% and 6.6%
at December 31, 1999 and 1998, respectively. The agreement matures on October
27, 2000.
The average debt outstanding on the revolving credit facilities was
$123,860,000 and $73,836,000 for the years ended December 31, 1999 and 1998,
respectively. The maximum amount borrowed under these facilities and the
weighted average interest rate for the years ended December 31, 1999 and 1998,
were $199,392,000 and $135,000,000, and 6.5% and 6.7%, respectively.
<PAGE> 50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. INCOME TAXES
For the years ended December 31, 1999, 1998 and 1997, the Company's
effective tax rate was 0.0%, 1.0% and 2.3%, respectively.
For the year ended December 31, 1998, the Company incurred income tax
expense of $787,000, which resulted from the realization of a taxable net
built-in gain associated with property owned by Advisers prior to the Merger.
For the year ended December 31, 1997, the Company's income was subject to
federal and state taxes related to the income generated by the pre-Merger
operations of Advisers.
NOTE 6. PREFERRED STOCK
Allied Investment has outstanding a total of 60,000 shares of $100 par
value, 3% cumulative preferred stock and 10,000 shares of $100 par value, 4%
redeemable cumulative preferred stock issued to the SBA pursuant to Section
303(c) of the Small Business Investment Act of 1958, as amended. The 3%
cumulative preferred stock does not have a required redemption date. Allied
Investment has the option to redeem in whole or in part the preferred stock by
paying the SBA the par value of such securities and any dividends accumulated
and unpaid to the date of redemption. The 4% redeemable cumulative preferred
stock has a required redemption date in June 2005.
NOTE 7. SHAREHOLDERS' EQUITY
Sale of common stock in 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Number of common shares..................................... 8,659 4,367
Gross proceeds.............................................. $172,539 $73,736
Less costs including underwriting fees...................... (8,270) (4,061)
-------- -------
Net proceeds.............................................. $164,269 $69,675
======== =======
</TABLE>
The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sale prices reported for the
Company's common stock for the five consecutive days immediately prior to the
dividend payment date.
Dividend reinvestment plan activity for 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Shares issued............................................... 233 241 551
Average price per share..................................... $19.43 $20.35 $15.67
</TABLE>
<PAGE> 51
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net increase in net assets resulting from operations........ $98,570 $78,078 $61,304
Less preferred stock dividends.............................. (230) (230) (220)
------- ------- -------
Income available to common shareholders..................... $98,340 $77,848 $61,084
======= ======= =======
Basic shares outstanding.................................... 59,877 51,941 49,218
Options outstanding to officers............................. 167 33 33
------- ------- -------
Diluted shares outstanding.................................. 60,044 51,974 49,251
======= ======= =======
BASIC EARNINGS PER COMMON SHARE............................. $ 1.64 $ 1.50 $ 1.24
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE........................... $ 1.64 $ 1.50 $ 1.24
======= ======= =======
</TABLE>
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN, 401(K) PLAN AND DEFERRED COMPENSATION
PLAN
The Company had an employee stock ownership plan ("ESOP"). Pursuant to the
ESOP, the Company was obligated to contribute 5% of each eligible participant's
total cash compensation for the year to a plan account on the participant's
behalf, which vested over a two-year period. ESOP contributions were used to
purchase shares of the Company's common stock.
As of December 31, 1999 and 1998, the ESOP held 303,210 shares and 282,500
shares, respectively, of the Company's common stock, all of which had been
allocated to participants' accounts. The plan is funded annually and the total
ESOP contribution expense for the years ended December 31, 1999, 1998, and 1997
was $641,000, $489,000 and $351,000, respectively, net of forfeitures of $4,100,
$4,000, and $0, respectively. In 1999, the Company established a 401(k) plan
(see below) and elected to terminate the ESOP Plan in 2000. During 2000, the
ESOP assets will be transferred into the 401(k) plan.
