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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, 1996
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, NW, NINTH FLOOR
WASHINGTON, D.C. 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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
------------------- -------------------
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 19, 1997 was approximately $151,980,013 based upon the average
bid and asked price for the registrant's common stock on that date. As of March
19, 1997 there were 7,604,016 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 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 2, 1997 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, as amended
("SBIC") and Allied Financial II is licensed by the SBA as a specialized small
business investment company under Section 301(d) of the Small Business
Investment Act of 1958, as amended ("SSBIC"). Allied Capital Advisers, Inc.
("Advisers") serves as the investment adviser of the Company under an
investment advisory agreement.
The Company seeks to provide 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. 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 made by the Company include those made by its
subsidiaries). The investments made by the Company include providing financing
for growth, for leveraged buyouts of such companies, for note purchases and
loan restructurings, and for special situations, such as acquisitions, buyouts,
recapitalizations, and bridge financing 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
invests in businesses operating in a variety of different industries, such as
broadcasting, manufacturing, environmental technologies, wholesale
distribution, 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.
The Company's Operation as a BDC
As a BDC, the Company may not acquire any investment 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 investment
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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, an affiliated person of the
issuer, or any other person (subject to Securities and Exchange
Commission rule-making), provided the 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 investments in and
advances to Allied Investment II and Allied Financial II are
Qualifying Assets) and (C) either (I) does not have any class of
publicly traded securities with respect to which a broker may extend
margin credit or (ii) is controlled by the BDC.
(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. The Company makes available managerial assistance to its
portfolio companies through the Company's directors and officers, who are
employees of Advisers, the Company's investment adviser. 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 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 senior
securities representing indebtedness have asset coverage of at least 200%. This
limitation is not applicable to classes of senior securities representing
indebtedness of the Company's SBIC and SSBIC subsidiaries.
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, 1996, Allied I had total consolidated
assets of $165,751,000, compared to the Company's total consolidated assets of
$106,908,000 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, 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 coinvestment 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
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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 and Allied
Financial II would be deemed to be "associates" of one another and both may be
deemed to be "associates" of Allied Investment Corporation ("Allied
Investment") and Allied Capital Financial Corporation ("Allied Financial"),
which are SBIC and SSBIC subsidiaries of Allied I. As of December 31, 1996,
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 Financial 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 will be able to obtain SBA leverage.
Allied Investment II provides managerial assistance to its portfolio
companies by arranging syndicated financing, 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, as an SSBIC, operates as 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 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.
Allied Financial II provides managerial assistance to its portfolio
companies by arranging syndicated financing, 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. Prior to September 1996, when Allied Financial
II received its SSBIC license, the investment activity of Allied Financial II
was minimal. Total assets of Allied Financial II at December 31, 1996 were $3.6
million, of which $2.7 million was invested in cash and cash equivalents.
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Competition
A large number of entities and individuals compete for the opportunity
to make the kinds of investments made by the Company. Many of these entities
and individuals have greater financial resources than the combined resources of
the Company. As a result of this competition, the Company may from time to time
be precluded from making otherwise attractive investments on terms considered
to be prudent in light of the risks to be assumed.
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 advisory 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 advisory 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 advisory 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.
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.
The fee to Advisers 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 advisory 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.
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Change of Chairman and Chief Executive Officer
After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new
Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a director
on March 19, 1997 and will not stand for election to the board of directors.
Mr. Walton has been affiliated with the Allied Capital companies for more than
ten years, both as a director of Advisers and as a past director of Allied
Capital Corporation. Mr. Walton's extensive experience in the investment
industry combined with his performance as an entrepreneur provide an excellent
mix of talent for the Company. He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages. Mr. Walton has been a
commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a
private investor and an entrepreneur, and throughout his career has been
involved in the growth and finance of small business.
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, 1997, 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>
William L. Walton 47 Chairman of the Board, Employed by Advisers since 1997;
Chief Executive Officer Chairman and Chief Executive Officer of
and President Allied I, Allied Capital Commercial
Corporation ("Allied Commercial"),
Allied Capital Lending Corporation
("Allied Lending") and Advisers;
Manager of Allied Capital Midwest LLC
("Allied Midwest"); Chief Executive
Officer of Success Lab, Inc. (children's
educational services) from 1993 to 1996;
Chief Executive Officer of Language
Odyssey (educational publishing and
services) from 1992 to 1996; and
Managing Director of Butler Capital
Corporation from 1987 to 1991.
G. Cabell Williams III 42 Executive Vice President Employed by Advisers since 1981;
President and Chief Operating Officer of
Allied I; Executive Vice President of
Allied Commercial, Allied Lending,
Business Mortgage Investors, Inc.
("BMI"), Allied Midwest and Advisers.
Joan M. Sweeney 37 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, Allied Capital Mortgage,
LLC ("Allied Mortgage") and Allied
Midwest; Senior Manager at Ernst &
Young from 1990 to 1993.
Jon A. DeLuca 34 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, Allied Midwest and
Advisers; Manager of Entrepreneurial
Services at Coopers & Lybrand from
1986 to 1994.
</TABLE>
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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 "Shareholder Information" and "Quarterly Stock Price and Distributions to
Shareholders" sections of, and to Notes 4 and 6 of the Notes to Consolidated
Financial Statements contained in, the Company's Annual Report to Shareholders
for the year ended December 31, 1996 (the "1996 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 1996 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 1996 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 1996 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 1997 Annual Meeting
of Stockholders, scheduled to be held on May 2, 1997 (the "1997 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 1997 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 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to
the section captioned "Certain Transactions" of the 1997 Proxy Statement.
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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 1996 Annual Report:
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statement of Operations for the years ended December
31, 1996, 1995 and 1994.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Loans and Investments as of December 31,
1996.
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 1996 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:
Exhibit
Number Description
- ------ -----------
3(i)* Articles of Incorporation
3(ii)* By-Laws
4.1 Instruments defining rights of security holders -- See
Exhibits 3(i) and 3(ii).
10.1(1) Amended and Restated Credit Agreement by and between the
Company and NationsBank, N.A., dated September 28, 1995.
10.2* Investment Advisory Agreement between the Company and
Allied Capital Advisers, Inc., dated May 11, 1995.
10.3* Dividend Reinvestment Plan
10.4* Stock Option Plan
11* Statement regarding computation of per share earnings.
13* Excerpts from the 1996 Annual Report to Shareholders
21 Subsidiaries of the Company and jurisdiction of
incorporation:
Allied Investment Corporation II Maryland
Allied Financial Corporation II Maryland
23* Consents of Matthews, Carter and Boyce, independent
accountants.
27* Financial Data Schedule
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28* Financial statements as of and for the year ended December
31, 1996 of Allied Investment Corporation II and Allied
Financial Corporation II in the form filed with the U.S.
Small Business Administration.
- --------------------
* Filed herewith.
(1) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
(b) Reports on Form 8-K.
The Company filed a Form 8-K disclosing the resignation of William
F. Dunbar as a director on November 20, 1996.
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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 27, 1997.
/s/ WILLIAM L. WALTON
--------------------------------------------------
William L. Walton
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/ WILLIAM L. WALTON Chairman, Chief Executive March 27, 1997
- ------------------------------- Officer and President
William L. Walton (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Director March 27, 1997
- -------------------------------
George C. Williams
/s/ LAWRENCE I. HEBERT Director March 27, 1997
- -------------------------------
Lawrence I. Hebert
/s/ JOHN D. REILLY Director March 27, 1997
- -------------------------------
John D. Reilly
/s/ SMITH T. WOOD Director March 27, 1997
- -------------------------------
Smith T. Wood
/s/ JOHN I. LEAHY Director March 27, 1997
- -------------------------------
John I. Leahy
/s/ JOHN D. FIRESTONE Director March 27, 1997
- -------------------------------
John D. Firestone
/s/ JON A. DELUCA Executive Vice President, March 27, 1997
- ------------------------------- Treasurer and Chief Financial
Jon A. DeLuca Officer (Principal Financial
and Accounting Officer)
</TABLE>
<PAGE> 12
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3(i) Articles of Incorporation
3(ii) By-Laws
10.2 Investment Advisory Agreement between the Company and Allied
Capital Advisers, Inc., dated May 11, 1995.
10.3 Dividend Reinvestment Plan
10.4 Stock Option Plan
11 Statement regarding computation of per share earnings.
13 Excerpts from the 1996 Annual Report to Shareholders
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,
1996 of Allied Investment Corporation II and Allied Financial
Corporation II in the form filed with the U.S. Small Business
Administration.
<PAGE> 1
EXHIBIT 3(i)
ARTICLES OF INCORPORATION
ALLIED CAPITAL CORPORATION II
(A MARYLAND CORPORATION)
The undersigned, Thomas R. Salley, III, whose post office address is
1666 K Street, N.W., Suite 901, Washington, D.C. 20006, being at least
eighteen (18) years of age, does hereby form a corporation under the general
laws of the State of Maryland.
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is: Allied Capital Corporation II.
SECOND: The purposes for which the Corporation is organized are as
follows:
A. To render advice and consulting services to
corporations, individuals, partnerships and other business entities;
to enter into contracts with any of such entities for the purpose of
carrying out such advisory and consulting services; to register as an
investment adviser with such agencies and in such jurisdictions where
such registration is deemed appropriate; and to do all such other acts
as may be related or incidental to the purposes of an investment
adviser, merchant bank or similar financial institution;
B. To purchase, acquire, hold, own, improve, develop,
sell, convey, assign release, mortgage, encumber, use, lease, hire,
manage, deal in and otherwise dispose of real property and personal
property of every kind and nature or any interest therein, improved or
otherwise, including stocks and securities of other corporations; to
loan money; to take securities for the payment of all sums due the
Corporation; to sell, assign and release such securities;
C. To equip, furnish, improve, develop and manage any
property, real or personal; to invest, trade and deal in any personal
property; to encumber or dispose of any personal property at any time
held or owned by the Corporation;
D. To engage in, operate and acquire interests in any
kind of business, of whatever nature, which may be permitted by law;
E. To import, export, produce, buy, sell and otherwise
deal in and with, goods, wares and merchandise of every kind, class
and description;
F. To acquire all or any part of the good will, rights,
property and business of any individual, association, partnership,
joint venture, corporation or other legal entity; to hold, utilize,
enjoy and in any manner dispose of the whole or any part of the
rights, property and business so acquired; to assume in connection
therewith any liabilities of any such individual, association,
partnership, joint venture, corporation or other legal entity;
G. To acquire, by purchase, subscription or in any
other manner, take, receive, hold, use, employ, sell, assign,
transfer, exchange, pledge, mortgage, lease, dispose of and otherwise
deal in and with any shares of stock or other shares, voting trust
certificates, bonds, debentures, notes, mortgages or other
obligations, securities or evidences of indebtedness, and any
certificates, receipts, warrants or other instruments evidencing
rights or options to receive, purchase or subscribe for the same or
representing any other rights or interests therein or in any property
or assets, issued or created by any individual, association,
partnership, joint venture, corporation, government (or subdivision or
agency thereof) or other legal entity, wherever organized and wherever
doing business; to possess and exercise in respect thereof any and all
of the rights, powers and privileges of individual holders including,
without limitation, the right to vote any shares of stock so held or
owned and,
<PAGE> 2
upon a distribution of the assets or a division of the profits of the
Corporation, to distribute any such shares of stock or other shares,
voting trust certificates, bonds or other obligations, securities or
evidences of indebtedness (or the proceeds thereof) among the
stockholders of the Corporation;
H. To erect commercial buildings and other buildings,
private or public of all kinds, and to sell and rent the same; to
contract, enlarge, repair, grade, pave, dedicate, remodel or otherwise
engage in any work upon buildings of every nature, roads, avenues,
highways, paths, walks, parks, playgrounds and sidewalks; to engage in
iron, steel, wood, brick, concrete, stone, cement, masonry, glass and
earth construction; to execute contracts or to receive assignments of
contracts therefor or relating thereto; to manufacture and furnish the
building materials and supplies connected therewith;
I. To apply for, obtain, purchase or otherwise acquire
any patents, copyrights, licenses, trademarks, trade names, rights,
processes, formulae and the like; to use, exercise, develop and grant
licenses in respect of, sell and otherwise turn to account the same;
J. To purchase (or otherwise acquire), hold, sell,
retire, reissue or otherwise dispose of shares of its own stock of any
class in any manner now or hereafter authorized or permitted by law,
and to pay therefor, with cash or other property;
K. To borrow or raise money and to issue bonds,
debentures, notes or other obligations of any nature (and in any
manner permitted by law) for money so borrowed or in payment for
property purchased, or for any other lawful consideration, and to
secure the payment thereof, and of the interest thereon, by mortgage
upon, pledge, conveyance or assignment in trust of, the whole or any
part of the property of the Corporation, real or personal, including
contract rights, whether at the time owned or thereafter acquired; to
sell, pledge, discount or otherwise dispose of such bonds, debentures,
notes or other obligations of the Corporation;
L. To aid, by loan, subsidy, guaranty or in any lawful
manner whatsoever, any individual, association, partnership, joint
venture, corporation or other legal entity whose stocks, bonds, notes,
debentures or other obligations, securities or evidences of
indebtedness are in any manner directly or indirectly held or
guaranteed by the Corporation, or by any corporation in which the
Corporation may have an interest directly or indirectly as
stockholder, creditor, guarantor or otherwise, or whose shares or
securities are owned by the Corporation; to do any and all lawful acts
and things designed to protect, preserve, improve or enhance the value
of any stocks, bonds, notes, debentures or other obligations,
securities or evidences of indebtedness of any individual, association,
partnership, joint venture, corporation or other legal entity in which
the Corporation has an interest directly or indirectly as a
stockholder, creditor, guarantor or otherwise, or whose shares or
securities are owned by the Corporation, or to lend money with or
without collateral security;
M. To guarantee the payment of dividends upon any
shares of stock of any other association or corporation; to guarantee
the performance of any contract by any individual, association,
partnership, joint venture, corporation or other legal entity; to
endorse or otherwise guarantee the payment of principal and interest,
or either, of any bonds, debentures, notes, securities or other
evidences of indebtedness created or issued by any such individual,
association, partnership, joint venture, corporation or other legal
entity, it not being necessary that any such guaranty or endorsement
shall be intended to result in any benefit to the Corporation (it
being understood that in no way shall the Corporation act as a surety
company);
N. To carry out all or any part of the purposes set
forth herein as principal, broker, factor, agent, contractor or
otherwise, either alone, through or in conjunction with any
individual, association, partnership, corporation or other legal
entity; to make, execute
2
<PAGE> 3
and perform any contracts or agreements and to do any other acts and
things for the accomplishment of any of the purposes set forth herein
or incidental to such purposes, or which at any time may appear
conducive to or expedient for the accomplishment of any such purposes;
O. To carry out all of the purposes set forth herein in
any or all states, territories, districts, dependencies and
possessions of the United States of America and any foreign country;
to maintain offices and agencies in any or all states, territories,
districts, dependencies and possessions of the United States of
America and any foreign country;
P. To organize, incorporate, reorganize, liquidate and
dissolve any association, partnership, joint venture, corporation
(subsidiary, affiliated or other) or other legal entity for any
purpose permitted by law; to invest in any manner in any association,
partnership, joint venture, corporation (subsidiary, affiliated or
other) or other legal entity;
Q. To do any act or thing and exercise any power
suitable, convenient or proper for the accomplishment of any of the
purposes set forth herein or incidental to such purposes, or which at
any time may appear conducive to or expedient for the accomplishment
of any of such purposes; and
R. To have and exercise any and all powers and
privileges now or hereafter conferred by the general laws of the State
of Maryland upon corporations formed under such laws.
