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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-26672
ALLIED CAPITAL MORTGAGE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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MARYLAND 53-1081052
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., NINTH FLOOR 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
There is currently no market for the registrant's common stock. As of March
18, 1996 there were 70 shares of the registrant's common stock outstanding.
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PART I
ITEM 1. BUSINESS.
Allied Capital Mortgage Corporation (the "Company") was incorporated
in Maryland on August 10, 1995 and currently has no operations. Once its
operations begin, the Company will be engaged primarily in the business of
investing in small businesses through the purchase of non-performing loans or
other interests. The Company is a closed-end, non-diversified 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 may not change the nature of its business so as
to cease to be a BDC unless authorized by the vote of a majority, as defined in
the 1940 Act, of its outstanding voting securities. Once the Company
commences its operations, it proposes to enter into an investment advisory
agreement with Allied Capital Advisers, Inc. ("Advisers"), if such agreement
is approved by the majority of the Company's independent directors.
The Company is part of a group of funds (the "Allied Entities")
managed by Advisers that specialize in making loans to, and investments in,
small businesses, as well as buying performing and sub-performing loans from
the Federal Deposit Insurance Corporation ("FDIC"), banks and other financial
institutions. Over the past four years, Advisers has been exposed to numerous
opportunities to purchase non-performing loans and, while several of the Allied
Entities have purchased some loans, the Allied Entities have been restricted on
the types of investments they could make due to various regulations under which
they operate. As a result, it is intended that the Company will upon
commencement of its operations purchase non-performing loans from the FDIC,
banks and other institutions, many of which are expected to involve first
mortgages on real estate, as well as first liens on the operating assets of
small businesses. The Company will be the sole entity managed by Advisers
involved primarily in the business of purchasing non-performing loans.
Once a loan is purchased, the Company will contact the small business
concern that borrowed the funds with the objective of placing part of the
non-performing loan on a performing basis, and reducing the remaining part of
the loan to an equity ownership in the business or an equity ownership in the
real estate asset underlying the loan. It is expected that, once the Company
has completed the restructuring of the non-performing loan, the situation will
be similar to that of other small businesses to which one of the Allied
Entities has made a loan.
TYPES OF LOANS AND MORTGAGES
The Company will purchase and make a variety of loans and investments
in transactions that can generally be categorized as follows: (1) purchasing
non-performing loans and investments; (2) providing loans and investments to
small businesses to allow them to purchase their non-performing loans from a
prior lender; and (3) other financings. A description of each of these types
of financings is set forth below.
(1) Purchasing Non-performing Loans and Investments
The Company will purchase non-performing loans from the FDIC, banks
and other institutions. These types of loans typically have become
non-performing because the current earnings of the small business borrowers are
insufficient to generate the cash necessary to make full payments on the loan.
The situation may exist, for example, because a financial institution made a
loan to the small business expecting the business to grow significantly. In
some instances, the small business concern has had a contraction in its ability
to generate cash. In both instances, the small business is generating
sufficient cash to service part, but not all, of the loan.
The Company will purchase non-performing loans with the objective of
restructuring such loans into two segments. The first segment will be a
single, performing loan secured by the assets of the business, including real
estate. This segment will have regular interest payments being made on a
current basis, and the principal will be amortized over a reasonable time
frame. The second, non-performing segment of the loan will most likely be
converted into an equity ownership in the business or an equity ownership in
the real estate. This segment may later be sold to generate an optional gain.
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(2) Providing Financing to Purchase Non-Performing Loans
From time to time, some small businesses may negotiate with their
current lender a repayment of their loan at a substantial discount. In these
situations, the Company will work with the small business concern in order to
affect the same type of transaction that is covered above in "(1) Purchasing
Non-performing Loans and Investments." Two differences may exist in these
types of transactions, as compared with those covered in item (1) above.
First, the Company will be financing the small business concern directly to
assist it in buying its loan at a discount. Under those circumstances, the
Company will negotiate the terms and conditions of its new investment, plus its
potential equity option before the loan is purchased. Second, the Company may
provide additional financing to the small business for working capital or other
business needs. This would allow the Company to go directly to the small
business concerns that are seeking financing and to assist with their efforts
to both restructure their existing debt and raise new capital.
(3) Other Types of Financing
There are a number of small business concerns in which the new owner
has obtained financing by having the former owner of the business take back
financing for the purchase. In some instances, these financings are
collateralized by all the assets of the business, including the real estate.
The Company has developed a program whereby it will solicit opportunities to
help the small businesses buy back their owner-financed notes at a discount.
This type of financing, and other similar types of financings, will be a
secondary business of the Company. It is not expected that a large portion of
the assets of the Company will involve this type of financing.
OPERATION AS A BDC
As a BDC, the Company may not acquire any assets other than Qualifying
Assets unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the Company's total assets. The principal
categories of Qualifying Assets relevant to the business of the Company are the
following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined as any
issuer that is organized and has its principal place of business in
the United States and does not have any class of publicly-traded
securities with respect to which a broker may extend margin credit.
(2) Cash, cash items, Government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, to treat securities described in (1) 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, 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. Managerial assistance will be made available to the
portfolio companies by the Company's officers and the investment officers of
Advisers who manage the Company's investments. Each portfolio company will be
assigned for monitoring purposes to an investment officer and will be contacted
and counseled if it appears to be encountering business or financial
difficulties. The Company will also provide management assistance and
counselling on a continuing basis to any portfolio company that requests it,
whether or not difficulties are perceived. The Company's officers, all of whom
are employees of Advisers, are highly experienced in providing this type of
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 (as defined in the 1940 Act), of the
Company's shares.
As a BDC, the Company is entitled to borrow money and issue senior
securities representing indebtedness as long as its indebtedness has asset
coverage to the extent of at least 200%.
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LOAN GENERATION
Advisers has long-standing relationships with hundreds of sellers of
mortgages, as well as relationships with third-party loan generators in various
states who may or may not have a contractual relationship with one of the
Allied Entities to provide loan origination services. Any prospective loan
referred to the Company by any of these persons will be reviewed by the
Company's portfolio manager and its credit committee and will not be closed
unless approved by the Board of Directors of the Company. If and when a loan
referred by a third party is closed, the third party would be compensated based
on a percentage of the total loan.
LOAN PROCESSING PROCEDURES
The following is the procedure to be followed by the Company in the
processing of a loan from the time that such loan first comes to the Company's
attention to the time of the final collection or other disposition of each
loan.
The first step is the preparation of a file, called an underwriting or
credit file, which contains financial and other information about the borrower
and its principals. If the loan is being referred to the Company by a third
party, the credit file may be prepared in the first instance by the third
party. The credit file will then be reviewed by the Company's portfolio
manager and other investment officers, who may request additional information.
If the loan is considered by the portfolio manager to be one that is acceptable
under the Company's credit standards, it will then be reviewed by the credit
committee and, if deemed acceptable by the credit committee, the Company will
issue a conditional commitment letter to purchase the loan or investment. Once
the seller has accepted the terms of this conditional commitment, the loan
request will be submitted to the Board of Directors for approval.
If the loan has been referred to the Company by a third party,
Advisers will pay to the third party the agreed-upon fee within thirty days of
closing, and the Company will reimburse Advisers promptly for such fee. Upon
the closing of a loan, the loan will be entered on the books of the Company at
its cost, which includes the amount disbursed to the borrower and the fee, if
any, payable to the third-party. The Company's board of directors will, on a
quarterly basis, determine whether cost remains the appropriate basis for
valuation of the investment, or if a different basis is appropriate.
Under the terms of most restructured loans, payments from the borrower
(including interest and principal) are due monthly. All such payments are made
to the Company. Upon receipt of a payment, the Company calculates the portion
thereof to be treated as interest and records that portion as interest income.
