-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjJ5D3Xmiunz8Isf5c25EA/VWY9Q9RCB5x/Dm/pb5Ub5wCbsEcLlcprGHGHxgI6z az/KG8qLguoFZhKTaq/1qg== 0000950133-97-001065.txt : 19970329 0000950133-97-001065.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950133-97-001065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED CAPITAL CORP CENTRAL INDEX KEY: 0000003845 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 530245085 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 811-00907 FILM NUMBER: 97566463 BUSINESS ADDRESS: STREET 1: 1666 K ST N W STE 901 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 2023311112 MAIL ADDRESS: STREET 2: 1666 K STREET NW 9TH FL CITY: WASHINGTON STATE: DC ZIP: 20006 10-K 1 ALLIED CAPITAL CORPORATION 1996 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K ------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 811-00907 ALLIED CAPITAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) ------------ MARYLAND 53-0245085 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) C/O ALLIED CAPITAL ADVISERS, INC. 1666 K STREET, NW, NINTH FLOOR 20006 WASHINGTON, D.C. (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112 ------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $1.00 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the registrant's common stock held other than by directors and officers of the registrant and officers of its investment adviser as of March 19, 1997 was approximately $107,020,154, based upon the average bid and asked price for the registrant's common stock on that date. As of March 19, 1997 there were 7,326,626 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference into Parts II and IV of this Report. Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 1, 1997 are incorporated by reference into Part III of this Report. ================================================================================ 2 PART I ITEM 1. BUSINESS Allied Capital Corporation (the "Company") was incorporated under the laws of the District of Columbia in 1958 and was reorganized as a Maryland corporation in 1991. It is a closed-end management investment company that elected in 1991 to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has two active wholly owned subsidiaries, Allied Investment Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial"). Allied Investment and Allied Financial are Maryland corporations registered under the 1940 Act as closed-end management investment companies. Allied Investment is licensed by the U.S. Small Business Administration (the "SBA") as a small business investment company under Section 301(C) of the Small Business Investment Act of 1958, as amended (an "SBIC"), and Allied Financial is licensed by the SBA as a specialized small business investment company under Section 301(d) of the Small Business Investment Act of 1958, as amended (an "SSBIC"). As described below, the Company also has a significant ownership interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end management investment company that has elected to be regulated as a BDC and is an SBA-approved small business lending company. Allied Capital Advisers, Inc. ("Advisers") serves as the investment adviser to the Company under an investment advisory agreement. The Company seeks to provide current income and long-term growth in the value of its net assets by providing debt, mezzanine, and equity financing primarily for small, privately owned companies. The Company invests primarily in and lends primarily to small businesses, both directly and through its wholly owned subsidiaries (unless otherwise indicated, all further references herein to investments made by the Company include those made by its subsidiaries). The investments made by the Company include providing financing for growth, for leveraged buyouts of such companies, for note purchases and loan restructurings, and for special situations, such as acquisitions, buyouts, recapitalizations, and bridge financing of such companies. The Company's investments generally take the form of loans with equity features, such as warrants or conversion privileges, that entitle the Company to acquire a portion of the equity in the entity in which the investment is made. The typical maturity of such a loan made by the Company is seven years, with interest-only payments in the early years and payments of both principal and interest in the later years, although loan maturities and principal amortization schedules vary. The Company also makes senior loans without equity features. Loans generally bear interest at a fixed rate that the Company believes is competitive in the venture capital marketplace. Current income is derived primarily from interest earned on the loan element of the Company's investments. Generally, long-term growth in net asset value and realized capital gains, if any, from portfolio companies are achieved through the equity obtained as a result of the Company's growth financing and leveraged buyout activity. The Company seeks to structure its investments so that approximately one-half of the potential return is earned in the form of monthly or quarterly interest payments and the balance is derived from capital gains. The Company's investments may be secured by the assets of the entity in which the investment is made, which collateral interests may be subordinated in certain instances to institutional lenders, such as banks. The Company makes available significant managerial assistance to its portfolio companies. Pending investment of its assets, the Company's funds are generally invested in repurchase agreements fully collateralized by U.S. government securities. The Company usually invests in privately held companies or small public companies that are thinly traded and generally lack access to capital. These companies generally have been in business for at least one year, have a commercially proven product or service, and seek capital to finance expansion or ownership changes. The Company generally requires that the companies in which it invests demonstrate sales growth, positive cash flow, and profitability, although turnaround situations are also considered. The Company invests in businesses operating in a variety of different industries, such as broadcasting, manufacturing, environmental technologies, wholesale distribution, and retail operations. The Company emphasizes the quality of management of the companies in which it invests, and seeks experienced entrepreneurs with a management track record, relevant industry experience, and high integrity. Historically, all of the investments of the Company have been made in domestic small businesses. In 1995, the Company established a $20 million credit facility with the Overseas Private Investment Corporation ("OPIC"), pursuant to which it makes investments in businesses that engage, in whole or in part, in overseas operations, usually in countries representing the world's emerging markets. OPIC is a self-sustaining federal agency the purpose of which is to promote 1 3 economic growth in developing countries by encouraging U.S. private investment in those nations. Under OPIC regulations, investments generally may be made only in companies that have some affiliation with a U.S.-based business entity. In January 1996, the Company registered 885,448 shares of its stock to be offered in connection with a rights offering to its existing shareholders. Pursuant to the rights offering, the Company issued to the common stockholders at the close of business on January 22, 1996, (the "Record Date"), one non-transferable subscription right ("Subscription Right") for each share held which entitled each record date stockholder to subscribe for and purchase from the Company up to one authorized, but theretofore unissued share of the Company's common stock for each seven Subscription Rights held (the "Primary Subscription"). Stockholders who fully exercised their Subscription Rights were entitled to the additional privilege of subscribing for shares from the offering not acquired by exercise of Subscription Rights (the "Over-Subscription Privilege"). In addition, the Company increased the number of shares subject to subscription by 15%, or 132,817 shares, for an aggregate total of 1,018,265 shares available under the offering. The subscription price per common share was $13.11, which equaled 95% of the average of the last reported sale price of a share of common stock on the Nasdaq National Market on February 27, 1996 (the expiration date of the rights offering) and each of the four preceding business days. Stockholders participating in the offering subscribed for 411,961 shares through the Primary Subscription and 251,749 shares through the Oversubscription Privilege for a total of 663,710 shares. The Company received net proceeds of $8.3 million from the rights offering after estimated expenses of $437,000, including a 2.5% commission paid to eligible broker/dealers on each share sold as a result of their soliciting efforts. In the registration statement relating to the rights offering, the Company retained the right to offer and sell any unsubscribed-for shares through a subsequent offering. Any such subsequent offering may be made only through the use of a prospectus included in a post-effective amendment to the registration statement. The Company's Operation as a BDC As a BDC, the Company may not acquire any investment assets other than "Qualifying Assets" unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total investment assets (the "70% test"). The principal categories of Qualifying Assets relevant to the business of the Company are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, an affiliated person of the issuer, or any other person (subject to Securities and Exchange Commission rule-making), provided the issuer is an eligible portfolio company. An eligible portfolio company is defined to include any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than an SBIC wholly owned by the BDC (the Company's investments in and advances to Allied Investment and Allied Financial are Qualifying Assets, but its investment in Allied Lending, which is neither wholly owned nor an SBIC, is not) and (C) either (I) does not have any class of publicly traded securities with respect to which a broker may extend margin credit or (ii) is controlled by the BDC. (2) Securities received in exchange for or distributed with respect to securities described in (1) above, or pursuant to the exercise of options, warrants or rights relating to such securities. (3) Cash, cash items, government securities, or high quality debt securities (within the meaning of the 1940 Act) maturing in one year or less from the time of investment. In addition, to treat securities described in (1) and (2) above as Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance. Making available significant managerial assistance means, among other things, (I) any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company or (ii) in the case of an SBIC, making loans to a portfolio company. The Company makes available managerial assistance to its portfolio companies through the Company's directors and officers, who are employees of Advisers, the Company's investment adviser. Each portfolio company is assigned for monitoring purposes to an investment officer and its principals are contacted and counseled if the portfolio company appears to be encountering business or financial difficulties. The Company also provides 2 4 managerial assistance on a continuing basis to any portfolio company that requests it, whether or not difficulties are perceived. The Company's officers and directors are experienced in providing managerial assistance to small businesses. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a "majority of the outstanding voting securities," as defined in the 1940 Act, of the Company. Since the Company made its BDC election, it has not in practice made any substantial change in its structure or, on a consolidated basis, in the nature of its business, except for the disposition of its ownership interest in Allied Lending, as described below, which is not a change that results in the Company ceasing to be a BDC. As a BDC, the Company is entitled to borrow money and issue senior securities representing indebtedness as long as senior securities representing indebtedness have asset coverage of at least 200%. This limitation is not applicable to classes of senior securities representing indebtedness of the Company's SBIC and SSBIC subsidiaries. Co-Investment with Allied Capital Corporation II, Allied Venture Partnership, and Allied Technology Partnership In accordance with the conditions of several exemptive orders of the Securities and Exchange Commission (the "Commission") permitting co-investments (the "Co-investment Guidelines"), most of the Company's acquisitions and dispositions of investments are made in participation with Allied Capital Corporation II ("Allied II"). In the past, the Company also acquired certain investments in participation with Allied Venture Partnership ("Allied Venture") and Allied Technology Partnership ("Allied Technology"), both private venture capital partnerships managed by Advisers, neither of which is now making new investments. Allied II is a closed-end management investment company that has elected to be regulated as a BDC and for which Advisers serves as its investment adviser. At December 31, 1996, Allied II had total consolidated assets of $106,908,000, compared to the Company's total consolidated assets of $165,751,000 at that date. The Co-investment Guidelines generally provide that the Company and its wholly owned subsidiaries must be offered the opportunity to invest in any investment, other than in interim investments or marketable securities, that would be suitable for Allied II or its wholly owned subsidiaries and the Company to the extent proportionate to their respective consolidated total assets. Securities purchased by the Company or its wholly owned subsidiaries in a co-investment transaction with any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology, will consist of the same class of securities, will have the same registration rights, if any, and other rights related thereto, and will be purchased for the same unit consideration. Any such co-investment transaction must be approved by the Company's Board of Directors, including a majority of its independent directors. The Company will not make any investment in the securities of any issuers in which Allied II, Allied Venture or Allied Technology, but not the Company, has previously invested. The Co-investment Guidelines also provide that the Company will have the opportunity to dispose of any securities in which the Company or its wholly owned subsidiaries and any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology, have invested in proportion to their respective holdings of such securities, and that, in any such disposition, the Company will be required to bear no more than its proportionate share of the transaction costs. Allied Investment Allied Investment, as an SBIC, provides capital to privately owned small businesses primarily through loans, generally with equity features, and, to a lesser extent, through the purchase of common or convertible preferred shares. Loans with equity features are generally evidenced by a note or debenture that is convertible into common stock, requiring the holder to make a choice, prior to the loan's maturity, between accepting repayment and maintaining its equity position, or purchasing, frequently for a nominal consideration, common stock of the issuer even after the loan is repaid. Wherever possible, Allied Investment seeks collateral for its loans, but its security interest is usually subordinated to the security interest of other institutional lenders. As an SBIC, Allied Investment currently has the opportunity to sell to the SBA subordinated debentures with a maturity of up to ten years up to an aggregate principal amount determined by a formula which applies a multiple to its private capital, but not in excess of $90 million (the "$90 million limit"). The $90 million limit generally applies to all financial assistance provided by the SBA to any licensee and its "associates," as that term is defined in SBA regulations. For this purpose, Allied Investment and Allied Financial would be deemed to be "associates" of one another and both may be deemed to be "associates" of Allied Investment Corporation II ("Allied Investment II") and Allied Financial Corporation II ("Allied Financial II"), which are the SBIC and SSBIC subsidiaries of Allied II. As a group, 3 5 Allied Investment and Allied Financial have received $68,300,000 in subordinated debenture and preferred stock investments from the SBA as of December 31, 1996; as a result, this combined ability to apply for additional leverage from the SBA will be limited to $21,700,000 due to the $90 million limit. This combined ability to obtain additional leverage assumes that Allied Investment II and Allied Financial II do not obtain any SBA leverage. The Company is unable to predict the SBA's ability to meet demands for leverage on an ongoing basis, as such funding may be affected if Congress reduces appropriations for the SBA, which may compel the SBA to allocate leverage or to reduce the current limits on available leverage. Therefore, there is no guaranty that Allied Investment or Allied Financial will be able to obtain additional SBA leverage beyond what is currently held. Allied Investment provides managerial assistance to its portfolio companies by arranging syndicated financing, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. Allied Financial Allied Financial, as an SSBIC, operates as a small business investment company specializing in the financing of small businesses controlled by socially or economically disadvantaged persons. To determine whether the owners of a small business are socially or economically disadvantaged, the SBA relies on a composite of factors. Business owners who are members of the following groups, among others, are considered socially disadvantaged: African Americans, Hispanic Americans, Native Americans and Asian Pacific Americans. In determining whether the owners of a small business are economically disadvantaged, consideration may be given to factors such as levels of income, location (for instance, urban ghettos, depressed rural areas and areas of high unemployment or underemployment), education level, physical or other special handicap, inability to compete in the marketplace because of prevailing or past restrictive practices or Vietnam-era service in the armed forces, or any other factors that may have contributed to disadvantaged conditions. An SSBIC may sell preferred stock or long-term subordinated debt to the SBA in an amount of up to 200% of its private capital. Beginning with the SBA's 1996 fiscal year commencing on October 1, 1995, Congress discontinued subsidized funding for the SBA's SSBIC program. Prior to this change, an SSBIC was able to sell preferred stock and debentures which were issued with a rate reduction or subsidy. Preferred stock sold to the SBA after November 1989 pays dividends at an annual rate of four percent (4%) of par value and must be redeemed within 15 years of issuance; preferred stock sold to the SBA before November 1989 pays dividends at an annual rate of three percent (3%) of par value and has no required redemption date. In addition to preferred stock, the SBA had provided leverage to SSBICs at a reduced rate through the purchase or guarantee of debentures. As of December 31, 1996, Allied Financial had unsubsidized capital in the aggregate amount of $18,950,000 and subsidized capital in the aggregate amount of $7,000,000, consisting of subordinated debentures to the SBA in the amount of $18,950,000, 3% preferred stock of $6,000,000 and 4% preferred stock of $1,000,000. Allied Financial provides managerial assistance to its portfolio companies by arranging syndicated financing, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. The Company's Interest in Allied Lending The Company owned 2,380,000 shares, or all of the outstanding capital stock, of Allied Lending prior to consummation of the initial public offering of Allied Lending's common stock in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending's common stock was reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding at December 31, 1993. The Company has agreed to divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's stockholders or otherwise. As part of this divestiture, the Company declared an extra distribution in December 1994 and distributed in early January 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending to 1,244,914 shares, or 28% of the Allied Lending common stock then outstanding. On December 20, 1996, the Company commenced an underwritten offering of Allied Lending shares to the public, reducing the Company's ownership interest in Allied Lending to 844,914 shares, or 16%, as of December 31, 1996. 4 6 Until 1995, the business of Allied Lending consisted solely of making small business loans which are partially guaranteed under the SBA's 7(a) Loan Program ("7(a) guaranteed loans"). Allied Lending has been an active non-bank lender in the 7(a) Loan Program. Most of the loans made by Allied Lending historically have been made for the purpose of allowing portfolio companies to acquire real estate-related assets, such as factories, workshops, or retail premises, or to refinance outstanding loans made to acquire such real estate; a smaller proportion of such loans has been made for the purpose of allowing portfolio companies to purchase or refinance machinery and equipment. Allied Lending, pursuant to stockholder approval at a Special Meeting of Stockholders on November 9, 1995, expanded its ability to make loans to include, in addition to 7(a) guaranteed loans, loans that are made in conjunction with 7(a) guaranteed loans, and loans pursuant to the SBA 504 program. Competition A large number of entities and individuals compete for the opportunity to make the kinds of investments made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered to be prudent in light of the risks to be assumed. Investment Adviser Advisers is the investment adviser to the Company pursuant to an investment advisory agreement. The advisory agreement will remain in effect from year to year as long as its continuance is approved at least annually by the Board of Directors, including a majority of the disinterested directors, or by the "vote of a majority of the outstanding voting securities" (as defined in the 1940 Act), of the Company. The advisory agreement may, however, be terminated at any time on (60) sixty days' notice, without the payment of any penalty, by the Board of Directors or by vote of a majority of the Company's outstanding voting securities, as so defined, and will terminate automatically in the event of its assignment. Under the Agreement, Advisers manages the investments of the Company, subject to the supervision and control of the Board of Directors. Specifically, Advisers identifies, evaluates, structures, closes, and monitors the investments made by the Company. The Company will not make any investments that have not been recommended by Advisers as long as the advisory agreement remains in effect. Advisers has the authority to effect acquisitions and dispositions of investments for the Company's account, subject to approval by the Company's Board of Directors. The advisory agreement provides that the Company will pay all of its own operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments, legal and accounting fees, the fees and expenses of the Company's independent directors and the fees of its officer-directors, the costs of printing and mailing proxy statements and reports to stockholders, costs associated with promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of any company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or management assistance. Advisers will report to the Board of Directors not less often than quarterly all fees received by Advisers from any source whatever and whether, in its opinion, any such fee is one that Advisers is entitled to retain under the provisions of the advisory agreement. In the event that any member of the Board of Directors should disagree, the matter will be conclusively resolved by a majority of the Board of Directors, including a majority of the independent directors. As compensation for its services to and the expenses paid for the account of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company, consolidated Interim Investments, cash and cash equivalents, plus 0.125% per quarter of the quarter-end value of consolidated Interim Investments, cash and cash 5 7 equivalents. The advisory agreement provides specifically that the fee to Advisers will not apply to the Company's investment in Allied Lending, as required by the Commission's 1993 exemptive order permitting the spinoff of Allied Lending. Such fees on an annual basis are approximately 2.5% of the Company's consolidated total assets, less the Company's investment in Allied Lending and consolidated Interim Investments, cash and cash equivalents, and 0.5% of the Company's consolidated Interim Investments, cash and cash equivalents. The fee to Advisers is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, evaluating, structuring, closing, and monitoring the types of private investments in which the Company specializes. The rate of compensation paid by the Company to Advisers is substantially the same as that paid by Allied II. The Company also understands that the fee to Advisers provided for by the advisory agreement is not in excess of that frequently paid by private investment funds engaged in similar types of investments. Such private funds also typically allocate to management a substantial participation in profits. Change of Chairman and Chief Executive Officer After 22 years with the Allied Capital companies, David Gladstone stepped down as Chairman and Chief Executive Officer of the Company in early 1997, and the Board appointed William L. Walton to be the Company's new Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a director on March 19, 1997 and will not stand for election to the board of directors. Mr. Walton has been affiliated with the Allied Capital companies for more than ten years, both as a director of Advisers and as a past director of the Company. Mr. Walton's extensive experience in the investment industry combined with his performance as an entrepreneur provide an excellent mix of talent for the Company. He previously served as Managing Director of New York-based Butler Capital Corporation and was the personal venture capital advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr. Walton founded two private companies dedicated to improving education for children with a focus on reading and languages. Mr. Walton has been a commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a private investor and an entrepreneur, and throughout his career has been involved in the growth and finance of small business. Employees The Company has no employees, as all of its personnel are furnished by Advisers. ITEM 2. PROPERTIES. The Company does not own or lease any properties or other tangible assets. ITEM 3. LEGAL PROCEEDINGS. The Company is not a defendant in any material pending legal proceeding, and no such material proceedings are known by the Company to be contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names, ages and positions of the executive officers of the Company as of March 1, 1997, as well as certain other information with respect to those persons: 6 8
Positions Currently Held with the Principal Occupations Name Age Company During Past Five Years ---- --- ---------------------- ---------------------- William L. Walton 47 Chairman of the Board and Chief Employed by Advisers since Executive Officer 1997; Chairman and Chief Executive Officer of Allied II, Allied Capital Commercial Corporation ("Allied Commercial"), Allied Lending and Advisers; Manager of Allied Capital Midwest LLC ("Allied Midwest"); Chief Executive Officer of Success Lab, Inc. (children's educational services) from 1993 to 1996; Chief Executive Officer of Language Odyssey (educational publishing and services) from 1992 to 1996; and Managing Director of Butler Capital Corporation from 1987 to 1991. G. Cabell Williams III 42 President and Chief Operating Employed by Advisers since Officer 1981. Executive Vice President of Allied II, Allied Commercial, Allied Lending, Business Mortgage Investors, Inc. ("BMI"), Allied Midwest and Advisers. He is the son of George C. Williams, also a director of the Company. Jon A. DeLuca 34 Executive Vice President, Treasurer, Employed by Advisers since and Chief Financial Officer 1994. Executive Vice President, Treasurer and Chief Financial Officer of Allied II, Allied Commercial, Allied Lending, BMI, Allied Capital Mortgage, LLC ("Allied Mortgage"), Allied Midwest and Advisers. Manager of Entrepreneurial Services at Coopers & Lybrand from 1986 to 1994. Joan M. Sweeney 37 Executive Vice President Employed by Advisers since 1993; President and Chief Operating Officer of Advisers; Executive Vice President of Allied II, Allied Commercial, Allied Lending, BMI, and Allied Mortgage and Allied Midwest; Senior Manager at Ernst & Young from 1990 to 1993.