The foregoing enumeration of the purposes of the Corporation is made
in furtherance and not in limitation of the powers conferred upon the
Corporation by law. The mention of any particular purpose is not intended in
any manner to limit or restrict the generality of any other purpose mentioned,
or to limit or restrict any of the powers of the Corporation. The Corporation
shall have, enjoy and exercise all of the powers and rights now or hereafter
conferred by the laws of the State of Maryland upon corporations of a similar
character, it being the intention that the purposes set forth in each of the
paragraphs of this Article shall, except as otherwise expressly provided, in
nowise be limited or restricted by reference to or inference from the terms of
any other clause or paragraph of this or any other Article of these Articles of
Incorporation, or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as purposes; provided, however,
that nothing herein contained shall be deemed to authorize or permit the
Corporation to carry on any business or exercise any power, or do any act which
a corporation formed under the general laws of the State of Maryland may not at
the time lawfully carry on or do.
THIRD: The post office address of the principal office of the
Corporation in the State of Maryland is: 5422 Albia Road, Bethesda, Maryland
20816. The name and post office address of the resident agent of the.
Corporation in the State of Maryland are: G. Cabell Williams III, 5422 Albia
Road, Bethesda (Montgomery County), Maryland 20816. Said resident agent is a
citizen of the State of Maryland and actually resides therein.
FOURTH: The total number of shares of stock which the Corporation
has authority to issue is twenty million (20,000,000) shares of Common Stock,
with a par value of One Dollar ($1.00) per share. The aggregate par value of
all such shares is Twenty Million Dollars ($20,000,000.00).
FIFTH: The initial number of directors of the Corporation shall be
three (3) in accordance with the provisions of Section 2-402(a) of the General
Corporation Law of the State of Maryland, which number may be changed pursuant
to the provisions set forth in the Bylaws of the Corporation, but shall never
be less than the number permitted by law, and the names of the directors who
shall act until the first annual meeting of stockholders of the Corporation or
until their successors are duly chosen and qualify are: David Gladstone, David
P. Parker and Thomas R. Salley, III.
SIXTH: The following provisions are hereby adopted for the purpose
of defining, limiting and regulating the powers of the Corporation and of the
Board of Directors and stockholders:
3
<PAGE> 4
A. The Board of Directors of the Corporation is hereby
empowered to authorize and direct the issuance from time to time or at
any time or times of the shares of stock of the Corporation of any
class, now or hereafter authorized, any options or warrants for such
shares permitted by law, any rights to subscribe to or purchase such
shares and any other securities of the Corporation, for such
consideration as the Board of Directors may deem advisable, subject to
such limitations and restrictions, if any, as may be set forth in the
Bylaws of the Corporation.
B. No holder of shares of stock of the Corporation of
any class, now or hereafter authorized, shall have any preferential or
preemptive right to subscribe for, purchase or receive (i) any shares
of stock of the Corporation of any class, now or hereafter authorized,
(ii) any options or warrants for any such preferential or preemptive
shares, (iii) any rights to subscribe to or purchase any such shares,
or (iv) any other securities of the Corporation which may at any time
or from time to time be issued, sold or offered for sale by the
Corporation.
C. The Board of Directors of the Corporation is hereby
empowered to adopt Bylaw provisions with respect to the
indemnification of directors, officers, employees, agents and other
persons and to make such other indemnification as it shall deem
expedient and in the best interests of the Corporation to the extent
permitted by law and Article SEVENTH hereof.
D. The provisions relating to certain special voting
requirements set forth in Title 3, Subtitle 6 of the General
Corporation Law of the State of Maryland and the provisions relating
to certain control shares set forth in Title 3, Subtitle 7 of the
General Corporation Law of the State of Maryland shall not be
applicable, pursuant to Sections 3-603(e)(iii) and 3-702(b) thereof,
respectively, to the shares of the Corporation which are owned by, or
which shall in the future be issued to and owned by, any employee
stock ownership plan, incentive stock ownership plan or other similar
plan established now or in the future for the benefit of the
Corporation's directors, officers, employees or affiliates, and,
without limiting the foregoing, none of such shares owned by any such
plan shall, for purposes of such subtitles, be aggregated with any
shares owned individually by any beneficiaries of any such plan.
E. The Board of Directors is expressly authorized to
make, amend, alter, repeal or rescind the Bylaws of the Corporation.
F. The Corporation reserves the right to amend these
Articles of Incorporation in any way which alters the contract rights,
as expressly set forth in these Articles of Incorporation, of any
outstanding stock of the Corporation and substantially adversely
affects any of the rights of any of the holders of any outstanding
stock of the Corporation.
SEVENTH:
A. The Corporation shall indemnify (i) its directors
and officers, whether serving the Corporation or, at its request, any other
entity, to the full extent permitted by the general laws of the State of
Maryland now or hereafter in force, including the advance of expenses under the
procedures and to the full extent permitted by law and (ii) other employees and
agents to such extent as shall be authorized by the Board of Directors or the
Corporation's Bylaws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such Bylaws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment to or
repeal of this Article SEVENTH shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions occurring
prior to such amendment or repeal.
4
<PAGE> 5
B. To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders
for money damages. No amendment to or repeal of this Article SEVENTH shall
limit or eliminate the benefits provided to directors and officers under this
provision with respect to any act or omission which occurred prior to such
amendment or repeal.
EIGHTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation on the
19th day of December 1990, and I acknowledge the same to be my act and deed and
that, to the best of my knowledge, information and belief, all matters and
facts stated herein are true in all material respects and that such statement
is made under the penalties of perjury.
SOLE INCORPORATOR:
/s/ THOMAS R. SALLEY, III
--------------------------
Thomas R. Salley, III
5
<PAGE> 1
EXHIBIT 3(ii)
-----------------------
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,
November 8, 1995 and February 12, 1997.
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III - DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1. General Powers; Number; Tenure . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3. Removal; Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 7. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 8. Quorum; Adjournments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 9. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 10. Action by Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 11. Meetings by Telephone or Similar Communications . . . . . . . . . . . . . . . . 5
ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1. Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3. Procedure; Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5. Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 6. Vacancies; Changes; Discharges . . . . . . . . . . . . . . . . . . . . . 6
Section 7. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 8. Action by Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 9. Meetings by Telephone or Similar Communications . . . . . . . . . . . . 7
Section 10. Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 1. Form; Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VI - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 1. Designations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2. Term of Office; Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4. The Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5. The President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6. The Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 7. The Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 8. The Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 9. The Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 10. The Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE VII - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 1. Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2. Limitation for Disabling Conduct . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VIII - STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 1. Form; Signatures; Statements . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 2. Registration of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5. Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IX - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 1. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2. Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE X - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<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 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.
1
<PAGE> 5
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.
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.
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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.
(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 unless otherwise permitted
by law. A majority of the entire Board of
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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 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.
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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 Directors, 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
stockholders' approval, to amend these Bylaws or to approve any merger or share
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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 with the minutes of its
proceedings.
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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.
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
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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 the Executive Committee and an ex-officio
member of each standing committee.
Section 5. 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
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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 6. 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 7. 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 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 8. 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 9. 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 10. 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
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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 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.
(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;
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(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 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.
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<PAGE> 16
(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.
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".
13
<PAGE> 17
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.
14
<PAGE> 18
CERTIFICATE
We, WILLIAM L. WALTON and TRICIA B. DANIELS 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 12th day of February, 1997.
/s/ WILLIAM L. WALTON
------------------------------------------
William L. Walton, President
/s/ TRICIA BENZ DANIELS
------------------------------------------
Tricia B. Daniels, Secretary
[Corporate Seal]
15
<PAGE> 1
EXHIBIT 10.2
ALLIED CAPITAL CORPORATION II
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, dated as of the last date set forth below, is made by
and between Allied Capital Corporation II, a Maryland corporation (the
"Company"), and Allied Capital Advisers, Inc., a Maryland corporation (the
"Adviser").
1. PURPOSE OF THE COMPANY.
The Company is organized under the laws of the State of Maryland as a
closed-end investment company registered as such under Investment Company Act
of 1940 (the "ICA").
2. THE INVESTMENT ADVISER.
The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and has entered into this
Agreement with the Company to act as its investment adviser. The terms of this
Agreement are as follows:
3. OBLIGATIONS OF THE ADVISER.
The Company hereby engages the Adviser's services as the Company's
investment adviser. As such, the Adviser will:
(a) advise the Company as to the acquisition and disposition of
securities in accordance with the Company's investment policies;
(b) make available and, if requested by entities in the securities
of which the Company has invested or is proposing to invest, render
managerial assistance to, and exercise management rights in, such
entities;
(c) provide to the Company office space and facilities and
services to the extent required of the Adviser's officers and
employees;
(d) maintain the Company's books of account and other records and
files;
(e) report to the Company's Board of Directors, or to any
committee or officer of the Company acting pursuant to the authority
of the Board, at such times and in such detail as the Board deems
appropriate in order to enable the Company to determine that its
investment policies are being observed and implemented and that the
Adviser's obligations hereunder are being fulfilled. Any investment
program undertaken by the Adviser pursuant hereto and any other
activities undertaken by the Adviser on the Company's behalf shall at
all times be subject to any directives of the Company's Board of
Directors or any duly constituted committee or officer of the Company
acting pursuant to authority of the Company's Board of Directors; and
1
<PAGE> 2
(f) cause to be offered to the Company opportunities to acquire or
dispose of securities in co-investment with other entities managed by
the Adviser in accordance with the co-investment guidelines set out
below. Except to the extent of acquisitions and dispositions that, in
accordance with such guidelines, require the specific approval of the
Company's Board of Directors, the Adviser is authorized to effect
acquisitions and dispositions of securities for the Company's account
in the Adviser's discretion. Where such approval is required, the
Adviser is authorized to effect such acquisitions and dispositions for
the Company's account upon and to the extent of such approval. The
Company will put the Adviser in funds whenever the Adviser requires
funds for an acquisition of securities in accordance with the
foregoing, and the Company will cause to be delivered in accordance
with the Adviser's instructions any securities disposed of in
accordance with the foregoing. The Adviser will arrange for the
certificates for any securities acquired to be delivered to the
Company's custodian.
4. EXPENSES TO BE PAID BY THE ADVISER.
The Adviser will pay for its own account all expenses incurred by the
Adviser in rendering the services to be rendered by the Adviser hereunder.
Without limiting the generality of the foregoing, the Adviser will pay the
salaries and other employee benefits of the persons in its organization whom
the Adviser may engage to render such services, including without limitation
persons who may from time to time act as the Company's officers.
Notwithstanding the foregoing, the Board of Directors of the Company may, in
its sole discretion, award to such officers options to acquire shares of the
Company's common stock, which shall not be deemed part of their salaries or
other employee benefits for the purpose of this paragraph.
5. CO-INVESTMENT GUIDELINES.
Most investments made by the Company will continue to be made in
participation with Allied Capital Corporation ("Allied") and, to the extent
applicable, Allied Venture Partnership and Allied Technology Partnership (the
"affiliated partnerships"). The Securities and Exchange Commission exemptive
orders permitting such co-investment provide that the Company must be offered
the opportunity to invest in any investment that would be suitable for both
Allied and the Company to the extent of an amount proportionate to their
respective consolidated assets (including, in the case of Allied, the combined
assets of its affiliated partnerships so long as they are not fully invested).
Securities purchased in a joint transaction by both the Company and Allied or
an affiliated partnership will consist of the same class of securities,
including the same registrations rights, if any, and other rights related
thereto, and will be purchased for the same unit consideration, and the
approval of such transaction, including the determination by the Company's and
Allied's non-interested directors, will take place during the same time period.
The Company recognizes that the Adviser is obligated, with respect to Allied's
allocation of such opportunity and subject to specified exceptions, to allocate
to Allied Venture Partnership one-half of any investment opportunity made
available to Allied, and to consider Allied Technology Partnership for
participation in any investment by Allied that is otherwise made available for
syndication, as long as these affiliated partnerships have funds available for
investment.
2
<PAGE> 3
Notwithstanding the foregoing, the Company will not make any
investment in the securities of any issuer in which Allied or either of the
affiliated partnerships, but not the Company, has previously invested, or vice
versa.
The Adviser will give the Company the opportunity to dispose of any
securities in which both Allied or one or both of its affiliated partnerships
and the Company have invested in proportion to their holdings of such
securities. The Company will take advantage of such opportunity except to the
extent that a majority of the members of its Board of Directors, including a
majority of its non-interested directors, determines otherwise. In connection
with any such disposition, the Company will be required to bear no more than
its proportionate share of the transaction costs related thereto.
The Company will participate in any investment in which Allied may
also participate only to the extent that such participation is approved in
advance by a majority of the members of its Board of Directors, including a
majority of its non-interested directors.
The Adviser will give notice to the Company of any intention of Allied
or one or both of the affiliated partnerships to exercise any conversion
privilege or other right to acquire equity securities of an issuer in the
securities of which both Allied or one or both of the affiliated partnerships
and the Company have invested.
6. EXPENSES TO BE PAID BY THE COMPANY.
The Company will reimburse the Adviser promptly, against the Adviser's
voucher, for any expenses incurred by the Adviser for the Company's account.
Without limitation, such expenses shall include all expenses of any offering
and sale by the Company of its shares and, except as otherwise specifically
provided above, all expenses of the Company's operations; the fees and
disbursements of the Company's counsel, accountants, custodian, transfer agent
and registrar; the costs related to promoting the Company's stock; fees and
expenses incurred in producing and effecting filings with federal and state
securities administrators; costs of the Company's periodic reports to and other
communications with the Company's shareholders; fees and expenses of members of
the Company's Board of Directors who are not directors, officers or employees
of the Adviser or of any entity affiliated with the Adviser, and fees of
directors who are such officers, directors or employees; premiums for the
fidelity bond maintained by the Company pursuant to ICA Section 17; and all
transaction costs incident to the acquisition and disposition of securities by
the Company in proportion to the Company's participation therein, including,
without limitation, legal and accounting fees and other professional or
technical fees and expenses (e.g., credit report, title search and delivery
charges, costs of specialized consultants such as accountants or
industry-specific technical experts, and deal-specific travel expenses)
incurred in monitoring, negotiating and working-out such investments as well as
responding to any litigation arising therefrom. If the Company for its
corporate purposes uses the services of attorneys or paraprofessionals on the
staff of the Adviser in lieu of outside counsel, the Company will reimburse the
Adviser for such services at hourly rates calculated to cover the cost of such
services, as well as for incidental disbursements.
3
<PAGE> 4
7. RECEIPT OF FEES.
All fees that may be paid by or for the account of an entity in which
the Company has invested or is proposing to invest in connection with an
investment transaction in which the Company participates or provides follow-on
managerial assistance will be treated as commitment fees or management fees and
will be received by the Company, pro rata to the Company's participation in
such transaction. Nevertheless, the Adviser will be entitled to retain for its
own account any fees paid to the Adviser by or for the account of any entity,
including an entity in which the Company may have invested, for special
investment banking or consulting work performed for the entity which is not
related to such transaction or follow-on managerial assistance. The Adviser
will report to the Company's Board of Directors not less often than quarterly
all fees received by the Adviser from any source and whether, in its opinion,
any such fee is one that the Adviser is entitled to retain under the provisions
of this paragraph. In the event that any member of the Company's Board of
Directors should disagree, the matter shall be conclusively resolved by a
majority of the Company's Board of Directors, including a majority of its
members who are not interested persons of the Company.
8. COMPENSATION TO THE ADVISER.
As the Adviser's sole and exclusive compensation for its services to
be rendered pursuant to the terms set out above, the Company will, during the
term of this Agreement, pay to the Adviser, quarterly, a fee equal to 0.625%
per quarter of the quarter-end value of the Company's consolidated total assets
(less Interim Investments and cash) plus 0.125% per quarter of the quarter-end
value of the Company's consolidated Interim Investments and cash.
For this purpose "Interim Investments" are defined as short-term
securities issued or guaranteed by the U.S. government or an agency or
instrumentality thereof, or in repurchase agreements fully collateralized by
such securities.