The balance of the payment is recorded as (1) a reduction in the principal
amount outstanding and (2) income from amortization of any discount.
The Company will contact the small business and have discussions with
the objective of restructuring the non-performing loan into a portion that is
performing and the remainder that will be converted after the restructuring
into preferred or common stock of the small business concern or an ownership
position in the real estate owned by the small business. It is expected that
the small business will pay off the portion of the original note that is
restructured to be a performing note, and that the Company will sell its equity
interest in the small business or its ownership position in the real estate.
TEMPORARY INVESTMENTS
Pending the investment in loans of all of its initial equity capital,
the Company will invest at least 70% of its otherwise uninvested cash in U.S.
government or agency-issued or guaranteed securities that are backed by the
full faith and credit of the United States, or in high quality, short term
repurchase agreements fully collateralized by such securities. Typically, the
Company will invest in U.S. Treasury bills or in repurchase obligations of a
"primary dealer" in government securities (as designated by the Federal Reserve
Bank of New York) or of any other dealer whose credit has been established to
the satisfaction of the Board of Directors, in any case collateralized by
securities which carry the full faith and credit of the United States. A
repurchase agreement involves the purchase by an investor, such as the Company,
of a specified security and the simultaneous agreement by the seller to
repurchase it at an agreed-upon future date and at a price which is greater
than the purchase price by an amount
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that reflects an agreed-upon interest rate. Such interest rate is effective
for the period of time during which the investor's money is invested in the
arrangement and is related to current market interest rates rather than the
coupon rate on the purchased security. The Company will require the continual
maintenance by its custodian or its correspondent in its account with the
Federal Reserve/Treasury Book Entry System of collateral in an amount at least
equal to the repurchase price. If the seller were to default on its repurchase
obligation, the Company might suffer a loss to the extent that the proceeds
from the sale of the collateral were less than the repurchase price. A
seller's bankruptcy could delay or prevent a sale of the collateral. The
Company's Board of Directors has established procedures, which it will review
periodically, requiring Advisers to monitor the creditworthiness of the dealers
with which the Company enters into repurchase agreement transactions.
INVESTMENT ADVISER
Pursuant to the terms of a proposed investment advisory agreement
between the Company and Advisers (the "Agreement"), Advisers will manage the
investments of the Company, subject to the supervision and control of the
Company's Board of Directors. Specifically, Advisers will identify, evaluate,
structure, close and monitor the investments made by the Company. Each loan or
other investment must be approved by a credit committee composed of the most
senior investment officers of Advisers, as well as by the Company's Board of
Directors. The Company will not make any investments that have not been
recommended by Advisers. Advisers is a publicly owned (Nasdaq symbol "ALLA")
registered investment adviser located at 1666 K Street, N.W., 9th Floor,
Washington, D.C. 20006, telephone (202) 331-1112. Advisers is registered with
the Securities and Exchange Commission ("SEC" or "Commission") under the
Investment Advisers Act of 1940. Once the Agreement is effected, by its terms,
the Agreement will remain in effect for two years from its effective date and
from year to year thereafter as long as it is approved at least annually by the
Board of Directors, including a majority of the directors who are not
"interested persons" of the Company within the meaning of the 1940 Act, or by
vote of the holders of a majority of the outstanding shares of the Company, as
defined in the 1940 Act.
Advisers is a party to investment advisory agreements with Allied
Capital Corporation ("Allied I") and Allied Capital Corporation II ("Allied
II"), both BDCs which, directly or through Small Business Investment Company
("SBIC") subsidiaries, specialize in loans with equity features to, and equity
investments in, small business concerns. Advisers is also the investment
adviser to two privately funded limited partnerships that engage in the same
business. All of these entities co-invest with one another. Advisers is party
to an investment advisory agreement with Allied Capital Lending Corporation
("Allied Lending"), also a BDC, that specializes in providing secured loans to
small businesses that may be partially guaranteed by the United States Small
Business Administration. In addition, Advisers is the manager of Allied
Capital Commercial Corporation ("Allied Commercial"), a publicly held real
estate investment trust, and co-manager of Business Mortgage Investors, Inc.
("BMI"), a privately held real estate investment trust. Allied Commercial and
BMI participate with one another in buying, from the FDIC, banks and other
institutions, performing small business loans secured by real estate. At
December 31, 1995, total assets under Advisers' management were approximately
$670 million.
Under the Agreement, the Company will be required to pay all of its
operating expenses, except those specifically required to be borne by Advisers
by the Agreement. The latter 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 Company will reimburse Advisers
promptly, against Advisers' voucher, for any expenses incurred by Advisers for
the Company's account. Without limitation, such expenses will include all
expenses of any offering and sale by the Company of its shares and all expenses
of the Company's operations; the fees and disbursements of the Company's
counsel, accountants, custodian, transfer agent and registrar; 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; costs of promoting the
Company's stock; fees and expenses of members of the Company's Board of
Directors who are not directors, officers or employees of Advisers or of any
entity affiliated with Advisers, and fees of directors who are such officers,
directors or employees; premiums for the fidelity bond maintained by the
Company; and all transaction costs incident to the acquisition and disposition
of securities by the Company, 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
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litigation arising therefrom. If the Company for its corporate purposes uses
the services of attorneys or paraprofessionals on the staff of Advisers in lieu
of outside counsel, the Company will reimburse Advisers for such services at
hourly rates calculated to cover the cost of such services, as well as for
incidental disbursements. The Company will reimburse Advisers promptly,
against Advisers' voucher, for (a) any origination fee with respect to any loan
or investment made by the Company that was identified or referred to the
Company by any third party with which the Company then has a written agreement
or arrangement that specifies the amount or rate of such fee or (b) any
origination fee with respect to any loan or investment made by the Company that
was identified or referred to the Company by any third party with which the
Company or Advisers then does not have a written agreement or arrangement. All
such origination fees reimbursed to Advisers will be reviewed as of the end of
each calendar quarter by the Company's Board of Directors.
The Company will, during the term of the Agreement, pay to Advisers an
investment advisory fee equal to (a) 3.5% per year of the average of the
quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values 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.
Upon the completion of an annual audit at the end of each calendar
year, the Base Fee may be increased or decreased depending on the amount, if
any, by which the investment performance of the Company for such year is
greater or less than 13% for such year. At the end of each of the Company's
fiscal years, the net asset value per share will be calculated by the Company's
auditors. The investment return of the Company in a particular year will be
the sum of: (a) the change in its net asset value per share during such year;
(b) the value of its cash distributions per share during such year; and (c) the
value of capital gains taxes per share paid or payable, if any, on
undistributed realized long-term capital gains during such year. The
investment performance of the Company for such year will be its investment
return expressed as a percentage of its net asset value per share at the
beginning of such year. (For this purpose, the value of cash distributions per
share and capital gains taxes per share paid or payable on undistributed
realized long-term capital gains will be treated as reinvested in shares of the
investment company at the net asset value per share in effect at the close of
business on the record date for the payment of such distributions and the date
on which provision is made for such taxes, respectively, after giving effect to
such distributions and taxes.) To the extent the investment performance of the
Company exceeds 13% for that year, one-fifth of one percentage point will be
added to the Base Fee for every one percentage point of the difference between
the investment performance of the Company and 13%. The maximum amount added to
the Base Fee will be one percentage point, with the adjusted Base Fee not to
exceed 4.5%. To the extent the investment performance of the Company is less
than 13% for that year, one-fifth of one percentage point will be subtracted
from the Base Fee for every one percentage point of the difference between the
investment performance of the Company and 13%. The maximum amount subtracted
from the Base Fee will be one percentage point, with the adjusted Base Fee not
to be lower than 2.5% (the "Minimum Base Fee"). For purposes of calculating the
adjustment to the Base Fee, performance percentages will be rounded off to the
nearest whole percentage.