The Company has a 401(k) retirement investment plan, which is open to all
of its employees. The employees may elect voluntary wage deferrals ranging from
0% to 15% of taxable compensation for the year. In 2000, the Company will begin
making contributions to the 401(k) plan under the same terms that ESOP
contributions were made.
The Company also has a deferred compensation plan (the "DC Plan"). Eligible
participants in the DC Plan may elect to defer some of their compensation and
have such compensation credited to a participant account. All amounts credited
to a participant's account shall be credited solely for purposes of accounting
and computation and remain assets of the Company and subject to the claims of
the Company's general creditors. Amounts credited to participants under the DC
Plan are at all times 100% vested and non-forfeitable except for amounts
credited to participants' accounts related to the Formula Award (see Note 11). A
participant's account shall become distributable upon his or her separation from
service, retirement, disability, death or at a future determined date. All DC
Plan accounts will be distributed in the event of a change of control of the
Company or in the event of the Company's insolvency. Amounts deferred by
participants under the DC Plan are funded to a trust, the trustee of which
administers the DC Plan on behalf of the Company.
<PAGE> 52
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLAN
In conjunction with the Merger, all stock option plans that existed for
Allied Lending and the Predecessor Companies before the Merger ("Old Plans")
were cancelled on December 31, 1997, and at a special meeting of shareholders on
November 26, 1997, the Company's shareholders approved a new stock option plan
("Option Plan") for the Company to be effected post-Merger.
THE OPTION PLAN
The purpose of the Option Plan is to provide officers and non-officer
directors of the Company with additional incentives. Options may be granted from
time to time on up to 6,250,000 shares, which represents approximately 10% of
the outstanding shares as of December 31, 1999.
Options are exercisable at a price equal to the fair market value of the
shares on the day the option is granted. Each option states the period or
periods of time within which the option may be exercised by the optionee, which
may not exceed ten years from the date the option is granted.
All rights to exercise options terminate 60 days after an optionee ceases
to be (i) a non-officer director, (ii) both an officer and a director, if such
optionee serves in both capacities, or (iii) an officer (if such officer is not
also a director) of the Company for any cause other than death or total and
permanent disability. In the event of a change of control of the Company, all
outstanding options will become fully vested and exercisable as of the change of
control.
Information with respect to options granted, exercised and forfeited under
the Option Plan for the years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION PRICE
SHARES PER SHARE
------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Options outstanding at January 1, 1998...................... -- $ --
Granted..................................................... 5,190 20.16
Exercised................................................... (10) 21.38
Forfeited................................................... (66) 21.38
----- ------
Options outstanding at December 31, 1998.................... 5,114 $20.14
Granted..................................................... 1,288 19.75
Exercised................................................... (318) 19.07
Forfeited................................................... (195) 20.00
----- ------
Options outstanding at December 31,1999..................... 5,889 $20.12
===== ======
</TABLE>
OLD PLAN ACTIVITY
During 1997, the Predecessor Companies granted 1,474,000 options under the
Old Plans at exercise prices ranging from $9.53 to $22.58 per share. Total
shares issued pursuant to the exercise of stock options totaled 2,395,000 during
1997.
