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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-18016
ALLIED CAPITAL CORPORATION II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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MARYLAND 52-1628801
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., NINTH FLOOR 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 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 other than by
directors and officers of the registrant and officers of its investment adviser
as of March 18, 1996 was approximately $119,081,924 based upon the average bid
and asked price for the registrant's common stock on that date. As of March
18, 1996 there were 7,158,937 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1995 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 10, 1996 are incorporated by
reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS.
Allied Capital Corporation II (the "Company") was incorporated in
Maryland in 1989. The Company 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, as amended (the "1940 Act"). The
Company has two active wholly owned subsidiaries, Allied Investment Corporation
II ("Allied Investment II") and Allied Financial Corporation II ("Allied
Financial II"). Allied Investment II and Allied Financial II are Maryland
corporations that are registered under the 1940 Act as closed-end management
investment companies. Allied Investment II is licensed by the U.S. Small
Business Administration (the "SBA") as a small business investment company
under Section 301 (c) of the Small Business Investment Act of 1958 ("SBIC") and
Allied Financial II has applied to the SBA to be licensed as a specialized
small business investment company under Section 301 (d) of the Small Business
Investment Act of 1958 ("SSBIC"). Allied Capital Advisers, Inc. ("Advisers")
serves as the investment adviser of the Company under an investment advisory
agreement.
The investment objective of the Company is to provide a high level of
current income and long-term growth in the value of its net assets by providing
debt, mezzanine, and equity financing primarily for small, privately owned
companies. This objective may be changed by the Board of Directors of the
Company without "a vote of a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Company. To achieve its investment objective,
the Company invests primarily in and lends primarily to small businesses, both
directly and through its wholly owned subsidiaries (unless otherwise indicated,
all further references herein to investments by the Company include those made
by its subsidiaries). The investments made by the Company include providing
financing for growth, leveraged buyouts of such companies, for note purchases
and loan restructurings, and for special situations, such as acquisitions,
buyouts, recapitalizations, and bridge financings of such companies.
The Company's investments generally take the form of loans with equity
features, such as warrants or conversion privileges that entitle the Company to
acquire a portion of the equity in the entity in which the investment is made.
The typical maturity of such a loan made by the Company is seven years, with
interest-only payments in the early years and payments of both principal and
interest in the later years, although loan maturities and principal
amortization schedules vary. The Company also makes senior loans without
equity features. Loans generally bear interest at a fixed rate that the
Company believes is competitive in the venture capital marketplace. Current
income is derived primarily from interest earned on the loan element of the
Company's investments. Generally, long-term growth in net asset value and
realized capital gains, if any, from portfolio companies are achieved through
the equity obtained as a result of the Company's growth financing and leveraged
buyout activity. The Company seeks to structure its investments so that
approximately one-half of the potential return is earned in the form of monthly
or quarterly interest payments and the balance is derived from capital gains.
The Company's investments may be secured by the assets of the entity in which
the investment is made, which collateral interests may be subordinated in
certain instances to institutional lenders, such as banks. The Company makes
available significant managerial assistance to its portfolio companies.
Pending investment of its assets, the Company's funds are generally invested in
repurchase agreements fully collateralized by U.S. government securities.
The Company usually invests in privately held companies or small
public companies that are thinly traded and generally lack access to capital.
These companies generally have been in business for at least one year, have a
commercially proven product or service, and seek capital to finance expansion
or ownership changes. The Company generally requires that the companies in
which it invests demonstrate sales growth, positive cash flow, and
profitability, although turnaround situations are also considered. The
Company's emphasis is on low- to medium-technology businesses, such as
broadcasting, manufacturing, environmental concerns, wholesale distribution,
commodities storage, and retail operations. The Company emphasizes the quality
of management of the companies in which it invests, and seeks experienced
entrepreneurs with a management track record, relevant industry experience, and
high integrity.
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The Company's Operation as a BDC
As a BDC, the Company may not acquire any assets other than
"Qualifying Assets" unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the value of the Company's total assets (the
"70% test"). The principal categories of Qualifying Assets relevant to the
business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer 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 the BDC (the Company's investment
in and advances to Allied Investment II is a Qualifying Asset, but its
investment in Allied Financial II is not until Allied Financial II is
licensed as an SSBIC) 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.
(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.
In addition, to treat securities described in (1) and (2) 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. Making
available significant managerial assistance means, among other things, (i) any
arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does provide, significant guidance and
counsel concerning the management, operations or business objectives and
policies of a portfolio company or (ii) in the case of an SBIC, making loans to
a portfolio company. Managerial assistance is made available to the portfolio
companies by the Company's directors and officers, who are employees of
Advisers, which manages the Company's investments. Each portfolio company is
assigned for monitoring purposes to an investment officer and its principals
are contacted and counseled if the portfolio company appears to be encountering
business or financial difficulties. The Company also provides managerial
assistance on a continuing basis to any portfolio company that requests it,
whether or not difficulties are perceived. The Company's officers and
directors are highly experienced in providing managerial assistance to small
businesses.
The Company may not change the nature of its business so as to cease
to be, or withdraw its election as a BDC unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
the Company. Since the Company made its BDC election, it has not in practice
made any substantial change in its structure or, on a consolidated basis, in
the nature of its business. As a BDC, the Company is entitled to borrow money
and issue senior securities representing indebtedness as long as its
indebtedness representing senior securities has asset coverage of at least
200%. This limitation is not applicable to borrowings of the Company's SBIC
subsidiary.
Co-Investment with Allied Capital Corporation, Allied Venture Partnership and
Allied Technology Partnership
In accordance with the conditions of exemptive orders of the
Securities and Exchange Commission (the "Commission") permitting co-investments
(the "Co-investment Guidelines"), most of the Company's acquisitions and
dispositions of investments are made in participation with Allied Capital
Corporation ("Allied I"). In the past, the Company also acquired certain
investments in participation with Allied Venture Partnership ("Allied Venture")
and Allied Technology Partnership ("Allied Technology"), both private venture
capital partnerships managed by Advisers, neither of which is now making new
investments. Allied I is a closed-end management investment company that has
elected to be regulated as a BDC and for which Advisers serves as its
investment adviser. At December 31, 1995, Allied I had total consolidated
assets of $148,268,000, compared to the Company's total consolidated assets of
$107,169,000 at that date.
The Co-investment Guidelines generally provide that the Company and
its wholly owned subsidiaries must be offered the opportunity to invest in any
investment, other than in interim investments or marketable securities,
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that would be suitable for Allied I or its wholly owned subsidiaries and the
Company to the extent proportionate to the companies' respective consolidated
total assets. Securities purchased by the Company or its wholly owned
subsidiaries in a co-investment transaction with any of Allied I or its wholly
owned subsidiaries, Allied Venture or Allied Technology, will consist of the
same class of securities, will have the same registration rights, if any, and
other rights related thereto, and will be purchased for the same unit
consideration. Any such co-investment transaction must be approved by the
Company's Board of Directors, including a majority of its independent
directors. The Company will not make any investment in the securities of any
issuers in which Allied I, Allied Venture or Allied Technology, but not the
Company, has previously invested. The Co-investment Guidelines also provide
that the Company will have the opportunity to dispose of any securities in
which the Company or its wholly owned subsidiaries and any of Allied I or its
wholly owned subsidiaries, Allied Venture or Allied Technology, have invested
in proportion to their respective holdings of such securities, and that, in
any such disposition, the Company will be required to bear no more than its
proportionate share of the transaction costs.
Allied Investment II
Allied Investment II, as an SBIC, provides capital to privately owned
small businesses primarily through loans, generally with equity features, and,
to a lesser extent, through the purchase of common or convertible preferred
shares. Loans with equity features are generally evidenced by a note or
debenture that is convertible into common stock, requiring the holder to make a
choice, prior to the loan's maturity, between accepting repayment and
maintaining its equity position, or purchasing, frequently for a nominal
consideration, common stock of the issuer even after the loan is repaid.
Wherever possible, Allied Investment II seeks collateral for its loans, but its
security interest is usually subordinated to the security interest of other
institutional lenders.
As an SBIC, Allied Investment II currently has the opportunity to sell
to the SBA subordinated debentures with a maturity of up to ten years up to an
aggregate principal amount determined by a formula which applies a multiple to
its private capital, but not in excess of $90 million (the "$90 million
limit"). The $90 million 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. For this purpose, Allied Investment II may be
deemed to be an "associate" of Allied Investment Corporation ("Allied
Investment"), which is also an SBIC and is a subsidiary of Allied I, and Allied
Capital Financial Corporation ("Allied Financial"), an SSBIC that is a
subsidiary of Allied I. If Allied Financial II is licensed as an SSBIC, it
would be deemed to be an "associate" of Allied Investment II, and vice versa.
As of December 31, 1995, Allied Investment II had sold no debentures to the
SBA. As of that date, however, Allied Investment and Allied Financial had sold
debentures and preferred stock to the SBA in the aggregate principal amount of
$68,300,000; as a result, the combined ability of Allied Investment II, Allied
Investment and Allied Financial to apply for additional leverage from the SBA
may be limited to $21,700,000 due to the $90 million limit. The Company is
unable to predict the SBA's ability to meet demands for leverage on an ongoing
basis, as such funding may be affected if Congress reduces appropriations for
the SBA, which may compel the SBA to allocate leverage or to reduce the current
limits on available leverage. Therefore, there is no guaranty that Allied
Investment II or Allied Financial II, if and when licensed, will be able to
obtain SBA leverage.
Allied Investment II provides managerial assistance to its portfolio
companies by arranging syndicated financings, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.
Allied Financial II
Allied Financial II has applied to be licensed as an SSBIC, but cannot
predict when or if the SBA will act upon its application. An SSBIC is a small
business investment company specializing in the financing of small businesses
controlled by socially or economically disadvantaged persons. To determine
whether the owners of a small business are socially or economically
disadvantaged, the SBA relies on a composite of factors. Business owners who
are members of the following groups, among others, are considered socially
disadvantaged - African Americans, Hispanic Americans, Native Americans and
Asian Pacific Americans. In determining whether the owners of a small business
are economically disadvantaged, consideration may be given to factors such as
levels
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of income, location (for instance, urban ghettos, depressed rural areas and
areas of high unemployment or underemployment), education level, physical or
other special handicap, inability to compete in the marketplace because of
prevailing or past restrictive practices or Vietnam-era service in the armed
forces, or any other factors that may have contributed to disadvantaged
conditions. To date, the investment activity of Allied Financial II has been
minimal, pending receipt of its SSBIC license. Total assets of Allied
Financial II at December 31, 1995 were $3.6 million, of which $1.7 million was
invested in cash and cash equivalents.
Investment Adviser
Advisers is the investment adviser of the Company pursuant to an
investment advisory agreement. The advisory agreement will remain in effect
from year to year as long as its continuance is approved at least annually by
the Board of Directors, including a majority of the disinterested directors, or
by the "vote of a majority of the outstanding voting securities" (as defined in
the 1940 Act) of the Company. The current agreement may, however, be terminated
at any time on (60) sixty days' notice, without the payment of any penalty, by
the Board of Directors or by "vote of a majority of the Company's outstanding
voting securities," and will terminate automatically in the event of its
assignment.
Under the agreement, Advisers manages the investments of the Company,
subject to the supervision and control of the Board of Directors.
Specifically, Advisers identifies, evaluates, structures, closes and monitors
the investments made by the Company. The Company will not make any investments
that have not been recommended by Advisers as long as the current agreement
remains in effect. Advisers has the authority to effect acquisitions and
dispositions for the Company's account, subject to approval by the Company's
Board of Directors.
The advisory agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers. The expenses paid by Advisers include the compensation of its
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments, legal and accounting fees, the fees
and expenses of the Company's independent directors and the fees of its
officer-directors, the costs of printing and mailing proxy statements and
reports to stockholders, costs associated with promoting the Company's stock,
and the fees and expenses of the Company's custodian and transfer agent. The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers. Advisers is entitled to retain
for its own account any fees paid by or for the account of any company,
including a portfolio company, for special investment banking or consulting
work performed for that company which is not related to such investment
transaction or management assistance. Advisers will report to the Board of
Directors not less often than quarterly all fees received by Advisers from any
source whatever and whether, in its opinion, any such fee is one that Advisers
is entitled to retain under the provisions of the current agreement. In the
event that any member of the Board of Directors should disagree, the matter
will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent Directors. If the Company uses the
services of attorneys or paraprofessionals on the staff of Advisers for the
Company's corporate purposes in lieu of outside counsel, the Company will
reimburse Advisers for such services at hourly rates calculated to cover the
cost of such services, as well as for incidental disbursements by Advisers in
connection with such services.
As compensation for its services to and the expenses paid for the
account of the Company, Advisers is paid quarterly, in arrears, a fee equal to
0.625% per quarter of the quarter-end value of the Company's consolidated total
assets, less the Company's consolidated Interim Investments (i.e., U.S.
government securities), cash and cash equivalents, plus 0.125% per quarter of
the quarter-end value of consolidated Interim Investments, cash and cash
equivalents ("the current fee structure"). Such fees on an annual basis are
approximately 2.5% of the Company's consolidated total assets, less the
Company's consolidated Interim Investments, cash and cash equivalents, and 0.5%
of the Company's consolidated Interim Investments, cash and cash equivalents.
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Prior to the second quarter of 1995 under a former advisory agreement
(the "former agreement"), as compensation for its services to and the expenses
paid for the account of the Company, Advisers was entitled to be paid
quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end
value of the Company's consolidated total assets. Such fees on an annual basis
were approximately 2.5% of the Company's consolidated total assets. In
practice during the time in which the former agreement was in place, Advisers
waived a portion of its fees associated with the Company's consolidated Interim
Investments, cash and cash equivalents. Advisers waived its fee, except to the
extent of 0.125% per quarter, on the Company's consolidated Interim
Investments, cash and cash equivalents. As of December 31, 1994, the Company
had invested a substantial portion of such excess Interim Investments, cash and
cash equivalents and as a result, the Company amended its advisory agreement in
1995 to reflect the current fee structure that, in effect, provided for
advisory fees to be paid as they had historically been paid during the waived
periods. The new agreement and current fee structure were approved by
shareholders at the Company's 1995 annual meeting. For purposes of calculating
the fee, the values of the Company's consolidated assets are determined as of
the end of each calendar quarter. The quarterly fee is paid as soon as
practicable after the values have been determined.
The fee to Advisers provided for by the current agreement is
substantially higher than that paid by most investment companies because of the
efforts and resources devoted by Advisers to identifying, evaluating,
structuring, closing, and monitoring the types of private investments in which
the Company specializes. The rate of compensation paid by the Company to
Advisers is substantially the same as that paid by Allied I. The Company also
understands that the fee to Advisers provided for by the current agreement is
not in excess of that frequently paid by private investment funds engaged in
similar types of investments. Such private funds also typically allocate to
management a substantial participation in profits.
Employees
The Company has no employees as all of its personnel are furnished by
Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any properties or other tangible
assets.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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 1, 1996, as well as certain other
information with respect to those persons:
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<TABLE>
<CAPTION>
Positions Currently Principal Occupations
Name Age Held with the Company During Past Five Years
---- --- --------------------- ----------------------
<S> <C> <C> <C>
David Gladstone 53 Chairman of the Board and Employed by the Company or Advisers
Chief Executive Officer since 1974; Chairman and Chief
Executive Officer of Allied I, Allied
Capital Commercial Corporation ("Allied
Commercial"), Allied Capital Lending
Corporation ("Allied Lending") and
Advisers; Director, President and Chief
Executive Officer of Business Mortgage
Investors, Inc. ("BMI") and Allied
Capital Mortgage Corporation ("Allied
Mortgage"); Director of The Riggs
National Corporation; Trustee of The
George Washington University.
George C. Williams 69 Vice Chairman of Employed by the Company or Advisers
the Board since 1959; Vice Chairman of Allied I,
Allied Commercial, Allied Lending and
Advisers; Chairman of BMI and Allied
Mortgage. He is the father of G.
Cabell Williams III.
William F. Dunbar 37 President and Chief Employed by the Company or Advisers
Operating Officer since 1987; Executive Vice President of
Allied I, Allied Commercial, Allied
Lending, BMI and Advisers.
G. Cabell Williams III 41 Executive Vice President Employed by the Company or Advisers
since 1981; President and Chief
Operating Officer of Allied I;
Executive Vice President of Allied
Commercial, Allied Lending, BMI and
Advisers; Director of Environmental
Enterprises Assistance Fund. He is the
son of George C. Williams.
Joan M. Sweeney 36 Executive Vice President Employed by Advisers since 1993;
President and Chief Operating Officer
of Advisers; Executive Vice President
of Allied I, Allied Commercial, Allied
Lending, BMI and Allied Mortgage;
Senior Manager at Ernst & Young from
1990 to 1993.
Jon A. DeLuca 33 Executive Vice President, Employed by Advisers since 1994.
Treasurer and Chief Executive Vice President, Treasurer and
Financial Officer Chief Financial Officer of Allied I,
Allied Commercial, Allied Lending, BMI,
Allied Mortgage and Advisers; Manager
of Entrepreneurial Services at Coopers
& Lybrand from 1986 to 1994.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Thomas R. Salley 38 General Counsel and Employed by Advisers since 1988;
Secretary General Counsel and Secretary of Allied
I, Allied Lending, Allied Commercial,
BMI, Allied Mortgage and Advisers.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information in response to this Item is incorporated by reference to
the "Investor Information" section of, and to Notes 4 and 6 of the Notes to
Consolidated Financial Statements contained in, the Company's Annual Report to
Stockholders for the year ended December 31, 1995 (the "1995 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to
the table in the "Consolidated Comparison of Financial Highlights" section of
the 1995 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1995 Annual Report.
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
Accountants thereon contained in the 1995 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 "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1996 Annual Meeting
of Stockholders, scheduled to be held on May 10, 1996 (the "1996 Proxy
Statement"). Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" included in Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Executive Officers and Directors,"
"Incentive Stock Options" and "Compensation of Directors" of the 1996 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 "Beneficial Ownership of Common Stock" of the 1996
Proxy Statement.
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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 1996 Proxy Statement.
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
to the 1995 Annual Report:
Consolidated Balance Sheet at December 31, 1995 and 1994.
Consolidated Statement of Operations for the years ended December 31,
1995, 1994 and 1993.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994 and 1993.
Consolidated Statement of Loans to and Investments in Small Business
Concerns as of December 31, 1995.
Notes to Consolidated Financial Statements.
B. The Report of Independent Accountants with respect to the
financial statements listed in A. above is incorporated by reference
to the 1995 Annual Report.
2. No financial statement schedules of the Company 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:
3.1(1) Articles of Incorporation of the Company.
3.2* By-Laws of the Company, as amended.
4 Instruments defining rights of security holders -- See Exhibits 3.1
and 3.2.
10.1(2) Investment Advisory Agreement between the Company and Allied Capital
Advisers, Inc. dated May 11, 1995.
10.4(1) The Company's Dividend Reinvestment Plan.
10.5(3) The Company's Incentive Stock Option Plan, as amended.
10.6* Amended and Restated Credit Agreement by and between the Company and
NationsBank, N.A., dated September 28, 1995.
11* Statement re computation of per share earnings.
13(4)* 1995 Annual Report to Stockholders.
21 Subsidiaries of the Company and jurisdiction of incorporation:
Allied Investment Corporation II Maryland
Allied Financial Corporation II Maryland
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23* Consents of Matthews, Carter and Boyce, independent accountants.
27* Financial Data Schedule.
28* Financial Statements as of and for the year ended December 31, 1995
of Allied Investment Corporation II, in the form filed with the U.S.
Small Business Administration.
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* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on Form
N-2 (No. 33-28818) filed May 9, 1989.
(2) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement relating to the meeting of its stockholders held on May 11,
1995.
(3) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement relating to the meeting of its stockholders held on May 12,
1994.
(4) Except to the extent that portions of this exhibit are incorporated herein
by reference, this document shall not be deemed to have been filed
pursuant to the Securities Exchange Act of 1934.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended December
31, 1995.
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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, 1996.
/s/ DAVID GLADSTONE
-------------------------------------------------
David Gladstone
Chairman of the Board 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/ DAVID GLADSTONE Chairman and March 28, 1996
- --------------------------------------------- Chief Executive Officer
David Gladstone (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Vice Chairman of the Board March 28, 1996
- ---------------------------------------------
George C. Williams
/s/ WILLIAM F. DUNBAR Director and President March 28, 1996
- ---------------------------------------------
William F. Dunbar
/s/ LAWRENCE I. HEBERT Director March 28, 1996
- ---------------------------------------------
Lawrence I. Hebert
/s/ JOHN D. REILLY Director March 28, 1996
- ---------------------------------------------
John D. Reilly
/s/ SMITH T. WOOD Director March 28, 1996
- ---------------------------------------------
Smith T. Wood
/s/ JOHN I. LEAHY Director March 28, 1996
- ---------------------------------------------
John I. Leahy
/s/ JOHN D. FIRESTONE Director March 28, 1996
- ---------------------------------------------
John D. Firestone
/s/ JON A. DELUCA Executive Vice President, March 28, 1996
- --------------------------------------------- Treasurer and Chief Financial
Jon A. DeLuca Officer (Principal
Financial and Accounting
Officer)
</TABLE>
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.2 By-Laws of the Company, as amended.
10.6 Amended and Restated Credit Agreement by and between the Company
and NationsBank, N.A., dated September 28, 1995.
11 Statement re computation of per share earnings.
13 1995 Annual Report to Stockholders.
23 Consents of Matthews, Carter and Boyce, independent accountants.
27 Financial Data Schedule.
28 Financial Statements as of and for the year ended December 31, 1995
of Allied Investment Corporation II, as filed with the U.S. Small
Business Administration.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
---------------------------
ALLIED CAPITAL CORPORATION II
(a Maryland corporation)
-------------------
BYLAWS
-------------------
As adopted by the Board of Directors on December 21, 1990
and as amended by the Board of Directors on May 14, 1992
and November 8, 1995.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<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 6. General Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 7. Presiding Officer; Statement of Affairs; Order of Business . . . . . . . . . . . . . . . 2
Section 8. Quorum; Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 9. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 10. Action By Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III - DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 1. General Powers; Number; Tenure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3. Removal; Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 7. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 8. Quorum; Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 10. Action by Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 11. Meetings by Telephone or Similar Communications . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3. Procedure; Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5. Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 6. Vacancies; Changes; Discharges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 7. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 8. Action by Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 9. Meetings by Telephone or Similar Communications . . . . . . . . . . . . . . . . . . . . 8
Section 10. Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 1. Form; Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE VI - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 1. Designations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2. Term of Office; Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4. The Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5. The Vice Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6. The President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7. The Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 8. The Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 9. The Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 10. The Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 11. The Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VII - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS . . . . . . . . . . . . . . . . . 11
Section 1. Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. Limitation for Disabling Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII - STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 1. Form; Signatures; Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2. Registration of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5. Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE IX - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 1. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2. Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 3. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE X - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
ii
<PAGE> 4
BYLAWS
------
ARTICLE I
OFFICES
Section 1. Office. The principal office of the Corporation shall be:
5422 Albia Road, Bethesda, Maryland 20816; the Corporation shall also have an
office at 1666 K Street, N.W., Washington, D.C. 20006-2803.
Section 2. Additional Offices. The Corporation may also have offices at
such other places, both within and without the State of Maryland, as the
stockholders 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, within or without the State of Maryland, 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, commencing
with the year 1991, shall be held each year on the second Thursday of May, at
10:00 a.m., or at such other date and time within thirty-one (31) days of such
date, as shall be designated by the Board of Directors and stated in the notice
of the meeting. At such 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 to each
stockholder entitled to vote at such meeting 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 President or the Secretary
either (i) at the request in writing of a majority of the Board of Directors,
or, except as expressly set forth below, (ii) at the request in writing of
stockholders entitled to not less than 30% of all the votes entitled to be cast
at such meeting. Such request by
1
<PAGE> 5
stockholders shall state the purpose or purposes of such meeting and the
matters to be acted on thereat. If the request is made by the stockholders,
the President or 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 President or
Secretary shall give notice stating the purpose or purposes of the meeting, as
required by these Bylaws, to all stockholders entitled to vote at such meeting.
Notwithstanding the foregoing, no special meeting need be called upon request
of the holders of shares entitled to cast less than a majority of all votes
entitled to be cast at such meeting to consider any matter which is
substantially the same as a matter voted upon at any annual meeting or special
meeting of stockholders held during the preceding twelve (12) calendar months.
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 not less than 10 (unless a longer period is required by
law) nor more than 90 days prior to the meeting.
Section 6. General Powers. The business and affairs of the Corporation
shall be managed by its stockholders, which may exercise all powers of the
Corporation and perform all lawful acts and things on behalf of the
Corporation.
Section 7. Presiding Officer; Statement of Affairs; Order of Business.
(a) Meetings of stockholders shall be presided over by the
Chairman of the Board, if any, or, if he is not present (or, if there is none),
by the President, or, if he is not present, by a Vice President, or, if he 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 is not present, an Assistant Secretary, or, if he 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.
(b) The following order of business, unless otherwise ordered
at the meeting, shall be observed as far as practicable and consistent with the
purposes of the meeting:
1. Call of the meeting to order.
2. Presentation of proof of mailing of the notice of the
meeting and, if the meeting is a special meeting, the
call thereof.
3. Presentation of proxies.
2
<PAGE> 6
4. Announcement that a quorum is present.
5. Reading and approval of the minutes of the previous
meeting.
6. Reports, if any, of officers.
7. Submission of statement of affairs by Treasurer, if
the meeting is an annual meeting.
8. Election of directors, if the meeting is an annual
meeting or a meeting called for that purpose.
9. Miscellaneous business.
10. Adjournment.
Section 8. 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 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.
Section 9. 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 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.
3
<PAGE> 7
(b) Except as otherwise provided by law or the Articles of
Incorporation, a majority of the votes cast at a meeting of stockholders, duly
called and 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 10. Action By Consent. Any action required or permitted to be
taken 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 the Corporation. Such written consent shall be filed
with the minutes of meetings of stockholders.
ARTICLE III
DIRECTORS
Section 1. General Powers; Number; Tenure. The business and affairs
of the Corporation shall be managed by 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 less than 3 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, 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. The directors shall
be elected at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until
the next succeeding annual meeting or until his successor is elected and shall
qualify. Directors need not be stockholders.
Section 2. 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 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
4
<PAGE> 8
shall be filled.
Section 3. Removal; Resignation.
(a) Except as otherwise provided by law or the
Articles of Incorporation, at any meeting of stockholders, duly called and 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 4. Place of Meetings. The Board of Directors may hold
meetings, annual, regular or special, either within or without the State of
Maryland.
Section 5. 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 6. 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 7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if any, the President or
by 2 or more directors on at least 2 days' notice to each director, if such
notice is delivered personally or sent by telegram or telecopy, or on at least
3 days' notice, if sent by mail. Special meetings shall be called by the
Chairman of the Board, if any, the President or the Secretary in like manner
and on like notice on the written request of one-half 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 8. 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 or the Articles of Incorporation. If a quorum is not present at any
meeting of the Board of Direc-
5
<PAGE> 9
tors, the directors present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. 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 10. 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 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.)
Section 11. 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 Investment
Company Act of 1940 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 less than 2 directors, 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. Each member of the Executive Committee shall continue as a member
thereof until the expiration of his term as a director, or his earlier
resignation as a member or as a director, unless sooner removed as a member or
as a director.
Section 2. Powers. 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 (except the power
to declare dividends or distributions on stock, to issue stock but only to the
extent permitted by law, to recommend to stockholders any action requiring
6
<PAGE> 10
stockholders' approval, to amend these Bylaws or to approve any merger or share
exchange which does not require stockholders' approval) and may authorize the
seal of the Corporation to be affixed to all papers which may require the same.
Section 3. Procedure; Meetings. The Executive 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 the Executive
Committee shall provide. The Executive Committee shall keep regular minutes of
its meetings and deliver such minutes to the Board of Directors. The Chairman
of the Executive Committee, or, in his absence, a member of the Executive
Committee chosen by a majority of the members present, shall preside at the
meetings of the Executive Committee, and another member thereof chosen by the
Executive Committee shall act as Secretary of the Executive Committee.
Section 4. Quorum. A majority of the Executive Committee 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 the
Executive Committee. In the absence of any member of the Executive Committee,
the members thereof present at any meeting, whether or not they constitute a
quorum, may appoint a member of the Board of Directors to act in the place of
such absent member.
Section 5. Other Committees. The Board of Directors, by resolutions
adopted by a majority of the whole Board, may appoint directors, 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 6. Vacancies; Changes; Discharges. The Board of Directors
shall have the power at any time to fill vacancies in, to change the membership
of, and to discharge any committee.
Section 7. 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 8. 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
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with the minutes of its proceedings.
Section 9. 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.
Section 10. Audit Committee. The Board of Directors may appoint from
its membership an Audit Committee with an odd number of, but not less than
three, members, one of whom shall be designated chairman. The duties of the
said Audit Committee shall be as follows: (1) to issue instructions to and
receive reports from outside accounting firms and to serve as the liaison
between the Corporation and the said firms; (2) to 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. The Audit Committee shall act by majority vote of its
members. Meetings of this said Committee may be convened by any one of its
members or by the Chairman of the Board of Directors upon the same notice as
for meetings of the full Board.