The Company will, during the term of the Agreement, pay to Advisers,
quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on an
annualized basis) of the quarter-end value of the Company's consolidated total
assets (less the Company's Interim Investments and cash). The Company will
also pay 0.125% per quarter (0.5% on an annualized basis) of the quarter-end
value of the Company's consolidated Interim Investments and cash.
For the purpose of calculating the investment advisory fee, the values
of the Company's assets will be determined as of the end of each calendar
quarter by the Board of Directors. The Company will pay the Minimum Base Fee
and the fee on Interim Investments and cash with respect to a calendar quarter
as soon as practicable after the values of the Company's assets have been
determined for such quarter. The Company will pay the difference between the
Minimum Base Fee and the Base Fee as soon as practicable after the values of
the Company's assets have been determined for the year-end. If the termination
of Advisers' services hereunder does not coincide with the last day of a
calendar quarter or the year-end, then the Minimum Base Fee determined in
accordance with this paragraph shall be multiplied by the ratio of the number
of days in such quarter during which Advisers rendered services to the total
number of days in such quarter, with corresponding treatment for calculating
any adjustments to the Base Fee.
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The fees provided for in the Agreement are substantially higher than
that paid by most investment companies because of the efforts and resources
devoted by Advisers to identifying, structuring, closing and monitoring the
types of private non-performing investments in which the Company will
specialize. Other entities managed by Advisers, however, pay fees on
comparable bases, and the Company understands that the fees are not in excess of
that frequently paid by private investment funds engaged in similar types of
investments, in addition to the substantial participation in profits that such
private funds also typically allocate to management. Neither Advisers nor its
directors and officers will personally participate in any investments of the
Company or receive any profit-sharing interest therein except to the extent of
their ownership of shares of the Company and options thereon, if any.
OTHER POLICIES
The Company has also adopted the following additional policies which
may be changed by action of its board of directors:
The Company may borrow money and issue senior securities, to the
extent that the 1940 Act permits a BDC to do so, for the purpose of making
loans or for temporary or emergency purposes. A BDC may issue and sell senior
securities if, immediately after such issuance or sale, the securities will
have asset coverage of at least 200%.
The Company will not act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an "underwriter" of
securities purchased by it that must be registered under the Securities Act of
1933, as amended (the "Securities Act"), before they may be offered or sold to
the public), or purchase or sell real estate or interests in real estate or
real estate investment trusts (except that the Company may purchase and sell
real estate or interests in real estate in connection with the orderly
liquidation of investments and may own loans secured by or made to companies
that are in the business of buying and selling real estate), or sell securities
short, purchase securities on margin or write put or call options, or engage in
the purchase or sale of commodities or commodity contracts (except where
necessary in working out distressed loan situations) or acquire any of the
voting securities of, or invest any of its assets in any securities issued by,
other investment companies. The Company may not buy or sell publicly traded
options.
The Company can invest in any type of small business security that, in
the Company's judgment, offers a reasonable possibility of an adequate return
on the investment.
ADDITIONAL MATTERS
Absence of Direct Competition. The Company believes that its business
is unique. While other companies may purchase non-performing loans, typically
they will simply hold those loans as passive investors and at some point
liquidate them. The Company, however, will work with borrowers to assist them
in improving the outlook for their businesses and thus increase the likelihood
that the loans will become performing.
Environmental Law Considerations. The various types of properties
which secure the mortgage loans held by the Company (the "mortgaged
properties"), and the businesses that operate at those properties, are subject
to federal, state, and local environmental laws, such as the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(commonly referred to as the "Superfund" law), and the Resource Conversation
and Recovery Act, and their state counterparts, as well as to common law causes
of action for environmental harms. These laws and causes of actions could
diminish the value of any mortgage property in the event such property is
discovered to be contaminated or otherwise in violation of the environmental
laws.
As a general matter, the current owner and/or operator of a property,
and any individual or entity that formerly owned or operated the property at
the time contamination was occurring, may be held responsible for cleaning up
contamination on, or originating on, the property. Persons or entities who
take title to mortgaged property to protect a security interest generally are
exempted from this liability scheme, except that liability may attach if they
become so involved in management of the property, either before or after a
foreclosure, that they may
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be deemed "operators" for liability purposes. If such an event were to occur
with a mortgaged property, liability may not be limited to the value of the
affected mortgaged property and may extend to the Company as a whole.
Further, the security interest in an affected property may be impaired
if environmental liabilities cause a mortgagor to become insolvent, if
environmental liabilities cause a diminution in the value of the mortgaged
property, or if environmental liabilities render foreclosure on a property
unavailable as a remedy because of a significant risk liability. Moreover,
under the laws of some states, contamination may give rise to a lien, commonly
described as a "superlien," which may take priority over an existing mortgage
lien or property.
In order to minimize any exposure that the Company may have to
environmental liabilities, the Company intends to take customary precautionary
steps, including requiring environmental site assessments and, if necessary,
site remediation.
EMPLOYEES
The Company has no employees as all of its personnel are to be
furnished by Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any properties or other tangible
assets.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1996, as well as certain other
information with respect to those persons:
<TABLE>
<CAPTION>
Positions Currently Principal Occupations
Name Age Held with the Company During Past Five Years
---- --- --------------------- ----------------------
<S> <C> <C> <C>
David Gladstone 53 President and Chief Executive Employed by Allied I or Advisers since
Officer 1974; President or executive officer of
the Company since its inception; Chairman
and Chief Executive Officer of Allied I,
Allied II, Allied Commercial, Allied
Lending, and Advisers; Director,
President and Chief Executive Officer of
BMI.
George C. Williams 69 Chairman Employed by Allied I or Advisers since
1959; Vice Chairman of Allied I, Allied
II, Allied Lending, Allied Commercial and
Advisers; Chairman of BMI. He is the
father of G. Cabell Williams III.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
John M. Scheurer 43 Executive Vice President President and Chief Operating Officer of
Allied Commercial since 1992; Executive
Vice President of Allied I, Allied II,
Allied Lending, Advisers and BMI since
the later of 1991 or each company's
public offering or inception; engaged in
real estate brokerage, leasing and
consulting from 1984 to 1991.
Joan M. Sweeney 36 Executive Vice President Employed by Advisers since 1993;
President and Chief Operating Officer of
Advisers; Executive Vice President of
Allied I, Allied II, Allied Commercial,
Allied Lending, and BMI; Senior Manager
at Ernst & Young from 1990 to 1993.
Jon A. DeLuca 33 Executive Vice President, Employed by Advisers since 1994; Executive
Treasurer and Chief Vice President, Treasurer and Chief Financial
Financial Officer Officer of Allied I, Allied II, Allied
Commercial, Allied Lending, BMI and
Advisers since 1994; Manager of
Entrepreneurial Services at Coopers &
Lybrand from 1986 to 1994.
Thomas R. Salley 38 General Counsel and Secretary Employed by Advisers since 1988; General
Counsel and Secretary of Allied I, Allied
II, Allied Commercial, Allied Lending,
BMI and Advisers.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is currently no market for the Company's securities.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
As of and For the Period
Ended December 31, 1995 *
-----------------------
<S> <C>
Total Assets $1,050
Total Liabilities $ 0
Net Assets $1,050
per share $ 15
Number of Shares Outstanding 70
</TABLE>
- --------------------------
* The Company received its initial equity capitalization of $1,050 on
August 10, 1995. As of December 31, 1995, the Company had not yet commenced
operations.
8
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES AND RESULTS OF OPERATIONS
Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.