<PAGE> 53
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLAN, CONTINUED
NOTES RECEIVABLE FROM THE SALE OF COMMON STOCK
The Company provides loans to officers for the exercise of options. The
loans have varying terms not exceeding ten years, bear interest at the
applicable federal interest rate in effect at the date of issue and have been
recorded as a reduction to shareholders' equity. For the years ended December
31, 1999, 1998 and 1997, the Company had outstanding loans to officers of
$29,461,000, $23,735,000, and $29,611,000, respectively. Officers with
outstanding loans repaid principal of $195,000, $5,591,000, and $6,534,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. The Company
recognized interest income from these loans of $1,539,000, $1,600,000, and
$1,031,000, respectively, during these same periods.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
TOTAL WEIGHTED AVERAGE TOTAL
RANGE OF NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL LIFE AVERAGE EXERCISABLE AVERAGE
PRICES AT 12/31/99 (YEARS) EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
-------- ----------- ---------------- -------------- ------------ --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND YEARS)
<S> <C> <C> <C> <C> <C>
$15.19-$17.75.......... 774 9.75 $17.25 154 $16.92
$17.88................. 1,196 8.94 $17.88 265 $17.88
$18.50-$19.94.......... 238 9.26 $19.55 55 $19.50
$21.38................. 3,157 8.02 $21.38 1,045 $21.38
$22.00-$22.50.......... 524 9.65 $22.16 170 $22.11
----- ---- ------ ----- ------
$15.19-$22.50.......... 5,889 8.63 $20.12 1,689 $20.43
===== ==== ====== ===== ======
</TABLE>
The Company accounts for its stock options as required by the Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
no compensation cost has been recognized. Had compensation cost for the plan
been determined consistent with SFAS No. 123 "Accounting for Stock Based
Compensation," the Company's net increase in net assets resulting from
operations and basic and diluted earnings per common share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net increase in net assets resulting from
operations:
As reported.................................. $98,570 $78,078 $61,304
Pro forma.................................... $94,510 $72,684 $60,656
Basic earnings per common share:
As reported.................................. $1.64 $1.50 $1.24
Pro forma.................................... $1.58 $1.39 $1.23
Diluted earnings per common share:
As reported.................................. $1.64 $1.50 $1.24
Pro forma.................................... $1.57 $1.39 $1.23
</TABLE>
Pro forma expenses are based on the underlying value of the options granted
by the Company and the Predecessor Companies. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model, with the following weighted average assumptions for
<PAGE> 54
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLAN, CONTINUED
grants: risk-free interest rate of 5.9%, 5.0% and 5.7% for 1999, 1998 and 1997,
respectively; expected life of approximately five years for all options granted;
expected volatility of 37%, 35% and 35% for 1999, 1998 and 1997, respectively.
NOTE 11. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award
was computed for each unvested option as of the Merger date. The Cut-off Award
was equal to the difference between the market price on August 14, 1997 (the
Merger announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award was payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the appreciated value in unvested options at the Merger
announcement date, in order to set the foundation to balance option awards upon
the Merger. The Cut-off Award approximated $2.9 million in the aggregate and has
been expensed as the Cut-off Award vests. For the years ended December 31, 1999
and 1998, $532,000 and $807,000, respectively, of the Cut-off Award vested.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6%
of the difference between an amount equal to the combined aggregated market
capitalizations of the Predecessor Companies as of the close of the market on
the day before the Merger date (December 30, 1997), less an amount equal to the
combined aggregate market capitalizations of Allied Lending and the Predecessor
Companies as of the close of the market on the Merger announcement date.
Advisers' compensation committee allocated the Formula Award to individual
officers on December 30, 1997. The amount of the Formula Award as computed at
December 30, 1997 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust under the DC Plan (see Note 9) and was used to
purchase shares of the Company's stock (included in common stock held in
deferred compensation trust). The Formula Award vests equally in three
installments on December 31, 1998, 1999 and 2000; provided, however, that such
Formula Award vests immediately upon a change in control of the Company. The
Formula Award has been expensed in each year in which it vests. For the years
ended December 31, 1999 and 1998, $6,221,000 and $6,241,000, respectively, was
expensed as a result of the Formula Award. At December 31, 1999 and 1998, the
liability related to the Formula Award was $6,221,000 and $6,241,000,
respectively, and has been included in common stock held in deferred
compensation trust. Vested Formula Awards are distributable to recipients at the
Company's discretion, however, sale of the Company's stock by the recipients is
restricted. Unvested Formula Awards are forfeited upon a recipient's separation
from service and the related Company stock is retired. During 1999 and 1998,
$61,000 and $270,000, respectively, of the Formula Award was forfeited.
On January 3, 2000 and January 4, 1999, the Company distributed shares of
the Company's common stock with a value of $4,274,000 and $4,062,000,
respectively, representing the portion of the Formula Award that vested during
the previous year.