7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information in response to this Item is incorporated by reference to the "Shareholder Information" and "Quarterly Stock Price and Distributions to Shareholders" sections of, and to Notes 4 and 7 of the Notes to Consolidated Financial Statements contained in, the Company's Annual Report to Shareholders for the year ended December 31, 1996 (the "1996 Annual Report"). ITEM 6. SELECTED FINANCIAL DATA. Information in response to this Item is incorporated by reference to the table in the "Consolidated Comparison of Financial Highlights" section of the 1996 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Information in response to this Item is incorporated by reference to the "Management's Discussion and Analysis" section of the 1996 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information in response to this Item is incorporated by reference to the Consolidated Financial Statements, notes thereto and Report of Independent Accountants thereon contained in the 1996 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information in response to this Item is incorporated by reference to the identification of directors and nominees contained in the "Election of Directors" section and the subsection captioned "Compliance with Reporting Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the Company's definitive proxy statement in connection with its 1997 Annual Meeting of Stockholders, scheduled to be held on May 1, 1997 (the "1997 Proxy Statement"). Information in response to this Item also is included under the caption "Executive Officers of the Registrant" included in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION. Information in response to this Item is incorporated by reference to the subsections captioned "Compensation of Executive Officers and Directors," "Incentive Stock Options" and "Compensation of Directors" of the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information in response to this Item is incorporated by reference to the subsection captioned "Beneficial Ownership of Common Stock" of the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information in response to this Item is incorporated by reference to the subsections captioned "Certain Transactions" of the 1997 Proxy Statement. 8 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. A. The following financial statements are incorporated by reference from the 1996 Annual Report: Consolidated Balance Sheet at December 31, 1996 and 1995. Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994. Consolidated Statement of Changes in Net Assets for the years ended December 31, 1996, 1995 and 1994. Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Consolidated Statement of Loans and Investments at December 31, 1996. Notes to Consolidated Financial Statements. B. Report of Independent Accountants with respect to the financial statements listed in A. above is incorporated by reference from the 1996 Annual Report. 2. No financial statement schedules are filed herewith because (i) such schedules are not required or (ii) the information required has been presented in the aforementioned financial statements. 3. The following exhibits are filed herewith or incorporated by reference as set forth below:
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3(i)* Articles of Incorporation 3(ii)(1) By-Laws 4.1 Instruments defining the rights of security holders. See Exhibits 3(i) and 3(ii). 4.2* Form of debenture between certain subsidiaries of the Company and the U.S. Small Business Administration. 10.1(2) Note Agreement between the Company and certain subsidiaries and Massachusetts Mutual Life Insurance Company, as amended, dated April 30, 1992. 10.2(1) Loan Agreement between the Company and Overseas Private Investment Corporation, dated April 10, 1995. 10.3* Unsecured Line of Credit Agreement between the Company and certain subsidiaries and Riggs Bank N.A., dated December 20, 1996. 10.4* Unconditional Guaranty by the Company to and for the benefit of Riggs Bank N.A., dated December 20, 1996. 10.5* Promissory notes between the Company and certain subsidiaries and Riggs Bank N.A., dated December 20, 1996. 10.7* Investment Advisory Agreement between the Company and Allied Capital Advisers, Inc., dated May 4, 1995. 10.8* Dividend Reinvestment Plan 10.9* Stock Option Plan 11* Statement regarding computation of per share earnings.
9 11 13* Excerpts from the 1996 Annual Report to Shareholders. 21 Subsidiaries of the Company and jurisdiction of incorporation. Allied Investment Corporation Maryland Allied Capital Financial Corporation Maryland Allied Development Corporation District of Columbia 23* Consents of Matthews, Carter and Boyce, independent accountants. 27* Financial Data Schedule 28* Financial statements as of and for the year ended December 31, 1996 of Allied Investment Corporation and Allied Capital Financial Corporation, in the form filed with the U.S. Small Business Administration.
- ------------------- * Filed herewith. (1) Incorporated by reference to such Exhibit on Pre-Effective Amendment No. 2 filed with registration statement on Form N-2 on January 24, 1996 (File No. 33-64629). (2) Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii), (4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9, 1993. (b) Reports on Form 8-K. No reports on Form 8-K have been filed for the three months ended December 31, 1996. 10 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 27, 1997. /s/ WILLIAM L. WALTON --------------------- William L. Walton Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Title Signature (Capacity) Date - --------- ---------- ---- /s/ WILLIAM L. WALTON Chairman and March 27, 1997 - -------------------------- Chief Executive Officer William L. Walton (Principal Executive Officer) /s/ GEORGE C. WILLIAMS Director March 27, 1997 - -------------------------- George C. Williams /s/ G. CABELL WILLIAMS III Director and President March 27, 1997 - -------------------------- and Chief Operating Officer G. Cabell Williams III /s/ T. MURRAY TOOMEY Director March 27, 1997 - -------------------------- T. Murray Toomey /s/ JOSEPH A. CLORETY Director March 27, 1997 - -------------------------- Joseph A. Clorety III /s/ GUY T. STEUART II Director March 27, 1997 - -------------------------- Guy T. Steuart II /s/ WARREN K. MONTOURI Director March 27, 1997 - -------------------------- Warren K. Montouri /s/ MICHAEL I. GALLIE Director March 27, 1997 - -------------------------- Michael I. Gallie /s/ JON A. DELUCA Executive Vice President, Treasurer, March 27, 1997 - -------------------------- and Chief Financial Officer Jon A. DeLuca (Principal Financial and Accounting Officer)
11 13 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 3(i) Articles of Incorporation 4.2 Form of debenture between the Company's subsidiaries and the U.S. Small Business Administration. 10.3 Unsecured Line of Credit Agreement between the Company and certain subsidiaries and Riggs Bank N.A., dated December 20, 1996. 10.4 Unconditional Guaranty by the Company to and for the benefit of Riggs Bank N.A., dated December 20, 1996. 10.5 Promissory notes between the Company and certain subsidiaries and Riggs Bank N.A., dated December 20, 1996. 10.7 Investment Advisory Agreement between the Company and Allied Capital Advisers, Inc., dated May 4, 1995. 10.8 Dividend Reinvestment Plan. 10.9 Stock Option Plan 11 Statement regarding computation of per share earnings. 13 Excerpts from the 1996 Annual Report to Shareholders. 23 Consents of Matthews, Carter and Boyce, independent accountants. 27 Financial Data Schedule 28 Financial statements as of and for the year ended December 31, 1996 of Allied Investment Corporation and Allied Capital Financial Corporation, in the form filed with the U.S. Small Business Administration.
12 EX-3.I 2 ARTICLES OF INCORPORATION. 1 Exhibit 3(i) ARTICLES OF INCORPORATION ALLIED CAPITAL CORPORATION (A MARYLAND CORPORATION) The undersigned, Thomas R. Salley, III, whose post office address is 1666 K Street, N.W., Suite 901, Washington, D.C. 20006, being at least eighteen (18) years of age, does hereby form a corporation under the general laws of the State of Maryland. FIRST: The name of the corporation (hereinafter referred to as the "Corporation") is: Allied Capital Corporation. SECOND: The purposes for which the Corporation is organized are as follows: A. To render advice and consulting services to corporations, individuals, partnerships and other business entities; to enter into contracts with any of such entities for the purpose of carrying out such advisory and consulting services; to register as an investment adviser with such agencies and in such jurisdictions where such registration is deemed appropriate; and to do all such other acts as may be related or incidental to the purposes of an investment adviser, merchant bank or similar financial institution; B. To purchase, acquire, hold, own, improve, develop, sell, convey, assign, release, mortgage, encumber, use, lease, hire, manage, deal in and otherwise dispose of real property and personal property of every kind and nature or any interest therein, improved or otherwise, including stocks and securities of other corporations; to loan money; to take securities for the payment of all sums due the Corporation; to sell, assign and release such securities; C. To equip, furnish, improve, develop and manage any property, real or personal; to invest, trade and deal in any personal property; to encumber or dispose of any personal property at any time held or owned by the Corporation; D. To engage in, operate and acquire interests in any kind of business, of whatever nature, which may be permitted by law; E. To import, export, produce, buy, sell and otherwise deal in and with, goods, wares and merchandise of every kind, class and description; F. To acquire all or any part of the good will, rights, property and business of any individual association, partnership, joint venture, corporation or other legal entity; to hold, utilize, enjoy and in any manner dispose of the whole or any part of the rights, property and business so acquired; to assume in connection therewith any liabilities of any such individual association, partnership, joint venture, corporation or other legal entity; G. To acquire, by purchase, subscription or in any other manner, take, receive, hold, use, employ, sell, assign, transfer, exchange, pledge, mortgage, lease, dispose of and otherwise deal in and with any shares of stock or other shares, voting trust certificates, bonds, debentures, notes, mortgages or other obligations, securities or evidences of indebtedness, and any certificates, receipts, warrants or other instruments evidencing rights or options to receive, purchase or subscribe for the same or representing any other rights or interests therein or in any property or assets, issued or created by any individual, association, partnership, joint venture, corporation, government (or subdivision or agency thereof) or other legal entity, wherever organized and wherever doing business; to possess and exercise in respect thereof any and all of the rights, powers and privileges of individual holders including, without limitation, the right to vote any shares of stock so held or owned and, 2 upon a distribution of the assets or a division of the profits of the Corporation, to distribute any such shares of stock or other shares, voting trust certificates, bonds or other obligations, securities or evidences of indebtedness (or the proceeds thereof) among the stockholders of the Corporation; H. To erect commercial buildings and other buildings, private or public of all kinds, and to sell and rent the same; to contract, enlarge, repair, grade, pave, dedicate, remodel or otherwise engage in any work upon buildings of every nature, roads, avenues, highways, paths, walks, parks, playgrounds and sidewalks; to engage in iron, steel, wood, brick, concrete, stone, cement, masonry, glass and earth construction; to execute contracts or to receive assignments of contracts therefor or relating thereto; to manufacture and furnish the building materials and supplies connected therewith; I. To apply for, obtain, purchase or otherwise acquire any patents, copyrights, licenses, trademarks, trade names, rights, processes, formulae and the like; to use, exercise, develop and grant licenses in respect of, sell and otherwise turn to account the same; J. To purchase (or otherwise acquire), hold, sell, retire, reissue or otherwise dispose of shares of its own stock of any class in any manner now or hereafter authorized or permitted by law, and to pay therefor, with cash or other property; K. To borrow or raise money and to issue bonds, debentures, notes or other obligations of any nature (and in any manner permitted by law) for money so borrowed or in payment for property purchased, or for any other lawful consideration, and to secure the payment thereof, and of the interest thereon, by mortgage upon, pledge, conveyance or assignment in trust of, the whole or any part of the property of the Corporation, real or personal, including contract rights, whether at the time owned or thereafter acquired; to sell, pledge, discount or otherwise dispose of such bonds, debentures, notes or other obligations of the Corporation; L. To aid, by loan, subsidy, guaranty or in any lawful manner whatsoever, any individual, association, partnership, joint venture, corporation or other legal entity whose stocks, bonds, notes, debentures or other obligations, securities or evidences of indebtedness are in any manner directly or indirectly held or guaranteed by the Corporation, or by any corporation in which the Corporation may have an interest directly or indirectly as stockholder, creditor, guarantor or otherwise, or whose shares or securities are owned by the Corporation; to do any and all lawful acts and things designed to protect, preserve, improve or enhance the value of any stocks, bonds, notes, debentures or other obligations, securities or evidences of indebtedness of any individual, association, partnership, joint venture, corporation or other legal entity in which the Corporation has an interest directly or indirectly as a stockholder, creditor, guarantor or otherwise, or whose shares or securities are owned by the Corporation, or to lend money with or without collateral security; M. To guarantee the payment of dividend upon any shares of stock of any other association or corporation; to guarantee the performance of any contract by any individual, association, partnership, joint venture, corporation or other legal entity; to endorse or otherwise guarantee the payment of principal and interest, or either, of any bonds, debentures, notes, securities or other evidences of indebtedness created or issued by any such individual, association, partnership, joint venture, corporation or other legal entity, it not being necessary that any such guaranty or endorsement shall be intended to result in any benefit to the Corporation (it being understood that in no way shall the Corporation act as a surety company); N. To carry out all or any part of the purposes set forth herein as principal, broker, factor, agent, contractor or otherwise, either alone, through or in conjunction with any individual, association, partnership, corporation or other legal entity; to make, execute 2 3 and perform any contracts or agreements and to do any other acts and things for the accomplishment of any of the purposes set forth herein or incidental to such purposes, or which at any time may appear conducive to or expedient for the accomplishment of any such purposes; O. To carry out all of the purposes set forth herein in any or all states, territories districts, dependencies and possessions of the United States of America and any foreign country; to maintain offices and agencies in any or all states, territories, districts, dependencies and possessions of the United States of America and any foreign country; P. To organize, incorporate, reorganize, liquidate and dissolve any association, partnership, joint venture, corporation (subsidiary, affiliated or other) or other legal entity for any purpose permitted by law; to invest in any manner in any association, partnership, joint venture, corporation (subsidiary, affiliated or other) or other legal entity; Q. To do any act or thing and exercise any power suitable, convenient or proper for the accomplishment of any of the purposes set forth herein or incidental to such purposes or which at any time may appear conducive to or expedient for the accomplishment of any of such purposes; and R. To have and exercise any and all powers and privileges now or hereafter conferred by the general laws of the State of Maryland upon corporations formed under such laws. The foregoing enumeration of the purposes of the Corporation is made in furtherance and not in limitation of the powers conferred upon the Corporation by law. The mention of any particular purpose is not intended in any manner to limit or restrict the generality of any other purpose mentioned, or to limit or restrict any of the powers of the Corporation. The Corporation shall have, enjoy and exercise all of the powers and rights now or hereafter conferred by the laws of the State of Maryland upon corporations of a similar character, it being the intention that the purposes set forth in each of the paragraphs of this Article shall, except as otherwise expressly provided, in nowise be limited or restricted by reference to or inference from the terms of any other clause or paragraph of this or any other Article of these Articles of Incorporation, or of any amendment thereto, and shall each be regarded as independent, and construed as powers as well as purposes; provided, however, that nothing herein contained shall be deemed to authorize or permit the Corporation to carry on any business or exercise any power, or do any act which a corporation formed under the general laws of the State of Maryland may not at the time lawfully carry on or do. THIRD: The post office address of the principal office of the Corporation in the State of Maryland is: 5422 Albia Road, Bethesda, Maryland 20816. The name and post office address of the resident agent of the Corporation in the State of Maryland are: G. Cabell Williams III, 5422 Albia Road, Bethesda (Montgomery County), Maryland 20816. Said resident agent is a citizen of the State of Maryland and actually resides therein. FOURTH: The total number of shares of stock which the Corporation has authority to issue is ten million (10,000,000) shares of Common Stock, with a par value of One Dollar ($1.00) per share. The aggregate par value of all such shares is Ten Million Dollars ($10,000,000.00). FIFTH: The initial number of directors of the Corporation shall be three (3) in accordance with the provisions of Section 2-402(a) of the General Corporation Law of the State of Maryland, which number may be changed pursuant to the provisions set forth in the Bylaws of the Corporation, but shall never be less than the number permitted by law, and the names of the directors who shall act until the first annual meeting of stockholders of the Corporation or until their successors are duly chosen and qualify are: David Gladstone, David P. Parker and Thomas R. Salley, III. SIXTH: The following provisions are hereby adopted for the purpose of defining, limiting and regulating the powers of the Corporation and of the Board of Directors and stockholders: 3 4 A. The Board of Directors of the Corporation is hereby empowered to authorize and direct the issuance from time to time or at any time or times of the shares of stock of the Corporation of any class, now or hereafter authorized, any options or warrants for such shares permitted by law, any rights to subscribe to or purchase such shares and any other securities of the Corporation, for such consideration as the Board of Directors may deem advisable, subject to such limitations and restrictions, if any, as may be set forth in the Bylaws of the Corporation. B. No holder of shares of stock of the Corporation of any class, now or hereafter authorized, shall have any preferential or preemptive right to subscribe for, purchase or receive (i) any shares of stock of the Corporation of any class, now or hereafter authorized, (ii) any options or warrants for any such preferential or preemptive shares, (iii) any rights to subscribe to or purchase any such shares, or (iv) any other securities of the Corporation which may at any time or from time to time be issued, sold or offered for sale by the Corporation. C. The Board of Directors of the Corporation is hereby empowered to adopt Bylaw provisions with respect to the indemnification of directors, officers, employees, agents and other persons and to make such other indemnification as it shall deem expedient and in the best interests of the Corporation to the extent permitted by law and Article SEVENTH hereof. D. The provisions relating to certain special voting requirements set forth in Title 3, Subtitle 6 of the General Corporation Law of the State of Maryland and the provisions relating to certain control shares set forth in Title 3, Subtitle 7 of the General Corporation Law of the State of Maryland shall not be applicable, pursuant to Sections 3-603(e)(iii) and 3-702(b) thereof, respectively, to the shares of the Corporation which are owned by, or which shall in the future be issued to and owned by, any employee stock ownership plan, incentive stock ownership plan or other similar plan established now or in the future for the benefit of the Corporation's directors, officers, employees or affiliates, and, without limiting the foregoing, none of such shares owned by any such plan shall, for purposes of such subtitles, be aggregated with any shares owned individually by any beneficiaries of any such plan. E. The Board of Directors is expressly authorized to make, amend, alter, repeal or rescind the Bylaws of the Corporation. F. The Corporation reserves the right to amend these Articles of Incorporation in any way which alters the contract rights, as expressly set forth in these Articles of Incorporation, of any outstanding stock of the Corporation and substantially adversely affects any of the rights of any of the holders of any outstanding stock of the Corporation. SEVENTH: A. The Corporation shall indemnify (i) its directors and officers, whether serving the Corporation or, at its request, any other entity, to the full extent permitted by the general laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (ii) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such Bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment to or repeal of this Article SEVENTH shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. 4 5 B. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment to or repeal of this Article SEVENTH shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal. EIGHTH: The duration of the Corporation shall be perpetual. IN WITNESS WHEREOF, I have signed these Articles of Incorporation on the 18th day of December 1990, and I acknowledge the same to be my act and deed and that, to the best of my knowledge, information and belief, all matters and facts stated herein are true in all material respects and that such statement is made under the penalties of perjury. SOLE INCORPORATOR: /s/ T.R. Salley, III ------------------------------------ Thomas R. Salley, III 5 EX-4.2 3 DEBENTURE. 1 Exhibit 4.2 OMB Approval No.: 3245-0081 Expiration Date: ________ Page 1 of 3 SBIC License No. Loan No. ------------ ------------ DEBENTURE *************** $ Date of Issuance --------------- --------------- (the "Company") - --------------------------------------------------------- (Name of Licensee) - ------------------------------------------------------------------------------- (Street) (City) (State) (Zip) For value received, the Company hereby promises to pay to the order of Chemical Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust Agreement dated as of February 1, 1995, as same may be amended from time to time, by and among the Trustee, the U.S. Small Business Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof the principal sum of_________________________________dollars ($___________) (the "Original Principal Amount") on ______________(the "Maturity Date") at such location as SBA, as guarantor of this debenture, may direct and to pay interest semiannually on _______________1st and _______________lst (the "Payment Dates") of each year, as herein provided, at the rate of ____________________% per annum on the basis of a year of 365 days, for the actual number of days (including the first day but excluding the last day) elapsed (the "Stated Interest Rate"), on said principal sum from the date of the issuance hereof until payment of such principal sum has been made or duly provided for. The Company shall deposit all payments with respect to this debenture not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date is not a business day, all as directed by SBA. This debenture is issued by the Company and guaranteed by SBA, pursuant and subject to Section 303 of the Small Business Investment Act of 1958, as amended (the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the regulations promulgated under the Act, as amended from time to time, provided, however, that 13 C.F.R. Sections 107.210(h) and 107.261 as in effect on the date of this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 2 Page 2 of 3 The Company may elect to prepay this debenture, as a whole and not in part, on any Payment Date, in the manner and at the price as next described. The prepayment price (the "Prepayment Price") shall be an amount equal to the outstanding principal balance of this debenture, plus interest accrued and unpaid thereon to the Payment Date selected for prepayment, plus a prepayment premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated as a declining percentage (the "Applicable Percentage") multiplied by the Original Principal Amount of this debenture in accordance with the following table: CONSECUTIVE PAYMENT DATES APPLICABLE PERCENTAGE 1ST OR 2ND 5% 3RD OR 4TH 4% 5TH OR 6TH 3% 7TH OR 8TH 2% 9TH OR (10TH-IF NOT ALSO MATURITY DATE) 1% No Prepayment Premium is required to repay this debenture on its Maturity Date. No Prepayment Premium is required when the prepayment occurs on a Payment Date that is on or after the 11th consecutive Payment Date of this debenture, if this debenture has a 20 consecutive Payment Date term. The amount of the Prepayment Price shall be sent to SBA or such agent as SBA shall direct, by wire payment in immediately available funds, not less than three business days prior to the regular payment date. Until the Company is notified otherwise in writing by SBA, any Prepayment Price shall be paid to the account maintained by the Trustee, entitled the SBA Prepayment Subaccount and shall include an identification of the Company by name and SBA-assigned license number, the loan number appearing on the face hereof, and such other information as SBA or its agent may specify. This debenture shall be deemed issued in the District of Columbia as of the day, month, and year first stated above. The terms and conditions of this debenture shall be construed in accordance with, and its validity and enforcement governed by, federal law. The warranties, representations, or certifications made to SBA on the SBA Form 1022 or the Company's application letter for an SBA commitment related to this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 3 Page 3 of 3 Should any provision of this debenture or any of the documents incorporated by reference herein be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this debenture shall be construed as if said provisions were not contained herein. All notices to Company which are required or may be given under this debenture shall be sufficient in all respects if sent to the above-noted address of the Company. For the purposes of this debenture, the Company may change this address only upon written approval of SBA. COMPANY ORGANIZED AS CORPORATION IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL ----------------------------------- (Name of Licensee) By: -------------------------------- ----------------------------------- (Typed Name and Title) ATTEST: - -------------------------- Secretary or [Assistant Secretary] (Strike One) SBA Form 444C (Revised 4-95) EX-10.3 4 CREDIT AGREEMENT. 