The Company filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995. Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995. The purpose of the registration statement was to cause the
Company to become a reporting company under the Securities Exchange Act of
1934, which would, in turn, allow the Company to elect to be regulated as a
business development company under the Investment Company Act of 1940 ("1940
Act"). Any offering of the Company's securities may be made only pursuant to a
registration statement effective under the Securities Act of 1933 or an
exemption from registration thereunder. The only shares sold by the Company
were those shares sold to the Company's President and Chairman in connection
with the organization of the Company. The proceeds from the sale of stock
will be invested in accordance with the Company's investment objectives and
policies. The Company has recently been organized and currently has no
operations. Once operations begin, its business will consist of investing in
small businesses through the purchase of non-performing loans or other
interests. The Company is part of a group of funds managed by Allied Capital
Advisers, Inc. (the "Adviser"), which specializes in making loans to, and
investments in, small businesses, as well as buying performing and
sub-performing loans from financial institutions and other third parties.
The Company will purchase non-performing loans from financial institutions and
other third parties. It is expected that many of these loans will involve
first mortgages on real estate, as well as first liens on the operating assets
of small businesses. Once a mortgage is purchased, the Company will contact
the small business concern that borrowed the funds secured by the mortgage.
The objective will be to place part of the non-performing mortgage on a
performing basis, and to reduce the remaining part of the loan to an equity
ownership in the business or an equity ownership in the real estate asset
underlying the mortgage.
The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc. The Agreement would remain in
effect for two years from its effective date and from year to year thereafter,
subject to annual approval by the Board of directors, including its independent
directors, or by vote of the holders of a majority of the outstanding shares of
the Company. The Agreement can be terminated at any time on sixty days notice,
without the payment of penalty, by the 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. Under the Agreement, the Adviser
will manage the investments of the Company, subject to the supervision and
control of the Company's Board of Directors. Specifically, the Adviser will
identify, evaluate, structure, close and follow the investments made by the
Company. The Company will not make any investments that have not been
recommended by the Adviser. Except as to those investment decisions that
require specific Board approval, the Adviser will have the authority to effect
purchases and sales of assets for the Company's account.
The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code"). If
the Company qualifies as a RIC and distributes to shareholders annually in a
timely manner at least 90% of its "investment company taxable income," as
defined in the Code (i.e., net investment income, including accrued discount,
and net short-term capital gain), it will not be subject to federal income tax
on the portion of its investment company taxable income and net capital gain
(net long-term capital gain in excess of net short-term capital loss)
distributed to shareholders as required under the Code. In addition, if the
Company distributes in a timely manner 98% of its net capital gain income for
each one-year period, and distributes 98% of its investment company taxable
income for each calendar year (as well as any income not distributed in prior
years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of regulated investment
companies. If the Company qualifies as a RIC as it intends to do, it generally
will endeavor to distribute to shareholders all of its investment company
taxable income and its net capital gain, if any, for each taxable year so
that the Company will not incur income and excise taxes on its earnings. No
assurances can be made as to whether the company will ultimately qualify as
a RIC, or after such qualification is achieved, the Company will continue to
qualify as a RIC.
9
<PAGE> 11
Risks regarding acquisition of non-performing loans. The Company's
anticipated business operations depend upon its ability to purchase or acquire
non-performing loans from the FDIC, banks and other financial institutions.
Any such acquisitions of loans may require that the Company incur significant
levels of leverage. There can be no assurance that the Company will be able to
obtain the necessary to desired levels of leverage or that such leverage will
be available on acceptable terms. There also can be no assurance that the
Company will be successful in acquiring loans or an interest in any pool of
non-performing mortgage loans from the FDIC or through other means, or that any
interest or loans so acquired will be of any particular volume or principal
amount or that any such loans can be acquired at any particular prices or
discounts to face amount.
Risks regarding restructuring of non-performing loans. The Company's
anticipated business operations depend upon its ability to restructure
non-performing loans that it may purchase or otherwise acquire. There can be
no assurance that the Company will be able to restructure such loans, that the
terms on which a borrower may be willing to restructure any such loan will be
acceptable to the Company or that any restructured loan will not default.
There also can be no assurance that borrowers or their other creditors will not
commence bankruptcy or insolvency proceedings or otherwise seek protection from
creditors, which may impose other obstacles to, or delay substantially, any
eventual loan restructuring that may occur. Such delays or refusals to
restructure loans on terms acceptable to the Company may impact adversely the
financial results of the Company. In the event that any loan cannot be
restructured, the Company may be required to hold the loan and incur any loss
upon default, or dispose of such loan at a significant loss, as there is no
established trading market in which such loans are sold.
Risks of default, noncollection and loss. Loans to small businesses
involve a high risk of default. Non-performing loans involve an even higher
risk of default if not restructured upon terms that place the restructured loan
on a performing basis and reduce the risk of default. The Company does not
expect that any of the loans that it proposes to acquire will benefit from any
government guarantees so that, in the event of default, the Company would have
to bear any loss.
Potential conflicts. For the purpose of acquiring and carrying the
non-performing loans from the FDIC, banks and other financial institutions, in
which the Company's portfolio will be invested, the Company or an entity or
entities through which the Company anticipates acquiring such loans are
expected to borrow significant amounts of funds from Allied Capital Commercial
Corporation ("Allied Commercial") and Business Mortgage Investors, Inc.
("BMI"), both of which are managed by the Adviser, as well as banks or other
institutional lenders. Such borrowings will cause the Company or such entities
to be leveraged and will cause the lenders of those funds, which could include
Allied Commercial and BMI, to have fixed dollar claims on the assets of the
Company or such entities superior to the claims of the Company and, ultimately,
its shareholders. In addition, either or both of Allied Commercial and BMI are
expected to loan amounts with which the Company proposes to acquire loans for
its investment portfolio. In view of the foregoing, it is possible that the
interests of Allied Commercial and BMI, in their capacities as lenders to the
Company, may conflict with the interest of the Company and its shareholders.
Since the Adviser serves as the investment adviser to the Company as well
as the investment manager of Allied Commercial and BMI, it may have conflicts
of interest with respect to its management of the investments and operations of
the Company. The Adviser is aware of this potential conflict of interest
and has informed the Company that it will take all reasonable steps to ensure
that the Company's interests will be protected.
Interest rate fluctuations. Since loans proposed to be purchased by
the Company may be made at fixed rates of interest, the return on, and value
of, the Company's investment in such loans could decline in the event of any
increase in prevailing interest rates. Likewise, the return on, and value of,
the Company's investment in any restructured loans made at fixed rates of
interest could decline in the event of any increase in prevailing interest
rates. Any substantial increase in market rates of interest may result in
greater rates of prepayments or defaults on performing portfolio loans. As the
Company or any entity or entities through which the Company proposes to acquire
and hold such loans may incur significant levels of indebtedness, increases or
decreases in market rates on interest may adversely impact any return to the
Company.
Competition. There are a significant number of institutional
investors, as well as smaller pools of capital, that have been formed in order
to take advantage of the large number of non-performing loans and investments
in small businesses available from such sources as the FDIC, banks and other
financial institutions. Other competitors,
10
<PAGE> 12
which are larger than the Company and have more assets than the Company, may be
able to pay more for non-performing loans or may purchase more desirable
non-performing loans, and therefore may be a significant competitive factor in
the Company's ability to purchase non-performing loans.
Dependence on key personnel. The development, operation and success
of the Company and its business depends in major part on the efforts of the
Adviser and its key personnel expected to provide investment management and
loan restructuring services to the Company. Termination of the Agreement
between the Company and Adviser or loss of its key personnel expected to
provide such services to the Company would have a material adverse effect on
the ability of the Company to conduct its business as described in this
registration statement.