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, at his or
its post office address as it 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 may
also be given personally or by telegram or telecopy sent to his address as it
appears on the records of the Corporation.
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 any director who attends a
meeting of the Board of Directors without protesting at the commencement of the
meeting such lack of notice, shall be conclusively deemed to have waived notice
of such meeting.
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ARTICLE VI
OFFICERS
Section 1. Designations. From and after the date of adoption of these
Bylaws, the officers of the Corporation shall be chosen by the Board of
Directors and shall be a President, a Secretary and a Treasurer. The Board of
Directors may also choose a Chairman of the Board, a Vice President or Vice
Presidents, one or more Assistant Secretaries and/or Assistant Treasurers and
such other officers and/or agents as they shall deem necessary or appropriate.
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. Any
number of offices (except those of President and Vice President) may be held by
the same person, unless the Articles of Incorporation or these Bylaws otherwise
provide, but 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.
Section 2. Term of Office; Removal. The Board of Directors at its annual
meeting, after each annual meeting of stockholders, shall choose a President, a
Secretary and a Treasurer. The Board of Directors may also choose a Vice
President or Vice Presidents, one or more Assistant Secretaries and/or
Assistant Treasurers, and such other officers and agents as it shall deem
necessary or appropriate. The officers of the Corporation shall hold office
until their successors are chosen and shall qualify. 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. Such
removal shall be without prejudice to 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.
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 is also a director of the Corporation.
Section 4. The Chairman of the Board. The Chairman of the Board (if the
Board of Directors so deems advisable and selects one) shall be an officer of
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 from time to time by the Board. He shall, if present,
preside at all meetings of the stockholders and of the Board of Directors. In
the absence of the President, the Chairman of the Board shall have general
supervision, direction and control over the business and affairs of the
Corporation. The Chairman of the Board shall 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
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the Executive Committee and an ex-officio member of each standing committee.
Section 5. The Vice Chairman. The Vice Chairman, if any (or in the event
there be more than one, the Vice Chairmen in the order designated, or, in the
absence of any designation, in the order of their election), shall, in the
absence of the Chairman or in the event of his disability, perform the duties
and exercise the powers of the Chairman and shall generally assist the Chairman
and perform such other duties and have such other powers as may from time to
time be prescribed by the Board of Directors.
Section 6. The President.
(a) The President shall be selected from among the directors
and shall be the chief executive officer of the Corporation and, subject to the
direction of the Board of Directors, shall have general charge of the business,
affairs and property of the Corporation and general supervision over its other
officers and agents. In general, he 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.
(b) 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 security holders 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 shall execute in the corporate
name all appropriate deeds, mortgages, bonds, contracts or other instruments
requiring a seal of 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. The Vice Presidents. The Vice President, if any (or in the
event there be more than one, the Vice Presidents in the order designated, or,
in the absence of any designation, in the order of their election), shall, in
the absence of the President or in the event of his disability, perform the
duties and exercise the powers of the President and shall generally assist the
President and perform such other duties and have such other powers as may from
time to time be prescribed by the Board of Directors.
Section 8. 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 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
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<PAGE> 14
as may from time to time be prescribed by the Board of Directors, Chairman of
the Board or the President, under whose supervision he shall act. He shall
have custody of the seal of the Corporation, and he, 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 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 signature.
Section 9. 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
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 10. 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 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 transactions as Treasurer and of the
financial condition of the Corporation.
Section 11. 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
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
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 (1985), as amended. Particular reference is made to
the class of persons (hereinafter called "Indemnities") 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
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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, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation shall (and is hereby
obligated to) indemnify the Indemnities, and each of them, in each and every
situation where the Corporation is obligated to make such indemnification
pursuant to the aforesaid statutory provisions. The Corporation shall
indemnify the Indemnities, 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 determine 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. Not withstanding any of
the foregoing, the Corporation may not limit any liability, or indemnify any
director or officer of the Corporation against any liability, to the
Corporation or its security holders to which such director or officer might
otherwise be subject by reason of "disabling conduct", as hereinafter defined.
(a) In the case of a director or officer of the Corporation,
such determination shall include a determination that the liability for which
such indemnification is sought did not arise by reason of such person's
disabling conduct. Such determination 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 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.
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(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 Investment Company Act of
1940 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 Investment Company Act of
1940 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 not at least two (2)
years prior to his engagement to render the opinion in question has not been,
employed or retained by the Corporation, by any investment adviser to the
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, as defined in Section 2(b)
hereof.
(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
(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.
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ARTICLE VIII
STOCK CERTIFICATES
Section 1. Form; Signatures; Statements.
(a) Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by the Chairman of the Board or the President or a
Vice President 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 or it, and bearing
the seal of the Corporation. Such signatures and seal may be facsimile. 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 were such officer at the date of its issue.
(b) 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, preferences, limitations and relative rights of the shares of
each class authorized to be issued and, if the Corporation is authorized to
issue any preferred or special class of stock in series, the variations in
relative rights and preferences between the shares of each such series so far
as the same have been fixed and determined and the authority of the Board of
Directors to fix and determine 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.
(c) Every certificate representing shares which are restricted or
limited as to transferability by the Corporation shall either (i) set forth on
the face or back of the certificate a full statement of such restrictions or
limitations or (ii) state that the Corporation will furnish such a statement
upon request and without charge to any holder of such shares.
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, it shall be the duty of the Corporation or its transfer
agent to issue a new certificate to the person entitled thereto, to cancel the
old certificate and to record the transaction upon its books.
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 liable for calls and
assessments a person who is registered on its books as the owner of shares of
its capital
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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.
(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. 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 of the
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.
Such date shall not be more than 60 nor less than 10 days before the date of
any such meeting, nor more than 60 days prior to the date of any other action.
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 8 of Article III; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 5. 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, or his legal
representative, 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.
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.
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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.
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CERTIFICATE
We, WILLIAM F. DUNBAR and THOMAS R. SALLEY, III, President and
Secretary, respectively, of ALLIED CAPITAL CORPORATION II (the "Corporation"),
a Maryland corporation, DO HEREBY CERTIFY that the foregoing is a true and
correct copy of the Corporation's Bylaws as amended and in effect the date
hereof.
IN WITNESS WHEREOF, we have hereunto set our hands and affixed the
corporate seal of the Corporation this 8th day of November, 1995.
/s/ WILLIAM F. DUNBAR
------------------------------------
William F. Dunbar, President
/s/ THOMAS R. SALLEY
------------------------------------
Thomas R. Salley, Secretary
[Corporate Seal]
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EXHIBIT 10.6
AMENDED AND RESTATED CREDIT AGREEMENT
by and between
ALLIED CAPITAL CORPORATION II
as Borrower
and
NATIONSBANK, N.A.
as Bank
Dated September 28, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS; ACCOUNTING TERMS; AMENDMENTS . . . . . . . . . . . . . . . . . . . -1-
Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Section 1.02 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
ARTICLE II THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Part A. The Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Section 2.01 Amount of the Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Section 2.02 Advances; Revolving Period . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Section 2.03 Interest on the Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . -11-
Section 2.04 Repayment of the Revolving Loan; The Revolving Note . . . . . . . . . . . . . . -11-
Section 2.05 Reduction of Maximum Revolving Loan Amount; Conversion of Revolving
Loan to a Term Loan or Term Loans . . . . . . . . . . . . . . . . . . . . . . . -12-
Section 2.06 Purpose of the Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Section 2.07 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Part B. The Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Section 2.08 Aggregate Amount of the Term Loans . . . . . . . . . . . . . . . . . . . . . . -12-
Section 2.09 Interest on the Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Section 2.10 Repayment of the Term Loans; The Term Notes . . . . . . . . . . . . . . . . . . -13-
Section 2.11 Purpose of Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Part C. Terms Applicable to All Loans . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Section 2.12 EuroDollar Deposits Unavailable or Libor Rate Unascertainable . . . . . . . . . -13-
Section 2.13 Interest Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Section 2.14 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Section 2.15 Fixed Rate Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Section 2.16 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Section 2.17 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Section 2.18 Event of Default or Possible Default . . . . . . . . . . . . . . . . . . . . . -16-
ARTICLE III SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Section 3.01 Collateral Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Section 3.02 Debt Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Section 3.03 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 3.04 Collateral Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 3.05 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.06 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
Section 3.07 Inconsistent Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
Section 3.08 Collateral Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . -19-
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BORROWER . . . . . . . . . . . . . . . . -19-
Section 4.01 Organization of the Borrower; Business and Property . . . . . . . . . . . . . . -19-
Section 4.02 Authorization; Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Section 4.03 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Section 4.04 Projections and Financial Statements . . . . . . . . . . . . . . . . . . . . . -20-
Section 4.05 Financial Condition at Date of Credit Agreement . . . . . . . . . . . . . . . . -21-
Section 4.06 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
Section 4.07 Title to Properties; Patents, Trademarks, Etc. . . . . . . . . . . . . . . . . -21-
Section 4.08 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4.09 Compliance with Other Instruments . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4.10 Material Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4.11 Correctness of Data Furnished . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4.12 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Section 4.14 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Section 4.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Section 4.16 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.17 Regulation U, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.18 Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.19 Securities Act, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.20 Name Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 4.21 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 4.22 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 4.23 Principal Place of Business . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 4.24 Brokers, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 4.25 Employee Controversies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
ARTICLE V CONDITIONS TO BORROWING . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Part I Conditions Precedent Agreement . . . . . . . . . . . . . . . . . . . . . . . . -26-
Section 5.01 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.02 No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.03 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.04 Insurance Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.05 Notes, Collateral Lists and Collateral Security Documents . . . . . . . . . . . -27-
Section 5.06 Disbursement Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.07 Opinion of Counsel for the Borrower . . . . . . . . . . . . . . . . . . . . . . -27-
Section 5.08 Corporate Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
</TABLE>
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Section 5.09 Payment of Fees; Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.10 Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.11 Borrower's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.13 Landlord's Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 5.14 Other Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Part II Conditions Precedent to Subsequent Advances or Conversions . . . . . . . . . . -29-
Section 5.15 No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 5.16 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 5.17 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 5.18 Borrower's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
ARTICLE VI AFFIRMATIVE COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.01 Payment of Amounts Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.02 Existence, Business, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.03 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.04 Payment of Taxes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.05 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
Section 6.06 Accounts and Reports of the Borrower . . . . . . . . . . . . . . . . . . . . . -31-
Section 6.07 Information and Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Section 6.08 Notice of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Section 6.09 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Section 6.10 Unconsolidated Ratio of Total Liabilities to Tangible Net Worth . . . . . . . . -34-
Section 6.11 Consolidated Ratio of Total Liabilities to Tangible Net Worth . . . . . . . . . -35-
Section 6.12 Unconsolidated Ratio of Performing Investments to Total Debt . . . . . . . . . -35-
Section 6.13 Unconsolidated Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . -35-
Section 6.14 Consolidated Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . -35-
Section 6.15 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
Section 6.16 Post-Closing Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.18 On-Site Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.19 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
ARTICLE VII NEGATIVE COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . . . . -36-
Section 7.01 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 7.02 Limitation of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 7.03 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
</TABLE>
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Section 7.04 Management; Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . -39-
Section 7.05 Assignment or Sale of Accounts or Notes Receivable . . . . . . . . . . . . . . -39-
Section 7.06 Liquidation, Merger, or Consolidation . . . . . . . . . . . . . . . . . . . . . -40-
Section 7.07 Amendment of Certificate of Incorporation and/or By-Laws . . . . . . . . . . . -40-
Section 7.08 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
Section 7.09 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
Section 7.10 Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
Section 7.11 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
Section 7.12 Transaction with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
ARTICLE VIII WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
ARTICLE IX DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.01 Principal Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.02 Interest Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.03 Other Payment Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.04 Other Provision Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.05 Representation and Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 9.06 Collateral Security Document or Other Loan Document Default . . . . . . . . . . -43-
Section 9.07 Collateral Security Document Representation and Warranty . . . . . . . . . . . -43-
Section 9.08 Financial Difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Section 9.09 Permit and Real Estate Default . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 9.10 Cross-Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 9.11 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 9.12 Restraint on Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
ARTICLE X REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 10.01 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 10.02 Recovery of Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 10.03 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
Section 10.04 Cost of Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
Section 10.05 No Advances; Conversions, etc. . . . . . . . . . . . . . . . . . . . . . . . . -46-
ARTICLE XI MANAGEMENT AND COLLECTION OF COLLATERAL . . . . . . . . . . . . . . . . . . . . -46-
Section 11.01 Status of Investments and Other Collateral . . . . . . . . . . . . . . . . . . -46-
Section 11.02 Collection of Receivables, Investments; Management of Collateral . . . . . . . -47-
Section 11.03 Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
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ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Section 12.01 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Section 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-
Section 12.03 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . -52-
Section 12.04 Entire Agreement; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Section 12.05 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Section 12.06 Binding Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Section 12.07 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 12.08 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 12.09 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
</TABLE>
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<PAGE> 7
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT (this "Credit Agreement"),
dated as of the 28th day of September, 1995, is made by and between ALLIED
CAPITAL CORPORATION II, a Maryland corporation, and NATIONSBANK, N.A., a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower desires to borrow from the Bank a secured
revolving line of credit loan in the principal amount not to exceed
$25,000,000.00 (the "Revolving Loan"), all or part of which may be converted
from time to time into term loans in an aggregate principal amount of
$25,000,000.00 (each a "Term Loan" and collectively, the "Term Loans"), to be
extended by the Bank to the Borrower upon the terms and subject to the
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
In addition to terms defined elsewhere in this Credit Agreement,
certain terms used herein are defined in Section 1.01.
ARTICLE I
DEFINITIONS; ACCOUNTING TERMS; AMENDMENTS
Section 1.01 Definitions. As used herein and in the Revolving Note,
the Term Notes, and the other Loan Documents, the following terms shall have
the following meanings:
"Advances" means advances of cash proceeds obtained by the Borrower
in respect of the Revolving Loan.
"Affiliate" means any employee, officer, shareholder or partner of
the Borrower, or any spouse, parent, or child of any of the foregoing, or any
corporation, partnership or other business enterprise directly or indirectly
controlled by, or under direct, indirect or common control with, any one or
more of such Persons and/or the Borrower.
"Authorized Fiscal Officer" means the chief executive officer, chief
financial officer or president of the Borrower.
<PAGE> 8
"Bank" shall have the meaning given to it in the preamble of this
Credit Agreement.
"Borrower" shall have the meaning given to it in the preamble of this
Credit Agreement.
"Borrower's Certificate" shall have the meaning given to it in
Section 5.11.
"Business Day" means (i) any day in respect of which dealings in both
(a) United States Dollar deposits in the London inter-bank market and (b)
securities issued in the United States are, in both cases, carried on and (ii)
any day which is not a Saturday, Sunday or other day on which banks in the
District of Columbia are authorized or required to close.
"Capitalized Lease Obligations" means, as to any Person, the
obligations of such Person to pay rent or other amounts under leases of, or
other agreements conveying the right to use real or personal property, which
obligations are required to be classified and accounted for as capital leases
on a balance sheet of such Person, prepared in accordance with GAAP (including
the Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board).
"Closing Date" means the date that the first Advance of the Revolving
Loan is disbursed to the Borrower under this Credit Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor statute, and the rules and regulations promulgated
thereunder.
"Collateral" shall have the meaning given to such term in Section
3.03.
"Collateral Lists" shall have the meaning given to such term in
Section 3.04.
"Collateral Security Documents" shall have the meaning given to such
term in Section 3.08.
"Conclusive" means that the calculation, determination or other
matter referred to is presumed for all purposes to be true and correct and
absolutely binding on the Borrower except to the extent (i) of manifest or
obvious error (e.g. misplacement of decimal points) or (ii) that the Borrower
by a preponderance of evidence in a good faith contest in which the Borrower
bears the burden of proof has established that another result is materially
different and true and correct.
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"Convert", "Conversion", and "Converted" refers to a conversion of
the Revolving Loan, or a portion thereof in excess of $1,000,000.00, into a
Term Loan or Term Loans pursuant to Section 2.05.
"Conversion Date" means the date specified in a Conversion Notice for
the commencement of a Term Loan as a result of a Conversion pursuant to Section
2.05.
"Conversion Notice" means the written notice of the Borrower to the
Bank of a Conversion pursuant to Section 2.05.
"Debt Instruments" shall have the meaning given to such term in
Section 11.01 of this Credit Agreement.
"Effective Date" means a date on which the Bank makes an Advance or a
Conversion Date.
"Environmental" means relating to pollution of the environment,
including air, soil, water and groundwater, and the effects of Hazardous
Substances, or toxic and solid wastes.
"Environmental Matters" means (a) any injury to person or property
resulting or allegedly resulting from Environmental claims, (b) any suits,
investigations, notices, orders, decrees or proceedings and other acts and
actions arising under any existing or future Environmental laws, rules,
regulations, orders, permits, decrees, notices of violation and other
Environmental claims, and (c) any compliance required under existing or future
Environmental laws, orders, permits, decrees, notices of violations and other
Environmental claims.
"Environmental Remediation" means the remediation, clean-up or other
resolution of Environmental matters in respect of which the Borrower has any
liability or obligation.
"Equity Interests" shall have the meaning given to such term in
Section 11.01 of this Credit Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974 and
the regulations thereunder, each as amended from time to time.
"Event of Default" shall have the meaning specified in Article IX of
this Credit Agreement.
"Execution Date" means the date of this Credit Agreement first
written above.
-3-
<PAGE> 10
"Exhibits" and "Schedules" means and refers collectively to the
documents attached to this Credit Agreement and labeled as Exhibits or
Schedules hereto.
"federal", "state", or "local" means and relates to the United
States, its political divisions or states, and respective political
subdivisions, and equivalents thereof.
"Fixed Rate Indemnity" shall have the meaning specified in Section
2.15.
"Fixed Rate" means the Index, adjusted to a constant maturity equal
to the Term Loan Period designated in a Conversion Notice, for the weekly
auction which immediately precedes a Conversion Date.
"GAAP" means generally accepted accounting principles as applied in
the United States.
"Governmental Authority" shall have the meaning given to such term in
Section 4.03.
"Guaranteed" or to "Guarantee" as applied to any obligation shall
mean and include (a) a guarantee or guaranty (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
directly or indirectly, in any manner, of any part or all of such obligation
and (b) an agreement, direct or indirect, contingent or otherwise, and whether
or not constituting a guaranty, the practical effect of which is to assure the
payment or performance (or payment of damages in the event of non-performance)
of any part or all of such obligation whether by (i) the purchase of securities
or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of
property or the purchase or sale of services primarily for the purpose of
enabling the obligor with respect to such obligation to make any payment or
performance (or payment of damages in the event of non-performance) of or on
account of any part or all of such obligation, or to assure the owner of such
obligation against loss, (iii) the supplying of funds to or in any other manner
investing in the obligor with respect to such obligation, (iv) repayment of
amounts drawn down by beneficiaries of letters of credit or (v) the supplying
of funds to or investing in a Person on account of all or any part of such
Person's obligation under a Guarantee of any obligation or indemnifying or
holding harmless, in any way, such Person against any part or all of such
obligation.
"Hazardous Substances" means any toxic substances or related
materials, including, without limitation, asbestos and any substances defined
as or included in the definition of "hazardous substances", "hazardous waste",
"hazardous materials", or "toxic substances" under any applicable law or
regulation of any state, province, country or local
-4-
<PAGE> 11
government (which include, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Hazardous
Materials Transportation Act, the Resource Conservation and Recovery Act, and
the Occupational Health and Safety Act).
"Income Difference" shall have the meaning given to such term in
Section 2.15.
"Indebtedness" as applied to any Person, including the Borrower,
means:
(i) All items (except items of capital stock or
capital surplus or of contingency reserves, dividends and
distributions payable by a Person, reserves or allowances for
deferred income taxes or reserves or allowances for unearned
revenues, accrued expenses and trade accounts payable for goods or
services purchased in the ordinary course of business that are not
the subject of a conditional sales contract or Capitalized Lease
Obligation and only so long as paid within ninety (90) days of the
delivery of such goods or rendering of such services except to the
extent contested in good faith by appropriate proceedings and for
which reserves have been set aside in accordance with GAAP) which in
accordance with GAAP applied on a consistent basis would be included
in determining total liabilities as shown on the liability side of a
balance sheet of any such Person as of the date on which
Indebtedness is to be determined, regardless of whether such
indebtedness shall be recourse indebtedness or otherwise; and
(ii) All indebtedness of others within the meaning of
(i) above which any such Person has directly or indirectly Guaranteed.
"Indebtedness for Borrowed Money" of any Person means at any date,
without duplication, (i) all obligations of such Person for borrowed money,
including, without limitation, all borrowing under insurance policies, (ii) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (iii) all obligations of such Person to pay the deferred
purchase price for property or services, except accounts payable arising in the
ordinary course of business, (iv) all Capitalized Lease Obligations of such
Person, (v) all Indebtedness for Borrowed Money of others secured by a Lien on
any asset of such Person, whether or not such Indebtedness for Borrowed Money
is assumed by such Person, and (vi) all Indebtedness for Borrowed Money of
others Guaranteed by such Person.
-5-
<PAGE> 12
"Indemnified Liabilities" shall have the meaning given to it in
Section 12.01.
"Index" means the average of weekly auction rates for United States
Treasury Securities, as published by the Federal Reserve Board.
"Indicated Spread" means the amount of basis points to be added to the
various Interest Options.
"Interest Adjustment Date" means the last day of each Interest Period.
"Interest Option" means the Libor Rate or the Fixed Rate.
"Interest Period" shall mean a period of thirty, sixty or ninety days
(as selected by the Borrower) commencing on the date of each Advance or each
Conversion Date if a Term Loan is bearing interest based on the Overall Libor
Rate and ending on each Interest Adjustment Date with respect thereto. If the
Borrower fails to select a new Interest Period with respect to any portion of
the Loans subject to the Overall Libor Rate at least two (2) Business Days
prior to any Interest Adjustment Date, the Borrower shall be deemed to have
selected an Interest Period of the same duration as the immediately preceding
Interest Period. With respect only to that portion of a Term Loan (as described
in Section 2.10 hereof) which represents a mandatory quarterly installment of
principal, the Borrower may not select an Interest Period the maturity of which
would extend beyond the due date of such installment payment without becoming
subject to the provisions of Section 2.15 hereof.
"Investment Advisory Agreement" shall mean that certain Investment
Advisory Agreement dated May 11, 1995 by and between the Borrower and Allied
Capital Advisors, Inc. pursuant to which Allied Capital Advisors, Inc. manages
the assets of the Borrower.
"Investment Income" shall have the meaning given to it in Section
2.15.
"Investments" means all loans, advances, extensions of credit or
contributions of capital made by the Borrower to any Person evidenced and
secured by Debt Instruments or purchase by the Borrower or other acquisition by
the Borrower of the stock or notes or debentures or other securities of, or any
other Equity Interest in, any Person.
"Libor Rate" means, with respect to any Interest Period, a rate per
annum equal to the quotient obtained (rounded upwards, if necessary, to the
next highest 1/16 of 1%) by dividing (i) the rate of interest determined by the
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Bank two (2) Business Days prior to the first day of such Interest Period that
it would have to pay at 11:00 a.m. London time in the London inter-bank market
for inter-bank deposits of United States Dollars with a maturity approximately
equal to the Interest Period selected by the Borrower for the use of such rate
in determining the interest to be charged on all or part of the outstanding
principal balance of the Loans and in an amount equal to the amount of the
outstanding principal balance of the Loans on which interest will be determined
by the Libor Rate by (ii) 1.00 minus for any day that percentage (expressed as
a decimal) which is in effect on such day, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
reserve requirement for the Bank in respect of "Eurocurrency liabilities" (or
in respect of any other category of liabilities which includes deposits by
reference to which the Libor Rate is determined).
"Lien" as applied to the property of any Person means: (a) any
mortgage, lien, pledge, charge, lease constituting a Capitalized Lease
Obligation, conditional sale or other title retention agreement, or other
security interest or encumbrance of any kind in respect of any property of such
Person, or upon the income or profits therefrom; (b) any arrangement, express
or implied, under which any property of such Person is transferred, sequestered
or otherwise identified for the purpose of subjecting the same to the payment
of Indebtedness for Borrowed Money in priority to the payment of the general,
unsecured creditors of such Person; and (c) the filing of, or any agreement to
give, any financing statement under the Uniform Commercial Code or its
equivalent of any jurisdiction in respect of Indebtedness for Borrowed Money.
"Loan Documents" means and includes this Agreement, the Notes, and the
Collateral Security Documents.
"Loans" means collectively the Revolving Loan and the Term Loans.
"Maximum Revolving Loan Amount" shall have the meaning given to such
term in Section 2.01 of this Credit Agreement.
"Notes" means collectively the Revolving Note and the Term Notes.
"Overall Fixed Rate" means the Fixed Rate plus the applicable
Indicated Spread.
"Overall Libor Rate" means the Libor Rate plus the applicable
Indicated Spread.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
"Performing Investments" means all Investments of the Borrower, less
any loans, advances or extensions of credit made by Borrower, whether under or
pursuant to Debt Instruments or Equity Interests, that are not performing as a
result of the existence or occurrence of a default or event of default
thereunder or related thereto.
"Permit" has the meaning given to such term in Section 4.03.
"Permitted Collateral Liens" means the permitted exceptions described
in clauses (i) through (v) of Section 7.01.
"Person" includes a corporation, an association, a partnership, an
organization, a trust or business trust, an individual, a government or
political subdivision thereof or a governmental agency or other entity.
"Plan" means any employee benefit plan as defined by ERISA of which
any Person is a sponsor, participating employer, or contributor.
"Pledge Agreements" shall have the meaning given to it in Section
3.05(ii).
"Possible Default" means an event or condition which, after notice or
lapse of time, or both, but the existence or occurrence of no other conditions,
would constitute an Event of Default.
"Pro Forma Balance Sheet" shall have the meaning given to it in
Section 4.04.
"Revolving Loan" shall have the meaning given to such term in the
recitals of this Agreement.
"Revolving Loan Commitment" shall have the meaning given to such term
in Part A of Article II.
"Revolving Note" means the revolving line of credit promissory note in
the form of Exhibit "A" attached hereto, as duly completed, executed and
delivered by the Borrower in favor of the Bank to evidence the Borrower's
indebtedness pursuant to the Revolving Loan.
"Revolving Period" shall have the meaning given to such term in
Section 2.02.
"Secured Obligations" shall have the meaning given to such term in
Section 3.02.
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"Security Agreement" shall have the meaning given to such term in
Section 3.05(i).
"Subsidiaries" means and includes any now existing or hereafter
created corporation, association, general partnership, limited partnership or
other business entity, (a) the majority (by number of votes) of the outstanding
stock of which is at the time in question owned or controlled by the Borrower
and/or by any Subsidiary of the Borrower, or (b) the majority of the
partnership interests, whether general or limited, of which is at the time
owned or controlled by the Borrower and/or by any Subsidiary of the Borrower.
"Tangible Net Worth" means the aggregate amount of a Person's stated
capital, including, without limitation, capital stock, paid in capital and
retained earnings, determined in accordance with GAAP, less the aggregate
amount of a Person's treasury stock, amounts due from officers, directors and
members of their immediate families, amounts due from Affiliates, investments
in Affiliated companies other than the Subsidiaries, goodwill, non-compete
agreements, capitalized expenses, costs associated with the closing of the
Loans and any other intangible assets.
"Taxes" means all federal, state and local or foreign income, payroll,
withholding, excise, sales, use, real and personal property, use and occupancy,
business and occupation, mercantile, real estate, capital stock and franchise
or other taxes, including interest and penalties thereon, and including
estimated taxes thereof.
"Tender Date" shall have the meaning given to such term in Section
2.15.
"Term Loan" and "Term Loans" shall have the meanings given to such
terms in the recitals set forth above.
"Term Loan Commitment" shall have the meaning given to such term in
Part B of Article II.
"Term Loan Maturity Date" shall have the meaning given to such term in
Section 2.10.
"Term Loan Period" shall have the meaning given to it in Section 2.08.
"Term Note" and "Term Notes" means (i) with respect to a Term Loan
bearing interest at the Overall Libor Rate, a term promissory note in the form
of Exhibit "B" attached hereto, as duly completed, executed and delivered by
the Borrower in favor of the Bank to evidence the Borrower's indebtedness
pursuant to a Term Loan and (ii) with respect to a Term Loan bearing interest
at the Overall Fixed Rate,
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a term promissory note in the form of Exhibit "C" attached hereto, as duly
completed, executed and delivered by the Borrower in favor of the Bank to
evidence the Borrower's indebtedness pursuant to a Term Loan.
"Total Debt" means Total Liabilities, less (i) the fees payable by the
Borrower to Allied Capital Advisers, Inc. under and pursuant to the terms of
the Investment Advisory Agreement, (ii) cash distributions payable to
shareholders of the Borrower, and (iii) accruals for deferred taxes and trade
accounts payable for goods or services purchased in the ordinary course of
business that are not the subject of a conditional sales contracts or
Capitalized Lease Obligations and only as long as paid within ninety (90) days
of the delivery of such goods or rendering of such services.