1 EXHIBIT 10.3 UNSECURED LINE OF CREDIT AGREEMENT THIS UNSECURED LINE OF CREDIT AGREEMENT, dated as of the 20th day of December, 1996, is made by and between ALLIED CAPITAL CORPORATION, a Maryland corporation ("Allied"), ALLIED INVESTMENT CORPORATION, a Maryland corporation ("AIC"), and ALLIED CAPITAL FINANCIAL CORPORATION, a Maryland corporation ("ACFC") (individually, a "Borrower" and collectively, the "Borrowers"), and RIGGS BANK N.A., a national banking association (the "Bank"). The Bank has agreed to extend credit to the Borrowers and the Borrowers have agreed to obtain credit from the Bank on the terms and conditions set forth in this Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Bank and the Borrowers agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings assigned to them below, which meanings shall be equally applicable to the singular and plural forms of the terms defined. "ACFC NOTE" means a promissory note in the original principal amount of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of ACFC to pay the principal amount of its borrowings hereunder, together with interest thereon, as the same may be amended, modified or supplemented from time to time. The term "ACFC Note" also shall include any promissory note executed and delivered by ACFC in connection with an extension of the Termination Date, an increase in the Maximum Amount or any other amendment to this Agreement. "ADC" means Allied Development Corporation, a District of Columbia corporation. "ADJUSTED SHAREHOLDERS' EQUITY" means, with respect to Allied, Consolidated Shareholders' Equity less investments in AIC, ACFC and ADC as shown on the equity method of accounting for unconsolidated subsidiaries in accordance with GAAP. "ADJUSTED TOTAL LIABILITIES" means, with respect to Allied, direct liabilities of Allied only as shown on the equity method of accounting for unconsolidated subsidiaries in accordance with GAAP. "AFFILIATE" means with respect to any specified Person, any other Person which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a Person, whether through ownership of common stock, by contract or otherwise. "AGREEMENT" means this Unsecured Line of Credit Agreement, as the same may be amended, modified or supplemented from time to time. "AIC NOTE" means a promissory note in the original principal amount of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of AIC to pay the principal amount of its 2 borrowings hereunder, together with interest thereon, as the same may be amended, modified or supplemented from time to time. The term "AIC Note" also shall include any promissory note executed and delivered by AIC in connection with an extension of the Termination Date, an increase in the Maximum Amount or any other amendment to this Agreement. "ALLIED NOTE" means a promissory note in the original principal amount of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of Allied to pay the principal amount of its borrowings hereunder, together with interest thereon, as the same may be amended, modified or supplemented from time to time. The term "Allied Note" also shall include any promissory note executed and delivered by Allied in connection with an extension of the Termination Date, an increase in the Maximum Amount or any other amendment to this Agreement. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized or required to close under the laws of the District of Columbia. "CAPITAL LEASE" means all leases which have been or should be capitalized on the books of the lessee in accordance with GAAP. "CONSOLIDATED" means, with reference to any term defined herein, that term as applied to Allied and its Subsidiaries, consolidated in accordance with GAAP. "DEFAULT" means any event which with the giving of notice, the lapse of time, or both, would constitute an Event of Default. "EVENT OF DEFAULT" means any of the events specified as an "Event of Default" under this Agreement, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "GAAP" means generally accepted accounting principles consistently applied. "GUARANTY" means the guaranty agreement from Allied unconditionally guaranteeing to the Bank the full repayment of the AIC Note and the ACFC Note and all other obligations of AIC and ACFC hereunder, as the same may be amended, modified or supplemented from time to time. "INDEBTEDNESS" means (1) indebtedness or liability for borrowed money; (2) obligations evidenced by bonds, debentures, notes, or other similar instruments; (3) obligations for the deferred purchase price of property or services (including trade obligations); (4) obligations as lessee under Capital Leases; (5) current liabilities in respect of unfunded vested benefits under Plans covered by ERISA; (6) obligations under letters of credit; (7) obligations under acceptance facilities; (8) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; and (9) obligations secured by any Liens, whether or not the obligations have been assumed. 2 3 "INVESTMENTS" means all debt or equity securities or share, participation, or other interest in any Person, which is, or is of a type, dealt in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment. "LETTER OF CREDIT" means a letter of credit issued by the Bank on behalf of a Borrower as described below in Section 2.05. "LIEN" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). "LOAN DOCUMENTS" means this Agreement, the Notes, the Guaranty, and any other document now or hereafter executed or delivered in connection with the Obligations in evidence thereof or as security therefor, including, without limitation, any life insurance assignment, pledge agreement, security agreement, deed of trust, mortgage, promissory note or subordination agreement. "LOANS" means the loans to be made to the Borrowers by the Bank pursuant to this Agreement and the Letters of Credit. "MAXIMUM AMOUNT" means (i) with respect to all Loans at any time outstanding, Ten Million Dollars and no/100 ($10,000,000.00), and (ii) with respect to all Letters of Credit at any time outstanding, One Million, Five Hundred Thousand Dollars and no/100 ($1,500,000.00), each as may be reduced from time to time pursuant to Section 2.01(d) of this Agreement. "NET INCOME" means income after deduction of all expenses, taxes and other proper charges, determined in accordance with GAAP and shall exclude all realized and unrealized gains or losses on Investments. "NOTES" means the Allied Note, the AIC Note and the ACFC Note. "OBLIGATIONS" means the Loans, the Notes, all Indebtedness and obligations of any Borrower under this Agreement and the other Loan Documents, as well as all other Indebtedness of such Borrower to the Bank, now existing or hereafter arising, of every kind and description, whether or not evidenced by notes or other instruments, and whether such Indebtedness is direct or indirect, fixed or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, joint, several or joint and several, related or unrelated to the Loans, similar or dissimilar to the Indebtedness arising out of this Agreement, of the same or a different class of Indebtedness as the Indebtedness arising out of this Agreement, including, without limitation, any overdrafts in any deposit account maintained by such Borrower with the Bank, all obligations of such Borrower with respect to Letters of Credit, any Indebtedness of such Borrower that is assigned to the Bank and any Indebtedness of such Borrower to any assignee of this Agreement. 3 4 "PERSON" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "SHAREHOLDERS' EQUITY" means, at any date with respect to any Person, shareholders' equity as computed in accordance with GAAP and reported in the financial statements of such Person delivered to the Bank. "SUBSIDIARY" means a corporation of which shares of stock having ordinary voting power to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by any Person. "TERMINATION DATE" means September 30, 1998, and any extension or extensions thereof granted by the Bank in its sole discretion. "TOTAL INTEREST EXPENSE" means, for any period with respect to any Person, the aggregate amount of interest incurred during such period on all Indebtedness of such Person outstanding during all or any part of such period, including any fees incurred in connection with such Indebtedness. "TOTAL LIABILITIES" means, with respect to any Person, the aggregate amount of all liabilities of such Person (including tax and other proper accruals), computed in accordance with GAAP. SECTION 1.02. ACCOUNTING TERMS. All accounting terms used herein which are not otherwise expressly defined in this Agreement shall have the meanings respectively given to them in accordance with GAAP in effect on the date of this Agreement. Except as otherwise provided herein, all financial computations made pursuant to this Agreement shall be made in accordance with GAAP and all balance sheets and other financial statements shall be prepared in accordance with GAAP. Except as otherwise provided herein, whenever reference is made in any provision of this Agreement to a balance sheet or other financial statement or financial computation with respect to Allied, such terms shall mean a consolidated balance sheet or other financial statement or financial computation, as the case may be. ARTICLE 2 TERMS OF THE LOANS SECTION 2.01. AMOUNT AND BORROWING PROCEDURE. (a) Subject to the terms and conditions of this Agreement, Allied, AIC, and ACFC may, from time to time, until the Termination Date request Loans from the Bank as provided herein in an aggregate principal amount under all three of the Notes not to exceed at any one time outstanding the Maximum Amount and the Bank will make such Loans on the terms provided herein and in the Notes. Up to the aggregate Maximum Amount, Allied, AIC, and ACFC may borrow, repay without penalty and re-borrow hereunder from the date of this Agreement until the Termination Date. 4 5 (b) The unpaid principal balance of the Loans shall bear interest as provided in the Notes. (c) The respective obligations of the Borrowers to repay the Loans, together with interest thereon, shall be evidenced by the Notes. The unpaid principal balance of the Notes shall be payable on the Termination Date together with all interest accrued and unpaid. (d) The Borrowers may terminate or reduce the credit facility provided for in Section 2.01(a) of this Agreement in whole or in part by giving at least fifteen (15) Business Days' prior written notice of such termination or reduction to the Bank. The termination or reduction of the credit facility provided for in Section 2.01(a) of this Agreement shall not affect the rights of the Bank with respect to any Obligations arising prior or subsequent to such termination or reduction and the provisions of this Agreement shall remain in full force and effect until the Obligations have been fully and completely paid and discharged. (e) The Borrowers and the Bank from time to time may agree to extend the Termination Date or increase the amount of credit to be provided under this Agreement, or both. During any such periods of extension, the remaining terms and conditions of this Agreement shall remain in full force and effect, and the Borrowers shall execute and deliver any amendments or modifications to the Loan Documents as the Bank may require in connection with any such extension or increase. Nothing in this Section 2.01(e) shall obligate the Bank to grant such extensions or to increase the amount of credit provided under this Agreement. (f) Notwithstanding any other provision herein or in any of the Loan Documents, the Borrowers agree that during each calendar year, there shall be a period of no less than sixty (60) consecutive days when no Loans are outstanding. SECTION 2.02. FEES. Allied agrees to pay to the Bank, in consideration of its commitment to make the Loans, an annual fee of one eighth of one percent (0.125%) per annum of the Maximum Amount, payable on each anniversary of the date of this Agreement until the Termination Date. In addition, the Borrowers agree to pay to the Bank, in consideration of its agreement to make the Loans, an unused commitment fee of one eighth of one percent (0.125%) per annum of the average daily amount of the difference between the Maximum Amount and the aggregate unpaid principal amount of the Loans outstanding on each day during the preceding quarter. The fee shall commence to accrue as of the date of this Agreement and shall cease to accrue on the Termination Date and shall be paid quarterly in arrears on last Business Day of March, June, September or December and on the Termination Date, commencing with the first such date after the date of this Agreement. If on the Termination Date the Bank has received an amount as a facility fee greater than that accrued under this Section 2.02, then such amount shall be applied to the amount due under the Notes or if no amount is then due the Bank shall pay such amount to the Borrowers. SECTION 2.03. PAYMENTS AND COMPUTATIONS. All payments due under this Agreement (including any payment or prepayment of principal, interest, fees and other charges) or with respect to the Notes or the Loans shall be made in lawful money of the United States of America, in immediately available funds, to the Bank at its office at 808 17th Street, N.W., Washington, D.C. 20006, or at such other place as the Bank may designate, and shall be applied first to accrued fees, next to accrued late charges, next to accrued interest and then to principal. If any payment of principal, interest or fees is due on a day which is not a Business Day, then the due date will 5 6 be extended to the next succeeding full Business Day and interest and fees will be payable with respect to the extension. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, interest shall accrue on the Loans at a per annum rate as provided in the Notes for such event. SECTION 2.04. LOAN ADVANCE PROCEDURES. Allied, AIC, and ACFC may at any time or from time to time request a Loan provided that after such amount is loaned the aggregate amount of all Loans shall not exceed the Maximum Amount. Such request shall state the date on which the Loan is to be made which shall be not less than one (1) Business Day after the receipt of such request by Bank. SECTION 2.05. LETTER OF CREDIT FACILITY. Subject to the terms of this Agreement, Bank will issue standby letters of credit (each a "Letter of Credit") on behalf of Allied, AIC, or ACFC. At no time, however, shall the total face amount of all Letters of Credit outstanding, less any partial draws paid under the Letters of Credit, exceed the Maximum Amount. Upon Bank's request, Allied, AIC, or ACFC promptly shall pay to Bank issuance fees and such other fees, commissions, costs, and any out-of-pocket expenses charged or incurred by Bank with respect to any Letter of Credit. The commitment by Bank to issue Letters of Credit shall, unless earlier terminated in accordance with the terms of this Agreement, automatically terminate on the Termination Date and no Letter of Credit shall expire on a date which is after the Termination Date. Each Letter of Credit shall be in form and substance satisfactory to Bank and in favor of beneficiaries satisfactory to Bank, provided that Bank may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where Bank, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation, or order from issuing such Letter of Credit. Prior to the issuance of each Letter of Credit, and in all events prior to any daily cutoff time Bank may have established for purposes thereof, Allied, AIC, or ACFC shall deliver to Bank a duly executed form of Bank's standard form of letter of credit reimbursement agreement and application for issuance of letter of credit with proper insertions. SECTION 2.06. USE OF PROCEEDS. The proceeds of the Loans hereunder shall be used by the Borrowers for general corporate purposes and the obtaining of Letters of Credit. The Borrowers will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or to extend credit to any Person for the purpose of purchasing or carrying any such margin stock, or for any purpose which violates, or is inconsistent with, Regulation X of such Board of Governors. ARTICLE 3 CONDITIONS PRECEDENT SECTION 3.01. CONDITION PRECEDENT TO INITIAL LOAN. The obligation of the Bank to make the initial Loan to any Borrower is subject to the condition precedent that the Bank shall have received on or before the day of such Loan each of the following, in form and substance satisfactory to the Bank and its counsel: (1) NOTES. The Notes duly executed by the Borrowers; 6 7 (2) GUARANTY. The Guaranty duly executed by Allied; (3) EVIDENCE OF ALL CORPORATE ACTION BY THE BORROWERS. Certified (as of the date of this Agreement) copies of all corporate action taken by the Borrowers, including resolutions of its Board of Directors, authorizing the execution, delivery, and performance of the Loan Documents to which it is a party and each other document to be delivered pursuant to this Agreement; (4) INCUMBENCY AND SIGNATURE CERTIFICATE OF THE BORROWERS. A certificate (dated as of the date of this Agreement) of the Secretary of each Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party and the other documents to be delivered by the Borrower under this Agreement; (5) OPINION OF COUNSEL FOR THE BORROWERS. A favorable opinion of counsel for the Borrowers as to such matters as the Bank may reasonably request; SECTION 3.02. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Bank to make each Loan (including the initial Loan) shall be subject to the further conditions precedent that on the date of such Loan: (1) The following statements shall be true and the Borrower's request for a Loan shall be deemed a statement by such Borrower dated the date of such Loan, that: (a) The representations and warranties contained in Article IV of this Agreement are correct on and as of the date of such Loan as though made on and as of such date; and (b) No Default or Event of Default has occurred and is continuing, or would result from such Loan; and (2) The Bank shall have received such other approvals, opinions, or documents as the Bank may reasonably request. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants that: SECTION 4.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Each of AIC and ACFC are wholly-owned Subsidiaries of Allied. Allied has no other Subsidiaries other than ADC; AIC, ACFC and ADC have no Subsidiaries. Borrower (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; (b) has the corporate power and authority to own its assets and to transact the business in which it is now engaged or in which it is proposed to be engaged; and (c) is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required except in such instances which would not, in any one case or in the 7 8 aggregate, materially and adversely affect the financial condition, operations, properties or business of the Borrower. SECTION 4.02. CORPORATE POWER AND AUTHORITY. The execution, delivery and performance by the Borrower of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of, or filing or registration with, any governmental agency or authority or the stockholders of such corporation; (b) contravene such corporation's charter or bylaws; (c) result in a breach of or constitute a default under any agreement or instrument to which such corporation is a party or by which it or its properties may be bound or affected; (d) result in, or require, the creation or imposition of any lien upon or with respect to any of the properties now owned or hereafter acquired by such corporation; or (e) cause such corporation to be in default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award applicable to such corporation. SECTION 4.03. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. SECTION 4.04. FINANCIAL STATEMENTS. The most recent consolidated financial statements of the Borrower which have been furnished to the Bank in connection with this Agreement are complete and correct and fairly present the financial condition of the Borrower as at the dates of such statements. Since the dates of such statements, there has been no material adverse change in the condition (financial or otherwise), business or operations of the Borrower. SECTION 4.05. LITIGATION. Except as set forth in the Borrower's most recent 10-Q and 10-K filed with the Securities and Exchange Commission, there is no pending or threatened action or proceeding against or affecting the Borrower, before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Borrower. SECTION 4.06. OTHER AGREEMENTS. The Borrower is not a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction, which has a material adverse effect on the business, properties, assets, operations, or conditions, financial or otherwise, of the Borrower, or the ability of the Borrower to carry out its obligations under the Loan Documents to which it is a party. The Borrower is not in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party, except in such instances which would not, in any one case or in the aggregate, materially and adversely affect the financial condition, operations, properties or business of the Borrower. SECTION 4.07. NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. The Borrower has satisfied all judgments and is not in default with respect to any judgment, writ, injunction, decree, rule, or regulation of any court, arbitrator, or federal, state, municipal, or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. 8 9 SECTION 4.08. OWNERSHIP AND LIENS. The Borrower has title to, or valid leasehold interests in, all of its properties and assets, real and personal, including the properties and assets and leasehold interests reflected in the financial statements referred to in Section 4.04 (other than any properties or assets disposed of in the ordinary course of business), and none of the properties and assets owned by the Borrower and none of its leasehold interests is subject to any Lien, except such as may be permitted pursuant to Section 6.01 of this Agreement. SECTION 4.09. OPERATION OF BUSINESS. The Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct its respective businesses substantially as now conducted and as presently proposed to be conducted, and is not in violation of any valid rights of others with respect to any of the foregoing, except in such instances which would not, in any one case or in the aggregate, materially and adversely affect the financial condition, operations, properties or business of the Borrower. SECTION 4.10. TAXES. The Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid all taxes, assessments, and governmental charges and levies thereon to be due, including interest and penalties. SECTION 4.11. ENVIRONMENT. The Borrower has not received notice of, nor knows of, or suspects facts which might constitute, any violations of any federal, state, or local environmental, health, or safety laws, codes or ordinances, and any rules or regulations promulgated thereunder with respect to its businesses, operations, assets, equipment, property, leaseholds, or other facilities. ARTICLE 5 AFFIRMATIVE COVENANTS Each Borrower covenants and agrees that: SECTION 5.01. MAINTENANCE OF EXISTENCE. The Borrower will preserve and maintain its corporate existence and good standing in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, except if the failure to so qualify would have, in any one case or in the aggregate, a material and adverse effect on the financial condition, operations, properties or business of the Borrower. SECTION 5.02. MAINTENANCE OF RECORDS. The Borrower will keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of the Borrower. The principal records and books of account, shall be kept at the chief executive office of the Borrower's investment adviser at 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006. The Borrower will not move such records and books of account or change such chief executive office or the name under which it does business without giving the Bank at least thirty (30) days' prior written notice. 