Loss of pass-through tax treatment. The Company may cease to qualify
for pass-through tax treatment if it is unable to comply with any of the
requirements contained in Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Non-availability of pass-through tax treatment would
have a materially adverse effect on the total return, if any, obtainable from
an investment in the Company's shares. Even if the Company does qualify as a
RIC for purposes of pass-through tax treatment, it may be subject to a 4%
excise tax, and to federal and state taxes based on income, if it fails to make
certain distributions in a timely manner. Under the 1940 Act, however, the
Company will not be permitted to make distributions to shareholders unless it
meets certain asset coverage requirements with respect to money borrowed and
senior securities issued.
11
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . $1,050
------
Total Assets . . . . . . . . . . . . . . . . 1,050
LIABILITIES
Liabilities . . . . . . . . . . . . . . . . . . . . . ------
------
NET ASSETS
Common stock, $0.0001 par value; 10,000,000 shares
authorized; 70 shares issued and outstanding . . . . ------
Additional paid-in capital . . . . . . . . . . . . . 1,050
------
Net Assets . . . . . . . . . . . . . . . . . $1,050
======
Net Asset Value per share . . . . . . . . . . . . . . $15.00
======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THIS FINANCIAL STATEMENT
12
<PAGE> 14
ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the period August 10, 1995
(date of incorporation) through
December 31, 1995
-----------------
<S> <C>
Investment income:
Interest $ 0
----
Total investment income 0
----
Expenses:
Operating Expenses 0
----
Total Expenses 0
----
Net investment income 0
Net realized gains on investments 0
----
Net investment income before net unrealized
appreciation (depreciation) on investments 0
Net unrealized appreciation (depreciation) on
investments 0
----
Net increase in net assets resulting from
operations $ 0
=====
Earnings per share $ 0
=====
Weighted average number of shares outstanding 70
=====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THIS FINANCIAL STATEMENT
13
<PAGE> 15
ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period August 10, 1995
(date of incorporation) through
December 31, 1995
-----------------
<S> <C>
Increase in net assets resulting from
operations:
Net investment income $ 0
Net realized gains on investments 0
Net change in unrealized appreciation 0
(depreciation) on investments ----
Net increase in net assets
resulting from operations 0
Distributions to Shareholders 0
Capital Share Transactions 1,050
-----
Net Increase in Net Assets 1,050
Net assets at beginning of period 0
----
Net assets at end of period $1,050
======
Net asset value per share $15
===
Shares outstanding at end of period 70
==
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THIS FINANCIAL STATEMENT
14
<PAGE> 16
ALLIED CAPITAL MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
NOTE 1. ORGANIZATION
Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.
The Company filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995. Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995. The purpose of the registration statement was to cause the
Company to become a reporting company under the Securities Exchange Act of
1934, which would, in turn, allow the Company to elect to be regulated as a
business development company under the Investment Company Act of 1940 ("1940
Act"). Any offering of the Company's securities may be made only pursuant to a
registration statement effective under the Securities Act of 1933 or an
exemption from registration thereunder. The only shares sold by the Company
were those shares sold to the Company's President and Chairman in connection
with the organization of the Company. The proceeds from the sale of stock
will be invested in accordance with the Company's investment objectives and
policies. The Company has recently been organized and currently has no
operations. Once operations begin, its business will consist of investing in
small businesses through the purchase of non-performing loans or other
interests. The Company is part of a group of funds managed by Allied Capital
Advisers, Inc., which specializes in making loans to, and investments in,
small businesses, as well as buying performing and sub-performing loans from
financial institutions and other third parties.
The Company will purchase non-performing loans from financial institutions and
other third parties. It is expected that many of these loans will involve
first mortgages on real estate, as well as first liens on the operating assets
of small businesses. Once a mortgage is purchased, the Company will contact
the small business concern that borrowed the funds secured by the mortgage.
The objective will be to place part of the non-performing mortgage on a
performing basis, and to reduce the remaining part of the loan to an equity
ownership in the business or an equity ownership in the real estate asset
underlying the mortgage.
The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code"). If
the Company qualifies as a RIC and distributes to shareholders annually in a
timely manner at least 90% of its "investment company taxable income," as
defined in the Code (i.e. net investment income, including accrued discount,
and net short-term capital gain), it will not be subject to federal income tax
on the portion of its investment company taxable income and net capital gain
(net long-term capital gain in excess of net short-term capital loss)
distributed to shareholders as required under the Code. In addition, if the
Company distributes in a timely manner 98% of its net capital gain income for
each one-year period, and distributes 98% of its investment company taxable
income for each calendar year (as well as any income not distributed in prior
years), it will not be subject to the 4% nondeductible federal excise tax
imposed with respect to certain undistributed income of regulated investment
companies. If the Company qualifies as a RIC as it intends to do, it generally
will endeavor to distribute to shareholders all of its investment company
taxable income and its net capital gain, if any, for each taxable year so that
the Company will not incur income and excise taxes on its earnings. No
assurances can be made as to whether the company will ultimately qualify as a
RIC, or after such qualification is achieved, the Company will continue to
qualify as a RIC.
NOTE 2. INVESTMENT ADVISORY AGREEMENT
The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc., (the "Adviser"). The Agreement
would remain in effect for two years from its effective date and from year to
year thereafter, subject to annual approval by the Board of Directors,
including its independent directors, or by vote of the holders of a majority of
the outstanding shares of the Company. The Agreement can be terminated at any
time on sixty days notice, without the payment of penalty, by the 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.
15
<PAGE> 17
Under the Agreement, the Adviser will manage the investments of the Company,
subject to the supervision and control of the Company's Board of Directors.
Specifically, the Adviser will identify, evaluate, structure, close and follow
the investments made by the Company. The Company will not make any investments
that have not been recommended by the Adviser. Except as to those investment
decisions that require specific Board approval, the Adviser will have the
authority to effect purchases and sales of assets for the Company's account.
The Company will be required to pay its share of the expenses (including
accounting, legal, printing, clerical, registration, filing and other expenses)
incurred by the Company in connection with its registration of common shares.
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 will include all expenses of any offering and sale by
the Company of its shares and all expenses of the Company's operations; the
fees and disbursements of the Company's counsel, accountants, custodian,
transfer agent and registrar; 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; costs of promoting the Company's stock; fees and expenses of
members of the Company's Board of Directors who are not directors, officers, or
employees; premiums for the fidelity bond maintained by the Company; and all
transaction costs incident to the acquisition and disposition of 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. The Company will reimburse the Adviser promptly,
against the Adviser's voucher, for (a) any origination fee with respect to any
loan or investment made by the Company that was identified or referred to the
Company by any third party with which the Company or the Adviser then has a
written agreement or arrangement that specifies the amount or rate of such fee
or (b) any origination fee with respect to any loan or investment made by the
Company that was identified or referred to the Company by any third party with
which the Company or the Adviser then does not have a written agreement or
arrangement. All such origination fees reimbursed to the Adviser will be
reviewed as of the end of each calendar quarter by the Company's Board of
Directors.
The Company will, during the term of the Agreement, pay to the Adviser, an
investment advisory fee equal to (a) 3.5% per year of the average of the
quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values 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.
Upon the completion of an annual audit, at the end of each calendar year, the
Base Fee may be increased or decreased depending on the amount, if any, by
which the investment performance of the Company exceeds or is exceeded by 13%.