"Total Liabilities" means as of any date of determination thereof, the
sum of all Indebtedness for Borrowed Money and all other liabilities on a
balance sheet of a Person prepared in accordance with GAAP applied on a
consistent basis, and in any event, including all reserves and all deferred
taxes and other deferred items.
Whenever any agreement, instrument, promissory note, security
agreement, pledge agreement, or other instrument or document is defined in this
Credit Agreement, such definition shall be deemed to mean and include, from and
after the date of an amendment, restatement, or modification thereof, such
agreement, security agreement, pledge agreement, promissory note or other
instrument or document as so amended, restated or modified. To the extent that
the plural of any term defined herein is not defined in this Credit Agreement,
that usage of the plural in this Credit Agreement shall mean the plural of the
singular term so defined and if the defined term is plural, usage of the
singular of such term shall mean the singular thereof, in each case as the
context so requires. The words "hereof", "herein" or similar words shall refer
to this Credit Agreement and references to Sections or Articles shall mean
Sections or Articles of this Credit Agreement.
Section 1.02 Accounting Terms. Any accounting terms used herein and
not defined herein shall have the meaning ascribed to them by, and be
determined in accordance with, GAAP. All computations made pursuant to this
Agreement shall be made in accordance with GAAP consistently applied and all
balance sheets and other financial statements shall be prepared in accordance
with GAAP consistently applied.
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ARTICLE II
THE LOANS
Part A. The Revolving Loan
The Bank hereby establishes the commitment (the "Revolving Loan
Commitment") pursuant to which the Revolving Loan will be made to the Borrower,
subject to the terms and conditions hereinafter stated in this Credit
Agreement, as follows:
Section 2.01 Amount of the Revolving Loan.
(i) The principal amount of the Revolving Loan outstanding from time
to time shall not exceed $25,000,000.00 (the "Maximum Revolving Loan Amount").
(ii) The aggregate amount borrowed by the Borrower from the Bank
under the Revolving Loan Commitment shall constitute a single Revolving Loan
from the Bank regardless of how many Advances have been borrowed, repaid or
reborrowed.
Section 2.02 Advances; Revolving Period. The Borrower may obtain
Advances, from time to time, in respect of the Revolving Loan from the Bank
during a period (the "Revolving Period") commencing as of the Closing Date
until (i) the termination of the Revolving Loan Commitment pursuant to any
provision hereof or (ii) the date the Maximum Revolving Loan Amount is equal to
zero as a result of a Conversion or Conversions of the Maximum Revolving Loan
Amount to a Term Loan or Term Loans pursuant to Section 2.05, whichever shall
first occur, whereupon the Revolving Loan Commitment shall terminate and be of
no further force and effect. Subject to the other provisions hereof, during
the Revolving Period, Advances may be borrowed, repaid (in accordance with
Section 2.04) and reborrowed so long as the principal amount of the Revolving
Loan outstanding at any one time does not exceed the Maximum Revolving Loan
Amount.
Section 2.03 Interest on the Revolving Loan. The Borrower shall pay
interest on the Revolving Loan at the rate equal to the Libor Rate plus one
hundred fifteen (115) basis points. Interest on the Revolving Loan shall be
payable on the last day of each November, February, May and August during the
term of the Revolving Loan and on the last day of the Revolving Period.
Section 2.04 Repayment of the Revolving Loan; The Revolving Note.
The unpaid principal balance of the Revolving Loan shall be due and payable on
the last day of the Revolving Period, but in any event no later than on May 31,
1997.
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The obligation of the Borrower to pay the principal of and interest on
the Revolving Loan shall also be evidenced by the Revolving Note. The unpaid
principal balance of and interest accrued on the Revolving Loan shall be
determined by the ledgers and records of the Bank as maintained in accordance
with the Bank's ordinary practices to reflect Advances and payments under this
Credit Agreement and shall be Conclusive.
Section 2.05 Reduction of Maximum Revolving Loan Amount; Conversion
of Revolving Loan to a Term Loan or Term Loans. The Borrower shall have the
right at all times during the Revolving Period to permanently reduce the
Maximum Revolving Loan Amount in whole or in part, by giving ten (10) days
written notice to the Bank of its intent to Convert the Revolving Loan
Commitment or a portion thereof in excess of $1,000,000.00 to a Term Loan (each
such notice being hereinafter referred to as a "Conversion Notice").
Concurrently with each Conversion, the Borrower shall execute a Term Note, as
more particularly described in Section 2.08 below.
Section 2.06 Purpose of the Revolving Loan. The proceeds of the
Revolving Loan shall be used by the Borrower to make Investments in small
businesses.
Section 2.07 Commitment Fee. The Borrower shall pay to the Bank, in
arrears on the last day of each November, February, May and August during the
Revolving Period, a commitment fee based on the average difference between (i)
the Revolving Loan Commitment and (ii) the average unpaid principal balance of
the Revolving Loan plus the outstanding principal balance of all Term Loans
during the preceding quarter, computed at the rate of one-eighth of one percent
(.125%) per annum.
Part B. The Term Loans
The Bank hereby establishes the commitment (the "Term Loan
Commitment") pursuant to which a Term Loan or Term Loans will be made to the
Borrower, subject to the terms and conditions hereinafter stated in this Credit
Agreement, as follows:
Section 2.08 Aggregate Amount of the Term Loans; Conversion Date;
Term Loan Period. The Borrower and the Bank agree that the Revolving Loan may
be Converted to a Term Loan or Term Loans in an aggregate principal amount not
to exceed Twenty-Five Million Dollars ($25,000,000.00). Each Conversion Notice
delivered to the Bank pursuant to Section 2.05 shall specify (i) the date on
which a Conversion will occur (the "Conversion Date"), (ii) which of the
Interest Options set forth in Section 2.09 shall apply on the Conversion Date,
and (iii) the period of time for which the Term Loan shall be in effect (each
such
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period being hereinafter referred to as a "Term Loan Period"); provided,
however, that each Term Loan Period shall be for a period of five (5) years or
less and no Term Loan Period shall extend beyond the Term Loan Maturity Date
(as hereinafter defined).
Section 2.09 Interest on the Term Loans. The Borrower shall pay
interest on each Term Note at the rate of interest calculated on the basis of
one of the following Interest Options plus the Indicated Spread set forth
below:
(i) an Overall Libor Rate equal to the Libor Rate plus an Indicated
Spread equal to one hundred fifty (150) basis points; or
(ii) an Overall Fixed Rate equal to the Fixed Rate plus an Indicated
Spread equal to one hundred seventy-five (175) basis points.
Section 2.10 Repayment of the Term Loans; The Term Notes. The
principal amount of each Term Note and interest thereon shall be due and
payable on the last day of each calendar quarter, in equal quarterly
installments of principal calculated on a fully amortizing schedule equivalent
to the Term Loan Period (i.e., principal payments on a Term Loan with a three
(3) year Term Loan Period shall be calculated on the basis of a three (3) year
amortization schedule), plus interest thereon at the Interest Option selected
by the Borrower in its Conversion Notice, with a final installment of all
unpaid principal and interest due in full on the last day of the Term Loan
Period, but in any event by no later than May 31, 2002 (the "Term Loan Maturity
Date").
The obligation of the Borrower to pay the principal of and interest on
each Term Loan shall also be evidenced by a Term Note, which shall be executed
on each Conversion Date for the principal amount of the Revolving Loan being
Converted to a Term Loan. The unpaid principal balance of and interest accrued
on the Term Loans shall be determined by the ledgers and records of the Bank,
as maintained to reflect borrowings and payments under this Credit Agreement,
which shall be Conclusive.
Section 2.11 Purpose of Term Loans. The purpose of the Term Loans is
to refinance the Revolving Loan.
Part C. Terms Applicable to All Loans
Section 2.12 EuroDollar Deposits Unavailable or Libor Rate
Unascertainable. In the event that the Bank determines that dollar deposits in
the relevant amount are not available or that by reason of circumstances
affecting such market, adequate and reasonable means do not exist for
ascertaining the Libor Rate on an Effective Date then, the
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Bank shall promptly give notice of such determination to the Borrower. In any
such event, all Loans subject to the Libor Rate shall at the expiration of the
applicable Interest Period then in effect become subject to an alternative
index and an appropriate Indicated Spread selected by the Lender in the
exercise of its reasonable discretion, which results in a comparable yield to
the Lender. In the event that the circumstances causing any such
unavailability of deposits or inability to determine the Libor Rate shall
change or terminate so that the Libor Rate may again be determined, the Bank
shall so notify the Borrower and the Libor Rate shall again be available to the
Borrower with the applicable Indicated Spread.
Section 2.13 Interest Calculations. The interest payable on the
Loans shall be computed on a 360-day-per-year basis for the actual number of
days elapsed. All payments to be made by the Borrower under this Credit
Agreement and the Notes shall be made in immediately available funds by 2:00
p.m., District of Columbia time, to the Bank and any payment received after
such time shall be deemed received on the next following Business Day. Whenever
any payment under this Credit Agreement and the Notes shall be due on any day
that is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the due date for any such payment is so
extended or extended for any other reason, including operation of law, or any
payment is received after a due date, interest shall accrue and be payable on
demand for such extended time.
Section 2.14 Prepayment. Subject to the provisions set forth in
Section 2.15, the Borrower may prepay the Loans in full or in part at any time.
No prepayment shall postpone the due date of any subsequent payment, nor shall
it change the amount of any payment otherwise required to be made under the
Loans.
Section 2.15 Fixed Rate Indemnity. (a) With respect to the Revolving
Loan and any Term Loan bearing interest at the Overall Libor Rate, the Borrower
shall compensate and pay the Bank for any documented costs and expenses
(whether internal or external), as determined by the Bank in its reasonable
discretion (including, without limitation, any interest paid by the Bank to
lenders of funds borrowed by it to fund and carry the portion of the Loans upon
which interest is being determined on an Overall Libor Rate and any loss
sustained by the Bank in connection with the reemployment of such funds), which
the Bank actually sustains: (1) if any repayment or prepayment occurs on a date
which is not the last day of an Interest Period applicable thereto, or (2) as a
consequence of any Event of Default or Possible Default under this Agreement.
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(b) The Borrower shall have the right to prepay each Term Note bearing
interest at an Overall Fixed Rate, in full or in part, upon payment to the Bank
of (i) the principal amount to be prepaid, (ii) all accrued interest thereon,
(iii) all fees and costs then due under the Collateral Security Documents, and
(iv) a prepayment fee calculated in accordance with the following formula:
(a) calculate the total amount of interest (the "Interest Income")
that would accrue to the Bank on account of the principal amount
prepaid between the date of prepayment (the "Tender Date") and the
last day of the Term Loan Period; then
(b) calculate the amount of investment income, less any and all costs
of making such an investment (the "Investment Income"), that would be
earned from the Tender Date until the last day of the Term Loan
Period, if the principal amount prepaid as of the Tender Date were to
be invested in a U.S. Treasury Bill obligation with a maturity date
most closely corresponding to the last day of the Term Loan Period,
bearing interest at the Index for the auction that is held immediately
prior to the Tender Date and in an amount equal to the amount of
principal prepaid for such period of time; then
(c) subtract the Investment Income from the Interest Income (the
"Income Difference"). If the Income Difference is positive, the
present value (as hereinafter defined) of the Income Difference shall
be the result of the computation under this formula (if the Income
Difference is negative, then the result of the computation shall be
zero). The present value of the Income Difference shall be calculated
by discounting at the rate of interest in effect on the Tender Date
for the Index, which Index shall be adjusted to a constant maturity
equal to the last day of the Term Loan Period.
Section 2.16 Late Charge. In the event that any payment or part of
any payment due under the Notes is not made within ten (10) days after the date
when the same is due, the Borrower shall pay to the Bank a late charge equal to
five percent (5%) of the delinquent payment. This charge shall be in addition
to any other sums due under the Notes or this Credit Agreement and any other
right or remedy the holder of the Notes may have.
Section 2.17 Default Rate. Upon the occurrence of any Event of
Default, each of the Notes shall bear interest during the pendency of such
Event of Default at a rate of interest equal to two percent (2%) per annum
above the rate of interest then in effect under each of the Notes.
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Section 2.18 Event of Default or Possible Default. The Borrower shall
not be entitled to obtain any Advance or to Convert any portion of the
Revolving Loan to a Term Loan if, at the time an Advance or Conversion is
requested, any Event of Default or Possible Default then exists or immediately
thereafter exists. Receipt by the Borrower of any Advances and the occurrence
of any Conversions, each in and of themselves, constitutes a continuing
representation and warranty by the Borrower that the representations and
warranties contained in Article IV continue to be accurate in all material
respects on and as of the time of such Advances or Conversions, with the same
effect as if made on and as of such date, and that the Borrower then is
entitled under this Credit Agreement to obtain the Advances or Conversions.
ARTICLE III
SECURITY
Section 3.01 Collateral Granted. All Collateral assigned, pledged or
otherwise granted under or in connection with this Credit Agreement shall be
granted to and or held by, as the case may be, the Bank for its sole benefit
and not in trust for, or for the benefit of the Borrower, any Affiliate or any
other Person.
Section 3.02 Debt Secured. All collateral and property assigned,
mortgaged, pledged or otherwise granted under or in connection with this Credit
Agreement shall secure:
(i) the payment of all principal of and interest
owing or outstanding on any of the Notes or the Revolving Loan or any
of the Term Loans, including, without limitation, future advances made
by the Bank which are or may be evidenced by the Notes, regardless of
whether the Bank was obligated to make such advances;
(ii) the payment of all amounts from time to time
owing to the Bank under or in connection with this Credit Agreement
and the Collateral Security Documents (as defined in Section 3.08
hereof);
(iii) the payment by the Borrower of all costs and
expenses (including attorneys' fees) incurred by the Bank in the
collection of any of the Loans or any of the Notes and in the
enforcement of its rights under this Credit Agreement, the Collateral
Security Documents, and the other Loan Documents;
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(iv) the payment by the Borrower of all sums
expended or advanced by the Bank pursuant to the terms of this Credit
Agreement, any Collateral Security Document or any other Loan
Document;
(v) the performance by the Borrower of all of its
obligations under this Credit Agreement, the Notes, the Collateral
Security Documents and the other Loan Documents; and
(vi) the payment of any and all other indebtedness
(including principal, interest or fees, if any) of any kind or description now
or hereafter owing by the Borrower to the Bank, including, without limitation,
overdrafts, amounts owing under other notes, bonds, debentures or other
evidences of indebtedness and interest rate protection arrangements and
contingent obligations.
All of the debt, liabilities and obligations described above shall be sometimes
hereinafter referred to as the "Secured Obligations."
Section 3.03 Collateral. The Borrower hereby grants and agrees to
grant to the Bank security interests and/or other liens in, and pledges and
assignments, of any and all of the Borrower's properties and assets, whether
now owned or existing or hereafter acquired or arising, including, but not
limited to, all Debt Instruments and Equity Interests (collectively the
"Collateral") which security interests, liens, pledges and assignments shall
have a first priority, except for Permitted Collateral Liens. The Borrower
agrees (i) to promptly execute and deliver all such agreements, documents and
instruments as the Bank shall from time to time reasonably request and (ii) to
take such other actions and to give such further assurances as the Bank shall
from time to time reasonably request to evidence, obtain and/or to perfect the
security interests, liens, pledges and assignments to be granted under this
Credit Agreement.
Section 3.04 Collateral Disclosure. On or prior to the Execution
Date, the Borrower shall deliver to the Bank such lists (the "Collateral
Lists"), which are attached hereto as Schedule 3.04, containing the following
information:
(i) identifying each place of business of the
Borrower;
(ii) identifying any lessee, bailee, warehouseman or
similar third party having possession of any property of the Borrower
which is part of the Collateral;
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(iii) identifying the places where records relating
to accounts receivable of the Borrower are maintained;
(iv) identifying all Debt Instruments;
(v) identifying all Equity Interests; and
(vi) identifying all patents, trademarks, service
marks, copyrights, franchises (including licenses to any of the
foregoing) in favor of or owned by the Borrower.
Upon the request of the Bank, the Borrower, as soon as possible but in any
event within twenty (20) days of such request, shall deliver to the Bank an
updated Collateral List as of the last day of the immediately preceding month,
such updated Collateral List to be certified by an Authorized Fiscal Officer.
The updated Collateral List shall set forth any changes which have occurred
since the previous Collateral List so that all such information is correct and
current as of the last day of the preceding month.
Section 3.05 Personal Property.
(i) Generally. On the Execution Date, the Borrower shall execute and
deliver to the Bank a Security Agreement with such additional assignments or
agreements required thereby (the "Security Agreement"), granting to the Bank a
valid security interest having the priority required by Section 3.03 and lien
covering all of the Collateral then owned or thereafter acquired by the
Borrower, in form and substance satisfactory to the Bank and its counsel,
together with related financing statements.
(ii) Stock Pledges. On the Execution Date, the Borrower shall execute
and deliver to the Bank pledge agreements (the "Pledge Agreements"), pledging
and granting a security interest to the Bank in all equity interests owned by
the Borrower in Allied Investment Corporation II and Allied Financial
Corporation II, in form and content satisfactory to the Bank and its counsel,
to secure the Obligations.
(iii) Casualty and Liability Insurance. The Collateral Security
Documents will require that the Bank be named as lender or mortgagee loss
payee, as applicable, on all casualty and liability insurance of the Borrower,
as well as an additional insured, and that none of such insurance policies may
be canceled or modified without at least thirty (30) days' prior written notice
to the Bank. The Collateral Security Documents shall contain provisions as to
the amount of such casualty and liability insurance and the payment of premiums
thereon.
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Section 3.06 Costs. The Borrower shall pay, to the fullest extent
permitted by law, on demand all reasonable costs, fees and expenses incurred by
the Bank and paid to third Persons in connection with the taking and/or
perfection of the Collateral, including, without limitation:
(i) fees and expenses incurred in preparing
Collateral Security Documents from time to time (including, without
limitation, attorneys' fees incurred in connection with preparing such
Collateral Security Documents);
(ii) all filing, recording and/or records search
fees and taxes;
(iii) attorneys' fees in connection with all legal
opinions required;
(iv) any appraisal and environmental report costs;
and
(v) all related costs, fees and expenses.
Section 3.07 Inconsistent Provisions. Except as provided in Section
6.05 hereof, in the event that the provisions of any Collateral Security
Document directly conflict with any provision of this Credit Agreement, the
provision of this Credit Agreement shall govern.
Section 3.08 Collateral Security Documents. The Security Agreement,
the Pledge Agreements and each other agreement, document or instrument executed
and/or delivered in connection with any of the foregoing shall be referred to
collectively as the "Collateral Security Documents" and singly as a "Collateral
Security Document."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
The Borrower represents and warrants to the Bank as follows:
Section 4.01 Organization of the Borrower; Business and Property.
The Borrower is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction of its incorporation. The Borrower
has all requisite corporate power and authority to execute and deliver the Loan
Documents and to carry out the provisions thereof. The Borrower has full
power, authority, and legal right to own and operate its properties and to
carry on the business in which it engages and currently intends to engage. The
Borrower is qualified or otherwise entitled to
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do business in every jurisdiction in which qualification is necessary.
Attached hereto as Schedule 4.01 is a true and correct summary of the
capital structure, including all capital stock and Indebtedness for Borrowed
Money (excluding the Loans) of the Borrower.
Section 4.02 Authorization; Validity. The Borrower has taken all
action necessary to authorize the execution, delivery and performance by it of
the Loan Documents. This Credit Agreement is, and each of the other Loan
Documents when executed and delivered will be, legal, valid and binding upon
the Borrower and enforceable against the Borrower in accordance with their
respective terms. No consent, approval, or authorization of, or registration
or declaration with, any governmental authority or other Person is required in
connection with the execution, delivery and performance by the Borrower of any
of the Loan Documents.
Section 4.03 Permits. Set forth on Schedule 4.03 hereto is a list
describing the following information: (i) the name and address of each federal,
state or local governmental authority (a "Governmental Authority"), from which
the Borrower and its Subsidiaries have on the date of this Credit Agreement
(either directly or indirectly through another Person) any permit, license or
authorization to operate their respective businesses (a "Permit"), (ii) an
identification of each such Permit, (iii) whether any restriction is contained
in such Permit as to the assignment or transfer thereof, and (iv) the stated
expiration date of the Permit. The Borrower represents and warrants that it
has delivered a true, correct and complete copy of each Permit set forth on
Schedule 4.03 to the Bank, that no material default or breach by the Borrower
or its Subsidiaries exists under any Permit, that each Permit set forth on
Schedule 4.03 is in full force and effect in all material respects, is issued
to the Borrower or one of its Subsidiaries and is free and clear of any lien,
security interest or charge of any kind, except Permitted Collateral Liens and
restrictions generally imposed by the Governmental Authority which issued such
Permit, and that such Permits collectively constitute all the necessary
federal, state and local governmental authorizations required for operation of
the Borrower's and its Subsidiaries' businesses. The Borrower and its
Subsidiaries are not subject to any outstanding or, to the knowledge of the
Borrower, threatened citation by any Governmental Authority, having
jurisdiction with respect to the operation of their respective businesses.
Section 4.04 Projections and Financial Statements. The Borrower has
furnished to the Bank certain financial data and reports concerning the
Borrower, including,
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without limitation, a pro forma balance sheet of the Borrower attached as
Schedule 4.04 (the "Pro Forma Balance Sheet"). This data is complete and
correct in all material respects and fairly presents the financial condition of
the Borrower as of the date thereof, and such data concerning the future
financial performance of the Borrower, represents the Borrower's reasonable and
good faith estimate of projected future operations of the Borrower as of the
date of this Credit Agreement, based on the notes and assumptions stated
therein (which the Borrower believes to be currently valid assumptions), and
the Borrower does not presently anticipate any material deviations from such
projections.
Section 4.05 Financial Condition at Date of Credit Agreement. As of
the Execution Date, the Borrower will not have any material amount of
liabilities, contingent or otherwise, required to be reflected in accordance
with GAAP, which are not reflected in the Pro Forma Balance Sheet, other than
those liabilities arising in the ordinary course of business. As of the
Execution Date, the Borrower will not have any outstanding or existing
commitments for the purchase of land, buildings, equipment, materials, or
supplies, or any contracts for services, except for those made in the ordinary
course of business. Other than as set forth on Schedule 4.05, the Borrower is
not a party to any bonus or profit-sharing plan.
Section 4.06 No Adverse Changes. Since June 30, 1994, there has been
no material adverse change in the condition, financial or otherwise, of the
Borrower, and the business, operations, and properties of the Borrower have not
been substantially and adversely affected in any way as a result of any fire,
explosion, earthquake, accident, labor disturbance, requisition or taking of
property by any governmental authority, flood, riot, or act of God.
Section 4.07 Title to Properties; Patents, Trademarks, Etc. The
Borrower has good and marketable title to all of its properties and assets,
including, without limitation, the properties and assets reflected in the Pro
Forma Balance Sheet (excepting, however, property and assets sold or otherwise
disposed of in the ordinary course of business subsequent to said date). There
are no Liens of any nature whatsoever on any of the properties or assets of the
Borrower other than Permitted Collateral Liens. The Borrower owns or possesses
all the patents, trademarks, service marks, trade names, copyrights, and
licenses and rights with respect to the foregoing necessary for the conduct of
its business as it is now conducted, without any known conflict with the valid
rights of others which would be inconsistent with the conduct of its business
substantially as now conducted and as currently proposed to be conducted.
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Section 4.08 Litigation. Except as set forth on Schedule 4.08
hereto, there are no outstanding judgments against, or actions, suits or
proceedings pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or its officers, at law or in equity or before or by any
federal, state, local or other governmental department, commission, board,
bureau, agency, or instrumentality, which involves the possibility of any
judgment or liability not fully covered by insurance or which may result in any
material, adverse change in its business, operations, properties, or assets or
condition, financial or otherwise.
Section 4.09 Compliance with Other Instruments. The Borrower is not
in default in the performance, observance, or fulfillment of any of the
material obligations, covenants, or conditions contained in any evidence of
Indebtedness for Borrowed Money or any lease or other instrument by which the
Borrower has acquired a real property interest. Neither the execution and
delivery of the Credit Agreement or the Loan Documents, nor the consummation of
the transactions contemplated thereby, nor compliance with the terms and
provisions thereof will violate the provisions of any applicable law or of any
applicable order or regulations of any governmental authority having
jurisdiction of the parties (excluding the Bank) to the Credit Agreement, or
the Loan Documents, or will conflict with any Permit, or will conflict with or
result in a breach of any of the terms, conditions or provisions of any
restriction or of any agreement or instrument to which the Borrower is now a
party, or will constitute a default thereunder, or will result in the creation
or imposition of any lien, charge, or encumbrance of any nature whatsoever upon
any of the properties or assets of the Borrower except in favor of the Bank.
Section 4.10 Material Restrictions. The Borrower is not a party to
any agreement or other instrument or party to any other document, including a
restriction which materially adversely affects its business, properties,
assets, operations, or conditions, financial or otherwise.
Section 4.11 Correctness of Data Furnished. Except as otherwise
specifically qualified elsewhere in this Credit Agreement or the Schedules or
Exhibits thereto, the Credit Agreement and all Schedules and Exhibits thereto,
taken as a whole, are true and correct in all material respects; and to the
knowledge of the Borrower, the matters disclosed in the Credit Agreement and
the Schedules and Exhibits thereto, taken as a whole, set forth all material
facts which specifically affect the business, properties or condition,
financial or otherwise, of the Borrower.
Section 4.12 Employee Benefits. The Borrower represents that:
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(i) Each Plan has been administered in compliance with the
requirements of Title I of ERISA and, if it has been treated as tax-qualified
under any provision of the Code, has been maintained in compliance with the
Code.
(ii) All required contributions of the Borrower to each Plan have
been made in a timely manner, and no Plan has had an accumulated funding
deficiency, whether or not waived.
(iii) The assets of each Plan that is a defined benefit pension plan
are sufficient to cover the present value of all liabilities of the plan on a
standard termination basis, determined as of the end of the most recent plan
year, except as disclosed on Schedule 4.12.
(iv) No event has occurred and no proceeding has been initiated, or
is anticipated by the Borrower to occur or to be initiated, that could subject
any Plan or the Borrower to any penalty, excise tax, fiduciary liability, or
any claim or liability for benefits that have not been funded or have been
decreased, with respect to any Plan by the Internal Revenue Service, U.S.
Department of Labor, or PBGC or any Plan participant or beneficiary, except as
disclosed on Schedule 4.12.
(v) No Borrower maintains or participates in any unfunded or
self-funded Plan or has made other promises or commitments, whether or not
contingent, to pay any nonwage employee benefits that have not been fully
funded, except as disclosed on Schedule 4.12.
(vi) No Borrower participates in any multiple or multi-employer Plan
with respect to which it has any potential withdrawal liability, except as
disclosed on Schedule 4.12.
The terms used in this Section 4.12 and Sections 6.09 and 7.09 have the
meanings given to the terms by ERISA and the Code or otherwise by accepted
industry usage.
Section 4.13 Taxes. Except for Taxes the payment of which are being
contested in good faith by appropriate proceedings for which reserves have been
set aside in accordance with GAAP and are fully described on Schedule 4.13, the
Borrower has (a) timely filed all returns required to be filed by it with
respect to all Taxes, (b) paid all Taxes shown to have become due pursuant to
such returns, and (c) paid all other Taxes for which a notice of assessment or
demand for payment has been received. All tax returns have been prepared in
accordance with all applicable laws and requirements and accurately reflect the
taxable income (or other measure of Tax) of the Borrower. The accruals for
Taxes contained in the Pro Forma Balance Sheet are adequate under GAAP to cover
all
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liabilities for Taxes for all periods ending on or before the date of such
balance sheet and include adequate provision for all deferred Taxes (including
deferred federal Taxes), and nothing has occurred subsequent to that date to
make any of such accruals inadequate. All Taxes for periods beginning after
the last date for which Tax returns were required to be filed through and
including the Execution Date have been paid or are adequately reserved against
on the books of the Borrower. The Borrower has timely filed all information
returns or reports which are required to be filed and has accurately reported
all information required to be included on such returns or reports. Except as
set forth in Schedule 4.13, there are no proposed assessments of Taxes against
the Borrower nor any proposed adjustments to any Tax return filed. The
Borrower has never (i) filed any consent or agreement under Section 341(f) of
the Code, (ii) executed a waiver or consent extending any statute of
limitations for any Tax liability which remains outstanding, (iii) joined in or
been required to join in filing a consolidated or combined Tax return, (iv)
applied for a Tax ruling other than a determination letter with respect to a
qualified employee benefit plan, (v) entered into a closing agreement with any
taxing authority, or (vi) filed an election under 338(g) or Section 338(h)(10)
of the Code or caused or permitted a deemed election under Section 338(e)
thereof to occur.
Section 4.14 Compliance with Laws. Except as described in Schedule
4.14, the Borrower and its Subsidiaries are in compliance in all material
respects with all laws, rules, regulations, court orders and decrees, and
orders of any governmental agency which are applicable to the Borrower and its
Subsidiaries or their respective properties, including, but not limited to, the
Small Business Investment Act of 1958 and the Investment Company Act of 1940.