9 10 SECTION 5.03. MAINTENANCE OF PROPERTIES. The Borrower will maintain, keep, and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. SECTION 5.04. CONDUCT OF BUSINESS. The Borrower will continue to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Agreement. SECTION 5.05. COMPLIANCE WITH LAWS. The Borrower will comply in all respects with all applicable laws, rules, regulations and orders (including, without limitation, the Employee Retirement Income Security Act, as amended from time to time), such compliance to include, without limitation, paying, before the same become delinquent, all duly imposed taxes, assessments and governmental charges imposed upon it or upon its property. SECTION 5.06. MAINTENANCE OF INSURANCE. The Borrower will maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated. SECTION 5.07. REPORTING REQUIREMENTS. The Borrower will furnish to the Bank: (a) Quarterly Financial Statements. As soon as available and, in any event, within forty-five (45) days after the end of each of the quarters of each fiscal year of the Borrower (i) unaudited financial statements consisting of a consolidated balance sheet of the Borrower, as of the end of such quarter, and consolidated statements of operations, changes in net assets and cash flows of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the previous fiscal year and all prepared in accordance with GAAP, and (ii) a certificate detailing a calculation of each of the ratios and amounts referred to in the financial covenants of the Borrower set forth in Sections 7.01 through 7.03 hereof, as may be applicable to such Borrower. Such financial statements and certificate shall be certified to be accurate by the chief financial officer of the Borrower (subject to year-end adjustments); (b) Annual Financial Statements. As soon as available and, in any event, within one hundred twenty (120) days after the end of each fiscal year of the Borrower audited financial statements consisting of a consolidated balance sheet of the Borrower as of the end of such fiscal year, consolidated statements of operations, changes in net assets, and cash flows of the Borrower for such fiscal year, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP. The consolidated financial statements shall be accompanied by an opinion thereon acceptable to the Bank of an independent certified public accounting firm selected by the Borrower and acceptable to the Bank; (c) Management Letters. Promptly upon receipt thereof, copies of any reports submitted to the Borrower by independent certified public accountants in connection with audit of the financial statements of the Borrower made by such accountants; 10 11 (d) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower, which, if determined adversely to the Borrower could have a material adverse effect on the financial condition, properties or operations of the Borrower; (e) Notice of Defaults and Events of Default. As soon as possible and, in any event, within 15 days after the occurrence of each Default and Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by the Borrower with respect thereto; (f) Proxy Statements, etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which the Borrower sends to its stockholders, and copies of all regular, periodic and special reports, and all material registration statements which the Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (g) General Information. Such other information respecting the condition or operations, financial or otherwise, of the Borrower or any Subsidiary as the Bank may from time to time reasonably request. SECTION 5.08. ENVIRONMENT. The Borrower will be and remain in compliance with the provisions of all federal, state, and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations issued thereunder. SECTION 5.09. INVESTMENT ADVISER. Allied Capital Advisers, Inc. will remain the investment adviser for the Borrower. SECTION 5.10. CORPORATE RELATIONSHIP. Each of AIC and ACFC will remain wholly-owned subsidiaries of Allied. SECTION 5.11. REFINANCING OF INDEBTEDNESS. With respect to any Indebtedness (other than the Obligations) which matures prior to the Termination Date, Borrower will refinance with a new maturity no earlier than the Termination Date no less than seventy-five percent (75%) of such Indebtedness; provided, however, that the amount of such required refinancing shall be reduced by the amount, if any, of new equity raised by Borrower after September 30, 1995. ARTICLE 6 NEGATIVE COVENANTS Each Borrower agrees that, without first obtaining the prior written consent of the Bank: SECTION 6.01. LIENS. The Borrower will not create, incur, assume or permit to exist any Lien upon or with respect to any of its properties or assets, now owned or hereafter acquired, except: (a) Liens in favor of the Bank; (b) Liens which are incidental to the conduct of the business of the Borrower, are not incurred in connection with the obtaining of credit and do not 11 12 materially impair the value or use of assets of the Borrower; and (c) Liens in existence on the date of this Agreement and disclosed in writing to the Bank. SECTION 6.02. INDEBTEDNESS. The Borrower will not create, incur, assume or permit to exist Indebtedness, except (a) the Obligations; (b) Indebtedness in existence on the date of this Agreement; (c) Indebtedness of the Borrower subordinated to the Obligations on terms satisfactory to the Bank; (d) Indebtedness of any Subsidiary to the Borrower or another Subsidiary; (e) ordinary trade accounts payable; and (f) up to $50,000,000 of unsecured debentures, the proceeds of which will be used by AIC or ACFC for investments and loans to Community Reinvestment Act-qualified activities. SECTION 6.03. MERGERS, ETC. The Borrower will not merge or consolidate with any Person and will not permit any subsidiary to merge with any person except that Borrower may merge with a Subsidiary and any Subsidiary may merge with another Subsidiary. SECTION 6.04. SALE AND LEASEBACK. The Borrower will not sell, transfer or otherwise dispose of any real or personal property to any Person and thereafter, in connection therewith, directly or indirectly, lease back the same or similar property. SECTION 6.05. SALE OF ASSETS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of any of its now owned or hereafter acquired assets except: (a) for assets disposed of in the ordinary course of business and (b) the sale or other disposition of assets no longer used or useful in the conduct of its business. SECTION 6.06. GUARANTIES, ETC. The Borrower will not assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable (including, but not limited to, any liability arising out of any agreement to purchase any obligation, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services, or to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss) for obligations of any Person, or permit any such guaranties or liabilities to exist, except (i) in favor of the Bank, (ii) with respect to Indebtedness in existence on the date hereof and previously disclosed to the Bank in writing, (iii) guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, and (iv) as may be implemented in the ordinary course of Borrower's portfolio activities, provided, however, that any such matter described in this clause (iv): (a) shall be treated as a non-contingent liability for purposes of calculating the financial covenants described below, and (b) if the aggregate amount thereof exceeds $100,000, shall be itemized in a writing provided to the Bank along with the financial statements described above. SECTION 6.07. TRANSACTIONS WITH AFFILIATE. The Borrower will not enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be applicable in a comparable arm's-length transaction with a Person not an Affiliate (provided that the investment advisory agreement between Borrower and Allied Capital Advisers, Inc. shall not be deemed to violate this provision). 12 13 ARTICLE 7 FINANCIAL COVENANTS So long as the Notes shall remain unpaid or the Bank shall have any Commitment or outstanding Letter of Credit under this Agreement, the Borrowers agree that: SECTION 7.01. MAXIMUM LEVERAGE RATIO. Each of AIC and ACFC will maintain at all times a ratio of Total Liabilities to Shareholders' Equity of not greater than 5.0 to 1. Allied will maintain at all times (i) a ratio of Consolidated Total Liabilities to Consolidated Shareholders' Equity of not greater than 3.0 to 1, and (ii) a ratio of Adjusted Total Liabilities to Adjusted Shareholders' Equity of not greater than 1.0 to 1. SECTION 7.02. MINIMUM CONSOLIDATED SHAREHOLDERS' EQUITY. Allied will maintain at all times Consolidated Shareholders' Equity of not less than Forty Million Dollars ($40,000,000). SECTION 7.03. CONSOLIDATED MINIMUM INTEREST COVERAGE. Allied will maintain a ratio of (a) Consolidated Net Income plus Consolidated Total Interest Expense to (b) Consolidated Total Interest Expense of not less than 1.5 to 1 as of the end of each calendar quarter for the previous four quarters. With respect to the above covenants, no effect shall be given to the contemplated credit facility from the Bank to Borrower consisting of a cash-secured line of credit available only during the last ten (10) days of each calendar quarter and to be repaid promptly thereafter. ARTICLE 8 EVENTS OF DEFAULT SECTION 8.01. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: (a) Failure of a Borrower to pay any Obligation to the Bank, including, without limitation, the principal of or interest on the Notes or any of the Loans, when the same shall become due and payable, and such failure shall continue for a period of five (5) days; or (b) Failure of a Borrower to perform or observe any covenant set forth in this Agreement (except any such failure resulting in the occurrence of another Event of Default described in this section), or to perform or observe any other term, condition, covenant, warranty, agreement or other provision contained in this Agreement within thirty (30) days after receipt of notice from the Bank specifying such failure; or (c) Discovery that any representation or warranty by a Borrower in this Agreement or any statement or representation made in any certificate, report or opinion delivered pursuant to this Agreement or in connection with any Loan under this Agreement was materially untrue in any material respect provided, however, the Bank shall take no action based on a default under this 13 14 paragraph unless such Borrower shall have been provided a reasonable opportunity to render such misrepresentation or untruth immaterial; or (d) If, as a result of default, any other obligation of a Borrower for the payment of any debt in excess of $500,000.00 becomes or is declared to be due and payable prior to the expressed maturity thereof, unless and to the extent that the declaration is being contested in good faith in a court of appropriate jurisdiction; or (e) A Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, petitions or applies to any tribunal for any receiver or any trustee of such Borrower or any substantial part of its property, or commences any proceeding relating to such Borrower under any reorganization, arrangement, readjustments of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (f) If, within thirty (30) days after the filing of a bankruptcy petition or the commencement of any proceeding against a Borrower seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the proceeding shall not have been dismissed, or, if, within 30 days after the appointment, without the consent or acquiescence of such Borrower, of any trustee, receiver or liquidator of such Borrower or of all or any substantial part of the properties of such Borrower, the appointment shall not have been vacated; or (g) Any judgment against a Borrower in excess of $500,000.00 or any attachment in excess of $500,000.00 against any property of a Borrower that remains unpaid, undischarged, unbonded or undismissed for a period of thirty (30) days, unless and to the extent that the judgment or attachment is appealed in good faith in a court of higher jurisdiction and the appeal remains pending; or (h) The occurrence of an event of default (and the expiration of any applicable cure period) under any other Loan Document. SECTION 8.02. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, the following provisions shall be applicable: (a) The Bank may, at its option, terminate its obligation to make Loans under this Agreement and declare all Obligations, whether incurred prior to, contemporaneous with or subsequent to the date of this Agreement, and whether represented in writing or otherwise, immediately due and payable and may exercise all of it rights and remedies against the Borrowers. (b) The Bank shall have such set-off rights as are provided by applicable common law or statute. (c) EACH BORROWER EXPRESSLY WAIVES ITS RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. 14 15 (d) The Bank may itself perform or comply, or otherwise cause performance or compliance, with the obligations of the Borrowers contained in this Agreement. The reasonable expenses of the Bank incurred in connection with such performance or compliance shall be payable by the Borrowers to the Bank on demand and shall constitute Obligations. (e) The Bank may, at its sole and absolute discretion and in addition to any other remedies available to it under this Agreement or otherwise, require a Borrower to pay immediately to Bank, for application against drawings under any outstanding Letters of Credit issued for the account of such Borrower, the outstanding principal amount of any such Letters of Credit which have not expired. Such amount shall be held in an interest-bearing account pledged to secure the Obligations. Any portion of the amount remaining in such account which is not applied to satisfy draws under any such Letters of Credit or any other Obligations of such Borrower to the Bank shall be repaid to such Borrower. ARTICLE 9 MISCELLANEOUS SECTION 9.01. COLLECTION COSTS. The Borrowers shall pay all of the reasonable costs and expenses incurred by the Bank in connection with the enforcement of this Agreement and the other Loan Documents, including, without limitation, reasonable attorneys' fees and expenses. SECTION 9.02. MODIFICATION AND WAIVER. Except for the other documents expressly referred to in this Agreement, this Agreement contains the entire agreement between the parties and supersedes all prior agreements between the Bank and the Borrowers concerning the unsecured line of credit and the Loans hereunder. No modification or waiver of any provision of the Notes or this Agreement and no consent by the Bank to any departure therefrom by the Borrowers shall be effective unless such modification or waiver shall be in writing and signed by an officer of the Bank with a title of vice president or any higher office, and the same shall then be effective only for the period and on the conditions and for the specific instances and purposes specified in such writing. No notice to or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances. No failure or delay by the Bank in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Bank contained in this Agreement are cumulative and not exclusive of any rights or remedies otherwise provided by law. SECTION 9.03. NOTICES. All notices, requests, demands or other communications provided for in this Agreement shall be in writing and shall be delivered by hand, sent prepaid by Federal Express (or a comparable overnight delivery service) or sent by the United States mail, certified, postage prepaid, return receipt requested, to the Bank, at 808 17th Street, N.W., Washington, D.C. 20006 Attention: Executive Vice President, Commercial Lending, or to the Borrowers at c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006, Attention: Chief Financial Officer. Any notice, request, demand or other communication delivered or sent in the foregoing manner shall be deemed given or made (as the case may be) upon the earliest of (a) the date it is actually received, (b) on the business day after the day on which it is properly delivered to Federal Express (or a comparable overnight delivery service), or (c) on the third 15 16 business day after the day on which it is deposited in the United States mail. Any of the Borrowers or the Bank may change its address by notifying the other party of the new address in any manner permitted by this Section 9.03. SECTION 9.04. CAPTIONS. The captions of the various sections and paragraphs of this Agreement have been inserted only for the purposes of convenience; such captions are not a part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. SECTION 9.05. SURVIVAL OF AGREEMENTS. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the making and renewal of the Loans hereunder. SECTION 9.06. FEES AND EXPENSES. Whether or not any Loans are made hereunder, the Borrowers shall pay on demand all reasonable out-of-pocket costs and expenses incurred by the Bank in connection with the preparation, negotiation, execution, delivery, filing, recording and administration of any of the documents and instruments executed or delivered in connection herewith, including, without limitation, the reasonable fees and expenses of counsel to the Bank (including, the reasonable fees of salaried counsel employed by the Bank or its affiliates), and local counsel who may be retained by the Bank, with respect to such documents and any amendments thereof or of this Agreement and any amendment hereof and with respect to advising the Bank as to its rights and responsibilities hereunder or thereunder, provided, however, that the Bank shall use reasonable efforts to notify the Borrowers prior to incurring any costs or expenses chargeable to Borrowers under this section, unless the Bank shall have determined in good faith, but at its sole and unfettered discretion, that a delay or such notice may impair or adversely impact the rights, remedies, claims or other interest of the Bank or the collectibility of the Loans. SECTION 9.07. USE OF DEFINED TERMS. All terms defined in this Agreement shall have the defined meanings when used in certificates, reports or other documents made or delivered pursuant to this Agreement, unless the context shall otherwise require. SECTION 9.08. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and bind the respective parties hereto and their successors and assigns; provided, however, that no Borrower may assign its rights hereunder without the prior written consent of the Bank. SECTION 9.09. INTERPRETATION. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the District of Columbia, without reference to conflicts of law principles. 16 17 IN WITNESS WHEREOF, the Borrowers and the Bank have caused this Agreement to be signed by their duly authorized representatives all as of the day and year first above written. ALLIED CAPITAL CORPORATION a Maryland corporation. By:/s/ G. Cabell Williams, III -------------------------------------------- Name: G. Cabell Williams, III Title: President ALLIED INVESTMENT CORPORATION a Maryland corporation. By:/s/ G. Cabell Williams, III -------------------------------------------- Name: G. Cabell Williams, III Title: President ALLIED CAPITAL FINANCIAL CORPORATION a Maryland corporation. By:/s/ G. Cabell Williams, III -------------------------------------------- Name: G. Cabell Williams, III Title: President RIGGS BANK N.A., a national banking association. By:/s/ David H. Olson -------------------------------------------- Name: David H. Olson Title: Vice President EX-10.4 5 UNCONDITIONAL GUARANTY. 1 EXHIBIT 10.4 UNCONDITIONAL GUARANTY This Unconditional Guaranty (this "Guaranty"), made as of December 20, 1996, by ALLIED CAPITAL CORPORATION (the "Guarantor") to and for the benefit of RIGGS BANK N.A. ("Riggs"), a national banking association. In order to induce Riggs to extend and continue to extend credit, to make and continue to make loans and advances and/or to forbear from exercising any rights Riggs may have to require repayment of or security for any such loans and advances heretofore made by Riggs, to ALLIED INVESTMENT CORPORATION and ALLIED CAPITAL FINANCIAL CORPORATION (the "Borrower(s)"), the Guarantor: (1) Guaranty of Payment. Unconditionally and absolutely guarantees the punctual payment when due (whether at stated maturity, by acceleration of maturity or otherwise) of all obligations of the Borrower(s) arising under the Unsecured Line of Credit Agreement executed by and among the Borrower(s), Guarantor and Riggs dated the date hereof, providing for loans in the principal amount of up to $10,000,000.00 (the "Agreement"), and any promissory notes or other documents and instruments executed by the Borrower(s) pursuant thereto, and all renewals, extensions and modifications thereof, such obligations and the interest thereon and all other sums payable with respect thereto being referred to herein as the "Indebtedness" and all documents and instruments executed by the Borrower(s) or any of them in connection therewith being referred to as the "Loan Documents." This is a guaranty of payment and not of collection and shall be binding upon the Guarantor irrespective of the genuineness, validity or enforceability of any underlying obligations of the Borrower(s) or any of them or the existence, validity, enforceability or perfection of any security therefor, it being the intention of the Guarantor that this Guaranty be absolute and unconditional in all events and not dischargeable or affected by any circumstances which may constitute a legal or equitable discharge. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of the Indebtedness or any part thereof is rescinded or must otherwise be returned by Riggs upon the insolvency, bankruptcy or reorganization of any Borrower or Guarantor, or otherwise, all as though such payment had not been made. (2) Waivers by Guarantor. Waives diligence, presentment, protest, notice of dishonor, demand for payment under the Loan Documents, extension of time of payment, notice of acceptance of this Guaranty, non-payment at maturity and indulgences of every kind, and consent to any and all forbearances and extensions of the time of payment of the Indebtedness, and to any and all changes in the terms, agreements and conditions of the Indebtedness or any part thereof hereafter made or granted, and to any and all substitutions and exchanges or releases of all or any part of any collateral security given therefor and any and all releases of any other party who is or may be liable upon any of the Indebtedness. (3) No Subrogation. Agrees that no payment by any Guarantor pursuant to any provision of this Guaranty or other satisfaction of Guarantor's obligations under this Guaranty shall entitle Guarantor, by subrogation to the rights of Riggs, by right of contribution or indemnity or under any agreement or otherwise, to any payment by the Borrower(s) or by any other party obligated to Riggs for payment of the Indebtedness or 2 out of the assets of the Borrower(s) or any such other party, except after payment in full of the Indebtedness. (4) No Waiver By Riggs; Remedies Cumulative. Agrees that no delay on the part of Riggs in the exercise of any rights hereunder or failure to exercise the same shall operate as a waiver of such rights, and that no notice to or demand on the maker of any promissory note shall be deemed to be a waiver of the obligation of the Guarantor or of the right of Riggs to take further action without notice or demand as provided herein. Each right, power, and remedy of Riggs against Borrower(s) or Guarantor arising hereunder or pursuant to any of the Loan Documents or by law shall be cumulative and concurrent. The exercise of any right, power or remedy or the failure or forbearance in the exercise thereof against Borrower(s) or Guarantor shall not preclude or require the exercise of any other right, power or remedy. (5) No Suit or Claim Required. Agrees that it shall not be necessary for Riggs, to enforce this contract of Guaranty, to first institute suit against the Borrower(s) or any of them to recover the amount of the Indebtedness or any part thereof. Riggs shall not be obligated to file any claim relating to the Indebtedness in the event that the Borrower(s) or any of them become subject to a bankruptcy, reorganization or similar proceeding, and the failure of Riggs so to file shall not affect the Guarantor's obligations hereunder. (6) Expenses and Attorneys' Fees. Agrees that the Guarantor will reimburse Riggs for all costs and expenses incurred by Riggs (including reasonable attorneys' fees) in enforcing any rights under this Guaranty, collecting any of the Indebtedness or protecting or realizing on any collateral therefor. Attorneys' fees shall include, in the case of a staff attorney employed by Riggs, the cost to Riggs of the services of such attorney, on an hourly basis, as determined by Riggs. (7) Representations of Guarantor. Represents and warrants and shall be deemed to represent and warrant on each day that any of the Indebtedness is outstanding that (a) all statements and information heretofore or hereafter provided by the Guarantor in connection with this Guaranty or the Indebtedness are and will be true and correct in all material respects and do not and will not omit to state any material fact, (b) Guarantor is duly organized and validly existing as such under the laws of its jurisdiction of incorporation or organization, (c) Guarantor has full power and authority to execute, deliver and perform this Guaranty and this Guaranty constitutes the legal, valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms, (d) except as otherwise disclosed to Riggs in writing, there is no suit, action, proceeding or investigation pending in which an adverse decision could materially adversely affect the financial condition of Guarantor, and (e) Guarantor has made its own credit analysis with respect to the Borrower(s) and the Indebtedness and has not relied on Riggs for any information with respect thereto. (8) Acceleration of Maturity. Agrees that upon (a) a material breach by Guarantor of any of its agreements, representations and warranties hereunder, (b) an authorized and written denial by Guarantor of its liability hereunder, (c) a failure by Guarantor to pay or 2 3 perform when due any other material obligations of Guarantor to Riggs, or (d) the dissolution, termination of existence, change of control, insolvency, appointment of a receiver of any material part of the property of, commencement of any bankruptcy or insolvency proceeding by or against (if not dismissed within sixty (60) days of filing against), assignment of a material asset for the benefit of creditors by, or issuance of an attachment, levy or execution against a material part of the property of, Guarantor, all of the Indebtedness, regardless of its terms, shall be deemed for purposes of this Guaranty to have become matured and the Guarantor, at the election of Riggs, shall promptly pay to Riggs all of the Indebtedness. (9) Subordination. Agrees that all of the present and future indebtedness of the Borrower(s) or any of them to the Guarantor shall be and hereby is subordinated to the Indebtedness. (10) Set Off. Agrees that, without limiting any other right of Riggs, whenever Riggs has the right to declare any of the Indebtedness to be immediately due and payable (whether or not it has so declared), Riggs and any branch or affiliate acting on its behalf is hereby authorized at any time and from time to time, to exercise all setoff rights to the fullest extent permitted by law. (11) Books and Records, etc. Agrees that the books and records of Riggs or any schedule, certificate or statement provided for in any agreement between Riggs and the Borrower(s) or any of them showing the amount owed by the Borrower(s) or any of them to Riggs from time to time or the rate of interest on such amount shall be admissible in any action or proceeding against Guarantor hereunder and shall be binding upon the Guarantor to the same extent as upon the Borrower(s) or any of them pursuant to any of the Loan Documents. (12) Successors and Assigns. Agrees that this Guaranty shall inure to the benefit of and may be enforced by Riggs, its successors and assigns and any assignee from Riggs of the Indebtedness or any part thereof, and shall be binding upon and enforceable upon the Guarantor and the successors, personal representatives and assigns of the Guarantor including (a) any successor person, association, partnership or corporation acquiring all or a substantial part of the assets of Guarantor, (b) any successor partnership created by reason of the admission of a new partner or the dissolution of an existing partnership by reason of the death, resignation or other withdrawal of a partner, and (c) any corporation into which Guarantor shall have been merged, consolidated, reorganized or otherwise absorbed. (13) Governing Law; Jurisdiction. Agrees that this Guaranty shall be deemed to be a contract under the laws of the District of Columbia (except for the conflict of law provisions thereof) and shall be governed by, and construed in accordance with, the laws of such jurisdiction, except to the extent that the rights and remedies of Riggs with respect to collateral located in any other jurisdiction are governed by the laws of such jurisdiction and except that in any legal proceeding in any other jurisdiction, Riggs shall be entitled to the benefit of all legal remedies available under the laws of such jurisdiction. 3 4 Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. If any action arising out of this Guaranty is commenced by Riggs in any District of Columbia court, or Federal court located in the District of Columbia, Guarantor hereby consents to the jurisdiction of any such court in any such action and to the laying of venue in the District of Columbia. Any process in any such action shall be duly served upon Guarantor if mailed by registered mail, postage prepaid, to Guarantor at its last known residence or business address as shown by the records of Riggs or otherwise served in accordance with law. The pleading of any statute of limitations and any right of Guarantor to TRIAL BY JURY in any suit, action or proceeding in connection herewith are hereby expressly WAIVED. IN WITNESS WHEREOF, the Guarantor has executed this instrument the day and year first above written. (SEAL) ALLIED CAPITAL CORPORATION ATTEST: By:/s/Suzanne V. Sparrow By:/s/G. Cabell Williams, III -------------------------- --------------------------------- Name: Suzanne V. Sparrow Name: G. Cabell Williams, III Title: Assistant Secretary Title: President Address: 1666 K Street, N.W., 9th Floor Washington, DC 20006 4 EX-10.5 6 PROMISSORY NOTE. 1 EXHIBIT 10.5 PROMISSORY NOTE $10,000,000.00 December 20, 1996 ALLIED CAPITAL CORPORATION, a corporation organized under the laws of Maryland (the "Borrower"), for value received, hereby promises to pay to the order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W., Washington, D.C. 20006, in lawful money of the United States and in immediately available funds the principal sum of Ten Million and no/100 Dollars ($10,000,000.00) or, if less, the aggregate unpaid principal amount of all loans advanced or re-advanced by the Bank to the Borrower hereunder. 