At the end of each of the Company's fiscal years, the net asset value per share
will be calculated by the Company's auditors. The investment return of the
Company in a particular year will be the sum of: (a) the change in its net
asset value per share during such year; (b) the value of its cash distributions
per share during such year, and (c) the value of capital gains taxes per share
paid or payable, if any, on undistributed realized long-term capital gains
during such year. The investment performance of the Company for such year will
be its investment return expressed as a percentage of its net asset value per
share at the beginning of such year. (For this purpose, the value of cash
distributions per share and capital gains taxes per share paid or payable or
undistributed realized long-term capital gains will be treated as reinvested in
shares of the investment company at the net asset value per share in effect at
the close of business on the record date for the payment of such distributions
and the date on which provision is made for such taxes, respectively, after
giving effect to such distributions and taxes). To the extent the investment
performance of the Company exceeds 13% for that year, one-fifth of one
percentage point will be added to the Base Fee for every one percentage point
of the difference between the investment performance of the Company and 13%.
The maximum amount added to the Base Fee will be one percentage point, with the
adjusted Base Fee not to exceed 4.5%. To the extent the investment performance
of the Company is exceeded by 13% for
16
<PAGE> 18
that year, one-fifth of one percentage point will be subtracted from the Base
Fee for every one percentage point of the difference between the investment
performance of the Company and 13%. The maximum amount subtracted from the
Base Fee will be one percentage point, with the adjusted Base Fee not to be
lower than 2.5% (the "Minimum Base Fee"). For purposes of calculating the
adjustment to the Base Fee, performance percentages will be rounded off to the
nearest whole percentage.
The Company will, during the term of the Agreement, pay to the Adviser,
quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on an
annualized basis) of the quarter-end value of the Company's consolidated total
assets (less the Company's Interim Investments and cash). The Company will
also pay 0.125% per quarter (0.5% on an annualized basis) of the quarter-end
value of the Company's consolidated Interim Investments and cash.
For the purpose of calculating the investment advisory fee, the values of the
Company's assets will be determined as of the end of each calendar quarter by
the Board of Directors. The Company will pay the Minimum Base Fee and the fee
on Interim Investments and cash with respect to a calendar quarter as soon as
practicable after the values of the Company's assets have been determined for
such quarter. The Company will pay the difference between the Minimum Base Fee
and the Base Fee as soon as practicable after the values of the Company's
assets have been determined for the year-end. If the termination of the
Advisers' services hereunder does not coincide with the last day of a calendar
quarter or the year-end, then the Minimum Base 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, with corresponding treatment for calculating any adjustments
to the Base Fee.
NOTE 3. NET ASSETS
The Company has 10,000,000 shares of stock authorized with a par value of
$.0001 per share. All shares of common stock have equal rights as to earnings,
assets, dividends and voting privileges. As of December 31, 1995, there were
70 shares of common stock issued and outstanding of which the Chairman and
President of the Company each owned 35 shares.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALLIED CAPITAL MORTGAGE CORPORATION
We have audited the accompanying statement of assets and liabilities of Allied
Capital Mortgage Corporation as of December 31, 1995, and the related
statements of operations and changes in net assets for the period August 10,
1995 (date of incorporation) through December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Capital Mortgage
Corporation as of December 31, 1995, and the results of its operations and
changes in its net assets for the period August 10, 1995 (date of
incorporation) through December 31, 1995 in conformity with generally accepted
accounting principles.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1996
17
<PAGE> 19
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.
DIRECTORS OF THE REGISTRANT
<TABLE>
<CAPTION>
Position With
Name and Address Age the Company(2) Principal Occupations During Past Five Years
- ----------------------- --- ------------- --------------------------------------------
<S> <C> <C> <C>
David Gladstone(1) 53 Director, President, Chairman and Chief Executive Officer of Allied
1666 K Street, N.W. Chief Executive Capital Advisers, Inc., Allied Capital
Washington, D.C. 20006 Officer Corporation, Allied Capital Corporation II,
Allied Capital Commercial Corporation and
Allied Capital Lending Corporation; Director,
President and Chief Executive Officer of
Business Mortgage Investors, Inc.; Director of
The Riggs National Corporation; Trustee of The
George Washington University. He has held
positions as an executive officer of Allied
Capital Advisers, Inc. since 1976 and with
Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Commercial
Corporation, Allied Capital Lending Corporation
and Business Mortgage Investors, Inc. since the
later of that year or their inception.
George C. Williams(1) 69 Director, Chairman Vice Chairman of the Board of Allied Capital
1666 K Street, N.W. of the Board Advisers, Inc., Allied Capital Corporation,
Washington, D.C. 20006 Allied Capital Corporation II, Allied Capital
Commercial Corporation and Allied Capital
Lending Corporation; Chairman of Business
Mortgage Investors, Inc.; He has held
positions as an executive officer of Allied
Capital Advisers, Inc., Allied Capital
Corporation, Allied Capital Corporation II,
Allied Capital Commercial Corporation, Allied
Capital Lending Corporation and Business
Mortgage Investors, Inc. since the later of 1964
of their inception.
Roger Machanic 62 Director President, Montgomery Real Estate Corporation
300 Montgomery Street since 1991; Chairman, MREC (1986-1991); Trustee
#200 Emeritus, George Mason University Foundation, Inc.
Alexandria, VA 22314 since 1995; Trustee and Treasurer, George Mason
University (1991-1994); Advisory Board member,
Virginia Commerce Bank since 1991.
Elizabeth Conahan 44 Director Senior Vice President, Walker & Dunlap since
7500 Old Georgetown Road 1994; Senior Vice President, NationsBank
Suite 800 (1991-1994); Principal and Division Manager;
Bethesda, MD 20814 AMRESCO Institutional, Inc. (1991-1994);
Senior Vice President, UST Corp. (1988-1991);
Member, Urban Land Institute; Member, Urban
Development and Mixed-Use Council; Vice
Chairman, Inner-City Committee.
Landon V. Butler 54 Director President, Landon Butler Company since 1981;
1215 19th Street, N.W. Member, Policy Board of Multi-Employer
Washington, D.C. 20036 Property Trust; Vice Chairman, Poland Partners
Management Company.
Joseph Morningstar 42 Director Managing Director and Partner, Rockwood
555 5th Avenue Realty Associates, Inc. since 1991; Vice
New York, New York 10017 President, afa Asset Services, Inc. (1982-1991).
</TABLE>
- ---------------
(1) "Interested person" of the Company as defined in the 1940 Act.
(2) All directors have been directors since 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are included in Part I of this
report under the caption "Executive Officers of the Registrant" and all
information under that caption is incorporated herein by reference.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors and executive officers, directors of the Company's
investment adviser, and any persons holding ten percent or more of the Company's
common stock are required to report their beneficial ownership and any changes
therein to the Commission and the Company. Specific due dates for those reports
have been established, and the Company is required to report herein any failure
to file such reports by those due dates. Based on the Company's review of Forms
3, 4 and 5 filed by such persons, the Company has identified that, pursuant to
Section 16(a) of the Securities Exchange Act of 1934 in its most recent fiscal
year, all of the Company's directors and executive officers (as reported in Item
10 of this Form), as well as certain directors of the Company's investment
adviser (Robert E. Long, William L. Walton, and Brooks H. Browne) were
delinquent in filing their respective Form 3s, although only two individuals
(David Gladstone and George C. Williams) own shares of the Company, as reported
in Item 12 of this Form.
ITEM 11. EXECUTIVE COMPENSATION.
Each member of the Board of Directors, including directors who are
officers of the Company, will receive a fee of $1,000 for each meeting of the
Board of Directors or committee thereof which such director attends, except that
a fee of only $500 will be paid for attendance at a committee meeting that is
held on the same date as a Board of Directors meeting. It is expected that the
full Board of Directors will hold at least five meetings per year and that
committees will meet as required.
Except for directors' fees to be paid to the two officers who are also
directors, none of the Company's officers have been nor is it contemplated that
any such officers will hereafter be compensated by the Company, since all of
their compensation is being and will continue to be paid by Advisers. It
is contemplated, however, that the officers will be awarded stock options
under the Company's stock option plan, the proposed terms of which are
summarized below.