<PAGE> 55
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. DIVIDENDS AND DISTRIBUTIONS
For the years ended December 31, 1999, 1998 and 1997, the Company declared
the following distributions:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
TOTAL TOTAL PER TOTAL TOTAL PER TOTAL TOTAL PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- --------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
First quarter......................... $23,286 $0.40 $18,025 $0.35 $14,347 $0.30
Second quarter........................ 23,746 0.40 17,966 0.35 14,795 0.30
Third quarter......................... 24,768 0.40 17,976 0.35 15,548 0.31
Fourth quarter........................ 26,141 0.40 19,444 0.35 31,022 0.61
Annual extra distribution............. -- -- 1,676 0.03 1,118 0.02
Special undistributed earnings
distribution........................ -- -- -- -- 8,848 0.17
------- ----- ------- ----- ------- -----
Total distributions to common
shareholders........................ $97,941 $1.60 $75,087 $1.43 $85,678 $1.71
======= ===== ======= ===== ======= =====
</TABLE>
For income tax purposes, distributions for 1999, 1998 and 1997 were
composed of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
TOTAL TOTAL PER TOTAL TOTAL PER TOTAL TOTAL PER
AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
------- --------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Ordinary income....................... $76,948 $1.26 $49,397 $0.94 $39,356 $0.79
Long-term capital gains............... 20,993 0.34 25,690 0.49 31,037 0.62
Return of capital (tax)............... -- -- -- -- 6,437 0.13
------- ----- ------- ----- ------- -----
Total distributions before special
distribution........................ 97,941 1.60 75,087 1.43 76,830 1.54
------- ----- ------- ----- ------- -----
Special undistributed earnings
distribution........................ -- -- -- 8,848 0.17
Total distributions to common
shareholders........................ $97,941 $1.60 $75,087 $1.43 $85,678 $1.71
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE> 56
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. DIVIDENDS AND DISTRIBUTIONS, CONTINUED
The following table summarizes the differences between financial statement
net income and taxable income for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Financial statement net income............................ $98,570 $78,078 $61,304
Adjustments:
Net unrealized gains................................. (2,138) (1,079) (7,209)
Amortization of discount............................. 129 2,207 (1,124)
Post-Merger gain on securitization of commercial
mortgage loans..................................... -- (14,812) --
Interest income from securitized commercial mortgage
loans.............................................. 4,640 4,910 --
Gains from disposition of portfolio assets........... (4,547) 1,177 17,890
Expenses not deductible for tax:
Merger expenses................................. -- -- 5,159
Formula award................................... 2,158 6,242 --
Other........................................... 1,053 1,393 853
Other................................................ (1,492) (3,816) (9,050)
Income tax expense................................... -- 787 1,444
------- ------- -------
Taxable income....................................... $98,373 $75,087 $69,267
======= ======= =======
</TABLE>
NOTE 13. CONCENTRATIONS OF CREDIT RISK
The Company places its cash with financial institutions and, at times, cash
held in checking accounts in financial institutions may be in excess of the
Federal Deposit Insurance Corporation insured limit. At December 31, 1999 and
1998, cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $24,419 $31,833
Less escrows held........................................... (6,264) (6,758)
------- -------
Total cash and cash equivalents................... $18,155 $25,075
======= =======
</TABLE>
NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During 1999, 1998 and 1997, the Company paid $21,092,000, $21,708,000 and
$26,874,000, respectively, for interest and income taxes. During 1999, 1998 and
1997, the Company's non-cash financing activities totaled $10,241,000,
$6,237,000 and $48,207,000, respectively, related primarily to common stock
issuance resulting from stock option exercises and dividend reinvestment shares
issued. During 1999, 1998 and 1997, the Company's non-cash investing activities
totaled $19,320,000, $1,265,000 and $12,022,000, respectively.