1. Payment of Principal and Interest; Prepayment; Etc. (a) Principal Payments. The principal amount of each loan hereunder shall be due and payable on the Termination Date (as defined in the Credit Agreement, hereinafter defined). (b) Interest Rate; Interest Payments. Except as otherwise provided hereinafter, each borrowing under this Note shall bear interest on the unpaid principal amount of such borrowing from time to time at a rate per annum equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each change in the LIBOR Rate hereunder shall be effective without notice to the Borrower on the first Business Day of each calendar month. Interest shall be payable on the first of each calendar month commencing on the first such date after each borrowing hereunder and at the Termination Date or earlier maturity hereof. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. As used herein: "LIBOR" means, with respect to any calendar month or portion thereof during which any loan hereunder is outstanding, the rate per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%) which is the average of interbank offered rates for U.S. dollar deposits in the London interbank market for a period of one month, as reported to the Bank on an On-Line Information Service at approximately 10:00 a.m. (Washington, D.C. time)(the "Index") on the first Business Day of each calendar month. If for any reason on such Business Day the Bank is unable to access the Index or LIBOR is not reported by the Index, then LIBOR shall be the London interbank offered rate for U.S. dollars deposits for a period of one month as reported in The Wall Street Journal on such Business Day. If LIBOR is not available, the Bank shall use the most comparable rate at its sole discretion or may use the average of the rates for the next shortest and next longest maturities. The Borrower acknowledges and agrees that the determination by the Bank of LIBOR shall be conclusive and binding on the Borrower in the absence of manifest error. LIBOR is not necessarily the rate at which the Bank offers or receives U.S. dollar deposits in the London interbank market or elsewhere, and is not necessarily the lowest rate charged by the Bank on loans. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the District of Columbia are generally authorized to close. "On-Line Information Service" means a textline or other on-line information service provided to the Bank by any of Reuters Information Services, Inc., Knight-Ridder 2 Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial Markets News Services. (c) Post-Maturity Interest. After maturity, whether by acceleration or otherwise, this Note shall bear interest payable on demand at a variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent permitted by law, any payment of interest on this Note not made when due shall bear interest from the date when due until payment is made payable on demand, at a rate per annum equal to 2% in excess of the LIBOR Rate. (d) Prepayment. This Note may be prepaid in whole at any time or in part from time to time without premium or penalty. This Note shall immediately be prepaid to the extent that the principal amount hereof at any time exceeds the Maximum Amount (as defined in the Credit Agreement). (e) Advances; Evidence of Amounts Due. This Note is held by the Bank as a master note against which loans may be advanced in lesser amount(s) than the principal amount. The Borrower shall give the Bank a written or telexed request or a telephonic request (to be promptly confirmed in writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of the desired borrowing, specifying: (i) the Business Day of the desired borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon request, notify the Borrower telephonically of the LIBOR Rate. The Borrower shall be liable only for so much of the principal amount as shall be equal to the total of the amounts advanced or re-advanced against this Note to or for the Borrower by the Bank from time to time, less all payments made by or for the Borrower and applied by the Bank to principal. The Borrower shall also be liable for interest on each such advance or re-advance as shown on the Bank's books and records, provided that the rate of such interest is in accordance with the applicable rate or rates specified in this Note. The Borrower acknowledges that a statement signed by an officer of the Bank setting forth the amount of principal and interest owed hereon as reflected in such books and records shall be presumptive evidence of the facts stated therein and shall, absent manifest error, be conclusive and binding. Any statement of account delivered to the Borrower shall be deemed correct and accepted unless a written statement of exceptions thereto is delivered to the Bank within thirty (30) days after mailing of such statement of account. In making any advance or re-advance hereunder, the Bank shall be entitled to rely upon any notice of borrowing or other instructions, whether oral, written or by any form of telecommunication, purporting to be made by a person designated to the Bank by the Borrower as an Authorized Representative of the Borrower, and deposit of the proceeds of an advance or re-advance hereunder in a deposit account in the name of the Borrower or the remittance of any proceeds to persons designated in such instructions shall conclusively establish that such loan was duly made hereunder. (f) Payments Due on Non-Business Days. If any installment of principal on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. If any payment of interest on any loan evidenced by this Note becomes due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, together with interest accrued during such extension. 2 3 2. Use of Loans. The loans made hereunder shall be used for the purpose of carrying on a business or commercial activity within the meaning of the District of Columbia Code Sections 28- 3301(d)(1)(B). 3. Events of Default, Remedies. The occurrence of any Event of Default under the Credit Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, the Bank is entitled to exercise the remedies set forth in the Credit Agreement. 4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket charges and expenses incurred by the Bank, including the reasonable fees and expenses of its legal counsel (including the cost of the Bank's in-house counsel as determined by the Bank) in connection with the negotiation, preparation and execution of this Note and any amendments, waivers, modifications or supplements hereto, and the enforcement of any provision of this Note or any amendment, waiver, modification or supplement hereto and the collection of this Note. 5. Additional Costs. In the event that at any time the Bank shall be required to maintain reserves against "Eurocurrency Liabilities" under Regulation D of the Board of Governors of the Federal Reserve System or in the event that there shall occur any change in applicable law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof or the introduction of any law or regulation subjects the Bank to any tax or governmental charge of any kind whatsoever with respect to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or changes the basis of taxation of payments to the Bank of principal of or interest payable with respect to this Note (except for changes in the rate of tax based solely on the overall net income of the Bank) or imposes, modifies or deems applicable any reserve, special deposit, capital ratio or similar requirement against assets held by or deposits in or for the account of, or loans by, the Bank or imposes on the Bank, directly or indirectly, any other conditions affecting this Note or the cost of U.S. dollar deposits obtained by the Bank in the domestic market or the London interbank market, and the result of any of the foregoing is to increase the cost to the Bank of making or maintaining loans hereunder, then the Bank shall notify the Borrower in writing of the additional amount or amounts necessary to compensate the Bank for such additional costs. A certificate of an officer of the Bank setting forth the calculation of such costs shall be conclusive and binding, absent manifest error. In the event the Borrower is unwilling to pay such additional costs, during the thirty days following the receipt of such notice, the Bank and the Borrower shall negotiate in good faith with a view toward modifying this Note to provide a substitute basis for the interest rate provided above which is financially a substantial equivalent of such rate. If, within such thirty-day period, the Bank and the Borrower shall agree in writing upon such substitute rate, then such substitute rate shall be retroactive to, and effective from, the date of the aforesaid notice. If, within such thirty-day period, the Bank and the Borrower shall fail to agree in writing upon such substitute rate, the Borrower agrees that this Note shall bear interest retroactive to, and effective from, the date of the aforesaid notice at a rate equal to the rate reported by The Wall Street Journal in its column "Money Rates" as the prime rate (the "Prime Rate"). If more than one rate or a range of rates is reported, the Prime Rate shall be the higher or highest such rate. In the event The Wall Street Journal fails to report a prime rate, the Prime Rate shall mean that rate announced from time to time by the Bank as its prime rate of interest. The Prime Rate, determined in either manner, is not necessarily the lowest rate charged by the Bank on loans. 3 4 6. Right of Setoff. Unless this Note be paid at its maturity, or when otherwise due, as herein provided, the Bank shall have all setoff rights provided by law. 7. Waivers and Consents. Except as otherwise expressly set forth herein, the Borrower and all endorsers, guarantors, and sureties of this Note (collectively the "Obligors") severally (a) waive all applicable exemption rights, whether under the laws of the District of Columbia or otherwise, and also waive, presentment for payment, protest, notice of protest, and diligence in collecting this Note, (b) agree to the release of any party primarily or secondarily liable hereon and agree that it will not be necessary for any holder hereof, in order to enforce payment of this Note by any party, to first institute suit against any other Obligor, and (c) consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION HEREWITH, IS HEREBY EXPRESSLY WAIVED. 8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be a contract under the laws of the District of Columbia (except for the conflict of law provisions thereof) and shall be governed by, and construed in accordance with, the laws of such jurisdiction. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. If any action arising out of this Note is commenced in any District of Columbia or Federal court located in the District of Columbia, each party signatory hereto hereby consents to the jurisdiction of any such court in any such action and to the laying of venue in the District of Columbia. Any process in such action shall be duly served if mailed by registered mail, postage prepaid, to the Borrower at its address given herein or its last known business address, or if otherwise served in acceptance with law. Any other notice or demand hereunder may be made by hand delivery or certified or registered mail, return receipt requested, to such address, with the same effect as if delivered in person. 9. Incorporated Provisions. This Note is the Allied Note referred to in an Unsecured Line of Credit Agreement dated as of the date hereof, between the Borrower, Allied Investment Corporation, Allied Capital Financial Corporation, and the Bank (the "Credit Agreement"), is subject to payment and acceleration upon the terms specified therein, and hereby incorporates by reference all of the provisions thereof. ALLIED CAPITAL CORPORATION By:/s/ G. Cabell Williams, III ---------------------------------- Name: G. Cabell Williams, III Title: President 4 5 PROMISSORY NOTE $10,000,000.00 December 20, 1996 ALLIED INVESTMENT CORPORATION, a corporation organized under the laws of Maryland (the "Borrower"), for value received, hereby promises to pay to the order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W., Washington, D.C. 20006, in lawful money of the United States and in immediately available funds the principal sum of Ten Million and no/100 Dollars ($10,000,000.00) or, if less, the aggregate unpaid principal amount of all loans advanced or re-advanced by the Bank to the Borrower hereunder. 1. Payment of Principal and Interest; Prepayment; Etc. (a) Principal Payments. The principal amount of each loan hereunder shall be due and payable on the Termination Date (as defined in the Credit Agreement, hereinafter defined). (b) Interest Rate; Interest Payments. Except as otherwise provided hereinafter, each borrowing under this Note shall bear interest on the unpaid principal amount of such borrowing from time to time at a rate per annum equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each change in the LIBOR Rate hereunder shall be effective without notice to the Borrower on the first Business Day of each calendar month. Interest shall be payable on the first of each calendar month commencing on the first such date after each borrowing hereunder and at the Termination Date or earlier maturity hereof. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. As used herein: "LIBOR" means, with respect to any calendar month or portion thereof during which any loan hereunder is outstanding, the rate per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%) which is the average of interbank offered rates for U.S. dollar deposits in the London interbank market for a period of one month, as reported to the Bank on an On-Line Information Service at approximately 10:00 a.m. (Washington, D.C. time)(the "Index") on the first Business Day of each calendar month. If for any reason on such Business Day the Bank is unable to access the Index or LIBOR is not reported by the Index, then LIBOR shall be the London interbank offered rate for U.S. dollars deposits for a period of one month as reported in The Wall Street Journal on such Business Day. If LIBOR is not available, the Bank shall use the most comparable rate at its sole discretion or may use the average of the rates for the next shortest and next longest maturities. The Borrower acknowledges and agrees that the determination by the Bank of LIBOR shall be conclusive and binding on the Borrower in the absence of manifest error. LIBOR is not necessarily the rate at which the Bank offers or receives U.S. dollar deposits in the London interbank market or elsewhere, and is not necessarily the lowest rate charged by the Bank on loans. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the District of Columbia are generally authorized to close. "On-Line Information Service" means a textline or other on-line information service provided to the Bank by any of Reuters Information Services, Inc., Knight-Ridder 1 6 Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial Markets News Services. (c) Post-Maturity Interest. After maturity, whether by acceleration or otherwise, this Note shall bear interest payable on demand at a variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent permitted by law, any payment of interest on this Note not made when due shall bear interest from the date when due until payment is made payable on demand, at a rate per annum equal to 2% in excess of the LIBOR Rate. (d) Prepayment. This Note may be prepaid in whole at any time or in part from time to time without premium or penalty. This Note shall immediately be prepaid to the extent that the principal amount hereof at any time exceeds the Maximum Amount (as defined in the Credit Agreement). (e) Advances; Evidence of Amounts Due. This Note is held by the Bank as a master note against which loans may be advanced in lesser amount(s) than the principal amount. The Borrower shall give the Bank a written or telexed request or a telephonic request (to be promptly confirmed in writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of the desired borrowing, specifying: (i) the Business Day of the desired borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon request, notify the Borrower telephonically of the LIBOR Rate. The Borrower shall be liable only for so much of the principal amount as shall be equal to the total of the amounts advanced or re-advanced against this Note to or for the Borrower by the Bank from time to time, less all payments made by or for the Borrower and applied by the Bank to principal. The Borrower shall also be liable for interest on each such advance or re-advance as shown on the Bank's books and records, provided that the rate of such interest is in accordance with the applicable rate or rates specified in this Note. The Borrower acknowledges that a statement signed by an officer of the Bank setting forth the amount of principal and interest owed hereon as reflected in such books and records shall be presumptive evidence of the facts stated therein and shall, absent manifest error, be conclusive and binding. Any statement of account delivered to the Borrower shall be deemed correct and accepted unless a written statement of exceptions thereto is delivered to the Bank within thirty (30) days after mailing of such statement of account. In making any advance or re-advance hereunder, the Bank shall be entitled to rely upon any notice of borrowing or other instructions, whether oral, written or by any form of telecommunication, purporting to be made by a person designated to the Bank by the Borrower as an Authorized Representative of the Borrower, and deposit of the proceeds of an advance or re-advance hereunder in a deposit account in the name of the Borrower or the remittance of any proceeds to persons designated in such instructions shall conclusively establish that such loan was duly made hereunder. (f) Payments Due on Non-Business Days. If any installment of principal on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. If any payment of interest on any loan evidenced by this Note becomes due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, together with interest accrued during such extension. 2 7 2. Use of Loans. The loans made hereunder shall be used for the purpose of carrying on a business or commercial activity within the meaning of the District of Columbia Code Sections 28- 3301(d)(1)(B). 3. Events of Default, Remedies. The occurrence of any Event of Default under the Credit Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, the Bank is entitled to exercise the remedies set forth in the Credit Agreement. 4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket charges and expenses incurred by the Bank, including the reasonable fees and expenses of its legal counsel (including the cost of the Bank's in-house counsel as determined by the Bank) in connection with the negotiation, preparation and execution of this Note and any amendments, waivers, modifications or supplements hereto, and the enforcement of any provision of this Note or any amendment, waiver, modification or supplement hereto and the collection of this Note. 5. Additional Costs. In the event that at any time the Bank shall be required to maintain reserves against "Eurocurrency Liabilities" under Regulation D of the Board of Governors of the Federal Reserve System or in the event that there shall occur any change in applicable law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof or the introduction of any law or regulation subjects the Bank to any tax or governmental charge of any kind whatsoever with respect to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or changes the basis of taxation of payments to the Bank of principal of or interest payable with respect to this Note (except for changes in the rate of tax based solely on the overall net income of the Bank) or imposes, modifies or deems applicable any reserve, special deposit, capital ratio or similar requirement against assets held by or deposits in or for the account of, or loans by, the Bank or imposes on the Bank, directly or indirectly, any other conditions affecting this Note or the cost of U.S. dollar deposits obtained by the Bank in the domestic market or the London interbank market, and the result of any of the foregoing is to increase the cost to the Bank of making or maintaining loans hereunder, then the Bank shall notify the Borrower in writing of the additional amount or amounts necessary to compensate the Bank for such additional costs. A certificate of an officer of the Bank setting forth the calculation of such costs shall be conclusive and binding, absent manifest error. In the event the Borrower is unwilling to pay such additional costs, during the thirty days following the receipt of such notice, the Bank and the Borrower shall negotiate in good faith with a view toward modifying this Note to provide a substitute basis for the interest rate provided above which is financially a substantial equivalent of such rate. If, within such thirty-day period, the Bank and the Borrower shall agree in writing upon such substitute rate, then such substitute rate shall be retroactive to, and effective from, the date of the aforesaid notice. If, within such thirty-day period, the Bank and the Borrower shall fail to agree in writing upon such substitute rate, the Borrower agrees that this Note shall bear interest retroactive to, and effective from, the date of the aforesaid notice at a rate equal to the rate reported by The Wall Street Journal in its column "Money Rates" as the prime rate (the "Prime Rate"). If more than one rate or a range of rates is reported, the Prime Rate shall be the higher or highest such rate. In the event The Wall Street Journal fails to report a prime rate, the Prime Rate shall mean that rate announced from time to time by the Bank as its prime rate of interest. The Prime Rate, determined in either manner, is not necessarily the lowest rate charged by the Bank on loans. 3 8 6. Right of Setoff. Unless this Note be paid at its maturity, or when otherwise due, as herein provided, the Bank shall have all setoff rights provided by law. 7. Waivers and Consents. Except as otherwise expressly set forth herein, the Borrower and all endorsers, guarantors, and sureties of this Note (collectively the "Obligors") severally (a) waive all applicable exemption rights, whether under the laws of the District of Columbia or otherwise, and also waive, presentment for payment, protest, notice of protest, and diligence in collecting this Note, (b) agree to the release of any party primarily or secondarily liable hereon and agree that it will not be necessary for any holder hereof, in order to enforce payment of this Note by any party, to first institute suit against any other Obligor, and (c) consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION HEREWITH, IS HEREBY EXPRESSLY WAIVED. 8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be a contract under the laws of the District of Columbia (except for the conflict of law provisions thereof) and shall be governed by, and construed in accordance with, the laws of such jurisdiction. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. If any action arising out of this Note is commenced in any District of Columbia or Federal court located in the District of Columbia, each party signatory hereto hereby consents to the jurisdiction of any such court in any such action and to the laying of venue in the District of Columbia. Any process in such action shall be duly served if mailed by registered mail, postage prepaid, to the Borrower at its address given herein or its last known business address, or if otherwise served in acceptance with law. Any other notice or demand hereunder may be made by hand delivery or certified or registered mail, return receipt requested, to such address, with the same effect as if delivered in person. 9. Incorporated Provisions. This Note is the AIC Note referred to in an Unsecured Line of Credit Agreement dated as of the date hereof, between the Borrower, Allied Capital Corporation, Allied Capital Financial Corporation, and the Bank (the "Credit Agreement"), is subject to payment and acceleration upon the terms specified therein, and hereby incorporates by reference all of the provisions thereof. ALLIED INVESTMENT CORPORATION By:/s/ G. Cabell Williams, III ------------------------------------- Name: G. Cabell Williams, III Title: President 4 9 PROMISSORY NOTE $10,000,000.00 December 20, 1996 ALLIED CAPITAL FINANCIAL CORPORATION, a corporation organized under the laws of Maryland (the "Borrower"), for value received, hereby promises to pay to the order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W., Washington, D.C. 20006, in lawful money of the United States and in immediately available funds the principal sum of Ten Million and no/100 Dollars ($10,000,000.00) or, if less, the aggregate unpaid principal amount of all loans advanced or re-advanced by the Bank to the Borrower hereunder. 1. Payment of Principal and Interest; Prepayment; Etc. (a) Principal Payments. The principal amount of each loan hereunder shall be due and payable on the Termination Date (as defined in the Credit Agreement, hereinafter defined). (b) Interest Rate; Interest Payments. Except as otherwise provided hereinafter, each borrowing under this Note shall bear interest on the unpaid principal amount of such borrowing from time to time at a rate per annum equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each change in the LIBOR Rate hereunder shall be effective without notice to the Borrower on the first Business Day of each calendar month. Interest shall be payable on the first of each calendar month commencing on the first such date after each borrowing hereunder and at the Termination Date or earlier maturity hereof. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. As used herein: "LIBOR" means, with respect to any calendar month or portion thereof during which any loan hereunder is outstanding, the rate per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%) which is the average of interbank offered rates for U.S. dollar deposits in the London interbank market for a period of one month, as reported to the Bank on an On-Line Information Service at approximately 10:00 a.m. (Washington, D.C. time)(the "Index") on the first Business Day of each calendar month. If for any reason on such Business Day the Bank is unable to access the Index or LIBOR is not reported by the Index, then LIBOR shall be the London interbank offered rate for U.S. dollars deposits for a period of one month as reported in The Wall Street Journal on such Business Day. If LIBOR is not available, the Bank shall use the most comparable rate at its sole discretion or may use the average of the rates for the next shortest and next longest maturities. The Borrower acknowledges and agrees that the determination by the Bank of LIBOR shall be conclusive and binding on the Borrower in the absence of manifest error. LIBOR is not necessarily the rate at which the Bank offers or receives U.S. dollar deposits in the London interbank market or elsewhere, and is not necessarily the lowest rate charged by the Bank on loans. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the District of Columbia are generally authorized to close. "On-Line Information Service" means a textline or other on-line information service provided to the Bank by any of Reuters Information Services, Inc., Knight-Ridder 10 Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial Markets News Services. (c) Post-Maturity Interest. After maturity, whether by acceleration or otherwise, this Note shall bear interest payable on demand at a variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent permitted by law, any payment of interest on this Note not made when due shall bear interest from the date when due until payment is made payable on demand, at a rate per annum equal to 2% in excess of the LIBOR Rate. (d) Prepayment. This Note may be prepaid in whole at any time or in part from time to time without premium or penalty. This Note shall immediately be prepaid to the extent that the principal amount hereof at any time exceeds the Maximum Amount (as defined in the Credit Agreement). (e) Advances; Evidence of Amounts Due. This Note is held by the Bank as a master note against which loans may be advanced in lesser amount(s) than the principal amount. The Borrower shall give the Bank a written or telexed request or a telephonic request (to be promptly confirmed in writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of the desired borrowing, specifying: (i) the Business Day of the desired borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon request, notify the Borrower telephonically of the LIBOR Rate. The Borrower shall be liable only for so much of the principal amount as shall be equal to the total of the amounts advanced or re-advanced against this Note to or for the Borrower by the Bank from time to time, less all payments made by or for the Borrower and applied by the Bank to principal. The Borrower shall also be liable for interest on each such advance or re-advance as shown on the Bank's books and records, provided that the rate of such interest is in accordance with the applicable rate or rates specified in this Note. The Borrower acknowledges that a statement signed by an officer of the Bank setting forth the amount of principal and interest owed hereon as reflected in such books and records shall be presumptive evidence of the facts stated therein and shall, absent manifest error, be conclusive and binding. Any statement of account delivered to the Borrower shall be deemed correct and accepted unless a written statement of exceptions thereto is delivered to the Bank within thirty (30) days after mailing of such statement of account. In making any advance or re-advance hereunder, the Bank shall be entitled to rely upon any notice of borrowing or other instructions, whether oral, written or by any form of telecommunication, purporting to be made by a person designated to the Bank by the Borrower as an Authorized Representative of the Borrower, and deposit of the proceeds of an advance or re-advance hereunder in a deposit account in the name of the Borrower or the remittance of any proceeds to persons designated in such instructions shall conclusively establish that such loan was duly made hereunder. (f) Payments Due on Non-Business Days. If any installment of principal on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon at the rate herein specified during such extension. If any payment of interest on any loan evidenced by this Note becomes due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, together with interest accrued during such extension. 2 11 2. Use of Loans. The loans made hereunder shall be used for the purpose of carrying on a business or commercial activity within the meaning of the District of Columbia Code Sections 28- 3301(d)(1)(B). 3. Events of Default, Remedies. The occurrence of any Event of Default under the Credit Agreement shall constitute an Event of Default hereunder. Upon the occurrence of an Event of Default, the Bank is entitled to exercise the remedies set forth in the Credit Agreement. 4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket charges and expenses incurred by the Bank, including the reasonable fees and expenses of its legal counsel (including the cost of the Bank's in-house counsel as determined by the Bank) in connection with the negotiation, preparation and execution of this Note and any amendments, waivers, modifications or supplements hereto, and the enforcement of any provision of this Note or any amendment, waiver, modification or supplement hereto and the collection of this Note. 5. Additional Costs. In the event that at any time the Bank shall be required to maintain reserves against "Eurocurrency Liabilities" under Regulation D of the Board of Governors of the Federal Reserve System or in the event that there shall occur any change in applicable law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof or the introduction of any law or regulation subjects the Bank to any tax or governmental charge of any kind whatsoever with respect to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or changes the basis of taxation of payments to the Bank of principal of or interest payable with respect to this Note (except for changes in the rate of tax based solely on the overall net income of the Bank) or imposes, modifies or deems applicable any reserve, special deposit, capital ratio or similar requirement against assets held by or deposits in or for the account of, or loans by, the Bank or imposes on the Bank, directly or indirectly, any other conditions affecting this Note or the cost of U.S. dollar deposits obtained by the Bank in the domestic market or the London interbank market, and the result of any of the foregoing is to increase the cost to the Bank of making or maintaining loans hereunder, then the Bank shall notify the Borrower in writing of the additional amount or amounts necessary to compensate the Bank for such additional costs. A certificate of an officer of the Bank setting forth the calculation of such costs shall be conclusive and binding, absent manifest error. In the event the Borrower is unwilling to pay such additional costs, during the thirty days following the receipt of such notice, the Bank and the Borrower shall negotiate in good faith with a view toward modifying this Note to provide a substitute basis for the interest rate provided above which is financially a substantial equivalent of such rate. If, within such thirty-day period, the Bank and the Borrower shall agree in writing upon such substitute rate, then such substitute rate shall be retroactive to, and effective from, the date of the aforesaid notice. If, within such thirty-day period, the Bank and the Borrower shall fail to agree in writing upon such substitute rate, the Borrower agrees that this Note shall bear interest retroactive to, and effective from, the date of the aforesaid notice at a rate equal to the rate reported by The Wall Street Journal in its column "Money Rates" as the prime rate (the "Prime Rate"). If more than one rate or a range of rates is reported, the Prime Rate shall be the higher or highest such rate. In the event The Wall Street Journal fails to report a prime rate, the Prime Rate shall mean that rate announced from time to time by the Bank as its prime rate of interest. The Prime Rate, determined in either manner, is not necessarily the lowest rate charged by the Bank on loans. 3 12 6. Right of Setoff. Unless this Note be paid at its maturity, or when otherwise due, as herein provided, the Bank shall have all setoff rights provided by law. 7. Waivers and Consents. Except as otherwise expressly set forth herein, the Borrower and all endorsers, guarantors, and sureties of this Note (collectively the "Obligors") severally (a) waive all applicable exemption rights, whether under the laws of the District of Columbia or otherwise, and also waive, presentment for payment, protest, notice of protest, and diligence in collecting this Note, (b) agree to the release of any party primarily or secondarily liable hereon and agree that it will not be necessary for any holder hereof, in order to enforce payment of this Note by any party, to first institute suit against any other Obligor, and (c) consent to any one or more extensions or postponements of time of payment of this Note on any terms or any other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION HEREWITH, IS HEREBY EXPRESSLY WAIVED. 8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be a contract under the laws of the District of Columbia (except for the conflict of law provisions thereof) and shall be governed by, and construed in accordance with, the laws of such jurisdiction. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. If any action arising out of this Note is commenced in any District of Columbia or Federal court located in the District of Columbia, each party signatory hereto hereby consents to the jurisdiction of any such court in any such action and to the laying of venue in the District of Columbia. Any process in such action shall be duly served if mailed by registered mail, postage prepaid, to the Borrower at its address given herein or its last known business address, or if otherwise served in acceptance with law. Any other notice or demand hereunder may be made by hand delivery or certified or registered mail, return receipt requested, to such address, with the same effect as if delivered in person. 9. Incorporated Provisions. This Note is the ACFC Note referred to in an Unsecured Line of Credit Agreement dated as of the date hereof, between the Borrower, Allied Capital Corporation, Allied Investment Corporation, and the Bank (the "Credit Agreement"), is subject to payment and acceleration upon the terms specified therein, and hereby incorporates by reference all of the provisions thereof. ALLIED CAPITAL FINANCIAL CORPORATION By:/s/ G. Cabell Williams, III ------------------------------------ Name: G. Cabell Williams, III Title: President 4 EX-10.7 7 INVESTMENT ADVISPORY AGREEMENT. 1 EXHIBIT 10.7 ALLIED CAPITAL CORPORATION INVESTMENT ADVISORY AGREEMENT THIS AGREEMENT, dated as of the last date set forth below, is made by and between Allied Capital Corporation, a Maryland corporation (together with its investment company subsidiaries, 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") and has elected under the ICA to be regulated as a business development company. 2. THE INVESTMENT ADVISER. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and has entered into this Agreement with the Company to act as its investment adviser. The terms of this Agreement are as follows: 3. OBLIGATIONS OF THE ADVISER. The Company hereby engages the Adviser's services as the Company's investment adviser. As such, the Adviser will: (a) advise the Company as to the acquisition and disposition of securities in accordance with the Company's investment policies; (b) make available and, if requested by entities in the securities of which the Company has invested or is proposing to invest, render managerial assistance to, and exercise management rights in, such entities; (c) provide to the Company office space and facilities and the 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 1 2 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 (f) cause to be offered to the Company opportunities to acquire or dispose of securities in co-investment with other entities managed by the Adviser in accordance with the co-investment guidelines set out below. Except to the extent of acquisitions and dispositions that, in accordance with such guidelines, require the specific approval of the Company's Board of Directors, the Adviser is authorized to effect acquisitions and dispositions of securities for the Company's account in the Adviser's discretion. Where such approval is required, the Adviser is authorized to effect such acquisitions and dispositions for the Company's account upon and to the extent of such approval. The Company will put the Adviser in funds whenever the Adviser requires funds for an acquisition of securities in accordance with the foregoing, and the Company will cause to be delivered in accordance with the Adviser's instructions any securities disposed of in accordance with the foregoing. The Adviser will arrange for the certificates for any securities acquired to be delivered to the Company's custodian. 4. CO-INVESTMENT GUIDELINES. Most investments made by the Company will continue to be made in participation with Allied Capital Corporation II ("Allied II") and Allied Venture Partnership and Allied Technology Partnership (the "affiliated partnerships"). The Securities and Exchange Commission exemptive orders permitting such co-investment provide that the Company must be offered the opportunity to invest in any investment that would be suitable for both Allied II and the Company to the extent of an amount proportionate to their respective consolidated assets (including, in the case of the Company, the combined assets of the affiliated partnerships so long as they are not fully invested). Securities purchased in a joint transaction by both the Company and Allied II or an affiliated partnership will consist of the same class of securities, including the same registrations rights, if any, and other rights related thereto, and will be purchased for the same unit consideration, and the approval of such transaction, including the determination by the Company's and Allied II's non-interested directors, will take place during the same time period. The Company recognizes that the Adviser, in turn, is obligated, subject to specified exceptions, to allocate to Allied Venture Partnership one-half of any investment opportunity made available to the Company, and to consider Allied Technology Partnership for participation in any investment that is otherwise made available for syndication, as long as these affiliated partnerships have funds available for investment. Notwithstanding the foregoing, the Company will not make any investment in the securities of any issuer in which Allied II or either of the affiliated partnerships, but not the Company, has previously invested, or vice versa. The Adviser will give the Company the opportunity to dispose of any securities in which both Allied II or one or both of the affiliated partnerships and the Company have invested in 2 3 proportion to their holdings of such securities. The Company will take advantage of such opportunity except to the extent that a majority of the members of its Board of Directors, including a majority of its non-interested directors, determines otherwise. In connection with any such disposition, the Company will be required to bear no more than its proportionate share of the transaction costs related thereto. The Company will participate in any investment in which Allied II may also participate only to the extent that such participation is approved in advance by a majority of the members of its Board of Directors, including a majority of its non-interested directors. The Adviser will give notice to the Company of any intention of Allied II or one or both of the affiliated partnerships to exercise any conversion privilege or other right to acquire equity securities of an issuer in the securities of which both Allied II or one or both of the affiliated partnerships and the Company have invested. 5. 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. 6. EXPENSES TO BE PAID BY THE COMPANY. The Company will reimburse the Adviser promptly, against the Adviser's voucher, for any expenses incurred by the Adviser for the Company's account. Without limitation, such expenses shall include all expenses of any offering and sale by the Company of its shares and, except as otherwise specifically provided above, all expenses of the Company's operations; the fees and disbursements of the Company's counsel, accountants, custodian, transfer agent and registrar; 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 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 industryspecific technical experts, and deal-specific travel expenses) incurred in monitoring, negotiating 3 4 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. 7. RECEIPT OF FEES. All fees that may be paid by or for the account of an entity in which the Company has invested or is proposing to invest in connection with an investment transaction in which the Company participates or provides follow-on managerial assistance will be treated as commitment fees or management fees and will be received by the Company, pro rata to the Company's participation in such transaction. Nevertheless, the Adviser will be entitled to retain for its own account any fees paid to the Adviser by or for the account of any entity, including an entity in which the Company may have invested, for special investment banking or consulting work performed for the entity which is not related to such transaction or follow-on managerial assistance. The Adviser will report to the Company's Board of Directors not less often than quarterly all fees received by the Adviser from any source and whether, in its opinion, any such fee is one that the Adviser is entitled to retain under the provisions of this paragraph. In the event that any member of the Company's Board of Directors should disagree, the matter shall be conclusively resolved by a majority of the Company's Board of Directors, including a majority of its members who are not interested persons of the Company. 8. COMPENSATION TO THE ADVISER. As the Adviser's sole and exclusive compensation for its services to be rendered pursuant to the terms set out above, the Company will, during the term of this Agreement, pay to the Adviser, quarterly, a fee equal to 0.625% per quarter of the quarter-end value of the Company's consolidated total assets (less the company's Interim Investments and cash and the Company's investment in Allied Capital Lending Corporation) and 0.125% per quarter of the quarter-end value of the Company's consolidated Interim Investments and cash. For this purpose "Interim Investments" are defined as short-term securities issued or guaranteed by the U.S. government or an agency or instrumentality thereof, or in repurchase agreements fully collateralized by such securities. For the purpose of calculating the fee, the values of the Company's assets will be determined as of the end of each calendar quarter by the Board of Directors. The Company will pay the quarterly fee as soon as practicable after the values for the applicable quarter have been determined. If the termination of the Adviser's services hereunder does not coincide with the last day of a calendar quarter, then any fee determined in accordance with this paragraph shall be multiplied by the ratio of the number of days in such quarter during which Adviser rendered services to the total number of days in such quarter. 4 5 9. INDEMNIFICATION OF THE ADVISER. The Company confirms that in performing services hereunder the Adviser will be an agent of the Company for the purpose of the indemnification provisions of the Company's By-Laws, subject, however, to the same limitations as though the Adviser were a director or officer of the Company. The Adviser shall not be liable to the Company, its shareholders or its creditors except for violations of law or for conduct which would preclude the Adviser from being indemnified under such provisions. 10. APPROVAL OF THE AGREEMENT. The Company represents that the Company's Board of Directors, including a majority of its members who are not interested persons of the Company, approved this Agreement at a meeting held on March 9, 1995 at which a quorum was personally present, and a majority, as defined in the ICA, of the Company's shareholders approved it at a meeting held on the date hereof. This Agreement shall continue in effect until the annual meeting of the shareholders of the Company to be held in 1996 and thereafter from year to year as long as such continuance is specifically approved at least annually by the Company's Board of Directors, including a majority of its members who are not interested persons of the Company, or by vote of the holders of a majority, as defined in the ICA, of the Company's outstanding voting securities. 11. TERMINATION OF THE AGREEMENT. The foregoing notwithstanding, this Agreement may be terminated by the Company at any time, without payment of any penalty, on 60 days' written notice to the Adviser if the decision to terminate has been made by the Company's Board of Directors or by vote of the holders of a majority, as defined in the ICA, of the Company's outstanding voting securities. This Agreement will terminate automatically in the event of its assignment, as defined in the ICA. The Adviser may also terminate this Agreement on 60 days' written notice to the Company; provided, however, that the Adviser may not terminate this Agreement unless another investment adviser has been approved by the vote of a majority, as defined in the ICA, of the Company's outstanding securities and by the Company's Board of Directors, including a majority of its members who are not parties to such agreement or interested persons of any such party. 12. JURISDICTION. This Agreement shall be governed by the laws of the State of Maryland. IN WITNESS WHEREOF, the parties have executed this Agreement on and as of May 4th, 1995. 5 6 ALLIED CAPITAL ADVISERS, INC. ALLIED CAPITAL CORPORATION By: /s/ Joan M. Sweeney By: /s/ G. Cabell Williams, III ----------------------------- ---------------------------------- Joan M. Sweeney, President G. Cabell Williams, III, President 6 EX-10.8 8 DIVIDEND REINVESTMENT PLAN. 1 EXHIBIT 10.8 ALLIED CAPITAL CORPORATION DIVIDEND REINVESTMENT PLAN COMPANY CONTACT: PLAN ADMINISTRATOR: Director, Shareholder Relations American Stock Transfer Allied Capital Corporation and Trust Company 1666 K Street, NW, 9th Floor 40 Wall Street Washington, DC 20006 New York, NY 10005 (202) 331-1112 (800) 937-5449 The following is the Allied Capital Corporation Dividend Reinvestment Plan (the "Plan"). Further questions and correspondence should be directed to either of the addresses listed above. 1. WHAT IS THE PURPOSE OF THE PLAN? The purpose of the Plan is to provide shareholders with a simple and convenient method of investing cash dividends and distributions in additional shares of Common Stock, $1 par value, of Allied Capital Corporation (the "Company") at the current market price. Participants in the Plan may have cash dividends and distributions automatically reinvested without charges for record-keeping, and may take advantage of the custodial and reporting services provided by the Plan Administrator, at no additional cost. 2. WHAT DOES THE PLAN ADMINISTRATOR DO AND WHAT ARE ITS RESPONSIBILITIES? The Plan Administrator administers the Plan for participants, keeps records, sends statements of accounts to participants, and performs other duties relating to the Plan. The Plan Administrator will not be liable under the Plan for any act done in good faith, or for any good faith omission to act, including without limitation, any claim of liability (i) arising out of any such act or omission to act which occurs prior to the termination of participation, and (ii) with respect to the prices at which shares are credited to a participant's account. Participants should recognize that neither the Company nor the Plan Administrator can assure participants of profits, or protect participants against losses, on shares issued or held under the Plan. 3. HOW DOES A SHAREHOLDER PARTICIPATE? Allied Capital Corporation's Dividend Reinvestment Plan is an "opt-in" plan. Shareholders will receive cash dividends and distributions with respect to all shares unless they choose to enroll in the Plan. Any person who has shares registered in his name may become a participant by sending to the Company or the Plan Administrator a properly completed and signed Enrollment Status Card in time to be received not less than five days before the dividend declaration date. A dividend declaration date is a date on which the Board of Directors of the Company declares a dividend or distribution to be paid and specifies the amount of such dividend or distribution. An Enrollment Status Card received after the declaration date for a particular dividend or distribution will not take effect until the next dividend or distribution. As a result, new shareholders or shareholders who have previously terminated participation in the Plan for all their shares, will receive a particular dividend or distribution in cash unless the Company receives an Enrollment Status Card before the declaration date of that dividend or distribution. 4. WHAT IF THE SHARES ARE HELD BY A BROKER, BANK OR NOMINEE? If a shareholder's shares are held in the name of a broker, bank or other nominee (a "nominee"), he can participate in the Plan only to the extent that the nominee participates on his behalf. Many nominees do not provide that service and routinely request dividends and distributions to be paid in cash on all shares registered in their names. Therefore, if shares are held for a shareholder's account by a nominee, the shareholder must either make appropriate arrangements for the nominee to participate on his behalf, or he must become a shareholder of record by having part or all of his shares transferred into his own name. 5. WHAT DO ENROLLMENT STATUS CARDS PROVIDE AND HOW DOES A SHAREHOLDER USE THEM? The Enrollment Status Card provides to the shareholder of record the opportunity to elect either (i) to receive dividends and distributions in shares with respect to all shares registered in such shareholder's name (unlimited participation), or (ii) to receive dividends and distributions in shares with respect to all shares so registered except those shares specified to be paid in cash (partial participation). 2 Enrollment Status Cards should be sent to the Company or the Plan Administrator and will be given effect as to any particular dividend or distribution (and all subsequent dividends and distributions) if received not less than five days before the declaration date for that dividend or distribution. A letter to the Company or the Plan Administrator clearly stating a shareholder's intent to enroll or to increase or decrease participation in the Plan may be used instead of an Enrollment Status Card. 6. WHAT IS THE EFFECT OF UNLIMITED PARTICIPATION? An unlimited participant will receive all dividends and distributions in shares with respect to (i) all shares registered in that participant's name for which the participant holds certificates (including shares so registered subsequent to initial enrollment), and (ii) all shares credited to that participant's account on the books of the Plan Administrator on any applicable record date. Thus, if an unlimited participant wants to continue to receive his dividends and distributions in shares, he need take no further action. 7. WHAT IS THE EFFECT OF PARTIAL PARTICIPATION? If an initially or subsequently enrolled participant has indicated on his Enrollment Status Card or other notice that he wants to participate in the Plan with respect to all shares except those specified, he will be considered a partial participant. A partial participant will receive dividends and distributions in cash only with respect to the number of shares that he has specified. With respect to any other shares registered in his name, and with respect to shares credited to his account on the books of the Plan Administrator (see question 10), the corresponding dividends and distributions will be paid in shares. The number of shares on which dividends and distributions are paid in cash may be changed at any time simply by writing to the Company or the Plan Administrator. 8. HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK AND HOW ARE SHARES ALLOCATED UNDER THE PLAN? When the Board of Directors declares a dividend or distribution, all non-participants will receive such dividend or distribution in cash. The number of shares allocated to a participant's account will be arrived at as follows. Except under the circumstances outlined in Question 9, the Plan Administrator will buy shares of Allied Capital Corporation in the open market, on NASDAQ or elsewhere, beginning on or before the payment date of the dividend or distribution, until it has expended for such purchases all of the cash that would otherwise be payable to the participants. The number of shares that will then be credited to the participants' Plan accounts will be based on the average cost of the shares so purchased, including brokerage commissions. Each participant's account will be credited with a number of shares, including fractional shares, equal to the total amount of cash dividend or distribution, net of any applicable withholding taxes, otherwise due to the participant, divided by the price of the shares. 