INCENTIVE STOCK OPTIONS
The Company plans to adopt an incentive stock option plan pursuant to
which the Stock Option Plan Committee will be authorized to award incentive
stock options to the Company's officers, including the two officers who are also
directors, to purchase for a specified period at fair market value on the date
of grant shares of Common Stock of the Company equal to an amount no greater
than 10% of the Company's outstanding shares. No options have been granted
under this plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
<TABLE>
<CAPTION>
========================================================================================================================
(2) Name and address (1) Amount and nature of
(1) Title of class of beneficial owner beneficial ownership (4) Percent of class
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock David Gladstone(1) 35 Shares(2) 50%
Common Stock George C. Williams(1) 35 Shares(2) 50%
========================================================================================================================
</TABLE>
(1) c/o Allied Capital Advisers, Inc., 1666 K Street, N.W. Washington, D.C.
20006
(2) Directly owned
(b) SECURITY OWNERSHIP OF MANAGEMENT.
The directors and officers of the Company, as a group, own 100% of the
outstanding common stock. Further details regarding security ownership of
management and provided in tabular form below. No other officer or director
owns any shares of the Company's common stock.
<TABLE>
<CAPTION>
========================================================================================================================
(2) Name (1) Amount and nature of
(1) Title of class of beneficial owner beneficial ownership (4) Percent of class
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock David Gladstone(1) 35 Shares(2) 50%
Common Stock George C. Williams(3) 35 Shares(2) 50%
========================================================================================================================
</TABLE>
(1) Director, President and Chief Executive Officer
(2) Directly owned
(3) Director, Chairman of the Board
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company proposes to enter into an investment advisory agreement
with Advisers (the "Agreement"). If the Agreement is approved, the Company
will, during the term of the Agreement, pay to Advisers an investment advisory
fee equal to (a) 3.5% per year of the average of the quarter-end values of the
Company's consolidated total assets (less the Company's Interim Investments, as
defined below, and cash) for such year (the "Base Fee"), and (b) 0.125% per
quarter of the quarter-end values 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. Upon the completion of an annual audit at the end of each
calendar year, the Base Fee may be increased or decreased depending on
the amount, if any, by which the investment performance of the Company for such
year is greater or less than 13%. Such adjustment, if any, will be based upon
a formula set forth in the Agreement. In no event will the Base Fee, as so
adjusted, be greater than 4.5% or less than 2.5%. By its terms, the
Agreement will remain in effect for two years from its effective date and from
year to year thereafter as long as it is approved at least annually by the Board
of Directors, including a majority of the directors who are not "interested
persons" of the Company within the meaning of the 1940 Act, or by vote of the
holders of a majority of the outstanding shares of the Company, as defined in
the 1940 Act.
All of the Company's officers are also officers of Advisers. Messrs.
Gladstone and Williams own shares of Advisers, and their beneficial ownership as
of March 15, 1996 represented approximately 9.7% and 3.4%, respectively, of
Advisers' shares then outstanding or deemed to be outstanding including shares
allocated to their respective Allied Employee Stock Ownership Plan stock
accounts through December 31, 1995. Mr. Gladstone, the Company's President
and Chief Executive Officer is the Chairman and Chief Executive Officer of
Advisers; Mr. Williams, the Company's Chairman is the Vice Chairman of Advisers.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. A. Financial Statements:
Statement of Assets and Liabilities at December 31, 1995.
Statement of Operations for the period August 10, 1995 (date of
incorporation) through December 31, 1995.
Statement of Changes in Net Assets for the period August 10, 1995
(date of incorporation) through December 31, 1995.
Notes to Financial Statements.
B. There is filed herewith the Report of Independent Accountants
with respect to the financial statements listed in A. above.
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:
18
<PAGE> 20
(3)(i)(1) Amended and Restated Articles of Incorporation of the Company.
(3)(ii)(2) By-laws of the Company, as amended.
(4) Instruments defining rights of security holders -- See Exhibits
(3)(i) and (3)(ii).
(10)(a)* Proposed Form of Investment Advisory Agreement between the
Company and Allied Capital Advisers, Inc.
(10)(b)(1)* Proposed Form of Allied Capital Mortgage Corporation Incentive
Stock Option Plan.
(11)* Statement re computation of per share earnings.
(27)* Financial Data Schedule.
- --------------------------------
* Filed herewith.
(1) Incorporated by reference to such document filed as an exhibit of the same
or similar number to the Company's registration statement on Form 10 (No.
0-26672) filed on August 23, 1995.
(2) Incorporated by reference to such document filed as an exhibit of the same
or similar number to Pre-Effective Amendment No. 2 to the Company's
registration statement on Form 10 (No. 0-26672) filed on October 20, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended December
31, 1995.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 28, 1996.
/s/ DAVID GLADSTONE
-------------------------------------
David Gladstone
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ DAVID GLADSTONE Director, President and March 28, 1996
- --------------------------------------------- Chief Executive Officer
David Gladstone (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Director, Chairman of March 28, 1996
- --------------------------------------------- the Board
George C. Williams
/s/ ROGER MACHANIC Director March 28, 1996
- ---------------------------------------------
Roger Machanic
/s/ ELIZABETH CONAHAN Director March 28, 1996
- ---------------------------------------------
Elizabeth Conahan
/s/ LANDON BUTLER Director March 28, 1996
- ---------------------------------------------
Landon Butler
/s/ JOSEPH MORNINGSTAR Director March 28, 1996
- ---------------------------------------------
Joseph Morningstar
/s/ JON A. DELUCA Executive Vice President, Treasurer, March 28, 1996
- --------------------------------------------- and Chief Financial Officer
Jon A. DeLuca (Principal Financial and
Accounting Officer)
</TABLE>
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10(a) Proposed Form of Investment Advisory Agreement between the
Company and Allied Capital Advisers, Inc.
10(b)(1) Proposed Form of Allied Capital Mortgage Corporation Incentive
Stock Option Plan.
11 Statement re computations of per share earnings.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10(a)
ALLIED CAPITAL MORTGAGE CORPORATION
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made by and between Allied Capital Mortgage
Corporation, 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 on the terms set
forth herein.
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, loans, real estate interests and other assets in accordance with
the Company's investment policies;
(b) make available and, if requested by entities in 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) subject to the Company's investment policies and any
specific directives from the Company's Board of Directors, effect acquisitions
and dispositions for the Company's account in the Adviser's discretion and to
arrange for the documents representing investments acquired to be delivered to
a custodian of the Company; and
(g) on a continuing basis, monitor, manage and service the
Company's loan and/or investment portfolio.
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. 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. The Company will reimburse
the Adviser promptly, against the Adviser's voucher, for (a) any origination
fee with respect to any loan or investment made by the Company that was
identified or referred to the Company by any third party with which the Company
or the Adviser then has a written agreement
2
<PAGE> 3
or arrangement that specifies the amount or rate of such fee or (b) any
origination fee with respect to any loan or investment made by the Company that
was identified or referred to the Company by any third party with which the
Company or the Adviser then does not have a written agreement or arrangement.
All such origination fees reimbursed to the Adviser will be reviewed as of the
end of each calendar quarter by the Company's Board of Directors.
6. 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 the 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.
7. COMPENSATION TO THE ADVISER.
The Company will, during the term of this Agreement, pay to the
Adviser, an investment advisory fee equal to (a) 3.5% per year of the average
of the quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values 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.