<PAGE> 57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999
-----------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total interest and related portfolio income............. $27,678 $33,186 $37,998 $42,278
Portfolio income before realized and unrealized gains... $13,830 $16,619 $19,273 $21,319
Net increase in net assets resulting from operations.... $18,580 $22,121 $26,944 $30,925
Basic earnings per common share......................... $ 0.33 $ 0.38 $ 0.44 $ 0.49
Diluted earnings per common share....................... $ 0.33 $ 0.38 $ 0.44 $ 0.49
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest and related portfolio income............. $36,897 $21,321 $22,546 $25,974
Portfolio income before realized and unrealized gains... $24,920 $ 9,148 $ 9,401 $11,776
Net increase in net assets resulting from operations.... $32,065 $14,476 $14,906 $16,631
Basic earnings per common share......................... $ 0.62 $ 0.28 $ 0.29 $ 0.31
Diluted earnings per common share....................... $ 0.61 $ 0.28 $ 0.29 $ 0.31
</TABLE>
<PAGE> 58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
---------- ---------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Portfolio at value:
Private finance.................... $ 513,835 $133,205 $ -- $ -- $ -- $ 647,040
Commercial real estate finance..... 422,514 4,530 -- 92,985 -- 520,029
Small business finance............. -- -- 61,428 -- -- 61,428
Investments in subsidiaries........ 162,161 -- -- -- (162,161) --
---------- -------- ------- ------- --------- ----------
Total portfolio at value...... 1,098,510 137,735 61,428 92,985 (162,161) 1,228,497
---------- -------- ------- ------- --------- ----------
Cash and cash equivalents.............. 10,198 3,361 2,256 2,340 -- 18,155
Intercompany notes and receivables..... 77,748 682 618 4 (79,052) --
Other assets........................... 35,113 2,771 4,299 1,203 -- 43,386
---------- -------- ------- ------- --------- ----------
Total assets.................. $1,221,569 $144,549 $68,601 $96,532 $(241,213) $1,290,038
========== ======== ======= ======= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and debentures....... $ 424,700 $ 62,650 $ -- $ -- $ -- $ 487,350
Revolving credit facilities........ 105,500 -- -- -- -- 105,500
Accounts payable and other
liabilities...................... 19,476 794 2,202 203 -- 22,675
Dividends and distributions
payable.......................... -- 6,131 7,791 3,861 (17,783) --
Intercompany notes and payables.... 4,380 9,500 38,664 8,726 (61,270) --
---------- -------- ------- ------- --------- ----------
Total liabilities............. 554,056 79,075 48,657 12,790 (79,053) 615,525
---------- -------- ------- ------- --------- ----------
Commitments and Contingencies
Preferred stock........................ -- 7,000 -- -- -- 7,000
Shareholders' Equity:
Common stock....................... 6 -- -- 1 (1) 6
Additional paid-in capital......... 699,149 36,673 17,643 81,129 (135,445) 699,149
Common stock held in deferred
compensation trust............... (6,218) -- -- -- -- (6,218)
Notes receivable from sale of
common stock..................... (29,461) -- -- -- -- (29,461)
Net unrealized appreciation
(depreciation) on portfolio...... 4,517 2,056 (970) (2,415) 1,329 4,517
Undistributed (distributions in
excess of) earnings.............. (480) 19,745 3,271 5,027 (28,043) (480)
---------- -------- ------- ------- --------- ----------
Total shareholders' equity.... 667,513 58,474 19,944 83,742 (162,160) 667,513
---------- -------- ------- ------- --------- ----------
Total liabilities and
shareholders' equity........ $1,221,569 $144,549 $68,601 $96,532 $(241,213) $1,290,038
========== ======== ======= ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidating financial
statements.