For the purpose of calculating the fee, the values of the Company's
assets will be determined as of the end of each calendar quarter by its Board
of Directors. The Company will pay the quarterly fee as soon as practicable
after the values for the applicable quarter have been determined. If the
termination of the Adviser's services hereunder does not coincide with the last
day of a calendar quarter, then any fee determined in accordance with this
paragraph shall be multiplied by the ratio of the number of days in such
quarter during which Adviser rendered services to the total number of days in
such quarter.
9. INDEMNIFICATION OF THE ADVISER.
The Company confirms that in performing services hereunder the Adviser
will be an agent of the Company for the purpose of the indemnification
provisions of the Company's By-Laws, subject, however, to the same limitations
as though the Adviser were a director or officer of the Company. The Adviser
shall not be liable to the Company, its shareholders or its creditors except
for violations of law or for conduct which would preclude the Adviser from
being indemnified under such provisions.
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<PAGE> 5
10. APPROVAL OF THE AGREEMENT.
The Company represents that the Company's Board of Directors,
including a majority of its members who are not interested persons of the
Company, approved this Agreement at a meeting held on February 15, 1995 at
which a quorum was personally present, and a majority, as defined in the ICA,
of the Company's shareholders approved it at a meeting held on the date hereof.
This Agreement shall continue in effect until the annual meeting of the
shareholders of the Company to be held in 1996 and thereafter from year to year
as long as such continuance is specifically approved at least annually by the
Company's Board of Directors, including a majority of its members who are not
interested persons of the Company, or by vote of the holders of a majority, as
defined in the ICA, of the Company's outstanding voting securities. This
Agreement supersedes the Investment Advisory Agreement dated April 25, 1991
between the parties.
11. TERMINATION OF THE AGREEMENT.
The foregoing notwithstanding, this Agreement may be terminated by the
Company at any time, without payment of any penalty, on 60 days' written notice
to the Adviser if the decision to terminate has been made by the Company's
Board of Directors or by vote of the holders of a majority, as defined in the
ICA, of the Company's outstanding voting securities. This Agreement will
terminate automatically in the event of its assignment, as defined in the ICA.
The Adviser may also terminate this Agreement on 60 days' written notice to the
Company; provided, however, that the Adviser may not terminate this Agreement
unless another investment adviser has been approved by the vote of a majority,
as defined in the ICA, of the Company's outstanding securities and by the
Company's Board of Directors, including a majority of its members who are not
parties to such agreement or interested persons of any such party.
12. JURISDICTION.
This Agreement shall be governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of May 11, 1995.
ALLIED CAPITAL ADVISERS, INC. ALLIED CAPITAL CORPORATION II
By: /s/ Joan M. Sweeney By: /s/ William F. Dunbar
---------------------------------- ----------------------------------
Joan M. Sweeney, President William F. Dunbar, President
5
<PAGE> 1
EXHIBIT 10.3
ALLIED CAPITAL CORPORATION II
DIVIDEND REINVESTMENT PLAN
COMPANY CONTACT:
Department of Shareholder Relations
Allied Capital Corporation II
1666 K Street, NW, Suite 901
Washington, DC 20006
(202) 331-1112
PLAN ADMINISTRATOR:
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
(800) 937-5449
<PAGE> 2
The following is the Allied Capital Corporation II Dividend Reinvestment Plan
(the "Plan"). Further questions and correspondence should be directed to
either of the addresses listed on the front of the Plan:
1. WHAT IS THE PURPOSE OF THE PLAN?
The purpose of the Plan is to provide shareholders with a
simple and convenient method of investing cash dividends and
distributions in additional shares of Common Stock, $ 1.00 par
value, of Allied Capital Corporation II (the "Company") at the
current market price. Participants in the Plan may have cash
dividends and distributions automatically reinvested without
charges for record-keeping, and may take advantage of the
custodial and reporting services provided by American Stock
Transfer and Trust Company ("AST") at no additional cost.
2. WHAT DOES THE PLAN ADMINISTRATOR DO?
AST administers the Plan for participants, keeps records,
sends statement of accounts to participants, and performs
other duties relating to the Plan.
3. HOW DOES A SHAREHOLDER ENROLL?
If you are a shareholder of record, that is if the shares.
you own are registered in your own name on the books of AST,
no enrollment is necessary. In that case, you are
automatically a participant in the Plan and AST, as the Plan
Agent, will automatically reinvest for your account all
dividends and distributions that may be declared and paid on
your shares. If all of your shares of record are enrolled in
the Plan, you are considered to be an unlimited participant.
4. WHAT IF THE SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?
If your shares are held on the books of AST in the name of a
broker, bank or other nominee (a "nominee"), you can
participate in the Plan only to the extent that the nominee
participates on your behalf. Many nominees do not provide
that service and routinely request dividends and distributions
to be paid in cash on all shares registered in their names.
Therefore, if your shares are held for your account by a
nominee, you must either make appropriate arrangements for
your nominee to participate on your behalf, or you must become
a shareholder of record by having a part or all of your shares
transferred to your own name.
5. WHAT IF A SHAREHOLDER WOULD RATHER RECEIVE CASH?
If you would rather receive cash, you may either write a
letter to the Company or to AST to communicate that you would
like to terminate your participation in the Plan, or return
the attached Enrollment Status Card to AST. Any communication
by you expressing a preference for cash in lieu of shares must
be received by the Company or AST before the record date of
the next dividend or distribution.
6. WHAT IF A SHAREHOLDER WISHES TO RECEIVE CASH ON ONLY SOME OF
HIS SHARES?
If you wish to receive dividends and distributions in cash on
some of your shares, and have the remaining dividends and
distributions reinvested, you must write to the Company or AST
and give us notice to that effect. You may also use the
attached Enrollment Status Card for this purpose. As a
partial participant, you will receive your dividends and
distributions in cash only with respect to the number of
shares that you have specified. With respect to any other
shares registered in your name, and with respect to the shares
credited to your account on the books of AST, the
corresponding dividends and distributions will be paid in
additional shares. The number of shares on which a cash
dividend is received may be changed at any time simply by
writing to the Company or to AST.
7. MAY A SHAREHOLDER ELECT TO REENROLL ONCE HE HAS TERMINATED
PARTICIPATION IN THE PLAN?
Yes. If a shareholder has previously elected to receive
dividends and distributions in cash and thus terminated
participation in the Plan, and later wishes to participate in
the Plan, the shareholder may reenroll at any time by writing
to the Company. Any letter requesting enrollment must be
received by the Company prior to the dividend declaration date
in order for it to take effect as of the next dividend or
distribution.
8. HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
When the Board of Directors declares a dividend or
distribution, all non-participants will receive it in cash.
Participants will have credited to their Plan Accounts the
number of full and fractional shares (computed to three
decimal places) that could be obtained, at the price
determined in accordance with the answers to Questions 9 and
10, with the cash, net of any applicable withholding taxes,
that would have been paid to them if they were not
participants.
9. HOW ARE SHARES ALLOCATED UNDER THE PLAN?
The number of shares allocated to a participant's account will
be arrived at as follows. Except under the circumstances
outlined below in Question 10, AST will buy shares of Allied
Capital Corporation II in the open market, on NASDAQ or
elsewhere, beginning on or before the payment date of the
dividend or distribution, until it has expended for such
purchases all of the cash that would otherwise be payable to
the participants. The number of shares that will then be
credited to the participants' Plan Accounts will be
<PAGE> 3
based on the average cost of the shares so purchased,
including brokerage commissions.
10. WILL NEWLY ISSUED SHARES EVER BE PAID TO PARTICIPANTS IN THE
PLAN?
There may come a time when Allied Capital II shares sell in
the market at a substantial premium over their net asset
value. In that case, the Company's Board of Directors may
(but is not required to) declare a dividend or distribution to
be paid to Plan participants in newly issued shares of Allied
Capital II. In that situation, the price of newly issued shares
issued to a participant's account will be equal to the average
of the closing sales prices reported for the shares in The
Wall Street Journal - NASDAQ National Market System listings
for the five days on which trading of shares takes place
immediately prior to the dividend payment date (but not less
than 95% of the opening sales price on that date).
Even if the Board of Directors has declared the dividend or
distribution to be payable to Plan participants in newly
issued shares, AST will be under standing instructions not to
credit newly issued shares, and instead to buy shares in the
market, if (1) the price at which newly issued shares are to
be credited does not exceed 110% of the last determined net
asset value of the Allied Capital II shares or (2) the
Company has advised AST that since such net asset value was
last determined we have become aware of events that indicate
the possibility of a change in per share net asset value as a
result of which the net asset value of the Allied Capital II
shares on the payment date might be higher than the price at
which AST would credit newly issued shares to the
participants' Plan Accounts.
If, as would normally be the case at least in the near future,
AST buys shares on the market, it is possible that by the time
AST has completed its purchases, the average per share
purchase price paid by AST may exceed the price at which the
newly issued shares would have been credited or the shares'
current net asset value. As a result, there would be credited
to the participants' Plan Accounts a smaller number of shares
than would have been credited if the dividend or distribution
had been paid in newly issued shares.
11. WHAT ACCOUNTS ARE MAINTAINED FOR PARTICIPANTS AND WHAT REPORTS
ON THESE ACCOUNTS DO PARTICIPANTS RECEIVE?
The Plan Administrator will maintain a separate account for
each participant. All shares issued to a participant under
the Plan will be credited to the participant's account. AST
will mail to each participant a statement confirming the
issuance of shares within fifteen days after the allocation of
shares is made. The statement will show the amount of the
dividend or distribution, the price at which shares were
credited, the number of full and fractional shares credited,
the number of shares previously credited and the cumulative
total of shares credited. In addition, each participant will
receive copies of the Company's annual and quarterly reports
to shareholders, proxy statements and dividend income
information for tax purposes. The proxy card received by each
participant will represent all shares held of record,
including shares held in the Plan Account.
<PAGE> 4
12. WILL CERTIFICATES BE ISSUED FOR SHARES ISSUED UNDER THE PLAN?
No. Certificates for shares issued under the Plan will not be
furnished to you until your account is terminated or unless
you request certificates in writing for a specified number of
shares credited to your Plan Account. All written requests
for certificates should be directed to AST, allowing two weeks
for processing. The issuance of certificates for shares
credited to a Plan Account will not terminate your
participation in the Plan. No certificate for a fractional
share will be issued. If you terminate your participation in
the Plan (see Question 15), AST will sell for your account any
fractional share and send you a check for the proceeds.
13. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?
Accounts under the Plan are maintained in the name in which
share certificates of the participant were registered at the
time the participant entered the Plan. Certificates for whole
shares issued at the request of a participant will be
similarly registered.
14. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND OR
DECLARES A STOCK SPLIT?
Any stock dividends or split shares distributed by the Company
on shares held by the Plan Administrator for the participant
will be credited to the participant's account.
15. WHAT HAPPENS IF A PARTICIPANT WISHES TO TERMINATE
PARTICIPATION?
You may terminate participation in the Plan at any time by
notifying the Company or AST in writing. Within twenty days,
and according to your instructions, AST will either (1) issue
certificates for the whole shares credited to your Plan
Account and a check representing the value of any fractional
shares or (2) sell the shares in the market. The proceeds of
the sale, less any brokerage commissions that may be incurred,
will be remitted to the shareholder and address of record at
the time of liquidation. The address of record may not be
changed per telephone
<PAGE> 5
instruction, but rather must be changed in writing to the
Company or to AST. Notification for termination must be
received prior to the record date of any impending
distribution in order for it to take effect for that
distribution.
If a participant sells or transfers all of the shares
registered in his name on the books of AST, participation in
the Plan will continue with respect to any shares credited to
the participant's Plan Account unless and until termination is
requested.
16. WHAT IS THE TAX STATUS OF REINVESTED DIVIDENDS?
The automatic reinvestment of dividends and distributions will
not relieve you of any income tax burden that you might
otherwise owe on such dividends or distributions. A
participant in the Plan will be treated for Federal income tax
purposes as having received, on the dividend payment date, a
dividend or distribution in an equal amount to the cash that
the participant could have received instead of shares. The tax
basis of such shares will equal the amount of such cash.
A participant will not realize any taxable income upon receipt
of certificates for whole shares credited to the participant's
account either upon the Participant's request for a specified
number of shares, or upon termination of enrollment in the
Plan.
Each participant in the Plan will receive early in each year
a Form 1099 regarding the Federal income tax status of all
dividends and distributions paid during the previous year.
17. ARE THERE ANY CHARGES FOR PARTICIPATING IN THE PLAN?
No. AST's fees for administering Allied Capital II's Dividend
Reinvestment Plan are included in the fees paid by the Company
to AST for acting as its transfer agent. The price at which
shares are credited to your account will, however, include
your share of brokerage commissions incurred in connection
with AST's open market purchases of such shares. There will be
no brokerage charges in connection with any credit of newly
issued shares.
18. MAY THE PLAN BE CHANGED?
Experience under the Plan may indicate that changes are
desirable. Accordingly, the Plan may be amended or terminated
by Allied Capital II or AST with at least 90 days' written
notice to Plan participants.
ALLIED CAPITAL CORPORATION II DIVIDEND REINVESTMENT PLAN
ENROLLMENT STATUS CARD
The undersigned shareholder of record of Allied Capital Corporation II elects
to:
[] TERMINATE enrollment in the Dividend Reinvestment Plan and
receive dividends and distributions in cash with respect to
all shares of Allied Capital Corporation II held of record or
credited to the undersigned's Plan account. CHECK ONE OF THE
FOLLOWING: [] Liquidate all Plan account shares and remit
proceeds, or [] Send certificate for whole shares in Plan
account and liquidate fractional shares.
[] PARTICIPATE in the Dividend Reinvestment Plan and receive
dividends and distributions in additional shares with respect
to ALL Allied Capital Corporation II shares held of record or
credited to the undersigned's Plan account.
[] PARTIALLY PARTICIPATE in the Dividend Reinvestment Plan
with respect to all Allied Capital Corporation II shares held
of record, including the shares subsequently credited to the
undersigned's Plan account, except ______ shares on which
dividends and distributions are to be paid in cash.
Termination and partial participation instructions will take effect on the
record date following receipt of this card by the Plan Administrator.
Enrollment instructions will take effect on the declaration date following
receipt of this card by the Plan Administrator.
<TABLE>
<S> <C>
- ------------------------------------------------------------ ------------------------------------------
Tax identification number Signature
- ------------------------------------------------------------ -------------------------------------------
Type or print name exactly as it appears on your share Signature
certificate(s).
</TABLE>
Please fold and staple for mailing.
<PAGE> 6
Post office will
not deliver
without stamp
AMERICAN STOCK TRANSFER & TRUST
40 Wall Street
New York, NY 10005
ATTN: Dividend Reinvestment
<PAGE> 7
Shareholder Relations
Allied Capital
1666 K Street, NW, 9th Floor
Washington, DC 20006
<PAGE> 1
EXHIBIT 10.4
ALLIED CAPITAL CORPORATION II
STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of this Stock Option Plan (this "Plan") is to advance
the interests of Allied Capital Corporation II (the "Company") by providing to
directors of the Company and to officers of the Company who have substantial
responsibility for the direction and management of the Company additional
incentives to exert their best efforts on behalf of the Company, to increase
their proprietary interest in the success of the Company, to reward outstanding
performance and to provide a means to attract and retain persons of outstanding
ability to the service of the Company. It is recognized that the Company
cannot attract or retain these officers and directors without this
compensation. Options granted under this Plan may qualify as "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee")
comprised of at least two (2) members of the Company's Board of Directors who
each shall (a) be a "disinterested person," as defined in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended, (b) have no
financial interest in grants of stock options to officers of the Company under
this Plan and (c) not be an "interested person," as defined in Section 2(a)(19)
of the Investment Company Act of 1940, as amended (the "Act"), of the Company.