Upon the completion of an annual audit at the end of each calendar
year, the Base Fee may be increased or decreased depending on the amount, if
any, by which the investment performance of the Company is greater or less than
13%. At the end of each of the Company's fiscal years, the net asset value per
share will be calculated by the Company's auditors. The investment return of
the Company in a particular year will be the sum of: (a) the change in its net
asset value per share during such year; (b) the value of its cash distributions
per share during such year; and (c) the value of capital gains taxes per share
paid or payable, if any, on undistributed realized long-term capital gains
during such year. The investment performance of the Company for such year will
be its investment return expressed as a percentage of its net asset value per
share at the beginning of such year. (For this purpose, the value of cash
distributions per share and capital gains taxes per share paid or payable on
undistributed realized long-term capital gains will be treated as reinvested in
shares of the Company at the net asset value per share in effect at the close
of business on the record date for the payment of such distributions and the
date on which provision is made for such taxes, respectively, after giving
effect to such distributions and taxes.) To the extent the investment
performance of the Company exceeds 13% for that year, one-fifth of one
percentage point will be added to the Base Fee for every
3
<PAGE> 4
one percentage point of the difference between the investment performance of
the Company and 13%. The maximum amount added to the Base Fee will be one
percentage point, with the adjusted Base Fee not to exceed 4.5%. To the extent
the investment performance of the Company is less than 13% for that year,
one-fifth of one percentage point will be subtracted from the Base Fee for
every one percentage point of the difference between the investment performance
of the Company and 13%. The maximum amount subtracted from the Base Fee will
be one percentage point, with the adjusted Base Fee not to be lower than 2.5%
(the "Minimum Base Fee"). For purposes of calculating the adjustment to the
Base Fee, performance percentages will be rounded off to the nearest whole
percentage.
The Company will, during the term of this Agreement, pay to the
Adviser, quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on
an annualized basis) of the quarter-end value of the Company's consolidated
total assets (less the Company's Interim Investments and cash). The Company
will also pay 0.125% per quarter (0.5% on an annualized basis) of the
quarter-end value of the Company's consolidated Interim Investments and cash.
For the purpose of calculating the investment advisory fee, the
values of the Company's assets will be determined as of the end of each
calendar quarter by the Board of Directors. The Company will pay the Minimum
Base Fee and the fee on Interim Investments and cash with respect to a calendar
quarter as soon as practicable after the values of the Company's assets have
been determined for such quarter. The Company will pay the difference between
the Minimum Base Fee and the Base Fee as soon as practicable after the values
of the Company's assets have been determined for the year-end. If the
termination of the Adviser's services hereunder does not coincide with the last
day of a calendar quarter or the year-end, then the Minimum Base Fee determined
in accordance with this paragraph shall be multiplied by the ratio of the
number of days in such quarter during which the Adviser rendered services to
the total number of days in such quarter, with corresponding treatment for
calculating any adjustments to the Base Fee.
8. 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 Bylaws, 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.
9. 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 March __, 1996 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 for two years from its effective date 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.
4
<PAGE> 5
10. TERMINATION OF THE AGREEMENT.
The foregoing notwithstanding, this Agreement may be terminated by
the Company at any time, without payment of any penalty, on sixty (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 sixty
(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.
11. 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
1996.
ALLIED CAPITAL MORTGAGE CORPORATION
Attest: By:
----------------------- -----------------------------
T. R. Salley, Secretary David Gladstone, President
ALLIED CAPITAL ADVISERS, INC.
Attest: By:
----------------------- -----------------------------
T R. Salley, Secretary Joan M. Sweeney, President
5
<PAGE> 1
EXHIBIT 10(b)(1)
ALLIED CAPITAL MORTGAGE CORPORATION
INCENTIVE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of this Incentive Stock Option Plan (this "Plan") is to
advance the interests of Allied Capital Mortgage Corporation (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 $.0001 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 four hundred thousand (400,000)
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.
1
<PAGE> 2
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 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 in this Plan 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 in this Plan 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 three thousand three hundred thirty-three (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 three
2
<PAGE> 3
thousand three hundred thirty-three (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 one hundred ten percent (110%) of such
current fair market value.
6. OPTION PERIOD
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 ten percent (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
3
<PAGE> 4
(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 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
4
<PAGE> 5
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 either: (i) 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, (ii) 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, or (iii) if neither such condition exists, as determined in good faith
by the Company's Board of Directors, including a majority of the non-interested
directors.
(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 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 One Hundred
Thousand Dollars ($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 twenty percent
(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.
5
<PAGE> 6
(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 Mortgage
Corporation, 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. CHANGE OF CONTROL
In the event of a Change of Control (as hereinafter defined), all
then-outstanding options will become fully vested and exercisable as of the
Change of Control. However, if in the opinion of counsel to the Company the
immediate exercisability of such options, when taken into consideration with
all other "parachute payments" as defined in Section 280G of the Code, would
result in an "excess parachute payment" as defined in such section, such option
shall not become immediately exercisable, except and to the extent the
Compensation Committee in its discretion shall otherwise determine. For
purposes of the Plan, "Change of Control" means the sale of substantially all
of the Company's assets or the acquisition, whether directly, indirectly,
beneficially (within the meaning of Rule 13d-3 of the Act), or of record, of
securities of the Company representing twenty-five (25%) or more in the
aggregate voting power of the Company's then-outstanding Common Stock by any
"person" (within the meaning of Sections 13(d) and 14(d) of the Act), including
any corporation or group of associated persons acting in concert, other than
(i) the Company or its subsidiaries and/or (ii) any employee pension benefit
plan (within the meaning of Section 3(2) of the Employee Retirement Income
Security Act of 1974) of the Company or its subsidiaries, including a trust
established pursuant to any such plan; provided, that a Change of Control will
not result from: (A) a transfer of the Company's voting securities by a person
who is the beneficial owner, directly or indirectly, of twenty-five percent
(25%) or more of the voting securities of the Company (a "25 Percent Owner") to
(i) a member of such 25 Percent Owner's immediate family (within the meaning of
Rule 16a-l(e) of the Act) either during such 25 Percent Owner's lifetime or by
will or the laws of descent and distribution; (ii) any trust as to which the 25
Percent Owner or a member (or members) of his immediate family (within the
meaning of Rule 16a-l(e) of the Act) is the beneficiary; (iii) any trust as to
which the 25 Percent Owner is the settlor with sole power to revoke; (iv) any
entity over which such 25 Percent Owner has the power, directly or indirectly,
to direct or cause the direction of the management and policies of the entity,
whether through the ownership of voting securities, by contract or otherwise;
or (v) any charitable trust, foundation or corporation under Section 501(c)(3)
of the Code that is funded by the 25 Percent Owner; or (B) the acquisition
voting securities of the Company by either (i) a person who was a 25 Percent
Owner on the effective date of the Plan or (ii) a person, trust or other entity
described in the foregoing clauses (A)(i)-(v) of this subsection.
6
<PAGE> 7
17. 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 that date which is ten (10) years after the date hereof (that
is March __, 2006), whichever shall first occur.
18. 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.
19. AMENDMENT HISTORY
Date of plan adoption by the Board of Directors ______________
Date of plan approval by Shareholders ______________
7
<PAGE> 1
Allied Capital Mortgage Lending Corporation
Exhibt 11 Computation of Earnings Per Common Share
For the period August 10, 1995 (date of incorporation) through December 31, 1995
<TABLE>
<CAPTION>
For the period August 10,
1995 (date of incorporation)
through December 31, 1995
----------------------------
<S> <C>
Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $ 0
===
Weighted average number of shares and
share equivalents outstanding 70
===
Earnings per Share $ 0
===
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL MORTGAGE CORPORATION'S STATEMENT OF ASSETS AND LIABILITIES AND
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED HEREWITH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> AUG-10-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1050
<TOTAL-ASSETS> 1050
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1050
<SHARES-COMMON-STOCK> 70
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1050
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 70
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1050
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