<PAGE> 59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
-------- ---------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and Related Portfolio
Income
Interest................... $ 91,863 $11,465 $ 7,931 $ 8,513 $ -- $119,772
Intercompany interest...... 6,237 -- -- -- (6,237) --
Premiums from loan
dispositions............. 4,525 40 9,719 -- -- 14,284
Income from investments in
wholly owned
subsidiaries............. 34,761 -- -- -- (34,761) --
Investment advisory fees
and other income......... 6,574 423 318 (231) -- 7,084
-------- ------- ------- ------- -------- --------
Total interest and
related portfolio
income.............. 143,960 11,928 17,968 8,282 (40,998) 141,140
-------- ------- ------- ------- -------- --------
Expenses
Interest................... 30,765 4,074 6 15 -- 34,860
Intercompany interest...... -- 285 4,648 1,304 (6,237) --
Employee................... 16,136 -- -- -- -- 16,136
Administrative............. 11,000 56 878 416 -- 12,350
-------- ------- ------- ------- -------- --------
Total operating
expenses............ 57,901 4,415 5,532 1,735 (6,237) 63,346
-------- ------- ------- ------- -------- --------
Formula and cut-off
awards................... 6,753 -- -- -- -- 6,753
-------- ------- ------- ------- -------- --------
Portfolio income before net
realized and unrealized
gains......................... 79,306 7,513 12,436 6,547 (34,761) 71,041
-------- ------- ------- ------- -------- --------
Net Realized and Unrealized
Gains
Net realized gains
(losses)................. 17,126 9,667 (1,000) (402) -- 25,391
Net unrealized gains
(losses)................. 2,138 593 1,104 (915) (782) 2,138
-------- ------- ------- ------- -------- --------
Total net realized and
unrealized gains
(losses)............ 19,264 10,260 104 (1,317) (782) 27,529
-------- ------- ------- ------- -------- --------
Net increase in net assets
resulting from operations..... $ 98,570 $17,773 $12,540 $ 5,230 $(35,543) $ 98,570
======== ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidating financial
statements.
<PAGE> 60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
ALLIED ALLIED ALLIED CONSOLIDATED
CAPITAL INVESTMENT SBLC OTHERS ELIMINATIONS TOTAL
--------- ---------- -------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net increase in net assets
resulting from operations.... $ 98,570 $ 17,773 $ 12,540 $ 5,230 $(35,543) $ 98,570
Adjustments
Net unrealized (gains)
losses.................... (2,138) (593) (1,104) 915 782 (2,138)
Depreciation and
amortization.............. 788 -- -- -- -- 788
Amortization of loan
discounts and fees........ (9,079) (761) (834) -- -- (10,674)
Changes in other assets and
liabilities............... (8,344) (64) (1,642) 1,338 -- (8,712)
--------- -------- -------- -------- -------- ---------
Net cash provided by
operating activities.... 79,797 16,355 8,960 7,483 (34,761) 77,834
--------- -------- -------- -------- -------- ---------
Cash Flows from Investing
Activities
Portfolio investments........ (596,725) (67,022) (88,124) -- -- (751,871)
Repayments of investment
principal................. 91,851 26,012 6,719 21,124 -- 145,706
Proceeds from loan sales..... 104,706 -- 93,662 -- -- 198,368
Net change in intercompany
investments............... 10,389 9,705 (7,980) (21,280) 9,166 --
Collections of notes
receivable from sale of
common stock.............. 195 -- -- -- -- 195
Other investing activities... 4,805 574 (8,198) 1,065 -- (1,754)
--------- -------- -------- -------- -------- ---------
Net cash (used in)
provided by investing
activities.............. (384,779) (30,731) (3,921) 909 9,166 (409,356)
--------- -------- -------- -------- -------- ---------
Cash Flows from Financing
Activities
Sale of common stock......... 164,269 -- -- -- -- 164,269
Common dividends and
distributions paid........ (95,031) -- -- -- -- (95,031)
Dividends paid to parent
company................... -- (12,111) (5,559) (7,925) 25,595 --
Preferred stock dividends
paid...................... 40 (220) -- (50) -- (230)
Net borrowings under notes
payable and debentures.... 239,000 15,000 -- -- -- 254,000
Net borrowings under
revolving lines of
credit.................... 4,500 -- -- -- -- 4,500
Other financing activities... (2,906) -- -- -- -- (2,906)
--------- -------- -------- -------- -------- ---------
Net cash provided by (used
in) financing
activities.............. 309,872 2,669 (5,559) (7,975) 25,595 324,602