Section 4.15 Environmental Matters. Except as disclosed in Schedule
4.15 attached hereto, the Borrower is conducting its business in compliance
with all applicable federal, state, and local Environmental laws including, but
not limited to, the Resource Conservation and Recovery Act, the Clean Air Act,
the Federal Water Pollution Control Act, the Toxic Substances Control Act, and
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") (hereinafter "Environmental Laws"), and, there is not pending or, to
the best knowledge of the Borrower after diligent investigation, threatened
civil or criminal litigation, notice of violation or lien, or administrative
proceedings relating to Environmental Matters involving the Borrower. Except
as disclosed in Schedule 4.15, there is no condition or situation, including,
without limitation, any lien or encumbrance, with respect to Environmental
Matters which, either individually or in the aggregate, has or is reasonably
expected to have a material adverse effect
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on the business, operations, properties or condition (financial or otherwise)
of the Borrower. Except as disclosed in Schedule 4.15, the Borrower has
obtained from every federal, state, and local Governmental Authority, all
approvals, consents, licenses, permits, and orders pertaining to Environmental
Matters and necessary to carry on its business as currently conducted. The
Borrower has not transported Hazardous Substances or arranged for the
transportation, disposal or treatment of such Hazardous Substances to any
location which is the subject of federal, state, or local enforcement actions
or other investigations which may lead to material claims against the Borrower
for clean-up costs, remedial work, damages to natural resources or for personal
injury claims. The Borrower has not treated, stored, recycled or disposed of
any Hazardous Substances on any property now or previously owned or leased by
the Borrower which under current interpretation of current federal, state, and
local law could reasonably be expected to result in loss or liability to the
Borrower.
Section 4.16 Leases. The Borrower enjoys peaceful and undisturbed
possession under all material leases and other agreements and documents to
which it is a party as lessee or holder of any other real property interest or
under which it is operating.
Section 4.17 Regulation U, etc. None of the proceeds of any of the
Loans will be used, directly or indirectly, by the Borrower for the purpose of
purchasing or carrying, or for the purpose of reducing or retiring any
indebtedness or other liability which was originally incurred to purchase or
carry, any margin stock within the meaning of Reg U (12 CFR Part 221) of the
Board of Governors of the Federal Reserve System (herein called "Margin Stock")
or for any other purpose which might cause the transactions contemplated hereby
to be considered a "purpose credit" within the meaning of said Regulation U, or
which might cause this Credit Agreement to violate Regulation G, Regulation U,
Regulation T, Regulation X, or any other regulation of the Board of Governors
of the Federal Reserve System or the Securities Exchange Act of 1934. Upon
request, the Borrower will promptly furnish the Bank with a statement in
conformity with the requirements of Federal Reserve Form U-1 referred to in
said Regulation U.
Section 4.18 Holding Company Act. The Borrower is not a "Holding
Company" or a "Subsidiary Company" of a "Holding Company", or an "Affiliate" of
a "Holding Company" or of a "Subsidiary Company" of a "Holding Company", as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended.
Section 4.19 Securities Act, etc. Neither the registration of any
security under the Securities Act of 1933, as amended, or any other federal,
state, or local
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securities laws, nor the qualification of the Loan Documents under the Trust
Indenture Act of 1939, as amended, is required in connection with the Loans or
the issuance and delivery of the Notes pursuant hereto.
Section 4.20 Name Changes. The Borrower has not, within the six-year
period immediately preceding the date of this Credit Agreement, except as
disclosed in Schedule 4.20 hereto, changed its name, been the surviving entity
of a merger or consolidation, or acquired all or substantially all of the
assets of any Person.
Section 4.21 Solvency. The Borrower is solvent and has assets having
a fair value in excess of the amount required to pay its probable liabilities
on its existing debts as they become absolute and matured, and has access to
adequate capital for the conduct of its business and the ability to pay its
debts from time to time incurred in connection therewith as such debts mature.
Section 4.22 No Default. No Possible Default or Event of Default has
occurred and is continuing.
Section 4.23 Principal Place of Business. The principal place of
business and chief executive office of the Borrower is set forth on Schedule
4.23. The books and records of the Borrower are housed at the locations listed
on Schedule 4.23A.
Section 4.24 Brokers, etc. The Borrower has not caused the Bank to
be under any obligation to pay any broker's fees, finder's fee or commission in
connection with the Loans or the transactions contemplated by the Credit
Agreement.
Section 4.25 Employee Controversies. There are no controversies
pending or, to the best of the Borrower's knowledge, threatened or anticipated,
between the Borrower and any of its respective employees.
ARTICLE V
CONDITIONS TO BORROWING
Part I
Conditions Precedent Agreement. The obligation of the Bank to extend
credit hereunder (including making the Revolving Loan, any Term Loans, and any
Advances) shall be subject to the satisfaction of the following conditions
prior to or concurrently with the effectiveness of this Credit Agreement, the
making of the Revolving Loan, the Conversion of the Revolving Loan or any
portion thereof to a Term Loan or Term Loans and any Advances hereunder:
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Section 5.01 Representations and Warranties. The representations and
warranties contained in Article IV shall be true in all material respects on
and as of the time of the making of the Revolving Loan and any Effective Date
with the same effect as if made on and as of such date.
Section 5.02 No Defaults. There shall exist no condition or event
constituting an Event of Default or Possible Default.
Section 5.03 Performance. The Borrower shall have performed and
complied with all material agreements and conditions contained herein required
to be performed or complied with by it prior to or at the time of the Making of
the Revolving Loan or any Effective Date.
Section 5.04 Insurance Report. The Borrower shall have delivered to
the Bank the insurance report required by Section 6.05.
Section 5.05 Notes, Collateral Lists and Collateral Security
Documents. The Bank shall have received the Notes, the Collateral Lists and
all of the Collateral Security Documents as required by Article III hereof and
accompanied by all documents and instruments required thereunder, duly executed
and delivered by the parties thereto.
Section 5.06 Disbursement Instructions. The Bank shall have received
disbursement instructions and supporting documentation from the Borrower
evidencing that the first Advance is being applied in accordance with Section
2.06.
Section 5.07 Opinion of Counsel for the Borrower. The Bank shall have
received the favorable opinion of counsel for the Borrower in form and
substance satisfactory to the Bank, substantially to the same effect as the
Borrower's representations and warranties set forth in Sections 4.01, 4.02,
4.03, 4.08 (to their knowledge), 4.09, 4.10, 4.14, 4.18 and 4.19. Such
opinions shall include a favorable opinion as to the validity and
enforceability of the security interests and the liens of the Bank pursuant to
the Collateral Security Documents, and such other matters relative to the
transactions contemplated by this Credit Agreement as the Bank and its counsel
may reasonably request.
Section 5.08 Corporate Proceedings. The Borrower shall have
delivered to the Bank, all dated as of the Execution Date (or as of a date
recent to the Execution Date) for itself and for each of its Subsidiaries:
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(i) copies of its certificate of incorporation,
certified by an authorized public officer of the respective
jurisdiction under which it is incorporated;
(ii) a certificate of good standing from the
jurisdiction under which it is incorporated, together with
certificates of good standing or authority to transact business or
similar certificates from each other state referred to in Section 4.01
where they have places of business or maintain records, in all cases
from the Secretary of State or comparable officer of such
jurisdiction;
(iii) a copy of its by-laws certified by its
secretary;
(iv) with respect to the Borrower, resolutions of
its Board of Directors, authorizing the execution, delivery and
performance of the Loan Documents (including, without limitation, this
Credit Agreement, and the Notes issued pursuant hereto), and the
consummation of the transactions contemplated thereby, certified by
its secretary or other authorized Person and, with respect to the
Subsidiaries, resolutions authorizing the consummation of the
transactions contemplated by the Pledge Agreements, certified by their
respective Secretaries or other authorized Person; and
(v) an incumbency certificate certifying the names
of its officers and their signatures, certified by its secretary.
Section 5.09 Payment of Fees; Expenses. The Borrower shall have
paid, or reimbursed the Bank for all fees and expenses of the Bank incurred in
connection with the extension of credit hereunder, including, but not limited
to the fees and expenses of the Bank's legal counsel.
Section 5.10 Schedules. The Bank shall have received and approved
(in its sole discretion) each of the Schedules attached hereto.
Section 5.11 Borrower's Certificate. The Bank shall have received a
Borrower's Certificate as of the Closing Date in the form attached hereto as
Exhibit "D" and made a part hereof (the "Borrower's Certificate").
Section 5.12 Insurance. On or before the Execution Date, the
Borrower shall furnish to the Bank copies of all fidelity bonds obtained by the
Borrower, together with
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evidence that the Borrower has adequate insurance from financially sound and
reputable insurers, covering all properties and risks usually insured by
business entities engaged in the same or similar activities and business as the
Borrower.
Section 5.13 Landlord's Waiver. The Bank shall have received a
satisfactory landlord's waiver from each real estate lessor of premises to the
Borrower, in form and content satisfactory to the Bank.
Section 5.14 Other Documents. The Bank shall have received such
other certificates, opinions, agreements and documents as it shall reasonably
request and the Bank, in its sole discretion, shall be satisfied with the
condition, financial and otherwise, of the Borrower.
Part II
Conditions Precedent to Subsequent Advances or Conversions. The
obligation of the Bank to make Advances or Convert the Revolving Loan or any
portion thereof to a Term Loan shall be subject to the satisfaction of the
following conditions prior to or concurrently with each such Advance or
Conversion:
Section 5.15 No Defaults. There shall exist no condition or event
constituting an Event of Default or Possible Default.
Section 5.16 Performance. The Borrower shall have performed and
complied with all material agreements and conditions contained herein required
to be performed or complied with by it prior to or at the time of the Advance
or Conversion.
Section 5.17 Representations and Warranties. The representations and
warranties contained in Article IV shall be true in all material respects on
and as of the time of the Advance or Conversion, with the same effect as if
made on and as of such date, after giving effect to such updated information,
reflecting transactions not prohibited by the terms of this Credit Agreement,
as is necessary to make such representations and warranties true in all
material respects as of such date.
Section 5.18 Borrower's Certificate. The Borrower shall have
delivered a duly completed Borrower's Certificate as of the date of each such
Advance and as of the date of each such Conversion.
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ARTICLE VI
AFFIRMATIVE COVENANTS OF THE BORROWER
Until all principal of and interest on the Loans and the Notes and all
other obligations, liabilities and indebtedness of the Borrower to the Bank
under this Credit Agreement have been paid in full:
Section 6.01 Payment of Amounts Due. The Borrower will make all
payments of the principal of and interest on the Loans and the Notes promptly
as the same become due under this Credit Agreement and/or the Notes.
Section 6.02 Existence, Business, etc. The Borrower will cause to be
done all things necessary to preserve and to keep in full force and effect its
existence and rights and will conduct its business in a prudent manner. The
Borrower will comply and cause its Subsidiaries to comply in all material
respects with all federal, state, and local laws and regulations material to
their businesses now in effect or hereafter promulgated by any properly
constituted governmental authority having jurisdiction. In connection with and
without limiting the generality of the foregoing, the Borrower will maintain
and preserve and cause its Subsidiaries to maintain and preserve its Permits
(including, without limitation, those listed on Schedule 4.03 hereto) granted
by the Governmental Authorities and other governmental authorities necessary to
operate their businesses in full force and effect and will take all action
which may be required to comply with all such laws and regulations now in
effect or hereafter promulgated by any federal, state, and local governmental
authority having jurisdiction over their businesses. The Borrower for itself
and for its Subsidiaries will obtain, renew and extend their Permits and will
give prompt written notice to the Bank of (i) any citation or order relating
thereto or any claim or notice of any default thereunder, (ii) any lapse or
other termination thereof, or (iii) any refusal of any Person to grant or
extend any of them.
Section 6.03 Maintenance of Properties. The Borrower will at all
times maintain, preserve, protect, and keep its properties used in the conduct
of its business in good repair, working order, and condition, ordinary wear and
tear excepted, and, from time to time, make all needful and proper repairs,
renewals, replacements, betterments, and improvements thereto, so that the
business carried on in connection therewith may be properly conducted at all
times.
Section 6.04 Payment of Taxes, etc. The Borrower will pay and
discharge all lawful Taxes, assessments, and governmental charges or levies
imposed upon it, or upon its income or profits, or upon any of its properties,
before
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the same shall become in default, as well as all lawful claims for labor,
materials, and supplies which, if unpaid, might become a lien or charge upon
such properties or any part thereof; provided, however, the Borrower shall not
be required to pay and discharge any such tax, assessment, charge, levy, or
claim so long as the validity thereof shall be contested in good faith by
appropriate proceedings and there shall be set aside on its books such reserves
with respect thereto as are required by GAAP. The Borrower will in all events
pay such tax, assessment, charge, levy or claim before the property subject
thereto shall be sold to satisfy any lien which has attached as security
therefor.
Section 6.05 Insurance. The Borrower will keep adequately insured,
by financially sound and reputable insurers, all properties of a character
usually insured by business entities engaged in the same or similar activities
and business against loss or damage resulting from fire or other risks insured
against by extended coverage and maintain in full force and effect public
liability insurance against claims for personal injury, death, or property
damage occurring upon, in, or about any properties occupied or controlled by
it, or through the operation of any motor vehicles or aircraft by any of their
agents or employees, or arising in any manner out of the business carried on by
it, all in such amounts as the Bank may from time to time reasonably request.
In addition, the Borrower shall maintain adequate errors and omissions
insurance and business interruption insurance. The Bank will be named lender
or mortgagee loss payee, as applicable, and an additional insured on all such
insurance policies. The Borrower will deliver to the Bank on or before the
Execution Date and at such other times as material changes may be effected in
the insurance coverage of the Borrower, certificates of the Authorized Fiscal
Officer of the Borrower containing a statement of the policies of insurance
covering the risks described herein in effect on the date of such certificate
and a statement that such policies comply with the provisions of this
subsection and accompanied by the endorsements naming the Bank as lender or
mortgagee loss payee, as applicable, and additional insured. To the extent, if
any, that the provisions of this subsection are inconsistent with any provision
of any of the Collateral Security Documents relating to insurance, the
provisions of such Collateral Security Document, as the case may be, shall
govern.
Section 6.06 Accounts and Reports of the Borrower. The Borrower will
maintain a standard system of accounting in accordance with GAAP and furnish to
the Bank the following reports prepared on an accrual basis:
(i) As soon as available, and in any event within
one hundred twenty (120) days after
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the end of each fiscal year of the Borrower, a complete audited
consolidated and consolidating annual financial statement together
with all notes thereto, prepared in reasonable detail and certified
without qualification by independent certified public accountants of
recognized standing selected by the Borrower and satisfactory to the
Bank, (the "Accountant") and certified by an Authorized Fiscal Officer
of the Borrower, which reports shall contain (w) balance sheets, (x)
statements of income and expense, (y) statements of cash flow, and (z)
reconciliations of net worth. The Accountant shall deliver to the
Bank a statement that the examination made in preparing and certifying
such report has not disclosed the existence of any condition or event
which constitutes an Event of Default or Possible Default or both, or
if such a condition or event exists, specifying the nature thereof;
and such other and further information as the Bank may reasonably
require;
(ii) As soon as available, and in any event within
forty-five (45) days after the end of each fiscal quarter an unaudited
consolidated and consolidating financial statement for the immediately
preceding fiscal quarter of the Borrower certified by an Authorized
Fiscal Officer of Borrower, which report shall contain (x) balance
sheets as of the end of such fiscal quarter (y) income and expense
statements for such fiscal quarter, including a year to date income
and expense statement and a comparison to the budget, all prepared in
accordance with GAAP, and (z) a statement that the examination made in
preparing and certifying such report has not disclosed the existence
of any condition or event which constitutes an Event of Default or
Possible Default, or both, or, if such a condition or event exists,
specifying the nature thereof;
(iii) Immediately after the occurrence of any
condition or event which constitutes an Event of Default or Possible
Default, notice of such condition or event and the action which the
Borrower proposes to take with respect thereto;
(iv) Upon the request of the Bank, copies of all
financial statements, audits, and reports which the Borrower and its
Subsidiaries may have made of or concerning their accounts, books, or
records, or which they have provided to any third party, including,
but not limited to, (y) all Securities and Exchange Commission
reporting documents when the same are released to
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the public, including, but not limited to, all annual 10-K's and
quarterly 10-Q's, and (z) the results of all audits or other
examinations conducted by the Securities and Exchange Commission, the
Small Business Administration or the Internal Revenue Service;
(v) As soon as available, and in any event within
forty-five (45) days after the end of each fiscal quarter of the
Borrower as and for the prior fiscal quarter (A) a detailed Portfolio
Valuation Report for all Investments, (B) a Past Due Report for all
Investments, and (C) a certificate of an Authorized Fiscal Officer of
the Borrower stating that as of such date no Possible Default or Event
of Default exists, or if such a condition or event exists, specifying
the nature thereof. The Bank shall have the right to confirm and
verify all of the information in the aforesaid reports by any manner
and through any medium it considers advisable and do whatever it may
deem reasonably necessary to protect its interests hereunder. The
items to be provided under this clause are to be in form satisfactory
to the Bank and executed by the Borrower and delivered to the Bank
from time to time solely for the Bank's convenience in maintaining
records with regard to the Loans, and the Borrower's failure to
deliver any of such items to the Bank shall not affect, terminate,
modify or otherwise limit the Bank's Lien on or security interest
granted pursuant to Article III and the Collateral Security Documents;
(vi) Promptly after filing, a copy of each annual
report (and related schedules) filed by the Borrower with any
governmental authority or agency in respect of any employee pension
benefit plan subject to ERISA;
(vii) As soon as available, and in any event within
sixty (60) days after the end of each December and June during the
term of the Loans, copies of the Borrower's semi-annual Credit Review
Report on each Investment in Borrower's portfolio;
(viii) As soon as available and in any event prior to
the end of each calendar year for the following calendar year, a
detailed annual budget, including projected principal payments due to
Borrower on existing Investments in Borrower's portfolio and
projections of anticipated growth in Investments during the upcoming
calendar year;
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(ix) Promptly upon request, such other information
respecting the business, properties or the condition or operations
(financial or otherwise) of the Borrower and its Subsidiaries as the
Bank may from time to time reasonably request (all such information to
be in such form and detail as the Bank shall reasonably request).
Section 6.07 Information and Inspection. The Borrower will furnish
to the Bank, from time to time, upon the request by the Bank, full information
pertinent to any covenant, provision, or condition of this Credit Agreement or
of any other Loan Document or to any matter in connection with its activities
and business, and at all reasonable times and as often as the Bank may
reasonably request, permit any authorized representative designated by the Bank
to visit and inspect (which visits and inspections shall be at the Borrower's
sole expense) during normal business hours any of its properties, including its
books (and to take extracts therefrom) and to discuss its affairs, finances,
and accounts with its officers and employees.
Section 6.08 Notice of Litigation. The Borrower will promptly notify
the Bank in writing of any litigation, legal proceeding or threat of legal
proceeding: (i) with any Person, including, without limitation, the
Governmental Authorities and any member of the staff or any representative of
any such Person, which involves the threat of termination of any agreements or
contracts which are material to the operations of the Borrower or its
Subsidiaries; or (ii) involving amounts in excess of $1,000,000.00 affecting
the Borrower or its Subsidiaries, whether or not fully covered by insurance,
and regardless of the subject thereof (excluding, however, any actions relating
to worker's compensation claims, if fully covered by insurance).
Section 6.09 Employee Benefits. The Borrower shall (a) assure that
each Plan continues to comply with the requirements of Title I of ERISA, and
where tax-qualified, continues to comply with the requirements of the Code, (b)
make all required contributions to each Plan in a timely manner, and (c)
promptly inform the Bank of any material change in the representations of
paragraphs (iii) and (iv) of Section 4.12.
Section 6.10 Unconsolidated Ratio of Total Liabilities to Tangible
Net Worth. For each fiscal quarter of the Borrower, commencing with the fiscal
quarter ending September 30, 1995, the Borrower will maintain, on an
unconsolidated basis determined in accordance with GAAP consistently applied, a
ratio of Total Liabilities to Tangible Net Worth of not more than 1.0 to 1.0,
as determined at the end of each fiscal quarter based on the
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quarterly financial statements of the Borrower described in Section 6.06(ii).
Section 6.11 Consolidated Ratio of Total Liabilities to Tangible Net
Worth. For each fiscal quarter of the Borrower, commencing with the fiscal
quarter ending September 30, 1995, the Borrower will maintain, on a
consolidated basis determined in accordance with GAAP consistently applied, a
ratio of Total Liabilities to Tangible Net Worth of not more than 1.0 to 1.0,
as determined at the end of each fiscal quarter based on the quarterly
statements of the Borrower described in Section 6.06(ii).
Section 6.12 Unconsolidated Ratio of Performing Investments to Total
Debt. For each fiscal quarter of the Borrower, commencing with the fiscal
quarter ending September 30, 1995, the Borrower will maintain, on an
unconsolidated basis determined in accordance with GAAP consistently applied, a
ratio of Performing Investments to Total Debt of at least 2.0 to 1.0, as
determined at the end of each fiscal quarter based on the quarterly statements
of the Borrower described in Section 6.06(ii).
Section 6.13 Unconsolidated Interest Coverage Ratio. For each fiscal
year of the Borrower, commencing with the fiscal year ending December 31, 1995,
the Borrower will maintain on an unconsolidated basis determined in accordance
with GAAP consistently applied, a ratio of the line item in the Borrower's
annual financial statement for Net Investment and Other Income Before Net
Realized Gain and Net Unrealized Appreciation (Depreciation) on Investments to
interest expense of 1.5 to 1.0, as determined at the end of each fiscal year
based on the annual audited statements of the Borrower described in Section
6.06(i).
Section 6.14 Consolidated Interest Coverage Ratio. For each fiscal
year of the Borrower, commencing with the fiscal year ending December 31, 1995,
the Borrower will maintain on a consolidated basis determined in accordance
with GAAP consistently applied, a ratio of the line item in the Borrower's
annual financial statement for Net Investment and Other Income Before Net
Realized Gain and Net Unrealized Appreciation (Depreciation) on Investments to
interest expense of 1.5 to 1.0, as determined at the end of each fiscal year
based on the annual audited statements of the Borrower described in Section
6.06(i).
Section 6.15 Deposit Accounts. In consideration for the Bank
extending credit to the Borrower pursuant to this Credit Agreement at the
interest rates, and subject to the costs and expenses provided for herein, the
Borrower agrees that from the Execution Date and thereafter so long as the
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Notes remain unpaid, Borrower shall maintain with Bank all of Borrower's
primary deposit accounts.
Section 6.16 Post-Closing Items. The Borrower will promptly perform
and complete to the satisfaction of the Bank each of the matters, if any, set
forth on Schedule 6.14 attached hereto (the "Listed Matters") on or before the
date set forth on Schedule 6.14 for the performance and completion thereof (the
"Satisfaction Date").
Section 6.17 Further Assurances. The Borrower agrees to execute and
deliver to the Bank any agreements, documents and instruments, including,
without limitation, additional promissory notes as replacements or
substitutions as may be required by the Bank, and to take such other actions as
reasonably requested by the Bank to effect the transactions contemplated
hereby.
Section 6.18 On-Site Inspection. The Borrower shall cooperate with
representatives of the Bank in the Bank's on-site annual review (or more
frequent on-site reviews as determined necessary by the Bank) of the Borrower's
Investments and procedures with respect thereto.
Section 6.19 Compliance with Law. The Borrower shall comply and
cause its Subsidiaries to comply in all material respects with all laws, rules,
regulations, court orders and decrees, and orders of any governmental agency
which are applicable to the Borrower and its Subsidiaries, including, but not
limited to, the Small Business Investment Act of 1958 and the Investment
Company Act of 1940.
ARTICLE VII
NEGATIVE COVENANTS OF THE BORROWER
Until all principal of and interest on the Loans and the Notes and all
other obligations, liabilities, and indebtedness of the Borrower to the Bank
under this Credit Agreement have been paid in full, the Borrower will not,
without the prior written consent of the Bank (which consent will not be
unreasonably withheld):
Section 7.01 Limitation on Liens. Create, incur, assume, or suffer
to be created, or incurred, or assumed, or to exist, or cause or permit any
Subsidiary to create, incur, assume, or suffer to be created, or incurred, or
assumed, or to exist, any Lien of any kind on any of their respective
properties or assets, including, but not limited to, the cash, accounts
receivable, negotiable instruments, marketable securities, inventory,
furniture, fixtures and equipment, Debt Instruments and Equity Interests of the
Borrower and its Subsidiaries, or own or acquire, or agree
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to acquire any property of any character subject to or upon any mortgage,
conditional sale agreement, or other title retention agreement; provided,
however, that the foregoing restrictions shall not prohibit:
(i) Liens in favor of the Bank;
(ii) Liens for taxes, assessments, governmental
charges, levies, or similar claims, if payment thereof shall not yet
be due or if the obligation to pay is being contested in good faith by
appropriate proceedings and adequate reserves with respect thereto
shall have been set aside on the books of the Borrower or its
Subsidiaries, as applicable, but in any event only so long as the sale
of property subject to such lien is not imminent by reason of
non-payment;
(iii) Liens of carriers, warehousemen, mechanics,
laborers, landlords, and materialmen, in each case, incurred in the
ordinary course of business for sums not yet due or if the obligation
to pay is being contested in good faith by appropriate proceedings and
adequate reserves with respect thereto shall have been set aside on
the books of the Borrower or its Subsidiaries, as applicable, but in
any event only so long as the sale of property subject to such lien is
not imminent by reason of non-payment;
(iv) Liens in the ordinary course of business in
connection with worker's compensation or unemployment insurance or
social security;
(v) Liens securing the indebtedness of Allied
Investment Corporation II and Allied Financial Corporation II
permitted by Section 7.02(iv) and (v);
(vi) Liens in the form of repurchase agreement
obligations in a dollar amount not to exceed $1,800,000.00 securing
the indebtedness of the Borrower permitted by Section 7.02(vii); and
(vii) Liens subordinate to the Bank's Liens securing
current Indebtedness incurred in the ordinary course of business
(excluding Indebtedness for Borrowed Money or represented by bonds,
notes or other securities) in an aggregate amount not to exceed
$250,000.00 at any time.
Section 7.02 Limitation of Indebtedness. The Borrower will not
create, incur, assume, become or be liable in any manner in respect of, any
Indebtedness, or
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cause or permit the Subsidiaries of the Borrower to create, incur, assume,
become or be liable in any manner in respect of, any Indebtedness, except:
(i) Indebtedness in respect of the Loans;
(ii) unsecured current Indebtedness and deferred
liabilities incurred in the ordinary course of business (excluding
Indebtedness for Borrowed Money or represented by bonds, notes, or
other securities);
(iii) unsecured Indebtedness in respect of
performance bonds, accrued salaries, wages and other compensation, in
each case, to the extent incurred in the ordinary course of business;
(iv) secured Indebtedness for Borrowed Money of
Allied Investment Corporation II to the Small Business Administration,
if and only to the extent that the ratio of Total Liabilities to
Tangible Net Worth of Allied Investment Corporation II does not exceed
1.0 to 1.0, as determined by the Bank on the basis of the quarterly
financial statements described in Section 6.06(ii);
(v) secured Indebtedness for Borrowed Money of
Allied Financial Corporation II to the Small Business Administration,
if and only to the extent that the ratio of Total Liabilities to
Tangible Net Worth of Allied Financial Corporation II does not exceed
1.0 to 1.0, as determined by the Bank on the basis of the quarterly
financial statements described in Section 6.06(ii);
(vi) Indebtedness for taxes, assessments,
governmental charges, liens, or similar claims to the extent that
payment thereof shall not yet be due or if the obligation to pay is
being contested in good faith by appropriate proceedings and adequate
reserves with respect thereto shall have been set aside on the books
of the Borrower or its Subsidiaries, but in any event only so long as
the sale of property subject to such Lien is not imminent by reason of
non-payment;
(vii) secured Indebtedness in respect of letters of
credit issued for the account of the Borrower in the aggregate amount
not to exceed $1,800,000.00; and
(viii) secured Current Indebtedness incurred in the
ordinary course of business (excluding Indebtedness for Borrowed Money
or represented by bonds, notes, or other securities) in an aggregate
amount, together with the amount described in
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subsection 7.03(iv), not to exceed $250,000.00 at any time.
Section 7.03 Guarantees. Guarantee, or otherwise become surety in
respect of the obligations of, or lend its credit to, any other Person, or
enter into any working capital maintenance or similar agreement, or cause or
permit any of its Subsidiaries to guarantee, or otherwise become surety in
respect of the obligations of, or lend its credit to any person or enter into
any working capital maintenance or similar agreement, except that the Borrower
and its Subsidiaries may endorse negotiable instruments for deposit or
collection in the ordinary course of its business and except for the Guarantees
of:
(i) unsecured current Indebtedness and deferred
liabilities incurred in the ordinary course of business (excluding
Indebtedness for Borrowed Money or represented by bonds, notes, or
other securities);
(ii) unsecured Indebtedness in respect of performance
bonds, accrued salaries, wages and other compensation, in each case,
to the extent incurred in the ordinary course of business;
(iii) Indebtedness for taxes, assessments,
governmental charges, liens, or similar claims to the extent that
payment thereof shall not yet be due or if the obligation to pay is
being contested in good faith by appropriate proceedings and adequate
reserves with respect thereto shall have been set aside on the books
of the Borrower or its Subsidiaries, but in any event only so long as
the sale of property subject to such Lien is not imminent by reason of
non-payment; and
(iv) secured Current Indebtedness incurred in the
ordinary course of business (excluding Indebtedness for Borrower Money
or represented by bonds, notes, or other securities) in an aggregate
amount, together with the amount described in subsection 7.02(viii),
not to exceed $250,000.00 at any time.