The Committee shall interpret this Plan and, to the extent and in the manner
contemplated herein, shall exercise the discretion reserved to it hereunder.
The Committee may prescribe, amend and rescind rules and regulations relating
to this Plan and to make all other determinations necessary for its
administration. The decision of the Committee on any interpretation of this
Plan or administration hereof, if in compliance with the provisions of the Act
and regulations promulgated thereunder, shall be final and binding with respect
to the Company, any optionee or any person claiming to have rights as, or on
behalf of, any optionee.
3. SHARES SUBJECT TO THE PLAN
The shares subject to option and the other provisions of this Plan
shall be shares of the Company's common stock, par value $1.00 per share
("shares"). Subject to the provisions hereof concerning adjustment, the total
number of shares which may be purchased upon the exercise or surrender of stock
options granted under this Plan shall not exceed 1,200,000 shares, which
includes all shares with respect to which options have been granted or
surrendered for payment in cash or other consideration pursuant to this Plan or
predecessor forms of this Plan. In the event any option shall cease to be
exercisable in whole or in part for any reason, the shares which were covered
by such option, but as to which the option had not been exercised, shall again
be available under this Plan. Shares may be made available from authorized,
unissued or reacquired stock or partly from each.
4. PARTICIPANTS
(a) Officers. The Committee shall determine and designate from
time to time those key officers of the Company who shall be eligible to
participate in this Plan. The Committee shall also determine the number of
shares to be offered from time to time to each optionee. In making these
determinations, the Committee shall take into account the past service of each
such officer to the Company, the present and potential contributions of such
officer to the success of the Company and such other factors as the Committee
shall deem relevant in connection with accomplishing the purposes of this Plan;
provided that
1
<PAGE> 2
the Committee shall determine that each grant of options to an optionee, the
number of shares offered thereby and the terms of such option are in the best
interests of the Company and its shareholders. The date on which the Committee
approves the grant of an option to an officer of the Company shall be the date
of issuance of such option; provided, however, that if (1) any such action by
the Committee does not constitute approval thereof by both (A) a majority of
the Company's directors, who each has no financial interest in such action and
(B) a majority of the Company directors who each is not an "interested person"
[as defined in Section 2(a)(19) of the Act] of the Company and (2) such
approval is then required by Section 61(a)(3)(B)(i)(I) of the Act, then the
grant of any option by such action shall not be effective, and there shall be
no issuance of such option, until there has been approval of such action by (A)
a majority of the Company's directors who each has no financial interest in
such action and (B) a majority of the Company's directors who each is not an
"interested person" of the Company, on the basis that such action is in the
best interests of the Company and its shareholders, and the last date on which
such required approval is obtained shall be the date of issuance of such
option. The agreement documenting the award of any option granted pursuant to
this paragraph 4(a) shall contain such terms and conditions as the Committee
shall deem advisable, including but not limited to being exercisable only in
such installments as the Committee may determine.
(b) Non-Officer Directors. A one-time grant of options in
accordance with the provisions of this paragraph (b) shall be made to each
director of the Company who is not an officer of the Company or of the
Company's investment adviser (a "non-officer director") who is serving at the
later of (i) the date on which the proposal to make grants of options to
non-officer directors is approved by the shareholders of the Company or (ii)
the date on which the issuance of options pursuant to this Plan to non-officer
directors is approved by order of the Securities and Exchange Commission
pursuant to Section 61(a)(3)(B)(i)(II) of the Act. After the later of such
dates, a one-time grant of options in accordance with the provisions of this
paragraph (b) shall be made to each non-officer director [other than any
non-officer director who received a grant pursuant to the first sentence of
this paragraph (b)] upon his or her initial election as a director of the
Company. Each grant pursuant to this paragraph (b) shall award the non-officer
director an option to purchase ten thousand (10,000) shares at a price equal to
the current fair market value of the shares at the date of issuance of such
option; provided, that if any non-officer director then holds ten percent (10%)
or more of the outstanding shares, the exercise price of such option shall not
be less than one hundred ten percent (110%) of such current fair market value.
The agreement documenting the award of any option granted pursuant to this
paragraph 4(b) shall contain such terms and conditions as the Committee shall
deem advisable; provided, however, that any such option shall vest in three
annual installments (so that the recipient can first exercise the option with
respect to not more than 3,333 shares on or after the date of issuance of such
option, can exercise the option with respect to not more than an additional
3,333 shares on or after the first anniversary of the date of issuance of such
option and can exercise such option with respect to the all of the shares
covered thereby on or after the second anniversary of the date of issuance of
such option).
(c) General. Agreements evidencing options granted to different
optionees or at different times need not contain similar provisions.
5. OPTION PRICE
Shares shall be optioned from time to time at a exercise price not
less than the current fair market value [as defined in paragraph 15(d) of this
Plan] of the shares at the date of issuance of such option; provided, that the
exercise price of any option granted to a holder of 10% or more of the
Company's shares shall not be less than 110% of such current fair market value.
6. OPTION PERIOD
2
<PAGE> 3
Each option agreement shall state the period or periods of time
within which the subject option may be exercised, in whole or in part, by the
optionee which shall be such period or periods of time as may be determined by
the Committee; provided, that the option period shall not exceed ten years from
the date of issuance of the option and shall not exceed five years if the
option is granted to a holder of 10% or more of the Company's shares.
7. PAYMENT FOR SHARES
Full payment for shares purchased shall be made at the time of
exercising the option in whole or in part. Payment of the purchase price shall
be made in cash (including check, bank draft or money order) or, if authorized
pursuant to paragraph 9 hereof, by a loan from the Company in accordance with
paragraph 9.
8. TRANSFERABILITY OF OPTIONS
Options shall not be transferable other than by will or the laws of
descent and distribution, and during an optionee's lifetime shall be
exercisable only by the optionee.
9. LOANS BY THE COMPANY
Upon the exercise of any option by an officer-optionee, the
Company, at the request of the officer-optionee, and subject to the approval of
both (a) a majority of the Company's directors who each has no financial
interest in such loan and (b) a majority of the Company's directors who each is
not an "interested person" [as defined in Section 2(a)(19) of the Act] of the
Company on the basis that such loan is in the best interests of the Company and
its stockholders (whether such approval is by the Committee or otherwise), may
lend to such officer-optionee, as of the date of exercise, an amount equal to
the exercise price of such option; provided, that such loan (a) shall have a
term of not more than ten years, (b) shall become due within sixty days after
the recipient of the loan ceases to be an officer of the Company, (c) shall
bear interest at a rate no less than the prevailing rate applicable to 90-day
United States Treasury bills at the time the loan is made, and (d) shall be
fully collateralized at all times, which collateral may include securities
issued by the Company. Loan terms and conditions may be changed by the
Committee to comply with applicable IRS and SEC regulations.
10. TERMINATION OF OPTION
All rights to exercise options shall terminate sixty days after any
optionee ceases to be a director or an officer of the Company for any cause
other than death or total and permanent disability.
11. RIGHTS IN THE EVENT OF TERMINATION OF SERVICE
If an optionee's service as a director or officer is terminated for
any reason other than death or total and permanent disability prior to
expiration of his or her option and before such option is fully exercised, the
optionee shall have the right to exercise the option during the balance of the
60-day period referred to in paragraph 10.
12. RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH
If an optionee becomes totally and permanently disabled or dies
prior to expiration of the option without having fully exercised it, he or the
executors or administrators or legatees or distributees of the estate, as the
case may be, shall, have the right, from time to time within one year after the
optionee's total
3
<PAGE> 4
and permanent disability or death and prior to the expiration of the term of
the option, to exercise the option in whole or in part, as provided in the
respective option agreement.
13. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN
Subject to any required action by the shareholders of the Company
and the provisions of applicable corporate law, the number of shares of
represented by the unexercised portion of an option, the number of shares which
has been authorized or reserved for issuance hereunder, and the number of
shares covered by any applicable vesting schedule hereunder, as well as the
exercise price of a share represented by the unexercised portion of an option,
shall be proportionately adjusted for (a) a division, combination or
reclassification of any of the shares of common stock of the Company or (b) a
dividend payable in shares of common stock of the Company.
14. GENERAL RESTRICTION
Each option shall be subject to the requirement that, if at any
time the Board of Directors shall determine, at its discretion, that the
listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Subject to the limitations of paragraph 6, no
option shall expire during any period when exercise of such option has been
prohibited by the Board of Directors, but shall be extended for such further
period so as to afford the optionee a reasonable opportunity to exercise his
option.
15. MISCELLANEOUS PROVISIONS
(a) No optionee shall have rights as a shareholder with respect to
shares covered by his option until the date of exercise of his option.
(b) The granting of any option shall not impose upon the Company
any obligation to appoint or to continue to appoint as a director or officer
any optionee, and the right of the Company to terminate the employment of any
officer or other employee, or service of any director, shall not be diminished
or affected by reason of the fact that an option has been granted to such
optionee.
(c) Options shall be evidenced by stock option agreements in such
form and subject to the terms and conditions of this Plan as the Committee
shall approve from time to time, consistent with the provisions of this Plan.
Such stock option agreements may contain such other provisions as the Committee
in its discretion may deem advisable.
(d) For purposes of this Plan, the fair market value of the shares
shall be the closing sales price of the stock as quoted on the National
Association of Securities Dealers Automated Quotation System for the date of
issuance of such option, as provided herein. If the Company's shares are
traded on an exchange, the price shall be the closing price of the Company's
stock as reported in The Wall Street Journal for such date of issuance of an
option.
(e) The aggregate fair market value (determined as of the date of
issuance of an option) of the shares with respect to which an option, or
portion thereof, intended to be an incentive stock option is exercisable
4
<PAGE> 5
for the first time by any optionee during any calendar year (under all
incentive stock option plans of the Company and subsidiary corporations) shall
not exceed $100,000.
(f) All options issued pursuant to this Plan shall be granted
within ten years from the earlier of the date of adoption of this Plan (or any
amendment thereto requiring shareholder approval pursuant to the Code) or the
date this Plan (or any amendment thereto requiring shareholder approval
pursuant to the Code) is approved by the shareholders of the Company.
(g) No option may be issued if exercise of all warrants, options
and rights of the Company outstanding immediately after issuance of such option
would result in the issuance of voting securities in excess of 20% of the
Company's outstanding voting securities.
(h) A leave of absence granted to an employee does not constitute
an interruption in continuous employment for purposes of this Plan as long as
the leave of absence does not extend beyond one year.
(i) Any notices given in writing shall be deemed given if delivered
in person or by certified mail; if given to the Company at Allied Capital
Corporation II, 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006; and, if
to an optionee, in care of the optionee at his or her last known address.
(j) This Plan and all actions taken by those acting under this Plan
shall be governed by the substantive laws of Maryland without regard to any
rules regarding conflict-of-law or choice-of-law.
(k) All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Company.
16. AMENDMENT AND TERMINATION
The Board of Directors may modify, revise or terminate this Plan at
any time and from time to time; provided, however, that no modification or
revision of any material provision of this Plan may be made without shareholder
approval except for such modifications or revisions which are necessary in
order to ensure the options issued as incentive stock options under this Plan
comply with Section 422 or any successor provision of the Code, applicable
provisions of the Act or any exemptive order therefrom issued to the Company in
connection with this Plan, Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended, or other applicable law. This Plan shall terminate
when all shares reserved for issuance hereunder have been issued upon the
exercise of options, by action of the Board of Directors pursuant to this
paragraph, or on February 17, 2004, whichever shall first occur.
17. EFFECTIVE DATE OF THE PLAN
This Plan shall become effective upon (1) adoption by the Board of
Directors and (2) approval of this Plan by the shareholders of the Company.
18. AMENDMENT HISTORY
<TABLE>
<CAPTION>
<S> <C>
Date of plan adoption by the Board of Directors February 15, 1990
Date of plan approval by shareholders May 17, 1990
Date of plan amendment adoption by the Board of Directors January 23, 1992
Date of plan amendment adoption by the Board of Directors February 18, 1993
Date of plan amendment approval by shareholders May 13, 1993
Date of plan amendment adoption by the Board of Directors February 17, 1994
Date of plan amendment approval by shareholders May 12, 1994
Date of approval by Securities and Exchange Commission December 26, 1995
Date of plan amendment adoption by the Board of Directors February 14, 1996
</TABLE>
5
<PAGE> 1
EXHIBIT 11
Allied Capital Corporation II and Subsidiaries
Statement of Computation of Earnings Per Share
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Share:
Net Increase in Net Assets Resulting
from Operations $10,149,000 $14,733,000 $10,515,000
=============================================
Weighted average number of
shares outstanding 7,266,669 6,946,815 6,938,191
Weighted average number of
shares issuable on exercise
of outstanding stock options 75,934 32,555 1,756
---------------------------------------------
Weighted average number of shares and
share equivalents outstanding 7,342,603 6,979,370 6,939,947
=============================================
Earnings per Share $1.38 $2.11 $1.52
=============================================
Fully Diluted Earnings Per Share:
Net Increase in Net Assets Resulting
from Operations $10,149,000 $14,733,000 $10,515,000
=============================================
Weighted average number of
shares and share equivalents
outstanding as computed for
primary earnings per share 7,342,603 6,979,370 6,939,947
Weighted average of additional
shares issuable on exercise
of outstanding stock options 59,306 41,184 -
---------------------------------------------
Weighted average of shares and
share equivalents outstanding, as adjusted 7,401,909 7,020,554 6,939,947
=============================================
Earnings per Share $1.37 $2.10 $1.52
=============================================
</TABLE>
<PAGE> 1
EXHIBIT 13
Allied Capital Corporation II
SHAREHOLDER INFORMATION
CORPORATE OFFICE
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Telephone: (202) 331-1112
Facsimile: (202) 659-2053
News-On-Demand: (888) 329-5519
Investor Relations: (202) 973-6334
Investor Relations E-mail: [email protected]
Marketing: (202) 331-2439
Marketing E-mail: [email protected]
Internet Address: http://www.alliedcapital.com
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries on transferring securities, replacing a lost or stolen certificate,
participating in the Dividend Reinvestment Plan, requesting Direct Deposit
information or processing a change of address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
In the United States: (800) 937-5449
Outside the United States: (212) 936-5100
E-mail: [email protected]
Internet Address: http://www.amstock.com
FORM 10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as filed with the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written request to the Investor
Relations Department at the Company's corporate offices. This information is
also available on Allied Capital's Internet site: http://www.alliedcapital.com
1997 ANNUAL MEETING OF SHAREHOLDERS
Montgomery Room at The Residence Inn by Marriott,
7335 Wisconsin Avenue, Bethesda, Maryland 20814
Friday, May 2, 1997
10 a.m. (EST)
All shareholders are welcome to attend.
INDEPENDENT ACCOUNTANTS
Matthews, Carter and Boyce, P.C.
McLean, VA
STOCK MARKET LISTING
Allied Capital Corporation II common stock is quoted on the Nasdaq National
Market under the ticker symbol ALII. Most newspapers list the Company's stock
as "AldCall". The Company has approximately 1,800 shareholders of record and
9,200 beneficial shareholders.
DIVIDENDS AND DISTRIBUTIONS
Generally, quarterly dividends on common stock are paid on the last business
day of each quarter. The Company has also paid a fifth distribution at year-end
since inception.