9. WILL NEWLY ISSUED SHARES EVER BE PAID TO PARTICIPANTS IN THE PLAN? The Company's Board of Directors may (but is not required to) declare a dividend or distribution to be paid to Plan participants in newly issued shares of Allied Capital Corporation. In that situation, the price of newly issued shares credited to a participant's account will be equal to the average of the closing sales prices reported for the shares in The Wall Street Journal NASDAQ National Market System listings for the five days on which trading of shares takes place immediately prior to the dividend payment date (but not less than 95% of the opening sales price on that date). Even if the Board of Directors has declared the dividend or distribution to be payable to Plan participants in newly issued shares, the Plan Administrator will be under standing instructions not to credit newly issued shares, and instead to buy shares in the market, if (i) the price at which newly issued shares are to be credited does not exceed 110% of the last determined net asset value of the Allied Capital Corporation shares or (ii) the Company has advised the Plan Administrator that since such net asset value was last determined it has become aware of events that indicate the possibility of a change in per share net asset value as a result of which the net asset value of the Allied Capital Corporation shares on the payment date might be higher than the price at which the Plan Administrator would credit newly issued shares to the participants' Plan accounts. If the Plan Administrator buys shares on the market, it is possible that by the time the Plan Administrator has completed its purchases, the average per share purchase price paid by the Plan Administrator may exceed the price at which the newly issued shares would have been credited, or the shares' current net asset value. As a result, there would be credited to the participants' Plan accounts a smaller number of shares than would have been credited if the dividend or distribution had been paid in newly issued shares. 3 10. WHAT ACCOUNTS ARE MAINTAINED FOR PARTICIPANTS AND WHAT REPORTS ON THESE ACCOUNTS DO PARTICIPANTS RECEIVE? The Plan Administrator will maintain a separate account for each participant. All shares issued to a participant under the Plan will be credited to the participant's account. The Plan Administrator will mail to each participant a statement confirming the issuance of shares within fifteen days after the allocation of shares is made. The statement will show the amount of the dividend or distribution, the price at which shares were credited, the number of full and fractional shares credited, the number of shares previously credited and the cumulative total of shares credited. In addition, each participant will receive copies of the Company's annual and quarterly reports to shareholders, proxy statements and dividend income information for tax purposes. 11. WILL CERTIFICATES BE ISSUED FOR SHARES ISSUED UNDER THE PLAN? No. Certificates for shares issued under the Plan will not be furnished until an account is terminated or unless a participant requests certificates in writing for a specified number of shares credited to his Plan Account. All written requests for certificates should be directed to the Plan Administrator, allowing two weeks for processing. The issuance of certificates for shares credited to a Plan account will not terminate his participation in the Plan. No certificate for a fractional share will be issued. If a shareholder terminates participation in the Plan (see Question 14), the Plan Administrator will sell for his account any fractional share and send him a check for the proceeds. 12. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED? Accounts under the Plan are maintained in the name in which share certificates of the participant were registered at the time the participant entered the Plan. Certificates for whole shares issued at the request of a participant will be similarly registered. 13. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND OR DECLARES A STOCK SPLIT? Any stock dividends or split shares distributed by the Company on shares held by the Plan Administrator for the participant will be credited to the participant's account. 14. WHAT HAPPENS IF A PARTICIPANT WISHES TO TERMINATE PARTICIPATION? A participant may terminate his enrollment in the Plan at any time by notifing the Company or the Plan Administrator in writing. Within twenty days, and according to the participant's instructions, the Plan Administrator will either (i) issue certificates for the whole shares credited to the participant's Plan account and send a check representing the value of any fractional shares or (ii) sell all full and fractional shares in the market. The proceeds of the sale, less any brokerage commissions that may be incurred, will be remitted to the shareholder at the address of record at the time of liquidation. The address of record may not be changed per telephone instruction, but rather must be changed in writing to the Company or to the Plan Administrator. Notification for termination must be received no later than five business days prior to the record date of any impending distribution in order for it to take effect for that distribution. Please note: If a participant sells or transfers all of the shares registered in his name on the books of the Plan Administrator, participation in the Plan will continue with respect to any shares credited to the participant's Plan account unless and until termination is requested. 15. HOW WILL A PARTICIPANT'S SHARES BE VOTED AT MEETINGS OF SHAREHOLDERS? The participant will receive a proxy card covering the total number of shares held by the participant of record, including shares credited to the participant's Plan account. If a proxy card is returned properly signed, but without indicating instructions as to the manner in which shares are to be voted with respect to any item thereon, the corresponding shares will be voted in accordance with the recommendation of the Company's Board of Directors. If the proxy card is not returned, or it is returned unexecuted or improperly executed, the corresponding shares will not be voted unless the participant or the participant's duly appointed representative votes in person at the meeting. 16. WHAT IS THE TAX STATUS OF REINVESTED DIVIDENDS? The automatic reinvestment of dividends and distributions will not relieve a participant of any income tax liability associated with such dividends or distributions. A participant in the Plan will be treated for Federal income tax purposes as having received, on the dividend payment date, a dividend or distribution in an equal amount to the cash that the participant could have received instead of shares. The tax basis of such shares will equal the amount of such cash. A participant will not realize any taxable income upon receipt of certificates for whole shares credited to the participant's account either upon 4 the participant's request for a specified number of shares, or upon termination of enrollment in the Plan. Each participant in the Plan will receive early in each year a Form 1099 regarding the Federal income tax status of all dividends and distributions taxable during the previous year. 17. ARE THERE ANY CHARGES FOR PARTICIPATING IN THE PLAN? No. The Plan Administrator's fees for administering Allied Capital Corporation's Dividend Reinvestment Plan are included in the fees paid by the Company to the Plan Administrator for acting as its transfer agent. The price at which shares are credited to a participant's acount will, however, include his share of any brokerage commissions incurred in connection with the open market purchases of such shares. There will be no brokerage charges in connection with any credit of newly issued shares. 18 . MAY THE PLAN BE CHANGED OR DISCONTIUNUED? The Company and the Plan Administrator each reserves the right to amend, suspend or terminate the Plan at any time. Notice of any such amendment, suspension or termination will be sent to all participants at least fifteen days prior to the dividend declaration date for which the amendment, suspension or termination is to be effective. 19. CAN A SUCCESSOR PLAN ADMINISTRATOR BE NAMED? The Company may from time to time designate another bank or trust company as successor Plan Administrator under the Plan. ALLIED CAPITAL CORPORATION DIVIDEND REINVESTMENT PLAN ENROLLMENT STATUS CARD The undersigned shareholder of record of Allied Capital Corporation elects to: [ ] PARTICIPATE in the Dividend Reinvestment Plan and receive dividends and distributions in additional shares with respect to ALL Allied Capital Corporation shares held of record or credited to the undersigned's Plan account. [ ] TERMINATE enrollment in the Dividend Reinvestment Plan and receive dividends and distributions in cash with respect to all shares of Allied Capital Corporation held of record or credited to the undersigned's Plan account. CHECK ONE OF THE FOLLOWING: [ ] Liquidate all Plan account shares and remit proceeds, or [ ] Send certificate for whole shares in Plan account and liquidate fractional shares. [ ] PARTIALLY PARTICIPATE in the Dividend Reinvestment Plan with respect to all Allied Capital Corporation shares held of record, including the shares subsequently credited to the undersigned's Plan account, except _____ shares on which dividends and distributions are to be paid in cash. Termination and partial participation instructions will take effect on the record date following receipt of this card by the Plan Administrator. Enrollment instructions will take effect on the declaration date following receipt of this card by the Plan Administrator. - -------------------------------------------------- -------------------------- Tax identification number Signature - -------------------------------------------------- -------------------------- Type or print name exactly as it appears on your Signature share certificate(s). Please fold and staple for mailing. 5 -------------------- Post office will not deliver without stamp -------------------- AMERICAN STOCK TRANSFER & TRUST 40 Wall Street New York, NY 10005 ATTN: Dividend Reinvestment 6 Shareholder Relations Allied Capital 1666 K Street, NW, 9th Floor Washington, DC 20006 EX-10.9 9 STOCK OPTION PLAN. 1 EXHIBIT 10.9 ALLIED CAPITAL CORPORATION STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purpose of this Stock Option Plan (this "Plan") is to advance the interests of Allied Capital Corporation (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 with 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 Compensation Committee (the "Committee") comprised of at least two (2) members of the Company's Board of Directors who each shall (a) be a "disinterested person," as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, (b) have no financial interest in grants of stock options to officers of the Company under this Plan and (c) not be an "interested person," as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "Act"), of the Company. The Committee shall interpret this Plan and, to the extent and in the manner contemplated herein, shall exercise the discretion reserved to it hereunder. The Committee may prescribe, amend and rescind rules and regulations relating to this Plan and to make all other determinations necessary for its administration. The decision of the Committee on any interpretation of this Plan or administration hereof, if in compliance with the provisions of the Act and regulations promulgated thereunder, shall be final and binding with respect to the Company, any optionee or any person claiming to have rights as, or on behalf of, any optionee. 3. SHARES SUBJECT TO THE PLAN The shares subject to option and the other provisions of this Plan shall be shares of the Company's common stock, par value $1.00 per share ("shares"). Subject to the provisions hereof concerning adjustment, the total number of shares which may be purchased upon the exercise or surrender of stock options granted under this Plan shall not exceed 1,350,000 shares, which includes all shares with respect to which options have been granted or surrendered for payment in cash or other consideration pursuant to this Plan or predecessor forms of this Plan. In the event any option shall cease to be exercisable in whole or in part for any reason, the shares which were covered by such option, but as to which the option had not been exercised, shall again be available under this Plan. Shares may be made available from authorized, unissued or reacquired stock or partly from each. 4. PARTICIPANTS (a) Officers. The Committee shall determine and designate from time to time those key officers of the Company who shall be eligible to participate in this Plan. The Committee shall also determine the number of shares to be offered from time to time to each optionee. In making these determinations, the Committee shall take into account the past service of each such officer to the Company, the present and potential contributions of such officer to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of this Plan; provided that the Committee shall determine that each grant of options to an optionee, the number of shares offered thereby and the terms of 1 2 such option are in the best interests of the Company and its shareholders. The date on which the Committee approves a grant of options to an officer of the Company shall be the date of issuance of such option; provided, however, that if (1) any such action by the Committee does not constitute approval thereof by both (A) a majority of the Company's directors who each has no financial interest in such action and (B) a majority of the Company's 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, the grant of any option by such action shall not be effective until there has been approval of such action by a majority of the Company's directors who each has no financial interest in such action and a majority of the Company's directors who each is not an "interested person" of the Company on the basis that such action is in the best interests of the Company and its shareholders, and the last date on which such required approval is obtained shall be the date of issuance of such option. The agreement documenting the award of any option granted pursuant to this paragraph 4(a) shall contain such terms and conditions as the Committee shall deem advisable, including but not limited to being exercisable only in such installments as the Committee may determine. (b) Non-Officer Directors. A one-time grant of options in accordance with the provisions of this paragraph (b) shall be made to each director of the Company who is not an officer of the Company or of the Company's investment adviser (a "non-officer director") who is serving at the later of (i) the date on which the proposal to make grants of options to non-officer directors is approved by the shareholders of the Company or (ii) the date on which the issuance of options pursuant to this Plan to non-officer directors is approved by order of the Securities and Exchange Commission pursuant to Section 61(a)(3)(B)(I)(II) of the Act. After the later of such dates, a one-time grant of options in accordance with the provisions of this paragraph (b) shall be made to each non-officer director [other than any non-officer director who received a grant pursuant to the first sentence of this paragraph (b)] upon his or her initial election as a director of the Company. Each grant pursuant to this paragraph (b) shall award the non-officer director an option to purchase ten thousand (10,000) shares at a price equal to the current fair market value of the shares at the date of issuance of such option; provided, that if any non-officer director then holds ten percent (10%) or more of the outstanding shares, the exercise price of such option shall not be less than one hundred ten percent (110%) of such current fair market value. The agreement documenting the award of any option granted pursuant to this paragraph 4(b) shall contain such terms and conditions as the Committee shall deem advisable; provided, however, that any such option shall vest in three annual installments (so that the recipient can first exercise the option with respect to not more than 3,333 shares on or after the date of issuance of such option, can exercise the option with respect to not more than an additional 3,333 shares on or after the first anniversary of the date of issuance of such option and can exercise such option with respect to the all of the shares covered thereby on or after the second anniversary of the date of issuance of such option). (c) General. Agreements evidencing options granted to different optionees or at different times need not contain similar provisions. 5. OPTION PRICE Shares shall be optioned from time to time at a exercise price not less than the current fair market value [as defined in paragraph 15(d) of this Plan] of the shares at the date of issuance of an option; provided, that the exercise price of any option granted to a holder of 10% or more of the Company's shares shall not be less than 110% of such current fair market value. 6. OPTION PERIOD Each option agreement shall state the period or periods of time within which the subject option may be exercised, in whole or in part, by the optionee which shall be such period or periods of time as may be determined by the Committee; provided, that the option period shall not exceed ten years from the date of issuance of the option and shall not exceed five years if the option is granted to a holder of 10% or more of 2 3 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 officeroptionee, and subject to the approval of both (a) a majority of the Company's directors who each has no financial interest in such loan and (b) a majority of the Company's directors who each is not an "interested person" [as defined in Section 2(a)(19) of the Act] of the Company, on the basis that such loan is in the best interests of the Company and its stockholders (whether such approval is by the Committee or otherwise), may lend to such officer-optionee, as of the date of exercise, an amount equal to the exercise price of such option; provided, that such loan (a) shall have a term of not more than ten years, (b) shall become due within sixty days after the recipient of the loan ceases to be an officer of the Company, (c) shall bear interest at a rate no less than the prevailing rate applicable to 90-day United States Treasury bills at the time the loan is made, and (d) shall be fully collateralized at all times, which collateral may include securities issued by the Company. Loan terms and conditions may be changed by the Committee to comply with applicable IRS and SEC regulations. 10. TERMINATION OF OPTION All rights to exercise options shall terminate sixty days after any optionee ceases to be a director or an officer of the Company for any cause other than death or total and permanent disability. 11. RIGHTS IN THE EVENT OF TERMINATION OF SERVICE If an optionee's service as a director or officer is terminated for any reason other than death or total and permanent disability prior to expiration of his or her option and before such option is fully exercised, the optionee shall have the right to exercise the option during the balance of the 60-day period referred to in paragraph 10. 12. RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH If an optionee becomes totally and permanently disabled or dies prior to expiration of the option without having fully exercised it, he or the executors or administrators or legatees or distributees of the estate, as the case may be, shall, have the right, from time to time within one year after the optionee's total 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 3 4 corporate law, the number of shares represented by the unexercised portion of an option, the number of shares which has been authorized or reserved for issuance hereunder, and the number of shares covered by any applicable vesting schedule hereunder, as well as the exercise price of a share represented by the unexercised portion of an option, shall be proportionately adjusted for (a) a division, combination or reclassification of any of the shares of common stock of the Company or (b) a dividend payable in shares of common stock of the Company. 14. GENERAL RESTRICTION Each option shall be subject to the requirement that, if at any time the Board of Directors shall determine, at its discretion, that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of the shares thereunder, such option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. Subject to the limitations of paragraph 6, no option shall expire during any period when exercise of such option has been prohibited by the Board of Directors, but shall be extended for such further period so as to afford the optionee a reasonable opportunity to exercise his option. 15. MISCELLANEOUS PROVISIONS (a) No optionee shall have rights as a shareholder with respect to shares covered by his option until the date of exercise of his option. (b) The granting of any option shall not impose upon the Company any obligation to appoint or to continue to appoint as a director or officer any optionee, and the right of the Company to terminate the employment of any officer or other employee, or service of any director, shall not be diminished or affected by reason of the fact that an option has been granted to such optionee. (c) Options shall be evidenced by stock option agreements in such form and subject to the terms and conditions of this Plan as the Committee shall approve from time to time, consistent with the provisions of this Plan. Such stock option agreements may contain such other provisions as the Committee in its discretion may deem advisable. (d) For purposes of this Plan, the fair market value of the shares shall be the closing sales price of the stock as quoted on the National Association of Securities Dealers Automated Quotation System for the date of issuance of such option, as provided herein. If the Company's shares are traded on an exchange, the price shall be the closing price of the Company's stock as reported in The Wall Street Journal for such date of issuance of an option. (e) Any option issued hereunder before January 1, 1987 shall not be exercisable while there is outstanding any stock option which was granted before the granting of such option to the same optionee to purchase shares of the Company or of any corporation which (at the time of the granting of such option) was a parent or subsidiary corporation of the Company, or any predecessor of any of any such corporations. (f) (1) The aggregate fair market value (determined as of the date of issuance of an option) of the shares for which any optionee may be granted options before January 1, 1987 in any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000 plus any unused limit carryover to such year, calculated in accordance with the provisions of Section 422A(c)(4) of the Code as it existed before enactment of the Tax Reform Act of 1986, P.L. No. 99-514. 4 5 (f) (2) 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 and granted after December 31, 1986 are 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 $100,000. (g) 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. (h) No option may be issued if exercise of all warrants, options and rights of the Company outstanding immediately after issuance of such option would result in the issuance of voting securities in excess of 20% of the Company's outstanding voting securities. (i) 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. (j) Any notices given in writing shall be deemed given if delivered in person or by certified mail; if given to the Company at Allied Capital Corporation, 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. (k) 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. (l) All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Company. 16. AMENDMENT AND TERMINATION The Board of Directors may modify, revise or terminate this Plan at any time and from time to time; provided, however, that no modification or revision of any material provision of this Plan may be made without shareholder approval except for such modifications or revisions which are necessary in order to ensure the options issued as incentive stock options under this Plan comply with Section 422 or any successor provision of the Code, applicable provisions of the Act or any exemptive order therefrom issued to the Company in connection with this Plan, Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or other applicable law. This Plan shall terminate when all shares reserved for issuance hereunder have been issued upon the exercise of options, by action of the Board of Directors pursuant to this paragraph, or on February 16, 2004, whichever shall first occur. 17. EFFECTIVE DATE OF THE PLAN This Plan shall become effective upon (1) adoption by the Board of Directors and (2) approval of this Plan by the shareholders of the Company. 18. AMENDMENT HISTORY Date of plan adoption by the Board of Directors May 6, 1983 Date of original plan approval by shareholders December 20, 1983 Date of amendment adoption by the Board of Directors November 12, 1987 Date of amendment adoption by the Board of Directors February 15, 1990 Date of amendment approval by shareholders May 17, 1990 5 6 Date of amendment adoption by the Board of Directors February 17, 1993 Date of amendment approval by shareholders May 6, 1993 Date of amendment adoption by the Board of Directors February 16, 1994 Date of amendment approval by shareholders May 5, 1994 Date of approval of Securities and Exchange Commission December 26, 1995 Date of amendment adoption by the Board of Directors February 14, 1996 6 EX-11 10 COMPUTATION. 1 EXHIBIT 11 Allied Capital Corporation and Subsidiaries Statement of Computation of Earnings Per Common Share For the Years Ended December 31, 1996, 1995 and 1994
For the Year Ended December 31, --------------------------------------- 1996 1995 1994 --------------------------------------- Primary Earnings Per Common Share: Net Increase in Net Assets Resulting from Operations $11,393,000 $15,317,000 $224,000 Less: Dividends for Preferred Stock (220,000) (220,000) (220,000) --------------------------------------- Net Increase in Net Assets Resulting from Operations Available to Common Shareholders $11,173,000 $15,097,000 $4,000 ======================================= Weighted average number of common shares outstanding 6,868,807 6,169,211 6,132,159 Weighted average number of common shares issuable on exercise of outstanding stock options 65,975 2,322 22,027 --------------------------------------- Weighted average number of common shares and common share equivalents outstanding 6,934,782 6,171,533 6,154,186 ======================================= Earnings per Common Share $1.61 $2.45 $0.00 ======================================= Fully Diluted Earnings Per Common Share: Net Increase in Net Assets Resulting from Operations $11,393,000 $15,317,000 $224,000 Less: Dividends for Preferred Stock (220,000) (220,000) (220,000) --------------------------------------- Net Increase in Net Assets Resulting from Operations Available to Common Shareholders $11,173,000 $15,097,000 $4,000 ======================================= Weighted average number of common shares and common share equivalents outstanding as computed for primary earnings per share 6,934,782 6,171,533 6,154,186 Weighted average of additional shares issuable on exercise of outstanding stock options 52,511 39,134 55 --------------------------------------- Weighted average number of common shares and common share equivalents outstanding, as adjusted 6,987,293 6,210,667 6,154,241 ======================================= Earnings per Common Share $1.60 $2.43 $0.00 =======================================