Section 7.04 Management; Investment Advisory Agreement. Make or
permit any change in the senior management of the Borrower in effect on the
date of this Credit Agreement nor make or permit any change in the Investment
Advisory Agreement.
Section 7.05 Assignment or Sale of Accounts or Notes Receivable.
Assign, sell, discount, or otherwise dispose of any accounts or notes
receivable or trade acceptances, or compromise, adjust, reduce, extend the
terms of, grant additional discounts, allowances, credits or accept returns in
respect of any account receivable or cause or permit any
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Subsidiaries of the Borrower to assign, sell, discount, or otherwise dispose of
any accounts or notes receivable or trade acceptances, or compromise, adjust,
reduce, extend the terms of, grant additional discounts, allowances, credits or
accept returns in respect of any account receivable; provided however, that
such restrictions shall not be applicable as long as no Possible Default or
Event of Default has occurred or exists, and such actions shall only be taken
in the ordinary course of business and only to the extent that the Bank is
granted a Lien on any proceeds thereof or therefrom.
Section 7.06 Liquidation, Merger, or Consolidation. Dissolve or
liquidate, or consolidate with or merge with or into any Person or otherwise
effect any business combination with any Person without the Bank's prior
written consent.
Section 7.07 Amendment of Certificate of Incorporation and/or
By-Laws. Amend, modify, or supplement the Borrower's certificate of
incorporation and/or its by-laws in any material respect.
Section 7.08 Disposition of Assets. Sell, lease or otherwise dispose
of any part of Borrower's assets to any Person, including, but not limited to
Subsidiaries, or permit any Subsidiary of the Borrower to sell, lease or
otherwise dispose of any part of the Subsidiaries' assets to any Person,
except, so long as no Possible Default or Event of Default has occurred or
exists, sales in the ordinary course of business, provided the Bank is granted
a Lien on proceeds thereof or therefrom.
Section 7.09 Employee Benefits. The Borrower shall not (a) adopt any
new Plan or create any new benefits under any existing Plan, including any new
benefit, benefit increase, or extension of benefit coverage, or make any new
promises or commitments to pay any nonwage employee benefits, whether or not
such benefits are funded, self-funded, or unfunded, (b) terminate any Plan for
which benefits are guaranteed by the PBGC, whether a standard or distress
termination, or (c) withdraw from any Plan for which any Borrower has a
liability, even if the Borrower intends to pay such liability, without 60 days
advance notice to and approval from the Bank.
Section 7.10 Regulation U. Apply any part of the proceeds of the
Loans to (a) the purchasing or carrying of any "margin stock" within the
meaning of Regulations G, T, U or X of the Federal Reserve Board, or any
regulations, interpretations or rulings thereunder, (b) extend credit to others
for the purpose of purchasing or carrying any such margin stock, or (c) retire
Indebtedness which was incurred to purchase or carry any such margin stock.
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Section 7.11 Environmental Compliance.
(a) Treat, store for more than ninety (90) days (or
such longer periods as are lawful for smaller quantity generators),
recycle or dispose of Hazardous Substances on any property owned or
leased by the Borrower, except in compliance with applicable laws,
regulations, or permits; or dispose of or release reportable
quantities of Hazardous Substances on any property owned or leased by
the Borrower;
(b) Purchase or lease any property where, to the
best knowledge of the Borrower, after all appropriate inquiry
consistent with good commercial or customary practice, Hazardous
Substances have been disposed or released; or
(c) Fail to comply in full with all clean-up or
remediation required under any Environmental law or order of any
governmental authority concerning property owned or leased by the
Borrower, except to the extent that compliance is being contested in
good faith by appropriate proceedings and reserves are established or
other appropriate provisions made therefor in accordance with GAAP.
Section 7.12 Transaction with Affiliates. Except for (i) the fee
payable to Allied Capital Advisors, Inc. under and pursuant to the Investment
Advisory Agreement, (ii) loans or advances to Subsidiaries of the Borrower, and
(iii) loans or advances to officers of the Borrower for the sole purpose of
exercising vested stock options in the Borrower, the Borrower shall not,
directly or indirectly, pay (excluding in all cases salary, bonuses and other
similar compensation payable in the ordinary course of business as customary
and reasonable compensation to any Affiliate who is a full-time employee of the
Borrower) any funds to or for the account of, make any Investment in, purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise deal with, in the ordinary course of business or otherwise, any
Affiliate except on terms that are no less favorable to the Borrower than those
terms which might be obtained at the time from unrelated third parties or
otherwise on terms consistent with the past practices of the Borrower and its
Affiliates relating to the allocation of the amount of investments made by the
Borrower and its Affiliates, provided that the return on such investments is
shared in a manner which is consistent with any such allocation.
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ARTICLE VIII
WAIVERS
Any of the acts which the Borrower is required or prohibited from
doing by any of the provisions of this Credit Agreement may, notwithstanding
such provisions, be omitted or done, as the case may be, only if the Bank by an
instrument in writing, has given its prior consent thereto.
ARTICLE IX
DEFAULTS
Each of the following events shall be termed "Events of Default":
Section 9.01 Principal Default. Default shall be made in the payment
of any principal of any of the Notes or any of the Loans when and as the same
shall become due and payable, whether at maturity or otherwise and such default
shall continue uncorrected for a period of five (5) days; or
Section 9.02 Interest Default. Default shall be made in the payment
of any interest on or with respect to any of the Notes or any of the Loans when
the same shall become due and payable and such default shall continue
uncorrected for a period of five (5) days; or
Section 9.03 Other Payment Defaults. Default shall be made in the
payment of any other amount when and as the same shall become due and payable
under the terms of this Credit Agreement or any of the Loan Documents in an
aggregate amount of $1,000.00 or more and such default shall continue
uncorrected for a period of five (5) days after written notice of such default
from the Bank to the Borrower; or
Section 9.04 Other Provision Default. Default shall be made in the
due observance or performance of any other covenant, agreement, or provision of
this Credit Agreement to be performed or observed by the Borrower or its
Subsidiaries and such default shall continue uncorrected for a period of
fifteen (15) days after written notice of such default from the Bank to the
Borrower; or
Section 9.05 Representation and Warranty. Any material
representation or warranty made by the Borrower under this Credit Agreement or
in any certificate, report, instrument, financial statement or other document
furnished pursuant to this Credit Agreement shall prove to have been false or
incorrect in any material respect as of the date on which made; or
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Section 9.06 Collateral Security Document or Other Loan Document
Default. Default shall be made in the due observance or performance of any
covenant, agreement, or provision of any Collateral Security Document or other
Loan Document (other than as provided elsewhere in this Article IX) to be
performed or observed by the Borrower and such default shall continue
uncorrected for a period of fifteen (15) days after written notice of such
default from the Bank to the Borrower; or
Section 9.07 Collateral Security Document Representation and
Warranty. Any representation or warranty made by the Borrower under any
Collateral Security Document, or in any certificate, report, instrument,
financial statement or other document furnished pursuant to any of the
foregoing shall prove to have been false or incorrect in any material respect
as of the date on which made; or
Section 9.08 Financial Difficulties. Any of the following events
evidencing the financial difficulties of the Borrower or its Subsidiaries shall
occur:
(i) any admission in writing of inability to pay
debts as they become due or the failure to pay debts generally as such
debts become due; or
(ii) the entry of an order for relief in the name of
the Borrower or a Subsidiary of the Borrower under Title 11 of the
United States Code or similar provisions of foreign law; or
(iii) the Borrower or a Subsidiary of the Borrower
shall make an assignment for the benefit of creditors; or
(iv) the Borrower or a Subsidiary of the Borrower
shall consent to the appointment of a trustee or receiver for all or a
major part of its property; or
(v) the commencement of a case by the Borrower or a
Subsidiary of the Borrower under Title 11 of the United States Code or
similar provisions of foreign law; or
(vi) the commencement of a case under Title 11 of
the United States Code or similar provisions of foreign law against
the Borrower or a Subsidiary of the Borrower, which case shall not be
dismissed within sixty (60) days from the date of commencement; or
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(vii) the entry of a court order appointing a
receiver or a trustee for all or a major part of the Borrower's
property or the property of a Subsidiary of the Borrower without
consent, which order shall not be vacated, denied, set aside, or
stayed within sixty (60) calendar days from the date of entry.
Section 9.09 Permit and Real Estate Default. Default by the Borrower
or its Subsidiaries shall occur in any material respect in (i) any Permit
(including, without limitation, those listed on Schedule 4.03) necessary for
the operation of the business of the Borrower or its Subsidiaries; (ii) any
material deed, lease, easement, license, permit or other document with respect
to the Borrower's ownership, leasing or use of real estate or (iii) with regard
to any of the items set forth in the foregoing clauses (i) and (ii), the terms
thereof shall have expired without the Borrower or its Subsidiaries obtaining a
renewal thereof or a new term of years such that the Borrower's or Subsidiary's
rights thereunder are, or may be, terminated, and in any such event, such
default shall continue uncorrected for a period of thirty (30) days after
written notice of such default from the Bank to the Borrower.
Section 9.10 Cross-Default. (a) Default shall be made by the
Borrower or its Subsidiaries in the payment when due of Indebtedness (whether
principal, interest or premium) now or hereafter owing by it (other than to the
Bank under this Credit Agreement and other than accounts payable to trade
creditors for amounts incurred in the ordinary course of business and not
evidenced by promissory notes, bonds or similar instruments) or (b) default
shall be made by the Borrower or its Subsidiaries in the performance of any
covenant or other obligation contained in any agreement, indenture, lease or
other instrument or document relating to, evidencing, or securing such
Indebtedness if the effect of the default is to permit the holder of such
Indebtedness (without the giving of notice or the lapse of time or both) to
accelerate the maturity thereof, and if any such default occurs with respect to
Indebtedness other than the Indebtedness described in Sections 7.02(iv) and
(v), the amount in question is $250,000.00 or more.
Section 9.11 Judgments. Entry of a final judgment (a final judgment
being one for which all available appeals have been exhausted or the time for
taking such appeal has lapsed) against the Borrower or its Subsidiaries in the
amount or $250,000.00 or more and the same is not discharged or satisfied
within thirty (30) consecutive days from the date of entry.
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Section 9.12 Restraint on Business. Any court or administrative or
regulatory agency shall have issued an injunction or order that materially
restricts or enjoins the Borrower or its Subsidiaries from conducting any
material part of its business as now conducted.
ARTICLE X
REMEDIES
Section 10.01 Acceleration. Upon (i) the occurrence of any Event of
Default described in Article IX, excluding Section 9.10, the Bank may, at any
time (unless all Events of Default shall theretofore have been remedied or
waived in accordance with the terms of this Credit Agreement), terminate the
Revolving Loan Commitment and the right of the Borrower to obtain Advances in
respect of the Revolving Loan or Convert the Revolving Loan or any part thereof
to a Term Loan, and/or declare the unpaid principal amount of any or all of the
Loans and/or Notes, all interest accrued thereon and all other amounts owing by
the Borrower to the Bank to be immediately due and payable, and (ii) upon the
occurrence of any Event of Default under Section 9.10, without further action
by the Bank, the right of the Borrower to obtain Advances in respect of the
Revolving Loan and the Revolving Loan Commitment or to Convert the Revolving
Loan or any part thereof to a Term Loan shall be immediately terminated and the
unpaid principal of the Loans and/or Notes and interest accrued thereon and all
other amounts owing by the Borrower to the Bank shall be immediately due and
payable and, in either case, such principal, interest and other amounts shall
thereupon be immediately due and payable, without presentment, demand, protest,
notice of protest, or other notice of any kind, all of which are hereby
expressly waived by the Borrower.
Section 10.02 Recovery of Amounts. In case any one or more Events of
Default shall occur, the Bank shall be entitled to recover judgment against the
Borrower for the amount due either before, or after, or during the pendency of
any proceedings for the enforcement of any security therefor, and, in the event
of realization of any funds from any security and application thereof to the
partial payment of the amounts due, the Bank shall be entitled to enforce
payment of and recover judgment for all amounts then remaining due and unpaid.
In case any one or more Events of Default shall happen the Bank may proceed to
protect and enforce its rights by suit in equity, action at law, and/or by any
other appropriate proceeding, including, without limitation, for the specific
performance of any covenant or agreement or in aid of the exercise of any power
granted to the Bank, or may proceed to enforce payment of the Notes or to
enforce any other legal or equitable right.
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Section 10.03 Remedies Cumulative. The Bank may pursue the rights or
remedies of the holders of the Notes under this Credit Agreement, independently
or concurrently. All rights, remedies, or powers herein conferred upon the Bank
shall, to the extent not prohibited by law, be deemed cumulative and not
exclusive of any other rights, remedies, or powers available to the Bank.
Without limiting the foregoing, the rights and remedies of the Bank under this
Credit Agreement, the Notes, and the other Loan Documents, are cumulative, may
be exercised simultaneously or in such order and at such times as the Bank may
elect and are in addition to its rights and remedies at law or equity. No
delay or omission of the Bank to exercise any right, remedy, or power shall
impair the same or be construed to be a waiver of any Event of Default or an
acquiescence therein. No waiver of any Event of Default shall extend to or
affect any subsequent Event of Default or shall impair any rights, remedies, or
powers available to the Bank. No single or partial exercise of any right,
remedy, or power shall preclude other or further exercise thereof by the Bank.
Section 10.04 Cost of Collection. The Borrower agrees that if
default shall be made in the payment of the principal of or interest on any of
the Notes, when the same shall become due and payable, they will pay to the
Bank such additional amount as shall be sufficient to cover the cost and
expenses of collection, including reasonable attorneys' fees, and any expenses
or liabilities incurred by the Bank in the collection thereof.
Section 10.05 No Advances; Conversions, etc. The Bank shall not be
required to make any Advances under this Credit Agreement or Convert all or any
part of the Revolving Loan to a Term Loan if a Possible Default or an Event of
Default has occurred and is continuing.
ARTICLE XI
MANAGEMENT AND COLLECTION OF COLLATERAL
Section 11.01 Status of Investments and Other Collateral. With
respect to Collateral at the time the Collateral becomes subject to the Bank's
Lien, the Borrower covenants, represents and warrants: (a) the Borrower shall
be the sole owner, free and clear of all Liens except in favor of the Bank or
otherwise permitted hereunder, of and fully authorized to sell, transfer,
pledge and/or grant a security interest in each and every item of said
Collateral, except as such authorization may be limited by applicable
securities laws or limitations set forth in the documents evidencing or
securing the Investments of the Borrower; (b)(i) to the best of Borrower's
knowledge, each promissory note, instrument, bond, debenture or other
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document or agreement evidencing or securing any indebtedness of a Person to
the Borrower and comprising an Investment of the Borrower (hereinafter
collectively referred to as the "Debt Instruments") shall be a good and valid
obligation representing an undisputed bona fide indebtedness incurred or an
amount indisputably owed by the Person therein named, for the amount set forth
therein; (ii) each mortgage, deed of trust, financing statement and other
recorded security document comprising a Debt Instrument shall be duly recorded
and all liens and security interests created thereby shall be duly perfected;
and (iii) adequate title insurance and, to the extent Borrower has the right to
require and cause the same to be maintained, adequate fire and extended
coverage insurance shall be obtained and shall be maintained with respect to
all real property and improvements thereon encumbered by Debt Instrument; (c)
to the best of Borrower's knowledge, no Debt Instrument is or shall be subject
to any defense, offset or counterclaim, and each Debt Instrument shall be
payable when stated to be due; (d) to the best of Borrower's knowledge, each
Investment which is a share of capital stock in a Person or an option, warrant,
or other right to acquire or convert property to capital stock of a Person or a
limited or general partnership interest in a Person (hereinafter collectively
referred to as "Equity Interests") shall be validly issued to the Borrower and
shall represent a legally enforceable equity interest in each such Person
enforceable in accordance with its respective terms; (e) to the best of
Borrower's knowledge, none of the transactions underlying or giving rise to any
Debt Instrument or Equity Interests comprising the Collateral shall violate any
applicable state or federal laws or regulations; (f) to the best knowledge of
the Borrower, each maker of a Debt Instrument comprising the Collateral shall
be solvent and able to pay the Debt Instrument on which it is obligated in full
when due; (g) no agreement under which any deduction or offset of any kind has
been or shall be granted with respect to any Debt Instrument comprising the
Collateral; (h) to the best of Borrower's knowledge, all documents and
agreements relating to Debt Instruments and Equity Interests comprising the
Collateral shall be true and correct and in all respects what they purport to
be; and (i) to the best of the Borrower's knowledge, all signatures and
endorsements that appear on all Debt Instruments and Equity Interests shall be
genuine and all signatories and endorsers shall have full capacity to contract.
Section 11.02 Collection of Receivables, Investments; Management of
Collateral. (a) Until the Borrower's authority to do so is terminated (which
the Bank may do at any time upon the occurrence of an Event of Default), the
Borrower will, at its own cost and expense, use its best efforts to collect and
otherwise enforce as the Bank's property and in trust for the Bank all amounts
payable on
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<PAGE> 54
or otherwise receivable with respect to the Investments of the Borrower and the
Debt Instruments and Equity Interests comprising the Collateral; provided,
however, upon the request of the Bank following the occurrence of an Event of
Default, the Borrower shall take such action (at the Borrower's expense) as
reasonably requested by the Bank to collect any designated Investments
evidenced by Debt Instruments.
The Bank shall have the right from time to time following the
occurrence of an Event of Default (at the Borrower's expense) to arrange for
the verification of all amounts owing under or on account of Debt Instruments
directly with the obligors thereof or by other methods reasonably satisfactory
to the Bank. Any such verification shall be conducted in such a manner as to
minimize disruption to the Borrower's business.
The Borrower shall notify the Bank promptly relating to material
default by any Person liable on a Debt Instrument which represents greater than
$1,000,000.00 or more in the aggregate of the Borrower's Investments or receipt
of any credit or information reflecting any insolvency proceedings under the
Bankruptcy Code, appointment of a creditors' committee, assignment for the
benefit of creditors or other information indicating any basis for doubt that
such Person will pay its obligations to the Borrower in full as the same
becomes due and payable.
The Borrower shall not, without the Bank's prior written consent,
grant any extension of the time of payment of any Debt Instrument or amount due
on account of an Equity Interest, compromise or settle any Debt Instrument for
less than the full amount thereof, release, in whole or in part, any person or
property liable for the payment thereof, or allow any credit or discount
whatsoever thereon except in each instance in the normal course of business
consistent with past practices.
In the event that after the occurrence of any Event of Default the
Borrower shall receive any amounts payable under or in respect to Debt
Instruments or Equity Interests, the Borrower shall receive the same in trust
for the Bank and shall deliver to the Bank (or to a depository designated by
the Bank) in original form and on the date or receipt thereof, all checks,
drafts, notes, money orders, acceptances, cash and other evidences of
indebtedness. The Borrower shall also direct all payments under or pursuant to
its Debt Instruments and Equity Interests to the Bank or its designee.
Section 11.03 Upon Event of Default. Upon the occurrence of an Event
of Default, in addition to each and other right and remedy granted by the
Borrower to the
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<PAGE> 55
Lender in this Credit Agreement or in the Collateral Security Agreements or
other Loan Documents or as otherwise provided at law and in equity, the
Borrower agrees to do all things necessary to perfect title to the Investments,
including, but not limited to, the Debt Instruments and the Equity Interests,
and shall assign and deliver to the Bank or its designee all Debt Instruments
and evidences of Equity Interests, with all requisite endorsements and
assignments in favor of the Bank, (which the Bank may make as attorney-in-fact
for the Borrower, the Bank being hereby appointed as attorney-in-fact for the
Borrower for such purposes), and all of the Borrower's books and records
relating thereto. At and after any Event of Default and while such Event of
Default is continuing, the Bank may send a notice of assignment and/or notice
of the Bank's Lien to any and all Persons liable on Debt Instruments and to all
issuers of Equity Interests or any third party holding or otherwise concerned
with any of the Collateral, and thereafter the Bank shall have the sole right
to collect directly the amounts payable under or related to the Debt
Instruments and the Equity interests.
The Borrower hereby constitutes the Bank or its designee on behalf of
the Bank as the Borrower's attorney-in-fact with power: upon occurrence and
during the continuance of an Event of Default to endorse the Borrower's name
upon any notes, acceptances, checks, drafts, money orders or other evidences of
payment or Collateral that may come into its possession; to take any and all
actions under each Debt Instrument which the holder and beneficiary thereof is
entitled to take thereunder and pursuant thereto, including, but not limited
to, obtaining appropriate insurance or paying taxes that are due and owing if
the Person liable under the Debt Instrument fails to perform the obligations of
such Person set forth in the Debt Instrument (and any such amounts advanced on
account of the Borrower shall constitute part of the Obligations, shall bear
interest at the highest rate of interest then applicable under the Notes, and
shall be payable on demand by the Borrower); upon the occurrence and during the
continuance of an Event of Default, to notify the Postal Service authorities to
change the address for delivery of mail addressed to the Borrower to such
address as the Bank may designate; and to do all other acts and things
necessary to carry out this Agreement. All acts of said attorney or designee
are hereby ratified and approved, and said attorney or designee shall not be
liable for any acts of omission or commission (except to the extent it is
determined by a final judicial decision that the Bank's act or omission
constituted gross negligence or willful misconduct), nor for any error of
judgement or mistake of fact or law; this power being coupled with an interest
is irrevocable until all of the Obligations are paid in full and this Credit
Agreement is terminated.
-49-
<PAGE> 56
The Bank, without notice to or consent of the Borrower, upon the
occurrence and during the continuance of an Event of Default (A) may sue upon
or otherwise collect, extend the time of payment of, or compromise or settle
for cash, credit or otherwise upon any terms, any of the Debt Instruments or
amounts owing on account of Equity Interests and insurance applicable thereto
and/or release the obligor thereon; and (B) shall have the right to receive,
endorse, assign and/or deliver in its name or the name of the Borrower any and
all checks, drafts and other instruments for the payment of money relating to
the Debt Instruments and Equity Instruments and the Borrower hereby waives
notice of presentment, protest and non-payment of any instrument so endorsed.
Nothing herein contained shall be construed to constitute the Borrower
as agent of the Bank for any purpose whatsoever, and the Bank shall not be
responsible or liable for any shortage, discrepancy, damage, loss or
destruction of any part of the Collateral wherever the same may be located and
regardless of the cause thereof (except to the extent it is determined by a
final judicial decision that the Bank's act or omission constitute gross
negligence or willful misconduct). The Bank shall not, under any circumstances
or in any event whatsoever, have any liability for any error or omission or
delay of any kind occurring in the settlement, collection or payment of any of
the Debt Instruments or any amount relating to the Equity Interests or for any
damage resulting therefrom (except to the extent it is determined by a final
judicial decision that the Bank's act or omission constituted gross negligence
or willful misconduct). The Bank, by anything herein or in any assignment or
otherwise, does not assume any of the Borrower's obligations under any contract
or agreement assigned to the Bank except to the extent the Bank takes action
with respect to any of such obligations in a manner that constitutes gross
negligence or wilful misconduct, and the Bank shall not be responsible in any
way for the performance by the Borrower of any of the terms and conditions
thereof.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Payment of Expenses. If any Taxes shall be payable, or
ruled to be payable, to any state, province or Federal authority, with respect
to the recordation of any Collateral Security Document, or other Loan Document
by reason of any existing or hereafter enacted Federal or state statutes, the
Borrower will pay all such Taxes in accordance with such statutes, including
interest and penalties thereon, excluding Taxes solely on income of the Bank if
any, and will indemnify and hold the
-50-
<PAGE> 57
Bank harmless against any liability in connection therewith. The Borrower will
also reimburse the Bank for the fees and disbursements incurred by Thompson,
Hine and Flory for their services to the Bank in preparing, reviewing, closing
or enforcing this Credit Agreement and the other documents executed in
connection herewith, and will reimburse the Bank for any out-of-pocket expenses
incurred in connection therewith. The Borrower shall at all times protect,
indemnify, defend and save harmless the Bank from and against any and all
claims, actions, suits and other legal proceedings and liabilities, damages,
costs, interest, charges, counsel fees and other expenses and penalties (the
"Indemnified Liabilities"), which the Bank may, at any time, sustain or incur
by reason or in consequence of or arising out of the execution and delivery of
this Credit Agreement and the consummation of the transactions contemplated
hereby, except for any such Indemnified Liabilities resulting from the gross
negligence or willful misconduct of the Bank. All amounts payable or
reimbursable by the Borrower under this Section 12.01 shall be due and payable
on demand. The obligations imposed upon the Borrower by this Section 12.01
shall survive the payment of the Loans and the Notes.
Section 12.02 Notices. Any notice to or demand upon the Borrower
shall be deemed to have been sufficiently given or served for all purposes
hereof one (1) day after being sent by overnight express courier, three (3)
days after being mailed, certified mail, return receipt requested or, when
received during normal business hours, by electronic facsimile (confirmed by
subsequent delivery of "hard copy"), addressed to the Borrower at 1666 K
Street, N.W., Suite 901, Washington, D.C. 20006, or to such other address as
may be furnished in writing to the Bank for such purpose by the Borrower. Any
notice to or demand upon the Bank shall be deemed to have been sufficiently
given or served for all purposes hereof one (1) day after being sent by
overnight express courier or three (3) days after being mailed, certified mail,
return receipt requested, addressed to the Bank at 8300 Greensboro Drive, Suite
550, McLean, Virginia 22102-3604, Attn: Leslie A. Grizzard, Vice President,
with a copy to Thompson, Hine and Flory, 1920 N Street, N.W., Suite 800,
Washington, D.C. 20036, Attn: Scott A. Fenske, Esq., or to such other address
as may be furnished in writing to the Borrower for such purpose by the Bank.
The Borrower agrees that the Bank may rely and act upon, without any
investigation or inquiry as to the authority or power to give, or accuracy or
reasonableness of, and the Borrower will be unconditionally and irrevocably
bound and obligated by, any instructions, notice, request, report or other
communications given by duly elected officers of the Borrower.
-51-
<PAGE> 58
Section 12.03 Survival of Representations and Warranties. All
representations and warranties contained herein shall survive the execution and
delivery of this Credit Agreement, any investigation at any time made by the
Bank, and the execution and delivery of the Notes and shall continue in full
force and effect so long as the Notes are outstanding and unpaid.
Section 12.04 Entire Agreement; Amendment. This Credit Agreement,
including all exhibits hereto, embodies the entire agreement and understanding
between the Borrower and the Bank and supersedes all other prior agreements and
understandings relating to the subject matter hereof. The Borrower and the
Bank may enter into further and additional written agreements to amend or
supplement this Credit Agreement and the terms and provisions of such further
and additional written agreements shall be deemed a part of this Credit
Agreement as though incorporated herein. Except as provided herein, the Bank
has no obligation to make loans or advances to the Borrower.
Section 12.05 Parties in Interest. All the terms and provisions of
this Credit Agreement shall inure to the benefit of and be binding upon and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not and, in particular, shall inure to the benefit of
and be enforceable by any holder of the Notes. The Borrower shall not assign
its rights under this Credit Agreement without the prior written consent of the
Bank.
Section 12.06 Binding Arbitration. Any controversy or claim between
or among the parties hereto, including but not limited to those arising out of
this instrument, agreement or document or any related instruments, agreements
or documents, including any claim based on or arising from an alleged tort,
shall be determined by binding arbitration in accordance with the Federal
Arbitration Act (or if not applicable, the applicable state law), the rules of
practice and procedure for arbitration of commercial disputes of the Judicial
Arbitration and Mediation Services, Inc. (J.A.M.S.) and the "Special Rules" set
forth below. In the event of an inconsistency, the Special Rules shall
control. Judgment upon any arbitration award may be entered in any court
having jurisdiction. Any party to this instrument, agreement or document may
bring any action, including a summary or expedited proceeding, to compel
arbitration of any controversy or claim to which this instrument, agreement or
document relates in any court having jurisdiction over such action.
(i) Special Rules. The arbitration shall be conducted in the city of
the Borrower's domicile at the time of execution of this instrument, agreement
or document and administered by J.A.M.S. who will appoint an
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<PAGE> 59
arbitrator. If J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within ninety (90) days of the demand
for arbitration; further, the arbitrator shall only, upon a showing of cause,
be permitted to extend the commencing of such hearing for an additional sixty
(60) days.