STOCK PRICE
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C> <C>
1995 Q1 $14.75 $13.75 $14.13
Q2 16.25 14.00 15.50
Q3 16.25 15.00 15.75
Q4 19.00 15.75 17.13
1996 Q1 $18.50 $16.25 $18.00
Q2 18.50 15.50 18.25
Q3 20.25 17.25 19.25
Q4 21.88 18.75 21.25
</TABLE>
TOTAL DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$1.15 $1.22 $1.34 $1.60 $1.92
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Value of $10,000 Investment January 1, 1990
Year-End Value
-------- -----
<S> <C>
1990 $11,887
1991 14,061
1992 14,795
1993 12,570
1994 13,192
1995 18,257
1996 25,042
</TABLE>
A $10,000 investment in Allied Capital Corporation II as of January 1, 1990,
with all distributions reinvested, was worth $25,042 at the end of 1996, a 14%
average annual total return over this period.
<PAGE> 2
Allied Capital Corporation II
COMPANY PROFILE
Allied Capital Corporation II offers shareholders the opportunity to profit
from a portfolio of long-term debt and equity investments in growing businesses
nationwide. Managed by Allied Capital Advisers, Inc., the company seeks to
provide current income and long-term capital appreciation for its
shareholders.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments at Value $ 86,266 $ 99,207
Total Assets $106,908 $107,169
Shareholders' Equity (Net Asset Value) $102,838 $101,981
Net Increase in Net Assets Resulting from Operations $ 10,149 $ 14,733
Earnings Per Share $ 1.38 $ 2.11
Distributions Per Share $ 1.92 $ 1.60
Number of Shares Outstanding 7,550 7,104
</TABLE>
Allied Capital Corporation II
1
<PAGE> 3
Allied Capital Corporation II
CONSOLIDATED COMPARISON OF FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total tax distributions $ 14,143 $ 11,206 $ 9,297 $ 8,454 $ 7,891
Ordinary income per share $ 1.49 $ 1.38 $ 1.25 $ 0.76 $ 0.97
Net capital gains per share 0.43 0.22 0.09 0.46 0.18
----------------------------------------------------------
Total tax distributions per share $ 1.92 $ 1.60 $ 1.34 $ 1.22 $ 1.15
- -----------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Total investment income $ 12,084 $ 11,539 $ 10,564 $ 7,770 $ 8,864
Per share $ 1.65 $ 1.65 $ 1.52 $ 1.12 $ 1.29
Net investment income $ 9,148 $ 8,350 $ 7,425 $ 5,315 $ 6,597
Per share $ 1.24 $ 1.20 $ 1.07 $ 0.77 $ 0.96
Net realized gains on investments $ 7,427 $ 3,621 $ 3,562 $ 148 $ 1,297
Net unrealized appreciation (depreciation) on investments $ (6,426) $ 2,762 $ (472) $ 5,011 $ 948
Net realized gains and unrealized appreciation
(depreciation) on investments $ 1,001 $ 6,383 $ 3,090 $ 5,159 $ 2,245
Per share $ 0.14 $ 0.91 $ 0.45 $ 0.74 $ 0.33
Net increase in net assets resulting from operations $ 10,149 $ 14,733 $ 10,515 $ 10,474 $ 8,842
Per share $ 1.38 $ 2.11 $ 1.52 $ 1.51 $ 1.29
Weighted average number of shares and
share equivalents outstanding 7,343 6,979 6,940 6,951 6,875
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Investments at value $ 86,266 $ 99,207 $ 88,130 $ 70,716 $47,739
Investments at cost $ 87,011 $ 93,526 $ 85,211 $ 67,325 $49,359
Total assets $106,908 $107,169 $101,934 $100,151 $96,165
Shareholders' equity (net asset value) $102,838 $101,981 $ 97,475 $ 96,225 $93,891
Per share $ 13.62 $ 14.36 $ 14.05 $ 13.87 $ 13.60
Per share market value at end of year $ 21.25 $ 17.13 $ 13.63 $ 14.25 $ 18.00
Shares outstanding at end of year 7,550 7,104 6,938 6,938 6,906
</TABLE>
Allied Capital Corporation II
9
<PAGE> 4
Allied Capital Corporation II
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
Allied Capital Corporation II (Company) had $18.5 million in total cash
available at December 31, 1996 and had an available credit facility of $25.0
million. At December 31, 1996, outstanding commitments for future financings by
the Company were $3.1 million. Given the balance of cash available at December
31, 1996 and the available credit facility, the Company believes that it has
adequate capital to continue to satisfy its operating needs, commitments and
other future investment opportunities that may arise throughout 1997.
RESULTS OF OPERATIONS
COMPARISON OF 1996 AND 1995
The net increase in net assets resulting from operations was $10.1 million, or
$1.38 per share, for the year ended December 31, 1996, compared to $14.7
million, or $2.11 per share, for the same period in 1995. Net realized gains on
investments were $7.4 million for the year ended December 31, 1996 as compared
to $3.6 million for the same period of the prior year. During 1996, the Company
successfully liquidated certain equity investments and received early payoffs
of loans in its portfolio. Since net gains are realized when the Company sells
or otherwise liquidates its investments, profit from net gains may vary
significantly from year to year.
The investments that generated the 1996 net realized gains had previously been
valued by the board of directors such that the Company had recorded net
unrealized appreciation totaling $3.4 million, or $0.46 per share. When the
investments were liquidated in 1996, the profit resulting from the net gains
was reduced by an offsetting decrease in net unrealized appreciation for the
$3.4 million previously recorded. The Company recorded additional portfolio
depreciation of $3.0 million for the year resulting from the valuations as
determined by the board of directors.
Total investment income increased 5% to $12.1 million for 1996 as compared to
$11.5 million for 1995. Interest income increased by $1.2 million, or 11%, to
$11.9 million in 1996, compared to $10.7 million in 1995, due to an increase in
loan discount amortization and the early recognition of loan fees on early
repayments. The Company also received prepayment penalties totaling $95,000 in
1996 as compared to $270,000 in 1995, which are included in other income. Other
income for the year ended December 31, 1995 included non-recurring income of
$308,000 resulting from litigation costs incurred in prior periods which were
recovered during 1995.
Total expenses decreased $0.3 million to $2.9 million in 1996 as compared to
$3.2 million in 1995. The Company's investment advisory fee remained level at
$2.4 million for 1996 and 1995. Other expenses decreased 33% for 1996
Allied Capital Corporation II
10
<PAGE> 5
Allied Capital Corporation II
MANAGEMENT'S DISCUSSION AND ANALYSIS
as compared to 1995. This decline resulted from a decline in legal costs
related to litigation that was resolved in late 1994.
Distributions to shareholders for 1996 were $14.1 million. The Company's
taxable income of $1.92 per share differed significantly from its net
investment income before net unrealized appreciation (depreciation) on
investments of $2.26 per share due to timing differences in the recognition of
income for tax purposes versus financial reporting purposes. The distributions
were comprised of taxable ordinary and net capital gain income.
COMPARISON OF 1995 AND 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 for 1995 versus $1.52 for
1994.
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.
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 in 1995 were 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. Net unrealized appreciation was $2.8 million
in 1995 as compared to net unrealized depreciation of $0.5 million in 1994.
Taxable distributions to shareholders for 1995 were $11.2 million, or $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 versus financial reporting purposes. The distributions
were comprised of taxable ordinary and net capital gain income.
INVESTMENT PORTFOLIO
Total investments decreased by $12.9 million or 13% to $86.3 million at
December 31, 1996 from $99.2 million at December 31, 1995. The Company
invested $25.8 million in small business concerns in 1996, a 33% decrease
compared to $38.3 million invested in 1995. As a result of declining interest
rates and the greater flow of capital into the marketplace, investment exits
and repayments totaled $32.3 million in 1996 as compared to $30.0 million in
1995. For the year ended December 31, 1996, the Company's portfolio experienced
net depreciation of $6.4
Allied Capital Corporation II
11
<PAGE> 6
Allied Capital Corporation II
MANAGEMENT'S DISCUSSION AND ANALYSIS
million due to various factors including the sale of certain investments which
resulted in net realized gains.
FACTORS AFFECTING THE COMPANY'S BUSINESS
Nature of Investments. Consistent with its operation as a business development
company, the Company's portfolio is expected to consist primarily of securities
issued by small and developing, privately-held companies. Typically, such
companies each depend for their success on the management talents and efforts
of one person, so that the death, disability or resignation of such person
could have a materially adverse impact on the companies. Moreover, smaller
companies frequently have narrower product lines and smaller market shares than
larger companies and therefore may be more vulnerable to competitors' actions
and market conditions, as well as general economic downturns. Because these
companies will generally have highly leveraged capital structures, reduced cash
flow resulting from an adverse competitive development, shift in customer
preferences, or an economic downturn may adversely affect the return on, or the
recovery of, the Company's investment in them. Investment in such companies
therefore involves a high degree of business and financial risk, which can
result in substantial losses and accordingly should be considered speculative.
Long-term Character of Investments. It is expected that investments made in
accordance with the Company's investment objective will usually yield a current
return from the time they are made, but will generally produce a profit, if
any, from an accompanying equity feature only after five to eight years. There
can be no assurance that either a current return or capital gains will actually
be achieved.
Illiquidity. Most of the Company's investments consist of securities acquired
directly from the issuers in private transactions. They are usually subject to
restrictions on resale or otherwise illiquid. There is usually no established
trading market for such securities into which they could be sold. In addition,
most of the securities are not eligible for sale to the public without
registration which would involve delay and expense.
Competition. A large number of entities and individuals compete for the
opportunity to make the kinds of investments made by the Company. Many of these
entities and individuals have greater financial resources than the combined
resources of the Company. As a result of this competition, the Company may from
time to time be precluded from making otherwise attractive investments on terms
considered to be prudent in light of the risks to be assumed.
Statements included in this report concerning the Company's future prospects
are "forward looking statements" under the Federal securities laws. There
can be no assurance that future results will be achieved and actual results
could differ materially from forecasts and estimates.
Allied Capital Corporation II
12
<PAGE> 7
Allied Capital Corporation II
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at Value:
Loans and debt securities (cost: 1996--$80,859; 1995--$86,474) $ 74,505 $ 84,235
Equity securities (cost: 1996--$5,956; 1995--$5,538) 11,613 13,548
Other investment assets (cost: 1996--$196; 1995--$1,514) 148 1,424
---------------------
Total investments 86,266 99,207
Cash and cash equivalents 18,525 6,227
Other assets 2,117 1,735
---------------------
Total assets $106,908 $107,169
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends and distributions payable $ 3,379 $ 3,403
Investment advisory fee payable 576 639
Other liabilities 115 1,146
---------------------
Total liabilities 4,070 5,188
---------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $1 par value, 20,000,000 shares authorized; 7,550,198 and
7,104,005 shares issued and outstanding at December 31, 1996 and 1995 7,550 7,104
Additional paid-in capital 99,522 92,225
Notes receivable from sale of common stock (5,387) (2,495)
Net unrealized appreciation (depreciation) on investments (745) 5,681
Undistributed (distributions in excess of) accumulated earnings 1,898 (534)
---------------------
Total shareholders' equity 102,838 101,981
=====================
Total liabilities and shareholders' equity $106,908 $107,169
=====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
Allied Capital Corporation II
13
<PAGE> 8
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $11,894 $10,686 $10,434
Other income 190 853 130
----------------------------------
Total investment income 12,084 11,539 10,564
----------------------------------
Expenses:
Investment advisory fee 2,438 2,445 2,145
Legal and accounting fees 197 343 695
Other operating expenses 301 401 299
----------------------------------
Total expenses 2,936 3,189 3,139
----------------------------------
Net investment income 9,148 8,350 7,425
Net realized gains on investments 7,427 3,621 3,562
----------------------------------
Net investment income before net unrealized appreciation (depreciation) on investments 16,575 11,971 10,987
Net unrealized appreciation (depreciation) on investments (6,426) 2,762 (472)
----------------------------------
Net increase in net assets resulting from operations $10,149 $14,733 $10,515
==================================
Earnings per share $ 1.38 $ 2.11 $ 1.52
==================================
Weighted average number of shares and share equivalents outstanding 7,343 6,979 6,940
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
14
<PAGE> 9
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income $ 9,148 $ 8,350 $ 7,425
Net realized gains on investments 7,427 3,621 3,562
Net unrealized appreciation (depreciation) on investments (6,426) 2,762 (472)
---------------------------------
Net increase in net assets resulting from operations 10,149 14,733 10,515
---------------------------------
Distributions to Shareholders from:
Net investment income (10,955) (9,622) (7,390)
Excess of net investment income -- -- (1,301)
Net capital gains (3,188) (1,584) (606)
---------------------------------
Net decrease in net assets resulting from distributions to shareholders (14,143) (11,206) (9,297)
---------------------------------
Capital Share Transactions:
Net (increase) decrease in notes receivable from sale of common stock (2,892) (1,552) 32
Issuance of common stock upon the exercise of stock options 3,766 1,910 --
Issuance of common stock in lieu of cash distributions 3,977 621 --
---------------------------------
Net increase in net assets resulting from capital share transactions 4,851 979 32
---------------------------------
Total increase in net assets 857 4,506 1,250
Net assets at beginning of year 101,981 97,475 96,225
---------------------------------
Net assets at end of year $102,838 $101,981 $97,475
=================================
Net asset value per share $ 13.62 $ 14.36 $ 14.05
=================================
Shares outstanding at end of year 7,550 7,104 6,938
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
15
<PAGE> 10
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations $ 10,149 $ 14,733 $ 10,515
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized (appreciation) depreciation on investments 6,426 (2,762) 472
Write-off of investments 1,616 657 607
Net realized gains on investments (9,043) (4,278) (4,169)
Interest income -- -- (1,469)
Amortization of loan discounts (1,099) (967) (906)
Changes in assets and liabilities:
Other assets (382) 256 (83)
Investment advisory fee payable (63) 60 108
Other liabilities (1,031) (244) (407)
----------------------------------
Net cash provided by operating activities 6,573 7,455 4,668
----------------------------------
Cash Flows from Investing Activities:
Investments in small business concerns (25,752) (38,264) (28,408)
Purchase of U.S. government securities -- (345) (8,460)
Payments on loans and debt securities and other investment assets 32,073 31,004 12,927
Net proceeds from sale of equity securities 8,720 2,869 3,294
Redemption of U.S. government securities -- 1,100 25,055
Payments on notes receivable from sale of common stock 874 358 32
----------------------------------
Net cash provided by (used in) investing activities 15,915 (3,278) 4,440
----------------------------------
Cash Flows from Financing Activities:
Dividends and distributions paid (10,190) (9,541) (8,464)
----------------------------------
Net cash used in financing activities (10,190) (9,541) (8,464)
----------------------------------
Net increase (decrease) in cash and cash equivalents 12,298 (5,364) 644
Cash and cash equivalents, beginning of year 6,227 11,591 10,947
----------------------------------
Cash and cash equivalents, end of year $ 18,525 $ 6,227 $ 11,591
==================================
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of common stock upon the exercise of stock options $ 3,766 $ 1,910 $ --
Issuance of common stock in lieu of cash distributions $ 3,977 $ 621 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
16
<PAGE> 11
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except number of shares)
Loans With Equity
- --------------------------------------------------------------------------------------------------------------------
Acme Paging, L.P. (IL) Loans and Debt Securities $ 1,646 $ 1,646
(South American paging service) Limited Partnership Interest (0.52%) 416 416
- --------------------------------------------------------------------------------------------------------------------
Allied Waste Industries, Inc. (AZ) (1) Warrants 103 1,651
(solid waste collection and disposal)
- --------------------------------------------------------------------------------------------------------------------
American Barbecue & Grill (KS) Loans and Debt Securities 1,600 1,600
(restaurants) Warrants 54 54
- --------------------------------------------------------------------------------------------------------------------
ASW Holding Corporation (IL) Loans and Debt Securities 1,425 1,425
(steel wool manufacturer) Warrants 47 323
- --------------------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc. (MA) (1) Loans and Debt Securities 3,718 3,718
(bakery cafes) Warrants (3) 118 0
- --------------------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc. (OH) Loans and Debt Securities 1,247 1,247
(manufacturer and distributor of sportswear) Common Stock (18,091 shares) 132 132
Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
CeraTech Holdings, Inc. (IL) Loans and Debt Securities 811 401
(ceramic plate manufacturer) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. (OH) Loans and Debt Securities 940 940
(direct marketer of woodcrafts) Common Stock (103 shares) 0 0
- --------------------------------------------------------------------------------------------------------------------
Colorado Prime Corporation (NY) Loans and Debt Securities 4,957 4,957
(home food delivery) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Convenience Corporation of America (NE) Loans and Debt Securities 4,223 4,223
(convenience stores) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Contemporary Media, Inc. (ID) Loans and Debt Securities 437 437
(radio stations) Warrants 160 206
- --------------------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. (TX) Loans and Debt Securities 1,372 1,372
(sodium sulfate producer) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. (IL) Warrants 117 170
(circuit board manufacturer)
- --------------------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (CT) (1) Warrants (3) 144 224
(tool manufacturer)
- --------------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. (CA) Loans and Debt Securities 4,851 4,851
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Enviroplan, Inc. (NJ) (2) Loans and Debt Securities 1,935 403
(emissions monitoring systems) Warrants 94 0
- --------------------------------------------------------------------------------------------------------------------
Esquire Communications, Ltd. (NY) (1) Warrants (3) 3 0
(court reporting services)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) Restricted public
security
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
17
<PAGE> 12
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except number of shares)
Fairchild Industrial Products Company (NC) Loans and Debt Securities $ 2,245 $ 2,245
(industrial controls and power transmissions) Warrants 112 112
- --------------------------------------------------------------------------------------------------------------------
Garden Ridge Corporation (TX) (1) Common Stock (163,044 shares) 449 1,281
(home decorating and craft products)
- --------------------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II (FL) Warrants 61 1,056
(television stations)
- --------------------------------------------------------------------------------------------------------------------
Grant Television, Inc. (FL) Loans and Debt Securities 2,738 2,738