--------- -------- -------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents................. $ 4,890 $(11,707) $ (520) $ 417 $ -- $ (6,920)
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at
beginning of year................ $ 5,308 $ 15,068 $ 2,776 $ 1,923 $ -- $ 25,075
--------- -------- -------- -------- -------- ---------
Cash and cash equivalents at end of
year............................. $ 10,198 $ 3,361 $ 2,256 $ 2,340 $ -- $ 18,155
========= ======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES:
We have audited the consolidated balance sheet of Allied Capital
Corporation and subsidiaries as of December 31, 1999 and 1998, including the
consolidated statement of investments as of December 31, 1999, and the related
consolidated statements of operations, changes in net assets and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements and supplementary consolidating financial
information referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and supplementary consolidating financial information
referred to below based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. These procedures
included physical counts of investments. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 3, the consolidated financial statements include
investments valued at $1,228,497,000 as of December 31, 1999 and $807,119,000 as
of December 31, 1998, (95 percent and 94 percent, respectively, of total assets)
whose values have been estimated by the board of directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by the
board of directors in arriving at its estimate of value of such investments and
have inspected the underlying documentation, and in the circumstances we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, the board of directors'
estimate of values may differ significantly from the values that would have been
used had a ready market existed for the investments, and the differences could
be material.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Allied
Capital Corporation and subsidiaries as of December 31, 1999 and 1998, and the
consolidated results of their operations, changes in net assets and cash flows
for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
consolidating balance sheet and related consolidating statements of operations
and cash flows are presented for purposes of additional analysis and are not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audit of the basic
consolidated financial statements and in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Arthur Anderson
Vienna, Virginia
February 14, 2000
<PAGE> 62
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
BOARD OF DIRECTORS AND MANAGEMENT
Directors
WILLIAM L. WALTON(1,2)
Chairman and Chief Executive Officer,
Allied Capital Corporation
GEORGE C. WILLIAMS, JR.(1)
Chairman Emeritus, Allied Capital Corporation
BROOKS H. BROWNE(3,4)
President, Environmental Enterprises
Assistance Fund
JOHN D. FIRESTONE(3)
Partner, Secor Group
ANTHONY T. GARCIA(3)
General Manager, Breen Capital Group
LAWRENCE I. HEBERT(2)
Director and President, Perpetual Corporation
JOHN I. LEAHY(1,4)
President, Management and Marketing Associates
ROBERT E. LONG(1,3)
Managing Director, Goodwyn Long & Black
Investment Management, Inc.
WARREN K. MONTOURI(1)
Partner, Montouri & Roberson
GUY T. STEUART, II(2,4)
Director and President, Steuart Investment
Corporation
T. MURRAY TOOMEY, ESQ.(2)
Attorney at Law
LAURA W. VAN ROIJEN(2)
Private Real Estate Investor
Executive Management
WILLIAM L. WALTON
Chairman and Chief Executive Officer
GEORGE C. WILLIAMS, JR.
Chairman Emeritus
PHILIP A. MCNEILL
Managing Director
JOHN M. SCHEURER
Managing Director
JOAN M. SWEENEY
Managing Director
G. CABELL WILLIAMS, III
Managing Director
Principals
THOMAS H. AIKEN
KELLY A. ANDERSON
SCOTT S. BINDER
ARTHUR S. COOPER
DOUGLAS L. COOPER
TRICIA B. DANIELS
CHRISTINA L. DELDONNA
RICHARD E. FEARON, JR.
MICHAEL P. GAFFNEY
MICHAEL J. GRISIUS
SAMUEL B. GUREN
JOHN J. HALL, JR.
PATRICK J. HARRINGTON
ROBERT M. MONK
DIANE E. MURPHY
MARY E. OLSON
CARR T. PRESTON
PENNI F. ROLL
JAMES P. SHEVLIN
SUZANNE V. SPARROW
THOMAS H. WESTBROOK
(1) Executive Committee (2) Nominating Committee (3) Compensation Committee
(4) Audit Committee
<PAGE> 63
[GRAPHIC] STOCKHOLDER INFORMATION
Corporate Headquarters
WASHINGTON, DC
1919 Pennsylvania Avenue, NW
Washington, DC 20006
Telephone: 202.331.1112
Fax: 202.659.2053
[email protected]
www.alliedcapital.com
Please visit our web site for a complete listing of regional offers
nationwide.