(ii) Reservation of Rights. Nothing in this instrument, agreement or
document shall be deemed to: (i) limit the applicability of any otherwise
applicable statutes of limitation or repose and any waivers contained in this
instrument, agreement or document; or (ii) be a waiver by Bank of the
protection afforded to it by 12 U.S.C. Section 91 or any substantially
equivalent state law; or (iii) limit the right of the Bank: (a) to exercise
self help remedies such as (but not limited to) setoff, or (b) to foreclose
against any real or personal property collateral, or (c) to obtain from a court
provisional or ancillary remedies such as (but not limited to) injunctive
relief, writs of possession or the appointment of a receiver. The Bank may
exercise such self help rights, foreclose upon such property, or obtain such
provisional or ancillary remedies before, during or after the pendency of any
arbitration proceeding brought pursuant to this instrument, agreement or
document. Neither the exercise of self help remedies nor the institution or
maintenance of any action for foreclosure or for provisional or ancillary
remedies shall constitute a waiver of the right of any party, including the
claimant in such action, to arbitrate the merits of the controversy or claim
occasioning resort to such remedies.
Section 12.07 Severability of Provisions. Any provision of this
Credit Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
of this Agreement or affecting the validity or enforceability of such provision
in any other jurisdiction.
Section 12.08 Headings. Article and Section headings used in this
Credit Agreement are for convenience of reference only and are not a part of
this Agreement for any other purpose.
Section 12.09 Governing Law. This Credit Agreement, the Notes and
each other Loan Document are and will be contracts made under the laws of the
District of Columbia (without regard to the laws regarding conflicts of laws)
and together with the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with and governed by the laws of the
District of Columbia.
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<PAGE> 60
Section 12.10 Counterparts. This Credit Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute but one and the
same agreement.
IN WITNESS WHEREOF, the parties have caused this Credit Agreement to
be executed as of the date first above written by their respective
representatives thereunto duly authorized.
ATTEST: BORROWER:
[Corporate Seal] ALLIED CAPITAL CORPORATION
II, a Maryland corporation
/s/ THOMAS R. SALLEY By: /s/ WILLIAM F. DUNBAR
- ---------------------- ------------------------
Secretary William F. Dunbar
President
BANK:
WITNESS: NATIONSBANK, N.A.
/s/ J. DECKMAN By:/s/ LESLIE A. GRIZZARD(SEAL)
- ---------------------- ----------------------
Leslie A. Grizzard
Vice President
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<PAGE> 61
AMENDED AND RESTATED REVOLVING NOTE
$25,000,000.00 September 28, 1995
FOR VALUE RECEIVED, the undersigned, ALLIED CAPITAL CORPORATION II, a
Maryland corporation (the "Borrower"), hereby promises to pay to the order of
NATIONSBANK, N.A. (the "Holder"), at its offices located at 8300 Greensboro
Drive, Suite 550, McLean, Virginia 22102-3604, the principal sum of
TWENTY-FIVE MILLION DOLLARS ($25,000,000.00), or, if lesser, the aggregate
unpaid principal amount of the Revolving Loan evidenced by this Note made by
the Holder to the Borrower pursuant to Article II, Part A of the Credit
Agreement (as hereinafter defined). The unpaid principal balance outstanding
on this Note from time to time and interest thereon shall be determined by the
ledgers and records of the Holder as maintained in accordance with the Holder's
ordinary practices.
This Note is the Revolving Note defined and referred to in, and is
entitled to the benefits of, a certain Amended and Restated Credit Agreement
dated as of September 28, 1995, by and between the Borrower and the Holder
(said Amended and Restated Credit Agreement, as it may be from time to time
amended, restated, or otherwise modified, being herein called the "Credit
Agreement"). Reference is made to the Credit Agreement for a statement of the
rights of the Holder and the duties and obligations of the Borrower in relation
thereto, but neither this reference to the Credit Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
Borrower to pay the principal of and interest on this Note when due.
Capitalized terms used in this Note but not defined herein shall have the
respective meanings ascribed to them in the Credit Agreement.
The principal of this Note shall be due and payable in full on May 31,
1997, or earlier as provided in the Credit Agreement.
The Borrower also promises to pay interest on the unpaid principal
amount of this Note from time to time outstanding from the date of this Note
until the payment in full thereof at the rate equal to the "Libor Rate" plus
one hundred fifteen (115) basis points. As used herein, the term "Libor Rate"
means, with respect to any Interest Period, a rate per annum equal to the
quotient obtained (rounded upwards, if necessary, to the next highest 1/16 of
1%) by dividing (i) the rate of interest determined by the Holder two (2)
Business Days prior to the first day of such Interest Period that it would have
to pay at 11:00 a.m. London time in the London inter-bank market for inter-bank
deposits of United States Dollars with a maturity approximately equal to the
Interest Period selected by the
<PAGE> 62
Borrower pursuant to the terms of the Credit Agreement for the use of such rate
in determining the interest to be charged on the outstanding principal balance
of this Note by (ii) 1.00 minus for any day that percentage (expressed as a
decimal) which is in effect on such day, as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
reserve requirement for the Holder in respect of "Eurocurrency liabilities" (or
in respect of any other category of liabilities which includes deposits by
reference to which the Libor Rate is determined).
Interest shall be payable on each date provided for in or determined
in accordance with the provisions of the Credit Agreement. Interest shall be
calculated on the basis of a 360 day year for the actual number of days
elapsed.
Reference is hereby made to the Credit Agreement, which contains
provisions for the acceleration of the maturity hereof upon the happening of
certain stated events and for voluntary prepayments hereon. The term "Holder"
includes the successors and assigns, if any, of the Holder named in the first
paragraph hereof.
All payments of principal of and interest in this Note shall be made
in lawful money of the United States of America and in immediately available
funds.
The Borrower waives demand, presentment for payment, notice of
dishonor, protest, notice of protest, and diligence in collection and bringing
suit, and agrees that Holder may extend the time for payment, accept partial
payment, take security therefor or exchange or release any collateral, without
discharging or releasing the Borrower.
The construction, validity and enforceability of this Note shall be
governed by the laws of the District of Columbia.
Any controversy or claim between or among the parties hereto,
including but not limited to those arising out of this instrument, agreement or
document or any related instruments, agreements or documents, including any
claim based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the rules of practice and procedure for
arbitration of commercial disputes of the Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.) and the "Special Rules" set forth below. In the
event of an inconsistency, the Special Rules shall control. Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any party
to this instrument, agreement or document may bring any action, including a
- 2 -
<PAGE> 63
summary or expedited proceeding, to compel arbitration of any controversy or
claim to which this instrument, agreement or document relates in any court
having jurisdiction over such action.
(i) Special Rules. The arbitration shall be conducted in the
city of Borrower's domicile at the time of execution of this instrument,
agreement or document and administered by J.A.M.S. who will appoint an
arbitrator. If J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within ninety (90) days of the demand
for arbitration; further, the arbitrator shall only, upon a showing of cause,
be permitted to extend the commencing of such hearing for an additional sixty
(60) days.
(ii) Reservation of Rights. Nothing in this instrument,
agreement or document shall be deemed to: (i) limit the applicability of any
otherwise applicable statutes of limitation or repose and any waivers contained
in this instrument, agreement or document; or (ii) be a waiver by the Holder of
the protection afforded to it by 12 U.S.C. Section 91 or any substantially
equivalent state law; or (iii) limit the right of the Holder: (a) to exercise
self help remedies such as (but not limited to) setoff, or (b) to foreclose
against any real or personal property collateral, or (c) to obtain from a court
provisional or ancillary remedies such as (but not limited to) injunctive
relief, writs of possession or the appointment of a receiver. The Holder may
exercise such self help rights, foreclose upon such property, or obtain such
provisional or ancillary remedies before, during or after the pendency of any
arbitration proceeding brought pursuant to this instrument, agreement or
document. Neither the exercise of self help remedies nor the institution or
maintenance of any action for foreclosure or for provisional or ancillary
remedies shall constitute a waiver of the right of any party, including the
claimant in such action, to arbitrate the merits of the controversy or claim
occasioning resort to such remedies.
ATTEST: ALLIED CAPITAL CORPORATION II,
a Maryland corporation
[Corporate Seal]
/s/ THOMAS R. SALLEY By:/s/ WILLIAM F. DUNBAR (SEAL)
- ----------------------- ---------------------
Secretary William F. Dunbar
President
- 3 -
<PAGE> 1
Allied Capital Corporation II and Subsidiaries
Exhibit 11 Computation of Earnings Per Common Share
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
For the Year Ended December 31
-----------------------------------------
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Share:
Net Increase in Net Assets Resulting
from Operations $14,733,000 $10,515,000 $10,474,000
=========================================
Weighted average number of
shares outstanding 6,946,815 6,938,191 6,938,191
Weighted average number of
shares issuable on exercise
of outstanding stock options 32,555 1,756 12,973
-----------------------------------------
Weighted average number of
shares and share equivalents outstanding 6,979,370 6,939,947 6,951,164
=========================================
Earnings per Share $2.11 $1.52 $1.51
=========================================
Fully Diluted Earnings Per Share:
Net Increase in Net Assets Resulting
from Operations $14,733,000 $10,515,000 $10,474,000
=========================================
Weighted average number of
shares and share equivalents
outstanding as computed for
primary earnings per share 6,979,370 6,939,947 6,951,164
Weighted average of additional
shares issuable on exercise
of outstanding stock options 41,184 - -
-----------------------------------------
Weighted average of shares and share equivalents
outstanding, as adjusted 7,020,554 6,939,947 6,951,164
=========================================
Earnings per Share $2.10 $1.52 $1.51
=========================================
</TABLE>
<PAGE> 1
EXHIBIT 13
[ALLIED CAPITAL CORPORATION II LOGO]
[PHOTO - Cover Photography: The United States Capitol by Carol M. Highsmith]
ALLIED CAPITAL CORPORATION II is an investment company whose management team
has specialized in small business finance for 37 years. The market demand for
small business finance is strong with few providers, and the Company has
developed a specialty in this market niche. Allied Capital II provides
investors the unique opportunity to profit from our management team's
investment experience and the ever-growing small business marketplace.
The Company operates much like a bank or finance company in its origination of
subordinated loans, and it frequently receives and profits from equity
interests in small businesses as well. Allied Capital II provides a unique
advantage to stockholders when compared to traditional lending institutions
because, as an investment company, it pays no corporate taxes - all of its
profits pass directly to stockholders.
THE ALLIED CAPITAL COMPANIES
Allied Capital Corporation II is one company in the Allied Capital complex of
public and private companies dedicated to financing the growth of small,
private businesses. With more than $650 million in combined total assets,
Allied Capital is a small business finance specialist and has financed
everything from equipment purchases, construction loans and commercial real
estate mortgages to management buyouts and acquisitions. Over the last 37
years, Allied Capital has invested in the growth of thousands of businesses
nationwide while providing substantial returns to its stockholders.
<PAGE> 2
Financial Highlights
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31,
(in thousands, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments at Value $ 99,207 $ 88,130
Total Assets $ 107,169 $ 101,934
Shareholders' Equity (Net Asset Value) $ 101,981 $ 97,475
Net Increase in Net Assets Resulting from Operations $ 14,733 $ 10,515
Earnings Per Share $ 2.11 $ 1.52
Distributions Per Share $ 1.60 $ 1.34
Number of Common Shares Outstanding 7,104 6,938
- -----------------------------------------------------------------------------------------
</TABLE>
CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Letter To Our Stockholders 2
Portfolio Manager's Report 4
Management's Discussion And Analysis 10
Consolidated Comparison Of
Financial Highlights 12
Consolidated Financial Statements 13
Consolidated Statement Of Loans To And
Investments In Small Business Concerns 17
Notes To The Consolidated
Financial Statements 20
Report Of Independent Accountants 26
Investment Officers 27
Directors And Officers 28
Investor Information 29
</TABLE>
1
<PAGE> 3
Letter To Our Stockholders
====================
Allied Capital Corporation II
[PHOTO]: David Gladstone, Chairman & Chief Executive Officer
Net income increased by 40% to $14.7 million, or $2.11 per share, making 1995
our most profitable year since inception. Total distributions to stockholders
increased by 19.4% to $1.60 per share, and the stock price increased by 26%
during the year. By all measures, it was a great year.
Valuations for both public and private companies throughout the United States
increased dramatically this year. These circumstances created an opportune time
to position several of our mature investments for sale so that we could realize
the appreciation in our portfolio. As a result, much of our time this year was
spent arranging sales, mergers or public offerings with our portfolio
companies. The results of the increase in value are reflected in our net
realized gains and net unrealized appreciation on our investments. Net
unrealized appreciation is recorded when certain investments in our portfolio
perform above our expectations and are valued above cost. For 1995, net
unrealized appreciation increased by 95% representing our potential for future
capital gains.
DIVIDENDS PER SHARE IN THE LAST NINE QUARTERS
[GRAPH]: 3/31/94 - $0.25
6/30/94 - $0.25
9/30/94 - $0.25
12/31/94 - $0.25
1/31/95 - $0.34
3/31/95 - $0.25
6/30/95 - $0.27
9/29/95 - $0.29
12/31/95 - $0.31
1/31/96 - $0.48
3/29/96 - $0.33
Allied Capital II raised the
regular quarterly dividend
three times in 1995. Total
distributions to stockholders
increased from $1.34 per share
in 1994 to $1.60 per share in 1995.
2
<PAGE> 4
The growth and appreciation in the portfolio, and the corresponding increase in
our net income, translated into significant growth in our total distributions
to stockholders this year. The board of directors increased the regular
quarterly dividend three times in 1995. At the beginning of the year, the
regular dividend was $0.25 per share and at year-end it was $0.31 per share, a
24% increase. The board also increased the annual extra distribution by 41%
over 1994 to $0.48 per share. We were very pleased with the Company's
performance.
Allied Capital II provided a 38.4% total return to stockholders this year, our
best single-year return since inception. It is our goal to continue the
increase in annual distributions to stockholders and maintain a solid total
return.
Total invested assets increased by 13% during the year as we made seventeen new
investments and provided follow-on financing to five existing portfolio
companies.
Marketing will be our primary focus in 1996. We believe there are additional
investment opportunities available for Allied Capital II, and it is our
objective to strengthen our targeted marketing activities, to identify strong
growth industries, and to make new investments in promising small businesses.
There are lots of senior debt lenders and equity investors, but there are only
a few investors like Allied Capital II that primarily seek to provide
subordinated debt financing. We will continue to be selective in our investing
and carefully structure our investments to provide the optimal return to the
Company and ultimately our stockholders.
We are grateful for your continued support. All stockholders are cordially
invited to attend our Annual Meeting of Stockholders at 10:00 am on Friday, May
10, 1996 at the Strathmore Hall Arts Center, 10701 Rockville Pike, North
Bethesda, Maryland.
"Allied Capital II provided a 38.4% total return to stockholders this year, our
best single-year return since inception."
/s/ DAVID GLADSTONE
David Gladstone
Chairman of the Board
3
<PAGE> 5
Portfolio Manager's Report
====================
Allied Capital Corporation II
[PHOTO]: William F. Dunbar President, Chief Operating Officer & Portfolio
Manager
Allied Capital Corporation II enjoyed another strong year of earnings in 1995.
Our portfolio of investments in small, growth companies performed well during
the year. Many of the investments in our portfolio have matured since we began
investing six years ago and we were provided with several opportunities for
significant capital gains in 1995. As a result, we were able to increase the
total annual distribution to stockholders by 19.4%. The regular quarterly
dividend increased by 24% during the year.
1995 CAPITAL GAINS
One of the largest components of Allied Capital II's return on investment is
realized when we exit an investment. Generally, we will sell our minority
equity interest in a company, which in many cases has appreciated in value over
time, and this sale will result in a capital gain for Allied Capital II. The
cyclical nature of the capital markets dictate that some years are better for
sellers and some years are better for buyers. In 1995, we found ourselves in a
seller's market, and we took advantage of these conditions. Allied Capital II
realized a total of $3.6 million in capital gains from sales of our investments
in four different portfolio companies. Each of the following small, private
companies was sold to a larger company, our most common means of exiting a
portfolio investment.
ENVIRCO CORP. is a leading manufacturer of clean room and filter systems used
by pharmaceutical companies, electronics manufacturers and hospitals to create
ultra-clean air environments. Allied Capital II financed a management buyout in
early 1993; by mid-1994, Envirco had repaid Allied Capital II's debt, but we
continued to hold warrants to purchase an equity interest representing
potential ownership of 10%. In 1995, Envirco, based in New Mexico, was sold to
Trion Inc., a publicly traded manufacturer of a full line of consumer,
commercial and
[PHOTO - Labor Ready, Inc. worker cleaning windows]
Labor Ready, Inc. provides
short-notice staffing of
low-skilled and semi-skilled
personnel for manufacturing,
construction and service businesses.
We provided Labor Ready with
$2.3 million in subordinated
debentures and received warrants
to acquire shares of the
company's common stock.
4
<PAGE> 6
[PHOTO - nails being polished with Kirker products]
Allied Capital II provided
buyout financing to Kirker
Enterprises, Inc., the
largest U.S. manufacturer
of bulk nail enamel and a
producer of automobile
coatings for the auto
sales after-market.
"Many of the investments in our
portfolio have matured since we
began investing six years ago and
we were provided with several
opportunities for significant
capital gains in 1995."
industrial indoor air cleaners. We realized an $805,000 capital gain from the
sale of our equity interest in the company.
GLOBAL SOFTWARE, INC., based in North Carolina, is a developer and marketer of
accounting software products. Allied Capital II made a $1.3 million investment
in the company in February 1994 as part of a management buyout. When Global was
sold in October 1995 to Quality Software Products Holdings, PLC, Allied Capital
II's investment was fully repaid. For our equity ownership in Global, we
received cash and stock of Quality Software Products, which is traded on the
London Stock Exchange under the symbol QSP, representing a total capital gain
of $591,000.
At year-end, consumer products and retail enterprises represented 20% of our
total portfolio. Allied Capital II's interest in these sectors remains strong,
as we have found numerous niche opportunities. One such opportunity came to
fruition in 1995. After investing in DOGLOO, INC. just one year ago, Allied
Capital II sold its entire equity ownership in the company to a California
buyout firm in September 1995. Allied Capital II sold its stock warrants for a
$1.3 million gain, and agreed to retain a subordinated debt investment in the
company to help consummate the buyout transaction.
JACKSON PRODUCTS, INC. provided a $934,000 gain this year when the company was
sold to a financial buyer. Headquartered in St. Louis, Jackson Products
produces industrial safety equipment, including welding helmets, hard hats,
face shields and safety glasses, and highway safety products such as reflective
glass beads, striping tape, safety cones and arrow signs.
5
<PAGE> 7
Portfolio Manager's Report
====================
Allied Capital Corporation II
1995 NEW INVESTMENTS
During 1995, we invested a total of $38.3 million in seventeen new small
businesses and five existing portfolio companies. Allied Capital II's
investment focus remains on basic, low-technology industries, which have always
performed well in the portfolio. In keeping with this strategy, our new
investments ranged from a temporary labor service company to a nail enamel
manufacturer to a provider of private, affordable education services.
In 1995, Allied Capital II invested in NOBEL EDUCATION DYNAMICS, INC., a
for-profit provider of child care and education services headquartered in
Pennsylvania. Nobel operates 106 campuses in 12 states educating children from
ages six weeks through the eighth grade. By serving middle-income working
families who place a high value on affordable, quality education, Nobel's
mission is to be the leading provider of affordable private early education.
Allied Capital II provided $5 million in a combination of subordinated debt and
preferred stock with warrants to enable Nobel to accelerate its growth plans.
Nobel is expected to continue its growth in 1996 by improving existing
operations, building new schools where demand is high, and by acquiring
existing schools and child care centers. In 1995, revenues grew 29% and pretax
profits increased 34%. Allied Capital II's equity interest in Nobel's common
stock, which is publicly traded under the symbol NEDI, has already appreciated
since we made our investment. Allied Capital II believes the company has an
outstanding management team and our investment has excellent growth potential.
[PHOTO - teacher and students]
Nobel Education Dynamics,
Inc. is a for-profit provider
of child care and education
services headquartered in
Pennsylvania. Allied Capital II
provided $5 million in a
combination of subordinated debt
and preferred stock with warrants
to enable Nobel to accelerate its
growth plans.
We invested in LABOR READY, INC., a successful participant in the temporary
staffing industry. Driven by employers' demands for flexible staffing, the
temporary personnel industry has experienced significant growth. In particular,
the industrial segment of the temporary staffing market, in which Labor Ready
competes, has doubled from approximately $4 billion in 1991 to $8.1 billion in
6
<PAGE> 8
"Allied Capital II's portfolio
continues to be broadly diversified,
encompassing industries from
broadcasting to manufacturing to
software development."
1994. Headquartered in Washington state, Labor Ready provides short notice
staffing of low-skilled and semi-skilled personnel for manufacturing,
construction and service businesses. The Company operates "dispatch halls"
where customers phone in their personnel requests, and workers meet to receive
job assignments and return to be paid the same day. More than 100 locations are
in operation in 26 states and Canada. We provided $2.3 million in subordinated
debentures and received warrants to acquire shares of the company's common
stock. With our investment, Labor Ready will finance the costs incurred from
the expansion of new locations.
RADIO ONE OF ATLANTA, INC. is a broadcast company formed in 1995 to acquire the
assets of WQUL-FM, a newly upgraded 25-kilowatt radio station in the Atlanta
market. The company's management team has a long and successful track record in
urban radio. This fact, combined with the favorable economics of the Atlanta
radio market, made this startup station an attractive investment opportunity
for Allied Capital II. We provided a total of $1.7 million of both senior and
subordinated debt to Radio One of Atlanta to finance its $6.6 million purchase
of WQUL-FM. We also received stock purchase warrants to acquire a portion of
the equity of the company.
Allied Capital II provided $5 million in subordinated debt to COLORADO PRIME
CORPORATION to finance a recapitalization of the company. Located in New York,
Colorado Prime provides home shopping services and focuses on custom-designed
food programs and non-food products related to in-home dining and family
entertainment. Colorado Prime's high customer retention rates and innovative
marketing strategy are expected to fuel continued growth and profitability.
LIBERTY BUSINESS FORMS & SYSTEMS, INC., also located in New York, is a classic
example of our ability to find hidden investment opportunities in basic
industries. Founded in 1934, Liberty is one of the country's leading
manufacturers of business forms and inventory control tags for the dry cleaning
industry. Allied Capital II provided $1.5 million in recapitalization financing
to the company in 1995. Liberty and its experienced management team are now
well-positioned to implement a strategic acquisition program to expand the
company's business.
In the second quarter of 1995, Allied Capital II provided buyout financing to
KIRKER ENTERPRISES, INC., the largest U.S. manufacturer of bulk nail enamel and
a producer of automobile coatings for the auto sales after-market. Located in
New Jersey, Kirker supplies nail enamel to the world's leading cosmetic
companies and produces over a thousand colors using more than twenty-five
different formulas, many of which are proprietary. Allied Capital II was
particularly attracted to this industry because the barriers to entry are high
and Kirker has few competitors. Over the past forty-five years, Kirker has
developed the technological capabilities required to handle the complexities of
the manufacturing process and product innovation. The company projects growth
from new domestic customers, new product lines, acquisitions within the
industry and international expansion. Allied Capital II provided $1.7 million
in subordinated debt and owns warrants to acquire a portion of the company's
equity at a nominal exercise price.
7
<PAGE> 9
Portfolio Manager's Report
====================
Allied Capital Corporation II
1995 FEATURED INDUSTRIES
Allied Capital II's portfolio continues to be broadly diversified, encompassing
industries from broadcasting to manufacturing to software development. We
believe diversity among many industries enhances the strength of our portfolio.
Allied Capital II's broadcasting portfolio, the largest single industry
represented in our investment portfolio at 26%, continued to perform well in
1995. GRANT BROADCASTING SYSTEMS II currently operates WJPR and WVFT (channels
21 and 27 in Roanoke/Lynchburg Virginia). These Fox affiliate stations were
purchased under distressed conditions and have been turned around by an
experienced management team. If the stations continue to meet plan, our
eventual exit could produce significant upside for Allied Capital II, which
owns approximately 18% of the company. JUNE BROADCASTING, INC. operates the
number one rated radio stations in both Pensacola, Florida and Harrisburg,
Pennsylvania. June has exceeded its business plan since inception and repaid
Allied Capital II's investment in December 1994, leaving us with no-cost
warrants representing 8.8% of the company. June has signed a definitive
agreement to be sold, and the closing is scheduled for early 1996.
Broadcasting represents
26% of Allied Capital II's
portfolio of small business
investments. The industry
continued to perform well in
1995 as was evidenced by the
net appreciation of this
industry's investments within
our porfolio.
[PHOTO - DeeJay in radio booth]
Investments in the retail sector accounted for 9% of the cost, and 13% of the
value of the portfolio at year end - our highest value-to-cost appreciation in
any one industry. GARDEN RIDGE CORPORATION was one of our small business
investments in retail that had an outstanding year. After a successful initial
public offering in May 1995 at a price of $15 per share, Garden Ridge's stock
appreciated by 158% to $38.75 per share at December 31, 1995. With over 200,000
shares and warrants of Garden Ridge in our portfolio at an average cost basis
of $5.70 per share, we expect this investment to provide capital gains to
Allied Capital II in the future.
8
<PAGE> 10
"We hope to continue to benefit
from these market conditions,
although most of our income is
from recurring interest on loans
and debt securities."
PORTFOLIO INDUSTRIES
[FIGURE]
Distribution-9%
Manufacturing-12%
Broadcasting-26%
Real Estate-16%
Retail-13%
Service-19%
Software Development-5%
In the software industry, TPG HOLDINGS, INC., a leading provider of data
processing systems for small and mid-size banks continues to perform well.
Through its largest subsidiary, Peerless Systems, TPG is at the leading edge of
product innovation for its growing market and the company's large, loyal
customer base continues to benefit from product upgrades and expansions. Recent
new product introductions and several acquisitions under consideration should
help TPG continue to grow in 1996.
THE PRIVATE EQUITY MARKET
The investment field is increasingly competitive. As a small business investor
we must become more competitive. Allied Capital II has a unique niche in the
small business financing market that sets us apart from many competing
institutional investors. Allied Capital II provides creative, flexible
financing to small business owners. Allied Capital II can provide senior debt,
subordinated debt, and equity, alone or in combination, and we strive to
provide small business owners with financing that is tailored to meet their
growth objectives. At $3 million for an average deal size, Allied Capital II's
typical investment in a portfolio company is generally smaller than most
nationwide investors. Also differentiating us from other institutional
investors is the fact that we focus on the broadcasting, manufacturing,
distribution and service industries, which many venture capitalists bypass in
their search for higher-risk, higher-return investments. These industries have
become the backbone of our portfolio and have provided the steady growth that
has benefited Allied Capital II and its stockholders.
Many of our portfolio companies have performed exceptionally well and are
therefore attractive to potential acquirers. We believe 1996 will continue to
be an excellent time to sell companies within our portfolio because the public
and private equity markets continue to be strong, and publicly held strategic
buyers are aggressively seeking acquisitions since most have enjoyed the
benefits of the bullish stock market. We hope to continue to benefit from these
market conditions, although most of our income is derived from recurring
interest on loans and debt securities, and many of our portfolio companies are
in noncyclical, or even counter-cyclical, industries. We look forward to the
opportunities that 1996 will provide and would like to thank you, our
stockholders, for your continued support.
9
<PAGE> 11
Management's Discussion And Analysis
====================
Allied Capital Corporation II
LIQUIDITY AND CAPITAL RESOURCES
Total investments increased by $11.1 million or 13% to $99.2 million at
December 31, 1995 from $88.1 million at December 31, 1994. The Company
disbursed a total of $38.3 million for new and follow-on investments during
1995, which represents a 35% increase from the $28.4 million disbursed for such
investments in 1994. The Company was also able to exit certain mature
investments in 1995 and had other investments pay off early decreasing
investments by $33.9 million. Exits and early pay offs resulted in net realized
gains of $3.6 million. Valuation changes in the portfolio resulted in net
unrealized appreciation of $2.8 million for the year ended December 31, 1995.
The Company has outstanding commitments for future financings of small
businesses of $2.1 million as of December 31, 1995. Given the cash and cash
equivalents available at December 31, 1995 and the $25 million available under
its existing line of credit, the Company believes that is has adequate capital
to continue to satisfy its operating needs, commitments and other future
investment opportunities that may arise throughout 1996.
RESULTS OF OPERATIONS
Comparison of 1995 to 1994.
Net increase in net assets resulting from operations increased 40% to $14.7
million for the year ended December 31, 1995 as compared to $10.5 million for
the same period in 1994. Earnings per share was $2.11 per share for 1995 versus
$1.52 for 1994.
As a business development company, the Company's portfolio consists primarily
of securities issued by small privately held companies. These types of
investments, by their nature, carry a high degree of business and financial
risk. The Company seeks to achieve a high level of current income from its
investments in these businesses to compensate for these risks. Total investment
income increased 9% from $10.6 million in 1994 to $11.5 million in 1995.
Interest income grew due to a net increase in the Company's outstanding loans
and debt securities of $7.4 million in 1995. The Company also received a
prepayment penalty on the early pay off of an investment in the third quarter
of 1995 totaling $270,000, which is included in interest income. Other income
consisted primarily of $308,000 of litigation costs incurred in prior periods,
but recovered during 1995, and $116,000 of income resulting from an equity
participation in one portfolio company.