(television stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Gulf South Medical Supply, Inc. (MS) (1) Loans and Debt Securities 360 360
(medical supplies distributor) Warrants (3) 70 70
- --------------------------------------------------------------------------------------------------------------------
Innotech, Inc. (VA) (1) Warrants (3) 30 0
(bifocal lens manufacturer)
- --------------------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. (MA) Loans and Debt Securities 1,830 1,830
(cord manufacturer) Warrants 129 129
- --------------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. (NJ) Loans and Debt Securities 1,504 1,504
(nail enamel manufacturer) Warrants 146 146
- --------------------------------------------------------------------------------------------------------------------
Kirkland's, Inc. (TN) Loans and Debt Securities 2,721 2,721
(retailer of home products) Warrants 42 42
- --------------------------------------------------------------------------------------------------------------------
Labor Ready, Inc. (WA) (1) Common Stock (146,534 shares) 1,310 1,935
(temporary labor services)
- --------------------------------------------------------------------------------------------------------------------
Liberty Business Forms & Systems, Inc. (NY) Loans and Debt Securities 1,436 1,436
(inventory control tags and forms) Warrants 43 43
- --------------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. (VA) Loans and Debt Securities 155 155
(residential land development) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. (FL) Warrants 125 0
(highway paint striping)
- --------------------------------------------------------------------------------------------------------------------
Montgomery Tank Lines (FL) (1) Common Stock (17,701 shares) 75 359
(tank truck carrier)
- --------------------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Inc. (PA) (1) Preferred Stock (166,223 shares) (3) 1,250 1,424
(educational services) Warrants (3) 0 202
- --------------------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. (PA) (2) Loans and Debt Securities 469 324
(custom embroidered apparel) Warrants 32 0
- --------------------------------------------------------------------------------------------------------------------
The Peerless Group, Inc. (TX) (1) Common Stock (253,240 shares) (3) 12 1,401
(commercial banking software development)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) Restricted public
security
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
18
<PAGE> 13
Allied Capital Corporation II
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except number of shares
and number of loans)
Pico Products, Inc. (CA) (1) Loans and Debt Securities $ 2,000 $ 2,000
(manufacturer of satellite/television components) Warrants (3) 0 0
- --------------------------------------------------------------------------------------------------------------------
Quality Software Products Holdings, PLC (UK) (1) Common Stock (41,571 shares) 396 148
(accounting software)
- --------------------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. (GA) Loans and Debt Securities 1,853 1,853
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------
R-Tex Decoratives Company, Inc. (PA) Loans and Debt Securities 659 659
(decorative ribbon manufacturer) Warrants 25 25
- --------------------------------------------------------------------------------------------------------------------
Steuart Petroleum (DC) Warrants 48 48
(petroleum products)
- --------------------------------------------------------------------------------------------------------------------
West Virginia Radio Corporation (WV) Loans and Debt Securities 527 527
(radio station) Warrants 200 0
- --------------------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company (GA) Loans and Debt Securities 1,060 1,060
(builders' supply yards) Warrants 9 9
- --------------------------------------------------------------------------------------------------------------------
Z-Spanish Radio Network (CA) Loans and Debt Securities 5,187 5,187
(radio stations) Warrants 2 2
- --------------------------------------------------------------------------------------------------------------------
Subtotal $59,860 $63,427
- --------------------------------------------------------------------------------------------------------------------
Loans With No Equity By Industry
- --------------------------------------------------------------------------------------------------------------------
Hotels/Motels (3 loans) $ 3,606 $ 3,606
- --------------------------------------------------------------------------------------------------------------------
Mobile Home Parks (3 loans) 4,694 4,694
- --------------------------------------------------------------------------------------------------------------------
Moving/Storage Company (1 loan) 572 572
- --------------------------------------------------------------------------------------------------------------------
Pet Products Manufacturer (1 loan) 2,669 2,669
- --------------------------------------------------------------------------------------------------------------------
Radio Stations (5 loans) 9,487 9,487
- --------------------------------------------------------------------------------------------------------------------
Retail Shops (1 loan) 373 373
- --------------------------------------------------------------------------------------------------------------------
Cold Food Storage Warehouse (1 loan) (2) 5,266 1,016
- --------------------------------------------------------------------------------------------------------------------
Other (6 loans) 288 273
- --------------------------------------------------------------------------------------------------------------------
Subtotal $26,955 $22,690
- --------------------------------------------------------------------------------------------------------------------
Other Investment Assets (4) $ 64 $ 17
- --------------------------------------------------------------------------------------------------------------------
Pledged Certificate of Deposit 132 132
- --------------------------------------------------------------------------------------------------------------------
Subtotal $ 196 $ 149
- --------------------------------------------------------------------------------------------------------------------
Total $87,011 $86,266
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest income not being accrued; (3) Restricted
public security; (4) Non-income producing
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation II
19
<PAGE> 14
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, registered investment company subsidiaries, Allied Investment
Corporation II (Allied Investment II) and Allied Financial Corporation II
(Allied Financial II). Allied Investment II and Allied Financial II are
licensed under the Small Business Investment Act of 1958 as a Small Business
Investment Company (SBIC) and a Specialized Small Business Investment Company
(SSBIC), respectively.
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 Advisers 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.
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. Loan fees and original issue
discount are 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 measured by the difference between
the net proceeds from the 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 change in the valuation of the
portfolio.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders 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
shareholders; 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.
Allied Capital Corporation II
20
<PAGE> 15
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends declared by the Company in December that are payable to shareholders
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
shareholder on December 31 of the year declared.
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) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Cash $ 481 $ 309
Repurchase agreements 18,044 5,918
---------------
Total $18,525 $6,227
===============
- --------------------------------------------------------
</TABLE>
On December 31, 1996, the Company had purchased $18,044,000 of overnight
repurchase agreements collateralized by U.S. Government securities under
agreements to resell on January 2, 1997. 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.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and
1994 financial statements to conform with the 1996 financial statement
presentation.
NOTE 2. INVESTMENTS
Loans and debt securities have stated interest rates ranging from generally 8
percent to 16 percent, and are generally payable in installments with final
maturities from 3 to 12 years from date of issue. At December 31, 1996 and
1995, loans and debt securities with a cost basis of $7,796,000 and $7,962,000,
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. All of the Company's equity securities are
non-income producing except for its investment in Quality Software Products
Holdings, PLC.
The following industries represent five percent or more of the total value of
the investments outstanding at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Broadcasting 31% 26%
Manufacturing/construction 23% 14%
Real estate 6% 13%
Retail 23% 18%
Service 9% 16%
Software 2% 5%
- --------------------------------------------------------
</TABLE>
The net unrealized appreciation for all securities over cost for federal income
tax purposes at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Aggregate gross unrealized
appreciation in which there is
an excess of value over cost $ 7,883 $10,736
Aggregate gross unrealized
depreciation in which there is
an excess of cost over value (7,327) (5,805)
----------------
Net unrealized appreciation $ 556 $ 4,931
================
- --------------------------------------------------------
</TABLE>
The aggregate cost of securities at December 31, 1996 and 1995 for federal
income tax purposes was $85,710,000 and $94,276,000, respectively.
Allied Capital Corporation II
21
<PAGE> 16
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 shareholders, 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 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, 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 the 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 $0.41 per
share dividend for the fourth quarter, a $0.38 per share dividend for the third
quarter, a $0.35 per share dividend for the second quarter and a $0.33 per
share dividend for the first quarter of 1996. The Company's board of directors
also declared an extra distribution in the fourth quarter of $0.45 per share,
which was paid to shareholders on January 31, 1997, for a total distribution in
1996 equal to $1.92 per share. The components of the dividends and
distributions of taxable income declared by the board of directors for 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Per Per Per
(in thousands, except per share amounts) Amount Share Amount Share Amount Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary income $10,955 $1.49 $ 9,622 $1.38 $8,691 $1.25
Long-term capital gains 3,188 0.43 1,584 0.22 606 0.09
-------------------------------------------------------------
Total distributions $14,143 $1.92 $11,206 $1.60 $9,297 $1.34
=============================================================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Allied Capital Corporation II
22
<PAGE> 17
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1996 distributions of $1.92 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 $1.49 and $0.43, respectively. The 1995
distribution of $1.60 was 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 distributions of $1.34 per
share 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) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Taxable income $14,143 $11,206 $ 9,297
Market discount amortization 1,301 -- (1,301)
Net realized gains (losses) 367 1,267 2,991
Net unrealized appreciation
(depreciation) on investments (6,426) 2,762 (472)
Other 764 (502) --
--------------------------------
Financial statement income $10,149 $14,733 $10,515
================================
- ----------------------------------------------------------------------
</TABLE>
As required by the 1940 Act, the Company is not permitted to make distributions
to shareholders 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 subsidiaries annually distribute all of their
taxable income to the Company. In order to make such distributions, the
subsidiaries must meet the minimum capital requirements as set forth by the
SBA. The subsidiaries are in compliance with these requirements.
NOTE 5. BANK LOANS
The Company has a secured 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 1996 and 1995, the Company did not use this facility and had no
borrowings outstanding under this agreement as of December 31, 1996 or 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). Shareholders 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 the Company may 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
immediately prior to and including the dividend payment date. During 1996, the
Company issued 214,166 shares at an average price of $18.57 per share. During
1995, the Company issued 35,796 shares at an average price of $17.34 per share.
The Company has an incentive stock option plan (the ISOplan) which allows the
granting of options to the Company's officers and directors. Under the ISO plan
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.
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 bear interest at the applicable federal interest rate in effect at
the date of issue.
Allied Capital Corporation II
23
<PAGE> 18
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the activity in the ISO plan is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 618,668 608,433 510,765
Options granted 183,073 260,888 118,168
Options exercised (232,027) (130,018) --
Options canceled (46,413) (120,635) (20,500)
---------------------------------------------
Options outstanding
at December 31 523,301 618,668 608,433
=============================================
Options available
for grant 201,998 338,658 478,911
Options exercisable 223,065 309,558 321,603
---------------------------------------------
Option prices
per share:
Granted $ 17.75 $13.75-17.75 $13.75-14.25
Exercised $13.75-18.25 $13.75-16.50 $ --
Canceled $13.75-17.75 $15.00-22.75 $13.75-22.75
---------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
The Company accounts for the ISO plan as required by APB Opinion No. 25, and no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the Company's net increase in net
assets resulting from operations and earnings per share would have been reduced
to the following pro forma amounts for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(in thousands, except per share amounts) 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Net increase in net assets
resulting from operations:
As reported $10,149 $14,733
Pro forma (unaudited) $ 9,776 $14,334
Earnings per share:
As reported $ 1.38 $ 2.11
Pro forma (unaudited) $ 1.33 $ 2.05
- --------------------------------------------------------
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants; risk-free interest rates of 6.4 and 6.0 percent
for 1996 and 1995; expected dividend yield of 9 percent for 1996 and 1995;
expected life of 5 years for all options granted in 1996 and 1995; expected
volatility of 36 percent for 1996 and 1995, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $3,120,000 at December 31, 1996.
At December 31, 1996, the Company had standby letters of credit and third party
guarantees outstanding totaling $215,000. The conditional commitments under the
letters of credit have been issued by a financial institution on behalf of the
Company to guarantee performance of a portfolio company to a third party. A
certificate of deposit of $132,000 has been used as collateral for the letters
of credit.
The Company is party to certain lawsuits in connection with its business. While
the outcome of these legal proceedings cannot at this time be predicted with
certainty, management does not expect that these proceedings will have a
material effect upon the financial condition of the Company.
NOTE 8. 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.
Allied Capital Corporation II
24
<PAGE> 19
Allied Capital Corporation II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1996
(in thousands, except per share amounts) Qtr 1 Qtr 2 Qtr 3 Qtr 4
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $3,054 $3,079 $2,790 $3,161
Net investment income $2,298 $2,230 $2,124 $2,496
Net increase (decrease) in net assets resulting from operations $5,949 $2,212 $2,548 $ (560)(1)
Per share $ 0.83 $ 0.30 $ 0.34 $(0.09)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
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>
(1) The net decrease in net assets resulting from operations for the fourth
quarter of 1996 is primarily due to the depreciation of two public company
investments of $2.4 million and one private company investment of $1.4 million
from their value at September 30, 1996.
Allied Capital Corporation II
25
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
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, 1996 and 1995, including
the consolidated statement of loans and investments as of December 31, 1996,
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,
1996, and the selected per share data presented as financial highlights for
each of the five years in the period ended December 31, 1996. 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, 1996 and 1995. An audit also 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, 1996 and 1995. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements 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, 1996 and 1995, 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, 1996, and the selected per share data for each of
the five years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As explained in Note 1, the consolidated financial statements include
securities valued at $86,266,000 as of December 31, 1996 and $99,207,000 as of
December 31, 1995, (81 percent and 93 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 4, 1997
Allied Capital Corporation II
26
<PAGE> 21
Allied Capital Corporation II
DIRECTORS AND OFFICERS*
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C> <C>
William L. Walton(1) William L. Walton Kelly A. Anderson
Chairman of the Board & Chairman of the Board, Vice President, Corporate Controller &
Chief Executive Officer Chief Executive Officer & President Assistant Treasurer
David Gladstone Jon A. DeLuca Christina L. DelDonna
Vice Chairman Executive Vice President, Treasurer & Vice President & Assistant Controller
Chief Financial Officer
John D. Firestone(2,3) Robert M. Monk
Partner, Secor Group Katherine C. Marien Vice President
Executive Vice President
Lawrence I. Hebert(1,3) Penni F. Roll
Director & President, John M. Scheurer Vice President, Controller &
Perpetual Corporation Executive Vice President Assistant Treasurer
John I. Leahy(2) George Stelljes III Suzanne V. Sparrow
President, Management & Executive Vice President Vice President, Investor Relations &
Marketing Associates, Inc. Assistant Secretary
Joan M. Sweeney
John D. Reilly(1,3) Executive Vice President Gay S. Truscott
President, Reilly Investment Corporation Vice President
Thomas H. Westbrook
George C. Williams Executive Vice President Peter C. Fisher
Financial Consultant Assistant Vice President
G. Cabell Williams III
Smith T. Wood(1,2) Executive Vice President Kristine M. Lansing
Director & President, CyberSERV, Inc. Assistant Vice President &
Tricia B. Daniels Assistant Secretary
(1) Executive Committee Senior Vice President & Secretary
(2) Audit Committee Donna B. Natale
(3) Compensation Committee Richard E. Fearon, Jr. Assistant Vice President &
Senior Vice President Assistant Secretary
*As of March 1, 1997
Philip A. McNeill Arthur S. Cooper
Senior Vice President Assistant Secretary
Carr T. Preston Thomas R. Salley III
Senior Vice President Assistant Secretary
</TABLE>
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1996 and 1995 and the 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>
- --------------------------------------------------------------------------------------------------------------
1996 1995
DISTRIBUTIONS Distributions
HIGH LOW PER SHARE High Low Per Share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $18.50 $16.25 $0.33 $14.75 $13.75 $0.25
Second Quarter $18.50 $15.50 $0.35 $16.25 $14.00 $0.27
Third Quarter $20.25 $17.25 $0.38 $16.25 $15.00 $0.29
Fourth Quarter $21.88 $18.75 $0.41 $19.00 $15.75 $0.31
Annual Extra Distribution $0.45 $0.48
----- -----
Total Distribution $1.92 $1.60
===== =====
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Designed by Curran & Connors, Inc.