Market Listing
Allied Capital Corporation common stock is listed on the Nasdaq National
Market under the trading symbol ALLC. The abbreviation often used in
newspaper stock listings is "AldCap." There were approximately 4,500
shareholders of record and 45,000 beneficial shareholders of the Company
as of December 31, 1999.
Stock Transfer Agent and Registrar
Investors with questions concerning account information, issuing new
certificates, replacing lost or stolen certificates, transferring
securities, participating in the Dividend Reinvestment Plan, dividend
payments, requesting payments, requesting direct deposit information or
processing a change of address should contact:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street, 46th Floor
New York, NY 10005
Telephone: 800.937.5449 or 212.936.5100
www.amstock.com
Investor Relations Contact
SUZANNE V. SPARROW, PRINCIPAL
Toll free: 888.818.5298
[email protected]
Information Requests
Allied Capital Corporation's Annual Report on Form 10-K and all quarterly
reports on Form 10-Q, as filed with the Securities and Exchange Commission
will be provided without charge to shareholders upon written requests to
the Investor Relations Department at the Company's corporate
headquarters.
Independent Public Accountants
ARTHUR ANDERSEN LLP
Vienna, VA
Corporate Counsel
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, DC
Annual Meeting of Stockholders
The Company's Annual Meeting of Stockholders will be held at 10:00 AM on
Tuesday, May 9, 2000, at the St. Regis Hotel, 923 16th Street, NW,
Washington DC.
All stockholders are welcome to attend.
QUARTERLY STOCK PRICES FOR 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
------------------------------ --------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
High $20.25 $24.00 $23.81 $23.13 $27.69 $29.00 $24.81 $18.88
- --------------------------------------------------------------------------------
Low $16.50 $17.00 $20.25 $16.75 $21.00 $21.75 $14.94 $12.50
- --------------------------------------------------------------------------------
Close $18.38 $24.00 $22.44 $18.31 $27.69 $24.50 $17.75 $17.31
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 23(i)
[ARTHUR ANDERSEN LOGO]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File No. 333-88681, relating to the
Company's 401K Plan and File No. 333-45525, relating to the Company's Stock
Option Plan.
/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 1,222,901
<INVESTMENTS-AT-VALUE> 1,228,497
<RECEIVABLES> 0
<ASSETS-OTHER> 43,386
<OTHER-ITEMS-ASSETS> 18,155
<TOTAL-ASSETS> 1,290,038
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 487,350
<OTHER-ITEMS-LIABILITIES> 128,175
<TOTAL-LIABILITIES> 615,525
<SENIOR-EQUITY> 6
<PAID-IN-CAPITAL-COMMON> 699,149
<SHARES-COMMON-STOCK> 65,414
<SHARES-COMMON-PRIOR> 55,919
<ACCUMULATED-NII-CURRENT> (480)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,517
<NET-ASSETS> 667,513
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 119,772
<OTHER-INCOME> 21,368
<EXPENSES-NET> 70,099
<NET-INVESTMENT-INCOME> 71,041
<REALIZED-GAINS-CURRENT> 25,391
<APPREC-INCREASE-CURRENT> 2,138
<NET-CHANGE-FROM-OPS> 98,570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 76,948
<DISTRIBUTIONS-OF-GAINS> 20,993
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,659
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 233
<NET-CHANGE-IN-ASSETS> 176,155
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 927
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 34,860
<GROSS-EXPENSE> 70,099
<AVERAGE-NET-ASSETS> 579,436
<PER-SHARE-NAV-BEGIN> 8.79
<PER-SHARE-NII> 1.18
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> 1.60
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> 0.12
</TABLE>