Total expenses of $3.2 million in 1995 were slightly higher than 1994 expenses
of $3.1 million. Investment advisory fee expense increased due to an increase
in the Company's portfolio investments and other assets upon which the
investment advisory fee is based. Legal and accounting fees are down from the
prior year as the Company settled various legal matters in late 1994 which
required significant legal resources in that year.
Net realized gains on investments were $3.6 million in both 1995 and 1994. The
1995 net realized gains resulted from exiting certain mature investments and
the early pay off of investments. Several mature investments were sold in 1995.
Net realized gains are unpredictable; however, the Company exits its portfolio
investments when it believes the realized gains can be maximized. Net
unrealized appreciation was $2.8 million in 1995 as compared to net unrealized
depreciation of $500,000 in 1994. Net unrealized appreciation would have been
greater for 1995 except for the write down of the value of one of the Company's
portfolio investments by $3 million during the fourth quarter. The Company's
investment in this company, which is now classified as nonperforming, equaled
$5.9 million on a cost basis with a value of $2.9 million as of December 31,
1995.
10
<PAGE> 12
Management's Discussion And Analysis
====================
Allied Capital Corporation II
Distributions to stockholders for 1995 were $1.60 per share. Taxable income
differed from net investment income before net unrealized appreciation on
investments due to timing differences in the recognition of income for tax
purposes as opposed to financial reporting purposes. The distributions were
comprised of both taxable ordinary and capital gain income.
Comparison of 1994 to 1993.
Net increase in net assets resulting from operations in 1994 of $10.5 million
remained relatively constant as compared to 1993, even though net investment
income increased by $2.1 million from 1993 to 1994.
Total investment income increased by $2.8 million or 36% in 1994 primarily due
to the growth in invested assets as well as the restructuring of certain
non-performing loans which restored them, at least in part, to a performing
basis. Total expenses increased by $700,000 in 1994 due to higher investment
advisory fees resulting from increased investment and other assets, and the
costs of certain litigation matters that were settled in 1994. Legal costs in
1994 and 1993 were $700,000 and $300,000, respectively.
Net realized gains on investments were $3.6 million in 1994 as opposed to
$100,000 in 1993. Net unrealized depreciation was $500,000 in 1994 as compared
to net unrealized appreciation of $5 million in 1993. During 1994, the Company
realized a $3 million gain on the sale of warrants in one portfolio company
that accounted for much of the unrealized appreciation in the prior year. As a
result, net realized gains on investments increased significantly and net
unrealized appreciation decreased by a similar amount during 1994. Overall,
excluding this transaction, the Company recorded net unrealized appreciation of
$2.5 million on its investments in 1994.
The Company paid dividends from taxable income in 1994 of $1.34 per share.
Taxable income differed from net investment income before net unrealized
depreciation on investments due to timing differences in the recognition of
income for tax purposes as opposed to financial reporting purposes.
11
<PAGE> 13
Consolidated Comparison Of Financial Highlights
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands except per share amounts) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total tax distributions $ 11,206 $ 9,297 $ 8,454 $ 7,891 $ 7,594
Ordinary income per share $ 1.38 $ 1.25 $ 0.76 $ 0.97 $ 1.00
Net capital gains per share 0.22 0.09 0.46 0.18 -
Return of capital per share - - - - 0.13
Total tax distributions per share $ 1.60 $ 1.34 $ 1.22 $ 1.15 $ 1.13
- -----------------------------------------------------------------------------------------------------------
OPERATIONS
Total investment income $ 11,539 $ 10,564 $ 7,770 $ 8,864 $ 8,356
Per share $ 1.65 $ 1.52 $ 1.12 $ 1.29 $ 1.24
Net investment income $ 8,350 $ 7,425 $ 5,315 $ 6,597 $ 6,547
Per share $ 1.20 $ 1.07 $ 0.77 $ 0.96 $ 0.97
Net realized gains on investments $ 3,621 $ 3,562 $ 148 $ 1,297 $ 150
Net unrealized appreciation (depreciation)
on investments $ 2,762 $ (472) $ 5,011 $ 948 $ (1,159)
Net realized gains and unrealized appreciation
(depreciation) on investments $ 6,383 $ 3,090 $ 5,159 $ 2,245 $ (1,009)
Per share $ 0.91 $ 0.45 $ 0.74 $ 0.33 $ (0.15)
Net increase in net assets resulting
from operations $ 14,733 $ 10,515 $ 10,474 $ 8,842 $ 5,538
Per share $ 2.11 $ 1.52 $ 1.51 $ 1.29 $ 0.82
Weighted average number of shares and
share equivalents outstanding 6,979 6,940 6,951 6,875 6,730
- -----------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Investments at value $ 99,207 $ 88,130 $ 70,716 $47,739 $ 48,971
Investments at cost $ 93,526 $ 85,211 $ 67,325 $49,359 $ 51,539
Total assets $107,169 $101,934 $100,151 $96,165 $ 91,874
Shareholders' equity (net asset value) $101,981 $ 97,475 $ 96,225 $93,891 $ 90,387
Per share $ 14.36 $ 14.05 $ 13.87 $ 13.60 $ 13.45
Per share market value at end of year $ 17.13 $ 13.63 $ 14.25 $ 18.00 $ 18.25
Shares outstanding at end of year 7,104 6,938 6,938 6,906 6,720
</TABLE>
12
<PAGE> 14
Consolidated Balance Sheet
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at Value:
Loans and debt securities (cost: 1995 _ $86,474; 1994 _ $79,044) $ 84,235 $ 79,423
Equity securities (cost: 1995 _ $5,538; 1994 _ $3,860) 13,548 6,714
Other investment assets (cost: 1995 _ $1,514; 1994 _ $2,307) 1,424 1,993
-----------------------
Total investments 99,207 88,130
Cash and cash equivalents 6,227 11,591
U.S. government securities - 748
Other assets 1,735 1,465
-----------------------
Total assets $ 107,169 $ 101,934
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends and distributions payable $ 3,403 $ 2,359
Investment advisory fee payable 639 579
Due to affiliates 35 297
Other liabilities 1,111 1,224
-----------------------
Total liabilities 5,188 4,459
-----------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $1 par value, 20,000,000 shares
authorized; 7,104,005 and 6,938,191 shares issued
and outstanding at December 31, 1995 and 1994 7,104 6,938
Additional paid-in capital 92,225 89,860
Notes receivable from sale of common stock (2,495) (943)
Net unrealized appreciation on investments 5,681 2,919
Distributions in excess of accumulated earnings (534) (1,299)
-----------------------
Total shareholders' equity 101,981 97,475
-----------------------
Total liabilities and shareholders' equity $ 107,169 $ 101,934
=======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 15
Consolidated Statement Of Operations
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
<S> <C> <C> <C>
Investment Income:
Interest $ 10,956 $ 10,434 $ 6,774
Net income from trust - - 966
Other income 583 130 30
--------------------------------------
Total investment income 11,539 10,564 7,770
--------------------------------------
Expenses:
Investment advisory fee 2,445 2,145 1,766
Legal and accounting fees 343 695 388
Other operating expenses 401 299 301
--------------------------------------
Total expenses 3,189 3,139 2,455
--------------------------------------
Net investment income 8,350 7,425 5,315
Net realized gains on investments 3,621 3,562 148
--------------------------------------
Net investment income before net unrealized appreciation
(depreciation) on investments 11,971 10,987 5,463
Net unrealized appreciation (depreciation) on investments 2,762 (472) 5,011
--------------------------------------
Net increase in net assets resulting from operations $ 14,733 $ 10,515 $ 10,474
======================================
Earnings per share $ 2.11 $ 1.52 $ 1.51
======================================
Weighted average number of shares and share equivalents outstanding 6,979 6,940 6,951
======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
Consolidated Statement Of Changes In Net Assets
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income $ 8,350 $ 7,425 $ 5,315
Net realized gains on investments 3,621 3,562 148
Net unrealized appreciation (depreciation) on investments 2,762 (472) 5,011
--------------------------------------
Net increase in net assets resulting from operations 14,733 10,515 10,474
--------------------------------------
Distributions to Stockholders from:
Net investment income (9,622) (7,390) (5,315)
Excess of net investment income _ (1,301) -
Net capital gains (1,584) (606) (148)
Excess of net capital gains _ - (2,991)
--------------------------------------
Net decrease in net assets resulting
from distributions to stockholders (11,206) (9,297) (8,454)
--------------------------------------
Capital Share Transactions:
Net (increase) decrease in notes receivable
from sale of common stock (1,552) 32 (173)
Issuance of shares upon the exercise of stock options 1,910 _ 487
Issuance of shares in lieu of cash distributions 621 - -
--------------------------------------
Net increase in net assets resulting
from capital share transactions 979 32 314
--------------------------------------
Total increase in net assets 4,506 1,250 2,334
Net assets at beginning of year 97,475 96,225 93,891
--------------------------------------
Net assets at end of year $ 101,981 $ 97,475 $ 96,225
======================================
Net asset value per share $ 14.36 $ 14.05 $ 13.87
======================================
Shares outstanding at end of year 7,104 6,938 6,938
======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
Consolidated Statement Of Cash Flows
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations $ 14,733 $ 10,515 $ 10,474
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized (appreciation) depreciation on investments (2,762) 472 (4,011)
Write-off of investments 657 607 61
Net realized gains on investments (4,278) (4,169) (209)
Interest _ (1,469) _
Amortization of loan discounts (967) (906) (832)
Provision for losses on accrued interest and accounts receivable 526 _ _
Changes in assets and liabilities:
Other assets (270) (83) 1,019
Investment advisory fee payable 60 108 105
Due to affiliates (262) (568) 1,229
Other liabilities 18 161 204
--------------------------------------
Net cash provided by operating activities 7,455 4,668 8,040
--------------------------------------
Cash Flows from Investing Activities:
Investments in small business concerns (38,264) (28,408) (23,812)
Purchase of U.S. government securities (345) (8,460) (47,650)
Payments on loans and debt securities and other investment assets 31,004 12,927 4,832
Net proceeds from sale of equity securities 2,869 3,294 1,209
Redemption of U.S. government securities 1,100 25,055 59,585
Payments on notes receivable from sale of common stock 358 32 314
--------------------------------------
Net cash provided by (used in) investing activities (3,278) 4,440 (5,522)
--------------------------------------
Cash Flows from Financing Activities:
Dividends and distributions paid (9,541) (8,464) (7,976)
--------------------------------------
Net cash used in financing activities (9,541) (8,464) (7,976)
--------------------------------------
Net increase (decrease) in cash and cash equivalents (5,364) 644 (5,458)
Cash and cash equivalents, beginning of year 11,591 10,947 16,405
--------------------------------------
Cash and cash equivalents, end of year $ 6,227 $ 11,591 $ 10,947
======================================
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of shares upon the exercise of stock options $ 1,910 $ _ $ 487
Issuance of shares in lieu of cash distributions $ 621 $ _ $ _
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
Consolidated Statement Of Loans To And
Investments In Small Business Concerns
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
ALLIED WASTE INDUSTRIES, INC. (AZ) (1) Warrants $ 103 $ 595
(solid waste collection & disposal)
- --------------------------------------------------------------------------------------------------------------------
AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 1,610 1,610
(restaurants) Warrants 54 54
- --------------------------------------------------------------------------------------------------------------------
ARNOLD MOVING COMPANY, INC. (KY) Loans and Debt Securities 660 670
(moving/storage firm) Warrants 24 191
- --------------------------------------------------------------------------------------------------------------------
ASW HOLDING CORPORATION (IL) Loans and Debt Securities 633 633
(steel wool manufacturer) Warrants 47 47
- --------------------------------------------------------------------------------------------------------------------
CERATECH HOLDINGS, INC. (IL) Loans and Debt Securities 820 820
(ceramic plate manufacturer) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 954 954
(direct marketer of woodcrafts) Common Stock (103 shares) 0 0
- --------------------------------------------------------------------------------------------------------------------
COAST GAS, INC. (CA) Loans and Debt Securities 1,638 1,638
(natural gas liquids distributor) Warrants 94 94
- --------------------------------------------------------------------------------------------------------------------
COLORADO PRIME CORPORATION (NY) Loans and Debt Securities 5,000 5,000
(home food delivery) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
CONVENIENCE CORPORATION OF AMERICA (NE) Loans and Debt Securities 4,300 4,300
(convenience stores) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
CONTEMPORARY MEDIA, INC. (ID) Loans and Debt Securities 457 457
(radio stations) Warrants 160 160
- --------------------------------------------------------------------------------------------------------------------
DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 2,025 2,025
(circuit board manufacturer) Warrants 117 117
- --------------------------------------------------------------------------------------------------------------------
DEVLIEG-BULLARD, INC. (CT) (1) Warrants 144 160
(tool manufacturer)
- --------------------------------------------------------------------------------------------------------------------
EL DORADO COMMUNICATIONS, INC. (CA) Loans and Debt Securities 4,940 4,940
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
ENVIROPLAN, INC. (NJ) (2) Loans and Debt Securities 1,924 1,320
(emissions monitoring systems) Warrants 94 0
- --------------------------------------------------------------------------------------------------------------------
ESQUIRE COMMUNICATIONS, LTD. (NY) (1) Loans and Debt Securities 2,597 2,597
(court reporting services) Warrants 3 3
- --------------------------------------------------------------------------------------------------------------------
FOUNTAINHEAD TECHNOLOGIES, INC. (RI) Loans and Debt Securities 1,097 1,097
(non-chlorine water purification systems) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
GARDEN RIDGE CORPORATION (TX) (1) Common Stock (126,522 shares) 649 3,910
(home decorating and craft products) Warrants 96 1,799
- --------------------------------------------------------------------------------------------------------------------
GATEWAY HEALTHCARE CORPORATION (VA) Loans and Debt Securities 1,997 1,997
(medical supplies distributors) Preferred Stock (4,550 shares) 535 45
Warrants 2 0
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest income not being accrued; (3) May be
considered an affiliate; (4) Unrestricted security
17
<PAGE> 19
Consolidated Statement Of Loans To And
Investments In Small Business Concerns
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities $ 839 $ 839
(television stations) Warrants 61 756
- --------------------------------------------------------------------------------------------------------------------
INNOTECH, INC. (VA) Warrants 30 0
(bifocal lens manufacturer)
- --------------------------------------------------------------------------------------------------------------------
JUNE BROADCASTING, INC. (NJ) Warrants 46 1,576
(radio stations)
- --------------------------------------------------------------------------------------------------------------------
KIRKER ENTERPRISES, INC. (NJ) Loans and Debt Securities 1,548 1,548
(nail enamel manufacturer) Warrants 147 147
- --------------------------------------------------------------------------------------------------------------------
LABOR READY, INC. (WA) (1) Loans and Debt Securities 2,077 2,350
(temporary labor services) Warrants 279 43
- --------------------------------------------------------------------------------------------------------------------
LIBERTY BUSINESS FORMS & SYSTEMS, INC. (NY) Loans and Debt Securities 1,462 1,462
(inventory control tags and forms) Warrants 43 43
- --------------------------------------------------------------------------------------------------------------------
MIDVIEW ASSOCIATES, L.P. (VA) Loans and Debt Securities 212 212
(residential land development) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
MILL-IT STRIPING, INC. (FL) Loans and Debt Securities 125 125
(highway paint striping) Warrants 125 0
- --------------------------------------------------------------------------------------------------------------------
MONTGOMERY TANK LINES (FL) (1,4) Common Stock (17,701shares) 75 246
(tank truck carrier)
- --------------------------------------------------------------------------------------------------------------------
NOBEL EDUCATION DYNAMICS, INC. (PA) (1) Loans and Debt Securities 3,750 3,750
(educational services) Preferred Stock (166,223 shares) 1,250 718
Warrants 0 834
- --------------------------------------------------------------------------------------------------------------------
OLD MILL HOLDINGS, INC. (PA) (2) Loans and Debt Securities 476 331
(custom embroidered apparel) Warrants 32 0
- --------------------------------------------------------------------------------------------------------------------
QUALITY SOFTWARE PRODUCTS HOLDINGS, PLC (UK) (1) Common Stock (41,571 shares) 396 380
(accounting software)
- --------------------------------------------------------------------------------------------------------------------
RADIO ONE OF ATLANTA, INC. (GA) Loans and Debt Securities 1,767 1,767
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 664 664
(decorative ribbon manufacturer) Warrants 25 0
- --------------------------------------------------------------------------------------------------------------------
STEUART PETROLEUM (DC) Warrants 48 48
(petroleum products)
- --------------------------------------------------------------------------------------------------------------------
SUNSTATES REFRIGERATED SERVICES, INC. (GA) (2,3) Loans and Debt Securities 5,296 2,897
(cold food storage) Preferred Stock (83,170 shares) 276 0
Common Stock (30,976 shares) 36 60
- --------------------------------------------------------------------------------------------------------------------
TPG HOLDINGS, INC. (TX) Loans and Debt Securities 1,872 1,872
(commercial banking software development) Warrants 5 885
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest income not being accrued; (3) May be
considered an affiliate; (4) Unrestricted security
18
<PAGE> 20
Consolidated Statement Of Loans To And
Investments In Small Business Concerns
====================
Allied Capital Corporation II
<TABLE>
<CAPTION>
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares and number of loans)
<S> <C> <C> <C>
WBIV, INC. (CA) Loans and Debt Securities $ 301 $ 301
(radio station) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA RADIO CORPORATION (WV) Loans and Debt Securities 571 571
(radio station) Warrants 200 0
- --------------------------------------------------------------------------------------------------------------------
WILLIAMS BROTHERS LUMBER COMPANY (GA) Loans and Debt Securities 1,458 1,458
(builders' supply yards) Warrants 9 694
- --------------------------------------------------------------------------------------------------------------------
Z -SPANISH RADIO NETWORK (CA) Loans and Debt Securities 2,161 2,161
(radio stations) Warrants 2 2
- --------------------------------------------------------------------------------------------------------------------
SUBTOTAL $60,768 $ 65,913
- --------------------------------------------------------------------------------------------------------------------
LOANS WITH NO EQUITY
- --------------------------------------------------------------------------------------------------------------------
Adult Care Facility (1 loan) $ 1,460 $ 1,460
- --------------------------------------------------------------------------------------------------------------------
Clean Room Equipment Manufacturer (1 loan) 52 0
- --------------------------------------------------------------------------------------------------------------------
Hotels/Motels (3 loans) 3,672 3,672
- --------------------------------------------------------------------------------------------------------------------
Mobile Home Parks (7 loans) 10,593 10,593
- --------------------------------------------------------------------------------------------------------------------
Pet Products Manufacturer (1 loan) 2,554 2,554
- --------------------------------------------------------------------------------------------------------------------
Physical Rehabilitation Facility (1 loan) 266 176
- --------------------------------------------------------------------------------------------------------------------
Radio Stations (7 loans) 11,369 11,369
- --------------------------------------------------------------------------------------------------------------------
Retail Shops (2 loans) 1,153 1,921
- --------------------------------------------------------------------------------------------------------------------
Television Station (1 loan) 125 125
- --------------------------------------------------------------------------------------------------------------------
SUBTOTAL $31,244 $ 31,870
- --------------------------------------------------------------------------------------------------------------------
Other Investment Assets (2) 269 179
- --------------------------------------------------------------------------------------------------------------------
Pledged repurchase agreements 1,245 1,245
- --------------------------------------------------------------------------------------------------------------------
SUBTOTAL $ 1,514 $ 1,424
- --------------------------------------------------------------------------------------------------------------------
GRANDTOTAL $93,526 $ 99,207
====================================================================================================================
</TABLE>
(1) Public company; (2) Interest income not being accrued; (3) May be
considered an affiliate; (4) Unrestricted security
19
<PAGE> 21
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Capital Corporation II (the Company) is a closed-end
management investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940 (1940 Act). The
Company seeks to achieve a high level of current income by providing debt,
mezzanine and equity financing, primarily for small privately owned growth
companies, and through long-term growth in the value of its net assets. The
Company has two wholly owned, regulated investment company subsidiaries, Allied
Investment Corporation II (Allied Investment II) and Allied Financial
Corporation II (Allied Financial II). Allied Investment II is licensed under
the Small Business Investment Act of 1958 as a Small Business Investment
Company (SBIC) and Allied Financial II has submitted its Specialized Small
Business Investment Company (SSBIC) license application to the Small Business
Administration (SBA) for approval.
The Company has an investment advisory agreement with Allied Capital Advisers,
Inc. (Advisers), whereby Advisers manages the investments of the Company
subject to the supervision and control of the Company's board of directors.
Certain directors and officers of Advisers are also directors and officers of
the Company.
Co-investments. Investments made by the Company are made in participation with
a separately organized public closed-end management investment company and two
private venture capital partnerships, which are also managed by the Company's
investment adviser, in accordance with the conditions of an exemptive order
issued to the Company by the Securities and Exchange Commission (Commission)
permitting co-investments.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany balances and transactions.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of business,
loans and debt securities are held to maturity, and the amount realized, in
addition to interest, is the face value, which may equal or exceed cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
U.S. government securities, cash and cash equivalents are carried at cost which
approximates fair value.
Interest Income. Interest income is recorded on the accrual basis to
the extent that such amounts are expected to be collected. Original issue
discount is amortized into interest income using the effective interest method.
All closing points received upon the funding of loans or debt securities are
treated as original issue discount and are amortized over the period to
maturity of such investments.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are accounted for on the trade date and
are measured by the difference between the proceeds of sale and the cost basis
of the investment without regard to unrealized appreciation or depreciation
previously recognized, and include investments written off during the year, net
of recoveries. Unrealized appreciation or depreciation reflects the difference
between cost and value.
Distributions to Stockholders. Distributions to stockholders are recorded on
the ex-dividend date.
Federal Income Taxes. The Company and its wholly owned subsidiaries' objectives
are to comply with the requirements of the Internal Revenue Code that are
applicable to regulated investment companies. The Company and its wholly owned
subsidiaries annually distribute all of their taxable income to their
stockholder(s); therefore, a federal income tax provision is not required.
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company and its wholly owned
subsidiaries intend to continue to annually distribute all of their taxable
income.
Dividends declared by the Company in December that are payable to stockholders
of record on a specified date in such month, but paid during January of the
following year, are treated as if the dividends were received by the
stockholder on December 31 of the year declared.
20
<PAGE> 22
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
Earnings Per Share. Earnings are defined as the net investment income, net
realized gains on investments and net unrealized appreciation or depreciation
on investments. The computation of earnings per share is based on the weighted
average number of shares and share equivalents outstanding during the period.
Equivalent shares included in the computation represent shares issuable upon
assumed exercise of stock options which would have a dilutive effect in years
where there are earnings.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date. At December 31, cash and cash
equivalents consisted of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------
(in thousands) 1995 1994
- -------------------------------------------------
<S> <C> <C>
Cash $ 309 $ 8,171
Repurchase agreements 5,918 3,420
------------------
Total $ 6,227 $11,591
==================
- -------------------------------------------------
</TABLE>
On December 31, 1995, the Company had purchased $5,918,000 of overnight
repurchase agreements collateralized by U.S. Government securities under
agreements to resell on January 2, 1996. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
instead held for the Company by the bank.
Incentive Stock Option Plan. Statement of Financial Accounting Standards No.
123, issued in October 1995, established new accounting standards for
stock-based compensation plans and is effective for fiscal years beginning
after December 15, 1995. This new standard will have no material impact on the
Company's financial statements.
Reclassifications. Certain reclassifications have been made to the 1994 and
1993 financial statements to conform with the 1995 financial statement
presentation.
NOTE 2. INVESTMENTS
The loans and debt securities included in investments are at annual stated
interest rates ranging from approximately zero percent to 17 percent, and are
generally payable in installments with final maturities from six months to 26
years from date of issue. At December 31, 1995 and 1994, loans and debt
securities with a cost basis of approximately $7,962,000 and $0, respectively,
were not accruing interest.
The investments of the Company and its subsidiaries consist primarily of
securities issued by privately owned companies. A majority of the securities
held by the Company are subject to restrictions on their resale or are
otherwise illiquid and cannot be sold to the public without registration under
the Securities Act of 1933. In connection with the Company's investments in
securities of publicly traded companies, the securities held with the following
companies are subject to restrictions on their sale: Allied Waste Industries,
Inc.; DeVlieg-Bullard, Inc.; Esquire Communications, Ltd.; Garden Ridge
Corporation; Labor Ready, Inc.; Nobel Education Dynamics, Inc.; and Quality
Software Products Holdings, PLC. All of the Company's equity securities are
non-income producing.
The following industries represent five percent or more of the total value of
the loans outstanding at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------
1995 1994
- ---------------------------------------------------
<S> <C> <C>
Broadcasting 26% 16%
Cold food storage * 8%
Educational services 5% *
Home food delivery 5% *
Manufacturing 12% 9%
Mobile home parks 11% 14%
Museums * 5%
Retail 13% 6%
Software development 5% 6%
- ---------------------------------------------------
</TABLE>
* less than 5%
21
<PAGE> 23
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
At December 31, 1995 and 1994, the net unrealized appreciation for all
securities based on cost for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands) 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Aggregate gross unrealized
appreciation in which there is an
excess of value over cost $10,736 $ 2,666
Aggregate gross unrealized
depreciation in which there is an
excess of cost over value (5,805) (1,048)
-------------------
Net unrealized appreciation $ 4,931 $ 1,618
===================
- --------------------------------------------------------------
</TABLE>
The aggregate cost of securities at December 31, 1995 and 1994 for federal
income tax purposes was $94,276,000 and $86,512,000, respectively.
NOTE 3. INVESTMENT ADVISORY AGREEMENT
The Company has an investment advisory agreement with Advisers that is approved
at least annually by the board of directors or by vote of the holders of a
majority of the outstanding shares of the Company. The agreement may be
terminated at any time on sixty days' notice, without penalty, by the Company's
board of directors or by vote of the holders of a majority of the Company's
outstanding shares and will terminate automatically in the event of its
assignment.
The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation of
the Company's officers and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses that
are paid by the Company include the Company's share of transaction costs
incident to the acquisition and disposition of investments, legal and
accounting fees, the fees and expenses of the Company's independent directors
and the fees of its officer-directors, the costs of printing and mailing proxy
statements and reports to stockholders, costs associated with promoting the
Company's stock, and the fees and expenses of the Company's custodian and
transfer agent. The Company is also required to pay expenses associated with
litigation and other extraordinary or non-recurring expenses, as well as
expenses of required and optional insurance and bonding. All fees paid by or
for the account of an actual or prospective portfolio company in connection
with an investment transaction in which the Company participates are treated as
commitment fees or management fees and are received by the Company, pro rata to
its participation in such transaction, rather than by Advisers. Advisers is
entitled to retain for its own account any fees paid by or for the account of a
company, including a portfolio company, for special investment banking or
consulting work performed for that company which is not related to such
investment transaction or management assistance. As compensation for its
services to and the expenses paid for the account of the Company, Advisers is
paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a
fee was paid equal to 0.625 percent per quarter of the quarter-end value of the
Company's consolidated total assets, less interim investments (i.e., U.S.
government securities) and cash and cash equivalents, plus 0.125 percent per
quarter of the quarter-end value of consolidated interim investments, cash and
cash equivalents. These fees on an annual basis approximate 2.5 percent on
consolidated invested assets and 0.5 percent on consolidated interim
investments, cash and cash equivalents. In the first quarter of 1995, and in
1994 and 1993, Advisers was entitled to a fee equal to 0.625 percent per
quarter of the quarter-end value of the Company's consolidated total assets;
however, Advisers waived a portion of its fee and agreed to a fee equal to
0.625 percent per quarter of each quarter-end value of the consolidated total
assets excluding consolidated interim investments, cash and cash equivalents,
plus 0.125 percent per quarter of the quarter-end value of the consolidated
interim investments, cash and cash equivalents.
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared and the Company paid a $0.31 per
share dividend for the fourth quarter, a $0.29 per share dividend for the third
quarter, a $0.27 per share dividend for the second quarter and a $0.25 per
share dividend for the first quarter of 1995. The Company's board of directors
also declared an extra distribution in the fourth quarter of $0.48 per share,
which was paid to stockholders on January 31, 1996, for a total distribution in
1995 equal to $1.60 per share.
22
<PAGE> 24
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
The components of the dividends and distributions of taxable income declared by
the board of directors for 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994 1993
PER Per Per
AMOUNT SHARE Amount Share Amount Share
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary income $ 9,622 $ 1.38 $8,691 $ 1.25 $ 5,315 $ 0.76
Long-term capital gains 1,584 0.22 606 0.09 3,139 0.46
-----------------------------------------------------------------
Totals $ 11,206 $ 1.60 $9,297 $ 1.34 $ 8,454 $ 1.22
=================================================================
- ----------------------------------------------------------------------------------------------
</TABLE>
The 1995 distributions of $1.60 per share were comprised of cash payments and
issuance of the Company's shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.38 and $0.22, respectively. The 1994 and
1993 distributions of $1.34 and $1.22 per share, respectively, were paid in
cash. Amounts represent the total of the quarterly dividends and the year-end
extra distribution declared by the Company based on the actual shares
outstanding on the record date for each dividend paid.