<PAGE> 1
[MATTHEWS, CARTER AND BOYCE LETTERHEAD]
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 4, 1997 included in Allied
Capital Corporation II's Annual Report to shareholders. It should be noted that
we have not audited any financial statements of the company subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<PAGE> 2
[MATTHEWS, CARTER AND BOYCE LETTERHEAD]
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 4, 1997 incorporated by reference in Allied Capital Corporation
II's Form 10-K for the year ended December 31, 1996 and to all references to
our Firm included in such registration statement.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 87,011
<INVESTMENTS-AT-VALUE> 86,266
<RECEIVABLES> 0
<ASSETS-OTHER> 2,117
<OTHER-ITEMS-ASSETS> 18,525
<TOTAL-ASSETS> 106,908
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,070
<TOTAL-LIABILITIES> 4,070
<SENIOR-EQUITY> 7,550
<PAID-IN-CAPITAL-COMMON> 94,135
<SHARES-COMMON-STOCK> 7,550
<SHARES-COMMON-PRIOR> 7,104
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,898
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (745)
<NET-ASSETS> 102,838
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,894
<OTHER-INCOME> 190
<EXPENSES-NET> 2,936
<NET-INVESTMENT-INCOME> 9,148
<REALIZED-GAINS-CURRENT> 7,427
<APPREC-INCREASE-CURRENT> (6,426)
<NET-CHANGE-FROM-OPS> 10,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,955
<DISTRIBUTIONS-OF-GAINS> 3,188
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 232
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 214
<NET-CHANGE-IN-ASSETS> 857
<ACCUMULATED-NII-PRIOR> (534)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,438
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,936
<AVERAGE-NET-ASSETS> 102,409
<PER-SHARE-NAV-BEGIN> 14.36
<PER-SHARE-NII> 1.24
<PER-SHARE-GAIN-APPREC> 0.14
<PER-SHARE-DIVIDEND> 1.49
<PER-SHARE-DISTRIBUTIONS> 0.43
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.62
<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, N.W.
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1680801
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/96
- --------------------------------------------------------------------------------
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 12/31/96
(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 8,289,525 0 0 8,289,525
------------ ----------- ----------- ------------
2 Debt Securities 19,813,281 2,087,584 2 17,725,699
------------ ----------- ----------- ------------
3 Equity Securities 1,973,996 127,938 1,813,329 3,659,387
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 30,076,802 2,215,522 1,813,331 29,674,611
------------ ----------- ----------- ------------
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 443,684 296,107 74,617 222,194
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 30,520,486 2,511,629 1,887,948 29,896,805
------------ ----------- ----------- ------------
11 Less Current Maturities 2,217,615
------------
12 Loans and Investments Net of Current Maturities 27,679,190
------------
Investment in 301(d) Licensee (2):
13 Name 0
----------------------------------- ------------
License No.
----------------
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 561,662
-----------
15 Invested Idle Funds 0 561,662
----------- -----------
16 Interest and Dividends Receivable 477,214
-----------
17 Notes and Accounts Receivable 301,210
-----------
18 Receivables from Parent or Other Associates 0
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 17,233 761,191
----------- -----------
20 Current Maturities of Portfolio Securities 2,217,615
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 2,217,615
----------- -----------
24 Other (specify) 0
-------------------------- -----------
25 Other (specify) 0 3,540,468
------------------------- ----------- ------------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
------------ -----------
27 Other (specify) Prepaid Expenses 1,751
-------------------------- -----------
28 Other (specify) 0 1,751
-------------------------- ----------- ------------
29 TOTAL ASSETS $31,221,409
------------
</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 12/31/96
(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 164
-----------
33 Due to Parent or Other Associates 16,555,707
-----------
34 Accrued Interest Payable 0
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 0
-----------
b. Current Maturities of Line 31 0 0
----------- -----------
37 Distributions Payable 3,927,182
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) 0
------------------------- -----------
40 Other(specify) 0 20,483,053
------------------------- ----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 336,913
-----------
42 Other(specify) 0
------------------------- -----------
43 Other(specify) 0 336,913
------------------------- ----------- ------------
44 TOTAL LIABILITIES 20,819,966
------------
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 8,213,796 8,213,846
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 8,213,846
-----------
51 3% Preferred Stock Purchased by SBA 0
-----------
52 Unrealized Gain (Loss) on Securities Held -623,681
-----------
53 Non-Cash Gains/Income 1,327,740
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 1,483,538
------------
c. Total (54a plus 54b) 1,483,538
-----------
55 Undistributed Realized Earnings (53 plus 54c) 2,811,278
-----------
56 Total 10,401,443
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 10,401,443
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $31,221,409
------------
</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 12/31/96
(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 3,716,521
----------
2 Dividend Income 967
----------
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 13,429
----------
7 Interest on Invested Idle Funds 117,272
----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 40,900
----------
10 GROSS INVESTMENT INCOME 3,889,089
-----------
EXPENSES
- --------
11 Interest Expense 1,541,670
----------
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 1,362
----------
24 Insurance 2,674
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 510
----------
27 Provision for Losses on Receivables (excluding loans receivable) 115,526
----------
28 Legal Fees 15,312
----------
29 Audit and Examination Fees 10,399
----------
30 Miscellaneous Expenses (attach schedule) 3,145
----------
31 TOTAL EXPENSES 1,690,598
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,198,491
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 2,496,029
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 4,694,520
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $4,694,520
-----------
37 Extraordinary Item 0
-------------------- -----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $4,694,520
-----------
</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 12/31/96
(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 2,959,747
----------
2 Dividends Received from Portfolio Concerns 0
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 175,427
----------
5 Interest on Invested Idle Funds 117,272
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 73,840
----------
CASH OUTFLOWS:
8 Interest Paid 1,937,278
----------
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) 36,596
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 8,119
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,344,293
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 10,845,928
----------
17 Returns of Capital Received from Portfolio Concerns 187,536
----------
18 Net Proceeds from Disposition of Portfolio Securities 2,007,901
----------
19 Liquidation of Idle Funds Investments 0
----------
20 Other (Specify) 0
------------------------- ----------
Cash Outflows:
21 Purchase of Portfolio Securities 1,194,330
----------
22 Loans to Portfolio Concerns 8,888,615
----------
23 Idle Funds Investments 0
----------
24 Other (Specify) 0
-------------------------- ----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,958,420
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 0
----------
27 Proceeds from Sale of 4% Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 0
----------
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 1,400,000
----------
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 3,825,195
----------
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 12/31/96
(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 -5,225,195
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -922,482
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,484,145
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $561,663
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 4,694,520
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 1,701
----------
44 Provision for Losses on Accounts Receivable 115,526
----------
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 -2,496,029
----------
48 Other (Specify) OID -142,870
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -411,330
----------
50 (Increase) Decrease in Other Current Assets 59,644
----------
51 Increase (Decrease) in Accounts Payable -4,895
----------
52 Increase (Decrease) in Accrued Interest Payable -395,608
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities -35,790
----------
56 Other (Specify) Deferred Credits -40,576
------------------------ ----------
57 Other (Specify) 0
------------------------ ----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,344,293
----------
</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, 1996
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.
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. When collection of interest is
in doubt, interest is not accrued or a reserve is established. Loan fees and
original issue discount are 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 measured by the difference between the
proceeds from the 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 change in the valuation of the
portfolio.
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.
<PAGE> 8
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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
Loans and debt securities have stated interest rates ranging generally from 9
percent to 16 percent, and are generally payable in installments with final
maturities from 3 years to 8 years from date of issue.
There were no accrued interest reserves at December 31, 1996. The following
loans and debt securities were not accruing interest at December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE
AMOUNT OF
INTEREST NOT
DATE INTEREST ACCRUED AT
ACCRUAL DECEMBER 31,
PORTFOLIO SECURITY DISCONTINUED NET COST 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST NOT ACCRUED:
Enviroplan 7/01/96 1,521,941 281,767
Enviroplan 7/01/96 416,402 88,783
Old Mill 9/22/95 393,058 68,857
Old Mill 9/22/95 83,242 13,984
----------------- ---------------------
Total $ 2,414,643 $ 453,391
================= =====================
</TABLE>
<PAGE> 9
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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
The Company's board of directors declared a dividend of $3,927,182 for the year
ended December 31, 1996, which was paid January 30, 1996. This represented all
of the Company's taxable income. Pursuant to SBA regulations, the Company's 1996
dividend exceeded retained earnings available for distribution by $1,028,091.
The Company reclassed this amount from paid-in surplus to undistributed retained
earnings in January 1997.
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, 1996,
the Company was paying interest at a rate of 8.5% per annum, and had $3,462,500
available under the note.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $474,583 at December 31, 1996.
<PAGE> 10
ALLIED INVESTMENT CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
<PAGE> 11
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/13/96
(page 1 of 2)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
(Amounts rounded to nearest dollar)
<TABLE>
<CAPTION>
Part I. CAPITAL STOCK AND PAID-IN SURPLUS CAPITAL PAID-IN
--------------------------------- STOCK SURPLUS TOTAL
(excluding capital contributed by SBA) ----- ------- -----
(pg 3C, line 47) (pg 3c, line 48)
<S> <C> <C> <C>
1 BALANCE AT BEGINNING OF PERIOD 50 9,896,085 9,896,135
------------ ---------- ----------
2 ADDITIONS:
a. Capital stock issued for cash 0 0 0
------------ ---------- ----------
b. Capital stock issued for services rendered 0 0 0
------------ ---------- ----------
c. Capital stock Issued for contributed non-cash assets 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution 0 0 0
------------ ---------- ----------
e. Gain on sale of Treasury Stock 0 0 0
------------ ---------- ----------
f. Other credits (specify) 0 0 0
---------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2f) 0 0 0
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 50 9,896,085 9,896,135
------------ ---------- ----------
5 DEDUCTIONS:
a. Retirement of capital stock 0 0 0
------------ ---------- ----------
b. Distributions in partial liquidation 0 0 0
------------ ---------- ----------
c. Loss on sale of Treasury Stock 0 0 0
------------ ---------- ----------
d. Other debits (specify) excess distributions 0 1,682,289 1,682,289
-------------------- ------------ ---------- ----------
6 Total Deductions (sum of 5a through 5d) 0 1,682,289 1,682,289
------------ ---------- ----------
7 BALANCE AT END OF PERIOD (line 4 minus line 6)--
totals must agree with lines 47 and 48, page 3C $50 $8,213,796 $8,213,846
------------ ---------- ----------
- -----------------------------------------------------------------------------------------------------------------------------------
Part II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED
------------------------------- GAINS/ NET REALIZED REALIZED
INCOME EARNINGS EARNINGS
------ -------- --------
(1) (2) (1) + (2)
1 BALANCE AT BEGINNING OF PERIOD 806,843 -445,192 361,651
------------ ---------- ----------
2 ADDITIONS:
a. Net investment income 118,759 2,079,732 2,198,491
------------ ---------- ----------
b. Realized gain (loss) on investments 738,929 1,757,100 2,496,029
------------ ---------- ----------
c. Gain on appreciation of securities distributed in kind 0 ////////// 0
------------ ---------- ----------
d. Other (specify) excess distributions 0 1,682,289 1,682,289
-------------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2d) 857,688 5,519,121 6,376,809
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 1,664,531 5,073,929 6,738,460
------------ ---------- ----------
5 DEDUCTIONS:
a. Dividends--Cash //////////// 3,927,182 3,927,182
------------ ---------- ----------
b. Dividends--Stock //////////// 0 0
------------ ---------- ----------
c. Dividends--In-kind (at fair value) 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0
------------ ---------- ----------
e. Other (specify) 0 0 0
-------------------- ------------ ---------- ----------
6 Total deductions (sum of 5a through 5e) 0 3,927,182 3,927,182
------------ ---------- ----------
7 Total before collection of non-cash gains/income (line 4 minus
line 6) 1,664,531 1,146,747 2,811,278
------------ ---------- ----------
8 ADJUSTMENT: Collection of non-cash gains/income -336,791 336,791 //////////
------------ ---------- ----------
9 BALANCE AT END OF PERIOD (line 7 plus line 8)--
total must agree with lines 53, 54c, and 55, page 3C $1,327,740 $1,483,538 $2,811,278
------------ ---------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C
<PAGE> 12
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(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> <C>
PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD
-----------------------------------------
1 NET UNREALIZED APPRECIATION (DEPRECIATION)
AT BEGINNING OF PERIOD 708,276
-----------
2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION
a. Portfolio securities:
(i) Increases 1,051,390
-----------
(ii) Decreases due to revaluation of securities -164,190
-----------
(iii) Decreases due to sale of securities -1,019,243
-----------
(iv) Decreases due to write-off of securities 0 -132,043
----------- -----------
b. Assets acquired in liquidation of portfolio securities 0
-----------
c. Operating concerns acquired 0
-----------
d. Notes and other securities received 74,617
-----------
3 TOTAL (sum of 2a through 2d) -57,426
-----------
4 Subtotal (line 1 plus line 3) 650,850
-----------
5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION
a. Portfolio securities
(i) Increases -1,340,519
-----------
(ii) Decreases due to revaluation of securities 294,180
-----------
(iii) Decreases due to sale of securities/repayment of principal 0
-----------
(iv) Decreases due to write-off of securities 0 -1,046,339
----------- -----------
b. Assets Acquired in liquidation of portfolio securities 0
-----------
c. Operating concerns acquired 0
-----------
d. Notes and other securities received -228,192
-----------
6 TOTAL (sum of 5a through 5d) -1,274,531
-----------
7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT
END OF PERIOD (line 4 plus line 6) -623,681
-----------
8 LESS: Estimated future tax expense (benefit)
on net unrealized appreciation (depreciation) 0
-----------
9 UNREALIZED GAIN (LOSS) ON SECURITIES HELD--
total must agree with line 52, page 3C $-623,681
-----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete
Page 8C
<PAGE> 13
OMB Approval No. 3245-0063
Expiration Date
I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION
II. REGULATORY AND LEVERAGEABLE CAPITAL
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation II License No. 03/03-0196
<TABLE>
<CAPTION>
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION
--------------------------------------------------------------
<S> <C> <C>
1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 1,483,538
-------------
2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 2,511,629
-------------
3 ADD: Cumulative Undeclared Dividends on 4% Redeemable
Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0
-------------
4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION -1,028,091
-------------
- ---------------------------------------------------------------------------------------------------------------------------
PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL
-----------------------------------------------
1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 8,213,846
-------------
2 ADD: Unfunded binding commitments from Institutional Investors 0
-------------
3 LESS: Regulatory Deductions:
a. Organizational Expenses Not Approved by SBA (1) ( 0)
--------------
b. Capital Stock Issued for Services ( 0)
--------------
c. Capital Stock Issued for Non-cash Assests (unless approved by SBA
for inclusion in Regulatory Capital or converted to cash) ( 0)
--------------
d. Investment in 301(d) Licensee ( 0)
--------------
e. Treasury Stock at cost ( 0)
--------------
f. Other (specify) ( 0)
-------------------- --------------
4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0)
--------------
5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 8,213,846
-------------
6 LESS: Unfunded binding commitments from Institutional Investors ( 0)
--------------
7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0)
--------------
8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0)
eligible investments in Small Concerns --------------
9 LESS: Other deductions (specify) 0
------------------- --------------
10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 8,213,846
--------------
PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL IMPAIRMENT AND OVERLINE PURPOSES
------------------------------------------------------------------------------
</TABLE>
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS
3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c), LICENSEE
WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET UNREALIZED
GAINS ON MARKETABLE SECURITIES (see note (2) below).
<TABLE>
<S> <C>
11 REGULATORY CAPITAL (Part II, line 5) 8,213,846
-------------
12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0
-------------
13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus 0
line 12 if line 12 greater than O) -------------
14 ADD: Net Unrealized Gains on Marketable Securities (3) 0
-------------
15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14 $0
if line 12 or line 14 greater than O) -------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deduct only those organizational expenses which were not accepted as
reasonable by SBA and which have not been amortized. See example in
"Instructions for Preparation of SBA Form 468."
(2) Licensee must have positive Retained Earnings Available for Distribution in
order to establish an increased overline limit pursuant to
13 CFR 107.303(c).
(3) As defined in 13 CFR 107,303(c). Attach a schedule showing the following for
each marketable security: name of Small Business Concern, market in which
traded, names of market makers for companies not listed on a stock exchange
or NASDAQ, class of security, cost, valuation, and unrealized gain or loss
in accordance with the requirements of Section 107.303(c).
SBA Form 468.1 (1-95) Previous editions obsolete Page 9C
<PAGE> 14
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Financial Corporation II 03/03-5207
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, NW 9th Floor
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1689359
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/96
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
---------------
A B C
---------------
3 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> 15
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
<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 491,092 0 0 491,092
------------ ----------- ----------- ------------
2 Debt Securities 326,297 0 0 326,297
------------ ----------- ----------- ------------
3 Equity Securities 395 0 0 395
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 817,784 0 0 817,784
------------ ----------- ----------- ------------
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 0 0 0 0
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 817,784 0 0 817,784
------------ ----------- ----------- ------------
11 Less Current Maturities 100,000
------------
12 Loans and Investments Net of Current Maturities 717,784
------------
Investment in 301(d) Licensee (2):
13 Name 0
----------------------------------- ------------
License No.
----------------
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 2,661,597
-----------
15 Invested Idle Funds 0 2,661,597
----------- -----------
16 Interest and Dividends Receivable 24,469
-----------
17 Notes and Accounts Receivable 59,813
-----------
18 Receivables from Parent or Other Associates 0
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 0 84,282
----------- -----------
20 Current Maturities of Portfolio Securities 100,000
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 100,000
----------- -----------
24 Other (specify) 0
-------------------------- -----------
25 Other (specify) 0 2,845,879
------------------------- ----------- ------------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
------------ -----------
27 Other (specify) DEFERRED ORGANIZA'L COSTS 2,101
-------------------------- -----------
28 Other (specify) PREPAID EXPENSES 204 2,305
-------------------------- ----------- ------------
29 TOTAL ASSETS $3,565,968
------------
</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> 16
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
<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 0
-----------
33 Due to Parent or Other Associates 2,792
-----------
34 Accrued Interest Payable 0
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 0
-----------
b. Current Maturities of Line 31 0 0
----------- -----------
37 Distributions Payable 947,457
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) 0
------------------------- -----------
40 Other(specify) 0 950,249
------------------------- ----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 9,161
-----------
42 Other(specify) 0
------------------------- -----------
43 Other(specify) 0 9,161
------------------------- ----------- ------------
44 TOTAL LIABILITIES 959,410
------------
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 10
------------
48 Paid-in Surplus 2,509,990 2,510,000
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 2,510,000
-----------
51 3% Preferred Stock Purchased by SBA 0
-----------
52 Unrealized Gain (Loss) on Securities Held 0
-----------
53 Non-Cash Gains/Income 84,369
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 12,189
------------
c. Total (54a plus 54b) 12,189
-----------
55 Undistributed Realized Earnings (53 plus 54c) 96,558
-----------
56 Total 2,606,558
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 2,606,558
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $3,565,968
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 17
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 139,092
----------
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 1,286
----------
7 Interest on Invested Idle Funds 111,438
----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 3,082
----------
10 GROSS INVESTMENT INCOME 254,898
-----------
EXPENSES
- --------
11 Interest Expense 0
----------
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 1,575
----------
24 Insurance 251
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 1,250
----------
27 Provision for Losses on Receivables (excluding loans receivable) 0
----------
28 Legal Fees 5,161
----------
29 Audit and Examination Fees 0
----------
30 Miscellaneous Expenses (attach schedule) 455
----------
31 TOTAL EXPENSES 8,692
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 246,206
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 779,177
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 1,025,383
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $1,025,383
-----------
37 Extraordinary Item 0
-------------------- -----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $1,025,383
-----------
</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> 18
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 1 of 2)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 113,563
----------
2 Dividends Received from Portfolio Concerns 0
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 253
----------
5 Interest on Invested Idle Funds 111,438
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 4,976
----------
CASH OUTFLOWS:
8 Interest Paid 0
----------
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) 7,511
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 0
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 222,719
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 272,240
----------
17 Returns of Capital Received from Portfolio Concerns 4,375
----------
18 Net Proceeds from Disposition of Portfolio Securities 719,918
----------
19 Liquidation of Idle Funds Investments 0
----------
20 Other (Specify) 0
------------------------- ----------
Cash Outflows:
21 Purchase of Portfolio Securities 200
----------
22 Loans to Portfolio Concerns 2,411
----------
23 Idle Funds Investments 0
----------
24 Other (Specify) 0
-------------------------- ----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 993,922
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 0
----------
27 Proceeds from Sale of 4% Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 0
----------
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 226,921
----------
37 Other (Specify) 0
-------------------------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 19
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 2 of 2)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -226,921
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 989,720
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,671,877
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $2,661,597
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 1,025,383
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 1,580
----------
44 Provision for Losses on Accounts Receivable 0
----------
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 -779,177
----------
48 Other (Specify) OID -3,621
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -16,500
----------
50 (Increase) Decrease in Other Current Assets 4,000
----------
51 Increase (Decrease) in Accounts Payable -395
----------
52 Increase (Decrease) in Accrued Interest Payable 0
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities -2,107
----------
56 Other (Specify) Deferred Credits -6,444
------------------------ ----------
57 Other (Specify) 0
------------------------ ----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $222,719
----------
</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> 20
ALLIED FINANCIAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Financial Corporation II (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 Specialized Small
Business Investment Company (SSBIC). 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.
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. When collection of interest is
in doubt, interest is not accrued or a reserve is established. Loan fees and
original issue discount are 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 measured by the difference between the
proceeds from the 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 change in the valuation of the
portfolio.
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.
<PAGE> 21
ALLIED FINANCIAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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
Loans and debt securities have stated interest rates ranging generally from 12
percent to 15 percent, and are generally payable in installments with final
maturities from 5 years to 8 years from date of issue.
There were no loans or debt securities that had accrued interest reserves, or
were not accruing interest at December 31, 1996.
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
<PAGE> 22
ALLIED FINANCIAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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
The Company's board of directors declared a dividend of $947,457 for the year
ended December 31, 1996, which was paid January 30, 1997. This represented all
of the Company's taxable income. Pursuant to SBA regulations, retained earnings
available for distribution at December 31, 1996 were sufficient to pay this
dividend.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to an existing portfolio company
totaling $50,000 at December 31, 1996.
NOTE 6. 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.
<PAGE> 23
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(page 1 of 2)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
(Amounts rounded to nearest dollar)
<TABLE>
<CAPTION>
PART I. CAPITAL STOCK AND PAID IN SURPLUS CAPITAL PAID-IN
--------------------------------- STOCK SURPLUS TOTAL
(excluding capital contributed by SBA) ----- ------- -----
(pg 3C, line 47) (pg 3C, line 48)
<S> <C> <C> <C>
1 BALANCE AT BEGINNING OF PERIOD 10 2,509,990 2,510,000
------------ ---------- ----------
2 ADDITIONS:
a. Capital stock issued for cash 0 0 0
------------ ---------- ----------
b. Capital stock issued for services rendered 0 0 0
------------ ---------- ----------
c. Capital stock Issued for contributed non-cash assets 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution 0 0 0
------------ ---------- ----------
e. Gain on sale of Treasury Stock 0 0 0
------------ ---------- ----------
f. Other credits (specify) 0 0 0
----------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2f) 0 0 0
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 10 2,509,990 $2,510,000
------------ ---------- ----------
5 DEDUCTIONS:
a. Retirement of capital stock 0 0 0
------------ ---------- ----------
b. Distributions in partial liquidation 0 0 0
------------ ---------- ----------
c. Loss on sale of Treasury Stock 0 0 0
------------ ---------- ----------
d. Other debits (specify) 0 0 0
---------------- ------------ ---------- ----------
6 Total Deductions (sum of 5a through 5d) 0 0 0
------------ ---------- ----------
7 BALANCE AT END OF PERIOD (line 4 minus line 6)--
totals must agree with lines 47 and 48, page 3C $10 $2,509,990 $2,510,000
------------ ---------- ----------
- ------------------------------------------------------------------------------------------------------------------------------
PART II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED
------------------------------- GAINS/ NET REALIZED REALIZED
INCOME EARNINGS EARNINGS
------ -------- --------
(1) (2) (1) + (2)
1 BALANCE AT BEGINNING OF PERIOD 0 18,632 18,632
------------ ---------- ----------
2 ADDITIONS:
a. Net investment income 6,443 239,763 246,206
------------ ---------- ----------
b. Realized gain (loss) on investments 77,926 701,251 779,177
------------ ---------- ----------
c. Gain on appreciation of securities distributed in kind 0 ////////// 0
------------ ---------- ----------
d. Other (specify) 0 0 0
-------------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2d) 84,369 941,014 1,025,383
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 84,369 959,646 1,044,015
------------ ---------- ----------
5 DEDUCTIONS:
a. Dividends--Cash //////////// 947,457 947,457
------------ ---------- ----------
b. Dividends--Stock //////////// 0 0
------------ ---------- ----------
c. Dividends--In-kind (at fair value) 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0
------------ ---------- ----------
e. Other (specify) 0 0 0
--------------------- ------------ ---------- ----------
6 Total deductions (sum of 5a through 5e) 0 947,457 947,457
------------ ---------- ----------
7 Total before collection of non-cash gains/income (line 4 minus
line 6) 84,369 12,189 96,558
------------ ---------- ----------
8 ADJUSTMENT: Collection of non-cash gains/income 0 0 //////////
------------ ---------- ----------
9 BALANCE AT END OF PERIOD (line 7 plus line 8)--
total must agree with lines 53, 54c, and 55, page 3C $84,369 $12,189 $96,558
------------ ---------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C
<PAGE> 24
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(page 2 of 2)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C> <C>
PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD
-----------------------------------------
1 NET UNREALIZED APPRECIATION (DEPRECIATION) 838,939
AT BEGINNING OF PERIOD ----------
2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION
a. Portfolio securities
(i) Increases 0
------------
(ii) Decreases due to revaluation of securities 0
------------
(iii) Decreases due to sale of securities -838,939
------------
(iv) Decreases due to write-off of securities 0 -838,939
------------ ----------
b. Assets Acquired in liquidation of portfolio securities 0
----------
c. Operating concerns acquired 0
----------
d. Notes and other securities received 0
----------
3 TOTAL (sum of 2a through 2d) -838,939
----------
4 Subtotal (line 1 plus line 3) 0
----------
5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION
a. Portfolio securities
(i) Increases 0
------------
(ii) Decreases due to revaluation of securities 0
------------
(iii) Decreases due to sale of securities/repayment of principal 0
------------
(iv) Decreases due to write-off of securities 0 0
------------ ----------
b. Assets Acquired in liquidation of portfolio securities 0
----------
c. Operating concerns acquired 0
----------
d. Notes and other securities received 0
----------
6 TOTAL (sum of 5a through 5d) 0
----------
7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT
END OF PERIOD (line 4 plus line 6) 0
----------
8 LESS: Estimated future tax expense (benefit) on
net unrealized appreciation (depreciation) 0
----------
9. UNREALIZED GAIN (LOSS) ON SECURITIES HELD--
total must agree with line 52, page 3C $0
----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 8C
<PAGE> 25
OMB Approval No. 3245-0063
Expiration Date
I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION
II. REGULATORY AND LEVERAGEABLE CAPITAL
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Financial Corporation II License No. 03/03-5207
<TABLE>
<CAPTION>
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION
--------------------------------------------------------------
<S> <C> <C>
1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 12,189
-------------
2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 0
-------------
3 ADD: Cumulative Undeclared Dividends on 4% Redeemable
Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0
-------------
4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION 12,189
-------------
- ---------------------------------------------------------------------------------------------------------------------------
PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL
-----------------------------------------------
1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 2,510,000
-------------
2 ADD: Unfunded binding commitments from Institutional Investors 0
-------------
3 LESS: Regulatory Deductions:
a. Organizational Expenses Not Approved by SBA (1) ( 0)
--------------
b. Capital Stock Issued for Services ( 0)
--------------
c. Capital Stock Issued for Non-cash Assests (unless approved by SBA
for inclusion in Regulatory Capital or converted to cash) ( 0)
--------------
d. Investment in 301(d) Licensee ( 0)
--------------
e. Treasury Stock at cost ( 0)
--------------
f. Other (specify) ( 0)
-------------------- --------------
4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0)
--------------
5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 2,510,000
-------------
6 LESS: Unfunded binding commitments from Institutional Investors ( 0)
--------------
7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0)
--------------
8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0)
eligible investments in Small Concerns --------------
9 LESS: Other deductions (specify) ( 0)
------------------------------- --------------
10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 2,510,000
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PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL IMPAIRMENT AND OVERLINE PURPOSES
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</TABLE>
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS
3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c),
LICENSEE WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET
UNREALIZED GAINS ON MARKETABLE SECURITIES (see note (2) below).
<TABLE>
<S> <C>
11 REGULATORY CAPITAL (Part II, line 5) 2,510,000
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12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0
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13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus line 12) 0
-------------
14 ADD: Net Unrealized Gains on Marketable Securities (3) 0
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15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14) $0
-------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deduct only those organizational expenses which were not accepted as
reasonable by SBA and which have not been amortized. See example in
"Instructions for Preparation of SBA Form 468."
(2) Licensee must have positive Retained Earnings Available for Distribution in
order to establish an increased overline limit pursuant to
13 CFR 107.303(c).
(3) As defined in 13 CFR 107.303(c). Attach a schedule showing the following for
each marketable security: name of Small Business Concern, market in which
traded, names of market makers for companies not listed on a stock exchange
or NASDAQ, class of security, cost, valuation, and unrealized gain or loss
in accordance with the requirements of Section 107.303(c).
SBA Form 468.1 (1-95) Previous editions obsolete Page 9C