The following represents a reconciliation from taxable income to income for
financial reporting purposes for the year ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Taxable income $11,206 $ 9,297 $ 8,454
Market discount amortization - (1,301) -
Net realized gains 1,267 2,991 (2,991)
Net unrealized appreciation
(depreciation) on investments 2,762 (472) 5,011
Other (502) - -
-----------------------------
Financial statement income $14,733 $10,515 $10,474
=============================
- --------------------------------------------------------------
</TABLE>
Under the 1940 Act, the Company is not permitted to make distributions to
stockholders unless it meets certain asset coverage requirements with respect
to money borrowed and senior securities issued. The Company was in compliance
with these requirements.
The Company's wholly owned subsidiary, Allied Investment II, annually
distributes all of its taxable income to the Company. In order to make such
distributions, Allied Investment II must meet the minimum capital requirements
as set forth by the SBA. Allied Investment II was in compliance with these
requirements.
NOTE 5. BANK LOANS
The Company has a revolving line of credit agreement with a bank under which it
may borrow up to $25,000,000, at an interest rate equal to the thirty, sixty or
ninety day (as selected by the Company) LIBOR rate plus 1.15 percent per annum,
payable quarterly. The company must pay a quarterly commitment fee of 0.125
percent per annum on the average unused portion of the line of credit. During
1995, the Company did not use this facility and had no borrowings outstanding
under this agreement as of December 31, 1995. The revolving period of the line
of credit agreement expires May 31, 1997.
NOTE 6. SHAREHOLDERS' EQUITY
The Company has a dividend reinvestment plan (the Plan). Stockholders of record
are automatically enrolled in the Plan, and the Plan is considered an "opt-out"
plan. The Company may instruct the stock transfer agent to buy shares in the
open market or to issue new shares. When the Company issues new shares, the
price is equal to the average of the closing sales prices reported for the
shares for the five days on which trading in the shares takes place on and
immediately prior to the dividend payment date. During 1995, the Company issued
35,796 shares at an average price of $17.34 per share. No shares were issued
under the Plan in 1994.
The Company has an incentive stock option plan (the ISOplan) which allows the
granting of options to the Company's officers. Under the ISOplan as amended, a
maximum of 1,200,000 options may be granted at a price not less than the market
value on the date of the grant and may be exercisable over a ten year period.
In May 1994, the ISO plan was amended to permit grants to non-officer
directors. The Company's stockholders approved a one-time grant of options to
each member of the board of directors who is not an
23
<PAGE> 25
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
employee of the investment adviser to purchase 10,000 shares of the Company's
common stock and such grants were subject to Commission approval. Such approval
was granted by the Commission on December 26, 1995 and the options were granted
at the current market price as of that date. Holders of ten percent or more of
the Company's stock must exercise their options within a five-year period.
Officers of the Company may borrow from the Company the funds necessary to
exercise vested stock options. The loans have varying terms not exceeding ten
years and generally bear interest at the applicable federal interest rate in
effect at the date of issue.
A summary of the activity in the ISO plan is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1, 608,433 510,765 212,380
Options granted 260,888 118,168 345,340
Options exercised (130,018) - (29,164)
Options canceled (120,635) (20,500) (17,791)
-------------------------------------------------------------
Options outstanding at December 31, 618,668 608,433 510,765
=============================================================
Options available for grant 338,658 478,911 67,779
Options exercisable 309,558 321,603 200,224
-------------------------------------------------------------
Option prices per share:
Granted $ 13.75 - 17.75 $ 13.75 - 14.25 $ 16.50 - 18.25
Exercised $ 13.75 - 16.50 - $ 15.68 - 18.63
Canceled $ 15.00 - 22.75 $ 13.75 - 22.75 $ 18.25 - 22.75
-------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7. NET EQUITY INTEREST IN TRUST
During 1993, the Company assumed assets which were held in a grantor trust in
1992. While these assets were held in the grantor trust, the Company retained
the residual interest in these assets that resulted in the recognition of
$966,000 in net income from the trust for the year ended 1993. As of December
31, 1993 the trust had no remaining assets or liabilities.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $2,138,000 at December 31, 1995.
At December 31, 1995, the Company had standby letters of credit and third party
guarantees outstanding totaling $1,312,000. The conditional commitments under
the letters of credit have been issued by a financial institution on behalf of
the Company to guarantee performance of certain portfolio companies to third
parties. Repurchase agreements of $1,245,000 have been used as collateral for
the letters of credit.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
NOTE 9. CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries place their cash in financial institutions
and, at times, cash held in checking accounts may be in excess of the FDIC
insurance limit.
24
<PAGE> 26
Notes To Consolidated Financial Statements
====================
Allied Capital Corporation II
NOTE 10. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995
QTR 1 QTR 2 QTR 3 QTR 4
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $ 2,932 $ 2,808 $ 3,158 $2,641
Net investment income $ 2,132 $ 1,979 $ 2,382 $1,857
Net increase (decrease) in net assets
resulting from operations $ 2,943 $ 5,648 $ 6,211 $ (69)
Per share $ 0.42 $ 0.81 $ 0.89 $(0.01)
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1994
Qtr 1 Qtr 2 Qtr 3 Qtr 4
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $ 2,043 $ 2,195 $ 2,305 $4,021
Net investment income $ 1,422 $ 1,530 $ 1,660 $2,813
Net increase in net assets resulting
from operations $ 1,431 $ 2,666 $ 1,308 $5,110
Per share $ 0.21 $ 0.38 $ 0.19 $ 0.74
- ------------------------------------------------------------------------------------
</TABLE>
Quarterly amounts for 1994 have been reclassified to conform with
classifications used in the financial statements for 1995.
- --------------------------------------------------------------------------------
25
<PAGE> 27
Report Of Independent Accountants
====================
Allied Capital Corporation II
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALLIED CAPITAL CORPORATION II
We have audited the consolidated balance sheet of Allied Capital Corporation II
and its wholly owned subsidiaries as of December 31, 1995 and 1994, including
the consolidated statement of loans to and investments in small business
concerns as of December 31, 1995, 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, 1995, and the selected per share data presented
as financial highlights for each of the five years in the period ended December
31, 1995. These financial statements and per share data are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and per share data 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 and per share data
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the examination or confirmation of
securities owned at December 31, 1995 and 1994. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data referred
to above present fairly, in all material respects, the financial position of
Allied Capital Corporation II and its wholly owned subsidiaries as of December
31, 1995 and 1994, and the consolidated results of their operations, changes in
net assets and cash flows for each of the three years in the period ended
December 31, 1995, and the selected per share data for each of the five years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As explained in Note 1, the consolidated financial statements include
securities valued at $99,207,000 as of December 31, 1995 and $88,130,000 as of
December 31, 1994, (93 percent and 86 percent, respectively, of total assets)
whose values have been estimated by the Board of Directors in the absence of
readily ascertainable market values. We have reviewed the procedures used by
the Board of Directors in arriving at its estimate of value of such securities
and have inspected underlying documentation, and, in the circumstances, we
believe the procedures are reasonable and the documentation appropriate.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
February 2, 1996
26
<PAGE> 28
Investment Officers
====================
Allied Capital Corporation II
[PHOTO]:
Philip A. McNeill
Senior Vice President
[PHOTO]:
Susan Gallagher
Senior Vice President
[PHOTO]:
Carr T. Preston
Senior Vice President
[PHOTO]:
Thomas H. Westbrook
Senior Vice President
[PHOTO]:
George Stelljes III
Senior Vice President
[PHOTO]:
Richard E. Fearon, Jr.
Vice President
[PHOTO]:
Gay S. Truscott
Vice President
[PHOTO]:
Robert M. Monk
Assistant Vice President
[PHOTO]:
Erik A. Scott
Vice President
[PHOTO]:
Donnel K. Pullum
Assistant Vice President
27
<PAGE> 29
Directors And Officers
====================
Allied Capital Corporation II
DIRECTORS
David Gladstone(1)
Chairman of the Board &
Chief Executive Officer
George C. Williams(1)
Vice Chairman of the Board
William F. Dunbar
President & Chief Operating Officer
John D. Firestone(2,3)
Chairman of the Board,
Secor Investments, Inc.
Lawrence I. Hebert(1,3)
Director & President, Perpetual Corporation (holding & management company)
John I. Leahy(2)
President, Management & Marketing Associates, Inc.
(management consulting firm)
John D. Reilly(1,3)
President, Reilly Investment Corporation
Smith T. Wood(1,2)
President, CyberServ, L.L.C.
(computer services provider)
OFFICERS
David Gladstone
Chairman of the Board
George C. Williams
Vice Chairman of the Board
William F. Dunbar
President & Chief Operating Officer
Katherine C. Marien
Executive Vice President
John M. Scheurer
Executive Vice President
Joan M. Sweeney
Executive Vice President
G. Cabell Williams III
Executive Vice President
Thomas R. Salley
General Counsel & Secretary
Tricia B. Daniels
Senior Vice President
Jon A. DeLuca
Senior Vice President, Treasurer &
Chief Financial Officer
Susan Gallagher
Senior Vice President
Philip A. McNeill
Senior Vice President
Carr T. Preston
Senior Vice President
George Stelljes III
Senior Vice President
Thomas H. Westbrook
Senior Vice President
Richard E. Fearon, Jr.
Vice President
Erik A. Scott
Vice President
Suzanne V. Sparrow
Vice President, Investor Relations
Gay S. Truscott
Vice President
Penni F. Roll
Controller & Assistant Treasurer
Kelly A. Anderson
Corporate Controller & Assistant Treasurer
Robert M. Monk
Assistant Vice President
Donnel K. Pullum
Assistant Vice President
Arthur S. Cooper
Assistant Secretary
(1) Executive Committee
(2) Audit Committee
(3) Stock Option Committee
28
<PAGE> 30
Investor Information
====================
Allied Capital Corporation II
CORPORATE HEADQUARTERS
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Tel: (202) 331-1112
Fax: (202) 659-2053
TRANSFER AGENT & REGISTRAR
Information on transferring securities,
replacing a lost or stolen certificate,
or processing a change of address
should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
DIVIDEND REINVESTMENT PLAN
For the benefit of our stockholders the
Company provides a dividend reinvestment
plan. All communication regarding this
service should be directed to the
Company's transfer agent and registrar
who also serves as the plan administrator.
STOCK MARKET LISTING
Nasdaq National Market
Symbol: ALII
CUSIP Number: 019 037 100
ANNUAL MEETING OF STOCKHOLDERS
The 1996 Annual Meeting of Stockholders will be held at 10:00 a.m. on Friday,
May 10, 1996 at Strathmore Hall Arts Center, 10701 Rockville Pike, North
Bethesda, Maryland. All stockholders are welcome to attend.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1995, as filed with the Securities and Exchange Commission, will be sent at
no charge to any stockholder upon request to the Investor Relations Department
at the Company's corporate headquarters.
INDEPENDENT ACCOUNTANTS
Matthews, Carter and Boyce
McLean, VA
NUMBER OF STOCKHOLDERS
As of December 31, 1995, there were approximately 1,900 stockholders of record.
The Company estimates there were 10,100 beneficial stockholders.
INVESTMENT ADVISER
Allied Capital Advisers,Inc.
Washington, DC
Shares of the investment adviser are traded on Nasdaq National Market under the
symbol ALLA.
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO STOCKHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1995 and 1994 and distributions paid
per share. The quotations represent interdealer quotations and do not include
markups, markdowns or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1995 1994
DISTRIBUTIONS Distributions
HIGH LOW PER SHARE High Low Per Share
- ------------------------------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 14.75 $ 13.75 $ 0.25 $15.00 $13.50 $ 0.25
Second Quarter $ 16.25 $ 14.00 $ 0.27 $14.75 $13.25 $ 0.25
Third Quarter $ 16.25 $ 15.00 $ 0.29 $15.50 $13.50 $ 0.25
Fourth Quarter $ 19.00 $ 15.75 $ 0.31 $15.25 $13.50 $ 0.25
Annual Extra Distribution $ 0.48 $ 0.34
------- -------
Total Distributions $ 1.60 $ 1.34
======= =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
[ALLIED CAPITAL LOGO]
1666 K Street, NW - 9th Floor - Washington, DC 20006
(202) 331-1112 - Fax: (202) 659-2053
http://www.alliedcapital.com
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation by reference
in this Form 10-K of our report dated February 2, 1996 included in Allied
Capital Corporation II's Annual Report to stockholders. It should be noted that
we have not audited any financial statements of the company subsequent to
December 31, 1995 or performed any audit procedures subsequent to the date of
our report.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 22, 1996
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in the registration statement on Form S-8 File No.33-78392, of our report
dated February 2, 1996 incorporated by reference in Allied Capital Corporation
II's Form 10-K for the year ended December 31, 1995 and to all references to
our Firm included in such registration statement.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION II AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 93,526
<INVESTMENTS-AT-VALUE> 99,207
<RECEIVABLES> 0
<ASSETS-OTHER> 1,735
<OTHER-ITEMS-ASSETS> 6,227
<TOTAL-ASSETS> 107,169
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,188
<TOTAL-LIABILITIES> 5,188
<SENIOR-EQUITY> 7,104
<PAID-IN-CAPITAL-COMMON> 89,730
<SHARES-COMMON-STOCK> 7,104
<SHARES-COMMON-PRIOR> 6,938
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (534)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,681
<NET-ASSETS> 101,981
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,956
<OTHER-INCOME> 583
<EXPENSES-NET> 3,189
<NET-INVESTMENT-INCOME> 8,350
<REALIZED-GAINS-CURRENT> 3,621
<APPREC-INCREASE-CURRENT> 2,762
<NET-CHANGE-FROM-OPS> 14,733
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,622
<DISTRIBUTIONS-OF-GAINS> 1,584
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 35,796
<NET-CHANGE-IN-ASSETS> 4,506
<ACCUMULATED-NII-PRIOR> (1,299)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1,301
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,445
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,189
<AVERAGE-NET-ASSETS> 99,728
<PER-SHARE-NAV-BEGIN> 14.05
<PER-SHARE-NII> 1.20
<PER-SHARE-GAIN-APPREC> 0.91
<PER-SHARE-DIVIDEND> 1.38
<PER-SHARE-DISTRIBUTIONS> 0.22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.36
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
EXHIBIT 28
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Investment Corporation II 03/03-0196
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, NW
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1680801
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/95
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
A B C
---------------
5 3 1
A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION
2 = $1 MILLION TO LESS THAN $2 MILLION
3 = $2 MILLION TO LESS THAN $5 MILLION
4 = $5 MILLION TO LESS THAN $10 MILLION
5 = $10 MILLION OR MORE
B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"):
1 = AT LEAST 50% OWNED BY BANK OR BHC
2 = AT LEAST 10% AND LESS THAN 50% OWNED BY
BANK OR BHC
OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK
OR BHC):
3 = PUBLICLY OWNED
4 = PRIVATELY OWNED
OWNED BY NON-FINANCIAL CORPORATION:
5 = PUBLICLY OWNED
6 = PRIVATELY OWNED
OWNED BY INDIVIDUALS:
7 = PUBLICLY OWNED
8 = PRIVATELY OWNED
OWNED BY PARTNERSHIP
9 = PUBLICLY OWNED
10 = PRIVATELY OWNED
C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED
2 = NON-DIVERSIFIED (SIC CODE____)
NOTE: Public reporting burden for this collection of information is estimated
to average 17 hours per response, including time for reviewing instructions,
searching existing data sources, gathering and maintaining the data needed, and
completing and reviewing the form. Send comments regarding this burden
estimate or any other aspect of this collection of information, including
suggestions for reducing this burden, to: Chief, Administrative Information
Branch, U.S. Small Business Administration, Washington, DC 20416, and to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503.
SBA Form 468.1 (1-95) Previous editions obsolete Page 1C
<PAGE> 2
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
ASSETS COST DEPRECIATION APPRECIATION VALUE(1)
------ -----------------------------------------------------------
LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4)
- ---------------------
<S> <C> <C> <C> <C>
Portfolio Securities:
1 Loans 8,761,096 0 0 8,761,096
------------ ----------- ----------- -----------
2 Debt Securities 20,551,296 748,604 160,704 19,963,316
------------ ----------- ----------- -----------
3 Equity Securities 1,153,877 420,577 1,784,668 2,517,968
------------ ----------- ----------- -----------
4 TOTAL PORTFOLIO SECURITIES 30,466,189 1,169,181 1,945,372 31,242,380
------------ ----------- ----------- -----------
Assets Acquired in Liquidation of Portfolio Securities:
5 Receivables from Sale of Assets Acquired 0 0 0 0
------------ ----------- ----------- -----------
6 Assets Acquired 0 0 0 0
------------ ----------- ----------- -----------
7 TOTAL ASSETS ACQUIRED 0 0 0 0
------------ ----------- ----------- -----------
8 Operating Concerns Acquired 0 0 0 0
------------ ----------- ----------- -----------
9 Notes and Other Securities Received 448,040 67,915 0 380,125
------------ ----------- ----------- -----------
10 TOTAL LOANS AND INVESTMENTS 30,914,229 1,237,096 1,945,372 31,622,505
------------ ----------- ----------- -----------
11 Less Current Maturities 1,564,185
-----------
12 Loans and Investments Net of Current Maturities 30,058,320
-----------
Investment in 301(d) Licensee (2):
13 Name ___________________________________ 0
-----------
License No. ________________
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 1,484,145
-----------
15 Invested Idle Funds 0 1,484,145
----------- -----------
16 Interest and Dividends Receivable 426,938
-----------
17 Notes and Accounts Receivable 115,116
-----------
18 Receivables from Parent or Other Associates 27,671
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 143,508 426,217
----------- -----------
20 Current Maturities of Portfolio Securities 1,564,185
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 1,564,185
----------- -----------
24 Other (specify) _________________________ 0
-----------
25 Other (specify) _________________________ 0 3,474,547
----------- -----------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
------------ -----------
27 Other (specify) Deferred organization cst 1,362
------------------------- -----------
28 Other (specify) Prepaid expenses & other 26,681 28,043
------------------------- ----------- -----------
29 TOTAL ASSETS $33,560,910
-----------
</TABLE>
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized
Depreciation + Unrealized Appreciation = Value)
(2) A note to item 13 should include percent owned, cost basis and changes
resulting from equity method of accounting.
SBA Form 468.1 (1-95) Previous editions obsolete Page 2C
<PAGE> 3
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
-----------------------
LONG-TERM DEBT (Net of Current Maturities)
- ------------------------------------------
30 Notes and Debentures Payable to or
Guaranteed by SBA 0
-----------
31 Notes and Debentures Payable to Others 0 0
----------- ------------
CURRENT LIABILITIES
- -------------------
32 Accounts Payable and Accrued Expenses 5,060
-----------
33 Due to Parent or Other Associates 17,991,496
-----------
34 Accrued Interest Payable 395,608
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 0
-----------
b. Current Maturities of Line 31 0 0
----------- -----------
37 Distributions Payable 3,825,195
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) _________________________ 0
-----------
40 Other(specify) _________________________ 0 22,217,359
----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 377,489
-----------
42 Other(specify) _________________________ 0
-----------
43 Other(specify) _________________________ 0 377,489
----------- ------------
44 TOTAL LIABILITIES 22,594,848
------------
REDEEMABLE SECURITIES (guaranteed or purchased by SBA)
- ------------------------------------------------------
45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 0
-----------
b. Cumulative Undeclared 4% Dividends 0 0
----------- -----------
46 TOTAL REDEEMABLE SECURITIES 0
------------
CAPITAL
- -------
47 Capital stock 50
------------
48 Paid-in Surplus 9.896,085 9,896,135
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 9,896,135
-----------
51 3% Preferred Stock Purchased by SBA 0
-----------
52 Unrealized Gain (Loss) on Securities Held 708,276
-----------
53 Non-Cash Gains/Income 806,843
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted -445,192
------------
c. Total (54a plus 54b) -445,192
-----------
55 Undistributed Realized Earnings (53 plus 54c) 361,651
-----------
56 Total 10,966,062
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 10,966,062
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $33,560,910
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 4
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 3,657,233
----------
2 Dividend Income 0
----------
3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0
----------
4 Income (Loss) from Investment in Section 301(d) Licensee 0
----------
5 Fees for Management Services 0
----------
6 Processing and Other Fees 9,660
----------
7 Interest on Invested Idle Funds 69,041
----------
8 Income from Assests Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 11,923
----------
10 GROSS INVESTMENT INCOME 3,747,857
-----------
EXPENSES
- --------
11 Interest Expense 1,627,888
----------
12 Commitment Fees 0
----------
13 Other Financial Cost 0
----------
14 Officers' Compensation and Benefits 0
----------
15 Employee Compensation and Benefits 0
----------
16 Investment Advisory and Management Services 0
----------
17 Directors' and Stockholders' Meetings 0
----------
18 Advertising and Promotion 0
----------
19 Appraisal and Investigation 0
----------
20 Communication 0
----------
21 Travel 0
----------
22 Cost of Space Occupied 0
----------
23 Depreciation and Amortization 5,449
----------
24 Insurance 697
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 1,000
----------
27 Provision for Losses on Receivables (excluding loans receivable) 143,508
----------
28 Legal Fees 4,756
----------
29 Audit and Examination Fees 3,680
----------
30 Miscellaneous Expenses (attach schedule) 1,813
----------
31 TOTAL EXPENSES 1,788,791
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 1,959,066
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 2,123,915
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 4,082,981
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $4,082,981
-----------
37 Extraordinary Item ____________________ 0
-----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $4,082,981
-----------
</TABLE>
(1)Include CHARGE-OFFS (full or partial) of loans and investments which
represent realized losses. DO NOT INCLUDE valuation adjustments classified
as unrealized appreciation or depreciation. Provide supporting detail for
all realized gains and losses on page 14C of this form.
SBA Form 468.1 (1-95) Previous editions obsolete Page 4C
<PAGE> 5
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 1 of 2)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 3,300,655
----------
2 Dividends Received from Portfolio Concerns 0
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 70,000
----------
5 Interest on Invested Idle Funds 69,041
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 0
----------
CASH OUTFLOWS:
8 Interest Paid 1,460,642
----------
9 Commitment Fees and Other Financial Costs 0
----------
10 Investment Advisory and Management Fees 0
----------
11 Officers, Directors and Employees Compensation and Benefits 0
----------
12 Operating Expenditures (excluding compensation and benefits) 6,887
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 11,993
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,960,174
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 6,542,924
----------
17 Returns of Capital Received from Portfolio Concerns 0
----------
18 Net Proceeds from Disposition of Portfolio Securities 1,396,462
----------
19 Liquidation of Idle Funds Investments 2,722,147
----------
20 Other (Specify) _________________________ 0
----------
Cash Outflows:
21 Purchase of Portfolio Securities 326,069
----------
22 Loans to Portfolio Concerns 13,265,207
----------
23 Idle Funds Investments 0
----------
24 Other (Specify) __________________________ 0
----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -2,929,743
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 0
----------
27 Proceeds from Sale of 41 Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 2,837,500
----------
29 Proceeds from Sale of Stock 0
----------
30 Other (Specify) __________________________ 0
----------
Cash Outflows:
31 Principal Payments on SBA-Guaranteed Debentures 0
----------
32 Principal Payments on Non-SBA Borrowing 0
----------
33 Redemption of 4% Preferred Stock 0
----------
34 Redemption of 3% Preferred Stock 0
----------
35 Redemption of Stock (excluding 3% and 4% Preferred) 0
----------
36 Dividends Paid 1,984,324
----------
37 Other (Specify) __________________________ 0
----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 6
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 2 of 2)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 853,176
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -116,393
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,600,538
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $1,484,145
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 4,082,981
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 5,449
----------
44 Provision for Losses on Accounts Receivable 143,508
----------
45 Provision for Deferred Income Taxes 0
----------
46 (Income) Loss from Investments in Partnerships/Flow-through
Entities (excluding income received in cash) 0
----------
47 Realized (Gains) Losses on Investments -2,123,915
----------
48 Other (Specify) Amort of OID, Cl Pt, Proc -267,444
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -235,276
----------
50 (Increase) Decrease in Other Current Assets 31,418
----------
51 Increase (Decrease) in Accounts Payable -40,146
----------
52 Increase (Decrease) in Accrued Interest Payable 167,246
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities 196,353
----------
56 Other (Specify) ________________________ 0
----------
57 Other (Specify) ________________________ 0
----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,960,174
----------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities is
required. See FASB Statement No. 95, paragraph 32.
SBA Form 468.1 (1-95) Previous editions obsolete Page 6C
<PAGE> 7
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Investment Corporation II (the Company), a wholly owned
subsidiary of Allied Capital Corporation II (Parent), is a closed-end
management investment company under the Investment Company Act of 1940. The
Company is licensed under the Small Business Investment Act of 1958 as a Small
Business Investment Company (SBIC). The Company seeks to achieve a high level
of current income by providing debt, mezzanine and equity financing for small
privately owned growth companies, and through long-term growth on the value of
its net assets.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of
business, loans and debt securities are held to maturity, and the amount
realized, in addition to interest, is the face value, which may equal or exceed
cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
Interest Income. Interest income is recorded on the accrual basis to the
extent that such amounts are expected to be collected. When collection of
interest is in doubt, interest is not accrued or a reserve is established.
Original issue discount is amortized into interest income using the effective
interest method.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are accounted for on the trade date and
are measured by the difference between the proceeds of sale and the cost basis
of the investment without regard to unrealized appreciation or depreciation
previously recognized, and includes investments written off during the year,
net of recoveries. Unrealized appreciation or depreciation reflects the
difference between cost and value.
Distributions to the Parent. Distributions to the Parent are recorded on the
ex-dividend date.
Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to the Parent; therefore, a federal income tax provision is not
required.
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company intends to continue to
annually distribute all of
<PAGE> 8
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
its taxable income.
Dividends declared by the Company in December, but paid during January of the
following year, are treated as if the dividends were received by the Parent on
December 31 of the year declared.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date.
NOTE 2. INVESTMENTS
The loans and debt securities included in investments are at annual stated
interest rates ranging from approximately six percent to 17 percent, and are
generally payable in installments with final maturities from six months to
eight years from date of issue. The following loans and debt securities had
accrued interest that was fully reserved, or were not accruing interest at
December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF
DATE INTEREST INTEREST RESERVED AT
ACCRUAL DECEMBER 31, 1995 OR
PORTFOLIO SECURITY DISCONTINUED(1) NET COST NOT ACCRUED (2)
- ---------------------------------------------------------------------------------------
<S> C> <C> <C>
ACCRUED INTEREST FULLY
RESERVED:
Enviroplan, Inc. 407,308 29,730
Enviroplan, Inc. 1,516,469 96,545
---------- ----------
Total $ 1,923,777 $ 126,275
========== ==========
INTEREST NOT ACCRUED:
Old Mill 9/22/95 393,009 22,750
Old Mill 9/22/95 83,198 4,745
---------- ----------
Total $ 476,207 $ 27,495
========== ==========
</TABLE>
(1) Date shown only for loans and debt securities not accruing interest.
(2) From date interest accrual discontinued.
<PAGE> 9
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 3. INVESTMENT ADVISORY SERVICES
The Company's investments are managed by Allied Capital Advisers, Inc.
("Advisers"), an independent publicly traded registered investment adviser.
Certain officers of the Company are also officers in Advisers. Pursuant to an
advisory agreement with the Parent, Advisers manages the day-to-day activities
of the Parent and its wholly owned subsidiaries. The Company pays all
operating expenses, except those specifically required to be borne by Advisers.
The expenses paid by Advisers include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. In exchange, Advisers is reimbursed
for its costs incurred in connection with the above through an investment
advisory fee paid by the Parent. The expenses that are paid by the Company
include the Company's share of transaction costs incident to the acquisition
and disposition of investments and legal and accounting fees. The Company is
required to pay expenses associated with litigation and other extraordinary or
non-recurring expenses, as well as expenses of required and optional insurance
and bonding. All fees paid by or for the account of an actual or prospective
portfolio company in connection with an investment transaction in which the
Company participates are treated as commitment fees or management fees and are
received by the Company, pro rata to its participation in such transaction,
rather than by Advisers. Advisers is entitled to retain for its own account
any fees paid by or for the account of a company, including a portfolio
company, for special investment banking or consulting work performed for that
company which is not related to such investment transaction or management
assistance.
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared a dividend of $3,825,195 for the year
ended December 31, 1995, which was paid January 29, 1996. This represented all
of the Company's taxable income. Pursuant to SBA regulations, retained
earnings available for distribution at December 31, 1995 were insufficient to
pay this dividend, which resulted in an excess distribution of $1,682,288 which
was charged against paid-in-surplus in January 1996.
NOTE 5. DEBT
Demand Note. The Company has a note from the Parent under which the Company
may borrow up to $20,000,000. The note is payable on demand, and bears
interest at the prime rate as published in the Wall Street Journal. As of
December 31, 1995, the Company was paying interest at a rate of 8.5% per annum,
and had $2,008,500 available under the note.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $119,444 at December 31, 1995.
The Company is party to certain lawsuits in connection with investments it has
made to small
<PAGE> 10
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
businesses. While the outcome of these legal proceedings cannot at this time
be predicted with certainty, management does not expect that these actions will
have a material effect upon the financial position of the Company.
NOTE 7. CONCENTRATIONS OF CREDIT RISK
The Company places its cash in financial institutions and, at times, cash held
in checking accounts may be in excess of the FDIC insurance limit.