EX-13 11 ANNUAL REPORT 1 Allied Capital Corporation SHAREHOLDER INFORMATION CORPORATE OFFICE c/o Allied Capital Advisers, Inc. 1666 K Street, NW, 9th Floor Washington, DC 20006 Telephone: (202) 331-1112 Facsimile: (202) 659-2053 News-On-Demand: (888) 329-5519 Investor Relations: (202) 973-6334 Investor Relations E-mail: ir@alliedcapital.com Marketing: (202) 331-2439 Marketing E-mail: info@alliedcapital.com Internet Address: http://www.alliedcapital.com STOCK TRANSFER AGENT AND REGISTRAR Inquiries on transferring securities, replacing a lost or stolen certificate, participating in the Dividend Reinvestment Plan, requesting Direct Deposit information or processing a change of address should be directed to: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, NY 10005 In the United States: (800) 937-5449 Outside the United States: (212) 936-5100 E-mail: info@amstock.com Internet Address: http://www.amstock.com FORM 10-K REPORT A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders upon written request to the Investor Relations Department at the Company's corporate office. This information is also available on Allied Capital's Internet site: http://www.alliedcapital.com 1997 ANNUAL MEETING OF SHAREHOLDERS Montgomery Room at The Residence Inn by Marriott, 7335 Wisconsin Avenue, Bethesda, Maryland 20814 Thursday, May 1, 1997 10 a.m. (EST) All shareholders are welcome to attend. INDEPENDENT ACCOUNTANTS Matthews, Carter and Boyce, P.C. McLean, VA STOCK MARKET LISTING Allied Capital Corporation common stock is quoted on the Nasdaq National Market under the ticker symbol ALLC. Most newspapers list the Company's stock as "AlldCap." The Company has approximately 1,700 shareholders of record and 6,100 beneficial shareholders. DIVIDENDS AND DISTRIBUTIONS Generally, quarterly dividends on common stock are paid on the last business day of each quarter. The Company has also paid a fifth distribution at year-end since 1964. STOCK PRICE
High Low Close ---- --- ----- 1995 Q1 13.50 11.50 12.00 Q2 12 11.13 11.88 Q3 13.75 11.25 13.00 Q4 14.25 12.25 13.63 1996 Q1 14.25 13.00 13.25 Q2 14.38 13.00 13.75 Q3 16 13.50 15.38 Q4 16.63 15.25 15.75
TOTAL DISTRIBUTIONS PER SHARE
1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- 1.30 1.32 1.35 1.40 1.44 1.51
AVERAGE ANNUAL TOTAL RETURN (thousands)
$10,000 Investment on January 1, 1960 ------------------------------------- Year end Value -------- ----- 1960 $ 8,864 1961 7,023 1962 5,150 1963 6,972 1964 13,144 1965 17,802 1966 15,221 1967 19,820 1968 31,944 1969 34,467 1970 25,943 1971 38,783 1972 163,525 1973 80,801 1974 66,406 1975 80,075 1976 126,311 1977 132,028 1978 139,134 1979 174,350 1980 200,072 1981 206,417 1982 408,997 1983 792,568 1984 688,709 1985 839,079 1986 1,450,600 1987 1,460,738 1988 2,051,958 1989 2,244,823 1990 2,217,343 1991 2,897,497 1992 2,699,319 1993 2,932,000 1994 2,896,683 1995 3,351,479 1996 4,281,997
A $10,000 investment in Allied Capital Corporation in 1960 at its initial public offering, with all dividends reinvested, was worth $4,281,997 at the end of 1996, a 17.8% average annual total return over this period. 2 Allied Capital Corporation COMPANY PROFILE Allied Capital Corporation offers shareholders the opportunity to profit from a portfolio of long-term debt and equity investments in growing businesses nationwide. Managed by Allied Capital Advisers, Inc., the company seeks to provide current income and long-term capital appreciation for its shareholders. FINANCIAL HIGHLIGHTS
December 31, (in thousands, except per share amounts) 1996 1995 - ------------------------------------------------------------------------------------------ Total Investments at Value $116,608 $123,184 Total Assets $165,751 $148,268 Total Debt and Redeemable Preferred Stock $ 91,600 $ 83,800 Shareholders' Equity (Net Asset Value) $ 68,320 $ 57,181 Net Asset Value Available to Common Shareholders $ 62,320 $ 51,181 Net Increase in Net Assets Resulting from Operations $ 11,393 $ 15,317 Earnings Per Common Share $ 1.61 $ 2.45 Distributions Per Common Share $ 1.51 $ 1.44 Number of Common Shares Outstanding 7,299 6,198
Allied Capital Corporation 1 3 Allied Capital Corporation CONSOLIDATED COMPARISON OF FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Total tax distributions $ 10,726 $ 8,894 $ 8,595 $ 8,239 $ 8,027 Ordinary income per common share $ 0.20 $ 0.40 $ 0.31 $ -- $ 0.45 Net capital gains per common share 1.31 1.04 0.92 1.35 0.87 Return of capital per common share -- -- 0.17 -- -- ------------------------------------------------------------------- Total tax distributions per common share $ 1.51 $ 1.44 $ 1.40 $ 1.35 $ 1.32 - --------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Total investment income $ 15,865 $ 14,126 $ 12,216 $ 12,384 $ 11,335 Per common share $ 2.29 $ 2.29 $ 1.99 $ 2.02 $ 1.85 Net investment income $ 4,395 $ 3,332 $ 2,126 $ 2,300 $ 3,055 Per common share $ 0.63 $ 0.54 $ 0.35 $ 0.38 $ 0.50 Net realized gains on investments $ 10,497 $ 5,526 $ 3,394 $ 5,943 $ 4,507 Net unrealized appreciation (depreciation) on investments $ (3,499) $ 6,459 $ (5,296) $ 12,163 $ 694 Net realized gains and unrealized appreciation (depreciation) on investments $ 6,998 $ 11,985 $ (1,902) $ 18,106 $ 5,201 Per common share $ 1.01 $ 1.94 $ (0.31) $ 2.95 $ 0.85 Net increase in net assets resulting from operations $ 11,393 $ 15,317 $ 224 $ 20,406 $ 8,256 Per common share $ 1.64 $ 2.48 $ 0.04 $ 3.33 $ 1.35 Preferred stock dividends $ 220 $ 220 $ 220 $ 220 $ 220 Per common share $ 0.03 $ 0.03 $ 0.04 $ 0.04 $ 0.03 Net increase in net assets resulting from operations available to common shareholders $ 11,173 $ 15,097 $ 4 $ 20,186 $ 8,036 Per common share $ 1.61 $ 2.45 $ 0.00 $ 3.29 $ 1.32 Weighted average number of common shares and common share equivalents outstanding 6,935 6,172 6,154 6,128 6,111 - --------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Investments at value $ 116,608 $123,184 $ 115,026 $ 94,630 $ 78,470 Investments at cost $ 112,538 $115,615 $ 111,058 $ 88,224 $ 84,227 Total assets $ 165,751 $148,268 $ 135,517 $134,606 $124,823 Total debt and redeemable preferred stock $ 91,600 $ 83,800 $ 78,005 $ 70,800 $ 70,800 Shareholders' equity $ 68,320 $ 57,181 $ 49,987 $ 58,185 $ 45,991 Net asset value available to common shareholders $ 62,320 $ 51,181 $ 43,987 $ 52,185 $ 39,991 Per common share $ 8.54 $ 8.26 $ 7.15 $ 8.54 $ 6.57 Per common share market value at end of year $ 15.75 $ 13.63 $ 13.13 $ 14.75 $ 14.50 Common shares outstanding at end of year 7,299 6,198 6,153 6,109 6,090
Allied Capital Corporation 9 4 Allied Capital Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 1996, Allied Capital Corporation (Company) offered a total of 885,448 shares of common stock pursuant to a one-for-seven non-transferable rights offering. Shareholders participating in the rights offering purchased 663,710 shares at $13.11 per share. The Company received net proceeds of $8.3 million, net of expenses. During the year, the weighted average shares outstanding increased by 12% as a result of this rights offering. In order to fund its investments in small businesses, the Company has cash, a line of credit with a commercial bank, a commitment from the Overseas Private Investment Corporation (OPIC), a note with an insurance company, debentures from the Small Business Administration (SBA) and other sources. The Company had total cash available at year end 1996 of $44.9 million and available credit facilities of $111.9 million, of which $90.6 million was outstanding. The underlying agreements for $81.3 million of the Company's debt require prepayment penalties if any principal payments are made prior to maturity, therefore the Company does not intend to prepay this debt. In 1997, $7 million of debentures payable to the SBA will mature. If the Company has sufficient resources to meet its operating needs at the time the debentures mature, the Company will repay this debt. If repaid, it is uncertain whether the Company would be able to obtain additional financing from the SBA in the future, as the Company is unable to predict the SBA's ability to meet demands for leverage requests on an ongoing basis. At December 31, 1996, outstanding commitments for future financings by the Company were $5.1 million. Given the balance of cash available at December 31, 1996 and the available credit facilities, the Company believes that it has adequate capital to continue to satisfy its operating needs, commitments and other future investment opportunities that may arise throughout 1997. RESULTS OF OPERATIONS COMPARISON OF 1996 AND 1995 The net increase in net assets resulting from operations was $11.4 million, or $1.61 per common share, for the year ended December 31, 1996, compared to $15.3 million, or $2.45 per common share, for the same period in 1995. Net realized gains on investments were $10.5 million for 1996, a 90% increase over $5.5 million in 1995. During 1996, the Company successfully liquidated certain equity investments and received early payoffs of loans in its portfolio. Since net gains are realized when the Company sells or otherwise liquidates its investments, profit from gains may vary significantly from year to year. The investments that generated the 1996 net realized gains had previously been valued by the board of directors such that the Company had recorded net unrealized appreciation totaling $4.2 million, or $0.61 per common share. When the investments were liquidated in 1996, the profit resulting from the net gains was reduced by an offsetting decrease in net unrealized appreciation for the $4.2 million previously recorded. The Company recorded portfolio appreciation of $0.7 million for the year resulting from the valuations as determined by the board of directors. Total investment income increased 12% to $15.9 million for 1996 as compared to $14.1 million for 1995. Interest income increased by $2.1 million, or 18%, to $14.0 million in 1996, compared to $11.9 million in 1995, due to an increase in loan discount amortization and the early recognition of loan fees on early repayments. The Company also received prepayment penalties totaling $126,000 in 1996 as compared to $60,000 in 1995, which are included in other income. Dividend income for 1996 increased 4% over 1995 primarily from an increased dividend distribution from Allied Capital Lending Corporation (Allied Lending). Other income for the year ended December 31, 1995 included non-recurring income of $327,000 resulting from litigation costs incurred in prior periods which were recovered during 1995. Allied Capital Corporation 10 5 Allied Capital Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS Total expenses increased $0.7 million to $11.5 million in 1996 as compared to $10.8 million in 1995. Interest expense increased 12% to $7.6 million in 1996 from $6.7 million in 1995 as a result of the Company's outstanding borrowings increasing to $90.6 million at December 31, 1996 from $82.8 million at December 31, 1995. The Company's investment advisory fee of $2.9 million for 1996 was 5% higher than the fee of $2.8 million for 1995. Other expenses decreased 23% for 1996 as compared to 1995. This decline resulted from a decline in legal costs related to litigation that was resolved in late 1994. Distributions to common shareholders for 1996 were $10.7 million. The Company's taxable income of $1.51 per common share differed significantly from its net investment income before net unrealized appreciation (depreciation) on investments of $2.11 per common share due to timing differences in the recognition of income for tax purposes versus financial reporting purposes. The distributions were comprised of taxable ordinary and net capital gain income. COMPARISON OF 1995 AND 1994 Net increase in net assets resulting from operations was $15.3 million for the year ended December 31, 1995 as compared to $224,000 for the same period in 1994. Earnings per common share increased to $2.45 per common share from a breakeven level for the same period in 1994. Total investment income increased 16% from $12.2 million in 1994 to $14.1 million in 1995. Interest income increased by $1.5 million or 14% to $11.9 million in 1995, compared to $10.4 million in 1994, due to a net increase in loans and debt securities outstanding. Dividend income declined by $190,000 or 11% to $1.5 million in 1995 as compared to $1.7 million in 1994, primarily due to the distribution of 335,086 shares of Allied Lending stock in January 1995. Total expenses increased 7% from $10.1 million in 1994 to $10.8 million in 1995. Interest expense grew due to the net increase in SBA subordinated debentures of $6.5 million in late September 1995 and a full year of interest charges on the $7 million of similar debentures issued in September 1994. Investment advisory fee expense increased due to the growth of the Company's portfolio of investments and other assets upon which the investment advisory fee is based. Legal and accounting fees in 1995 were down from the prior year as the Company settled various legal matters in late 1994, which required significant legal resources in that year. Net realized gains on investments increased 63% to $5.5 million from $3.4 million for the years ended December 31, 1995 and 1994, respectively. The increase in net realized gains resulted from the disposition of equity securities and early payoffs of investments. Net unrealized appreciation was $6.5 million in 1995 as compared to net unrealized depreciation of $5.3 million in 1994. Taxable distributions to common shareholders for 1995 of $8.9 million, or $1.44 per common share, approximated the net investment income before net unrealized appreciation (depreciation) on investments. The distributions were comprised of taxable ordinary and net capital gain income. INVESTMENT PORTFOLIO Total investments decreased by $6.6 million or 5% to $116.6 million at December 31, 1996 from $123.2 million at December 31, 1995. The Company invested $40.5 million in small business concerns in 1996, a 47% increase over the $27.6 million invested in 1995. New investments in 1996 included $8.7 million of debt and equity financings for international projects. These financings were funded with the Company's OPIC credit facility. As a result of declining interest rates and the greater flow of capital into the marketplace, investment exits and repayments totaled $43.6 million in 1996 as compared to $25.9 million in 1995. For the year ended December 31, 1996, the Company's portfolio experienced net depreciation of $3.5 million due to various factors including the sale of certain investments which resulted in realized gains. The Company owns 844,914 shares, or approximately 16% of Allied Lending's common stock outstanding at December 31, 1996. Prior to Allied Lending's public offering in November 1993, Allied Lending was a wholly owned subsidiary of the Company. The Company, pursuant to a condition of exemptive relief from the Securities and Exchange Commission (Commission), must divest itself of the currently owned shares by December 31, 1998 through public offerings, private placements, distributions to the Company's shareholders or otherwise. Allied Lending has registered the shares owned by the Company. The Company sold 400,000 shares of Allied Lending stock in 1996, and will continue its divestiture. Allied Capital Corporation 11 6 Allied Capital Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS FACTORS AFFECTING THE COMPANY'S BUSINESS Nature of Investments. Consistent with its operation as a business development company, the Company's portfolio is expected to consist primarily of securities issued by small and developing, privately-held companies. Typically, such companies each depend for their success on the management talents and efforts of one person, so that the death, disability or resignation of such person could have a materially adverse impact on the companies. Moreover, smaller companies frequently have narrower product lines and smaller market shares than larger companies and therefore may be more vulnerable to competitors' actions and market conditions, as well as general economic downturns. Because these companies will generally have highly leveraged capital structures, reduced cash flow resulting from an adverse competitive development, shift in customer preferences, or an economic downturn may adversely affect the return on, or the recovery of, the Company's investment in them. Investment in such companies therefore involves a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. Foreign Investments. The Company's investments in OPIC-qualifying small businesses are generally made in countries representing the world's emerging or developing markets. At December 31, 1996, 8% of the Company's total investments were in foreign investments. Foreign investments involve risks not ordinarily associated with domestic investing, including: (1) possible imposition of market controls; (2) possible seizure, expropriation or nationalization of assets; (3) lower liquidity and higher volatility in certain foreign markets; (4) the impact of political, social or diplomatic events; and (5) the possibility that a foreign government could restrict the ability of an entity in which the Company has invested from meeting its obligations under borrowings or other arrangements. The Company intends to take steps to reduce or eliminate certain of the above risks by diversifying its OPIC-related investments by country and type of business, as well as by purchasing insurance through OPIC to protect the Company against many of these risks when deemed necessary. Long-term Character of Investments. It is expected that investments made in accordance with the Company's investment objective will usually yield a current return from the time they are made, but will generally produce a profit, if any, from an accompanying equity feature only after five to eight years. There can be no assurance that either a current return or capital gains will actually be achieved. Illiquidity. Most of the Company's investments consist of securities acquired directly from the issuers in private transactions. They are usually subject to restrictions on resale or otherwise illiquid. There is usually no established trading market for such securities into which they could be sold. In addition, most of the securities are not eligible for sale to the public without registration which would involve delay and expense. Competition. A large number of entities and individuals compete for the opportunity to make the kinds of investments made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered to be prudent in light of the risks to be assumed. Statements included in this report concerning the Company's future prospects are "forward looking statements" under the Federal securities laws. There can be no assurance that future results will be achieved and actual results could differ materially from forecasts and estimates. Allied Capital Corporation 12 7 Allied Capital Corporation CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------------- December 31, (in thousands, except number of shares) 1996 1995 - ---------------------------------------------------------------------------------------------------------------- ASSETS Investments at Value: Loans and debt securities (cost: 1996--$97,805; 1995--$98,119) $ 90,581 $ 90,377 Equity securities (cost: 1996--$14,610; 1995--$15,039) 25,896 31,600 Other investment assets (cost: 1996--$123; 1995--$2,457) 131 1,207 ---------------------- Total investments 116,608 123,184 Cash and cash equivalents 44,915 22,743 Other assets 4,228 2,341 ---------------------- Total assets $165,751 $148,268 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving line of credit $ -- $ 1,500 Debentures and notes payable 90,600 81,300 Dividends and distributions payable 2,988 3,808 Accrued interest payable 1,696 1,469 Investment advisory fee payable 742 722 Other liabilities 405 1,288 ---------------------- 96,431 90,087 ---------------------- Redeemable preferred stock 1,000 1,000 ---------------------- Commitments and Contingencies Shareholders' Equity: Preferred stock of wholly owned subsidiary, $100 par value, 200,000 shares authorized; 60,000 shares issued and outstanding at December 31, 1996 and 1995 6,000 6,000 Common Stock, $1 par value, 10,000,000 shares authorized; 7,299,091 and 6,198,138 shares issued and outstanding at December 31, 1996 and 1995 7,299 6,198 Additional paid-in capital 54,440 41,491 Notes receivable from sale of common stock (3,759) (401) Net unrealized appreciation on investments 4,070 7,569 Undistributed (distributions in excess of) accumulated earnings 270 (3,676) ---------------------- Total shareholders' equity 68,320 57,181 ---------------------- Total liabilities and shareholders' equity $165,751 $148,268 ======================
The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 13 8 Allied Capital Corporation CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Investment Income: Interest $ 13,996 $11,897 $ 10,401 Dividends 1,618 1,556 1,746 Other income 251 673 69 ---------------------------------- Total investment income 15,865 14,126 12,216 ---------------------------------- Expenses: Interest expense 7,566 6,735 6,333 Investment advisory fee 2,933 2,799 2,356 Legal and accounting fees 552 654 977 Other operating expenses 419 606 424 ---------------------------------- Total expenses 11,470 10,794 10,090 ---------------------------------- Net investment income 4,395 3,332 2,126 Net realized gains on investments 10,497 5,526 3,394 ---------------------------------- Net investment income before net unrealized appreciation (depreciation) on investments 14,892 8,858 5,520 Net unrealized appreciation (depreciation) on investments (3,499) 6,459 (5,296) ---------------------------------- Net increase in net assets resulting from operations $ 11,393 $15,317 $ 224 ================================== Earnings per common share $ 1.61 $ 2.45 $ 0.00 ================================== Weighted average number of common shares and common share equivalents outstanding 6,935 6,172 6,154 ==================================
The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 14 9 Allied Capital Corporation CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Increase in Net Assets Resulting from Operations: Net investment income $ 4,395 $ 3,332 $ 2,126 Net realized gains on investments 10,497 5,526 3,394 Net unrealized appreciation (depreciation) on investments (3,499) 6,459 (5,296) ---------------------------------- Net increase in net assets resulting from operations 11,393 15,317 224 ---------------------------------- Distributions to Shareholders from: Net investment income (1,407) (2,110) (705) Excess of net investment income -- (355) (1,216) Net capital gains (9,319) (6,429) (4,595) Excess of net capital gains -- -- (1,035) Return of capital (tax) -- -- (1,044) Preferred stock dividends (220) (220) (220) ---------------------------------- Net decrease in net assets resulting from distributions to shareholders (10,946) (9,114) (8,815) ---------------------------------- Capital Share Transactions: Sale of common stock 8,264 -- -- Net (increase) decrease in notes receivable from sale of common stock (3,358) 415 (50) Issuance of common stock upon the exercise of stock options 4,445 -- 200 Issuance of common stock in lieu of cash distributions 1,341 576 243 ---------------------------------- Net increase in net assets resulting from capital share transactions 10,692 991 393 ---------------------------------- Total increase (decrease) in net assets 11,139 7,194 (8,198) Net assets at beginning of year 57,181 49,987 58,185 ---------------------------------- Net assets at end of year 68,320 57,181 49,987 Preferred stock of wholly owned subsidiary (6,000) (6,000) (6,000) ---------------------------------- Net asset value available to common shareholders $ 62,320 $51,181 $43,987 ================================== Net asset value per common share $ 8.54 $ 8.26 $ 7.15 ================================== Common shares outstanding at end of year 7,299 6,198 6,153 ==================================
The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 15 10 Allied Capital Corporation CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net increase in net assets resulting from operations $ 11,393 $ 15,317 $ 224 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net unrealized (appreciation) depreciation on investments 3,499 (6,459) 5,296 Write-off of investments 6,685 3,337 2,006 Net realized gains on investments (17,182) (8,863) (5,400) Interest income -- -- (1,159) Amortization of loan discounts (982) (728) (409) Changes in assets and liabilities: Other assets (1,887) 1,331 (255) Accrued interest payable 227 76 110 Investment advisory fee payable 20 64 249 Other liabilities (883) (276) 1,215 ------------------------------------- Net cash provided by operating activities 890 3,799 1,877 ------------------------------------- Cash Flows from Investing Activities: Investments in small business concerns (40,496) (27,551) (35,748) Purchase of U.S. government securities -- (14,957) (37,448) Payments on loans and debt securities and other investment assets 35,252 19,111 12,504 Net proceeds from sale of equity securities 19,800 9,268 2,677 Redemption of U.S. government securities -- 25,208 39,281 Payments on notes receivable from sale of common stock 201 415 150 ------------------------------------- Net cash provided by (used in) investing activities 14,757 11,494 (18,584) ------------------------------------- Cash Flows from Financing Activities: Sale of common stock 9,150 -- -- Common dividends and distributions paid (10,205) (4,734) (8,027) Preferred stock dividends (220) (220) (220) Proceeds from issuance of long-term debt 9,300 14,000 7,000 Payments on long-term debt -- (7,500) (2,000) Net borrowings under (payments on) revolving line of credit (1,500) (705) 2,205 ------------------------------------- Net cash provided by (used in) financing activities 6,525 841 (1,042) ------------------------------------- Net increase (decrease) in cash and cash equivalents 22,172 16,134 (17,749) Cash and cash equivalents, beginning of year 22,743 6,609 24,358 ------------------------------------- Cash and cash equivalents, end of year $ 44,915 $ 22,743 $ 6,609 ===================================== Supplemental Disclosure of Cash Flow Information Noncash investing and financing activities: Issuance of common stock upon the exercise of stock options $ 3,559 $ -- $ 200 Issuance of common stock in lieu of cash distributions $ 1,341 $ 576 $ 243 Issuance of Allied Capital Lending Corporation common stock in lieu of cash distributions $ -- $ 3,686 $ -- Interest paid $ 7,339 $ 6,659 $ 6,223
The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 16 11 Allied Capital Corporation CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------ Company's Name (State) December 31, 1996 (Type of Business) Investments Cost Value - ------------------------------------------------------------------------------------------------------------------ (in thousands, except number of shares) Loans With Equity - --------------------------------------------------------------------------------------------------------------- Acme Paging, L.P. (IL) Loans and Debt Securities $ 4,116 $ 4,116 (South American paging service) Limited Partnership Interest (1.3%) 1,040 1,040 - --------------------------------------------------------------------------------------------------------------- AGPAL Broadcasting, Inc. (OR) Loans and Debt Securities 928 928 (radio stations) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Allied Capital Lending Corporation (MD) (1,3) Common Stock (844,914 shares) (4) 2,045 11,375 (business development company) - --------------------------------------------------------------------------------------------------------------- American Barbecue & Grill (KS) Loans and Debt Securities 2,121 2,121 (restaurants) Warrants 71 71 - --------------------------------------------------------------------------------------------------------------- ASW Holding Corporation (IL) Loans and Debt Securities 1,883 1,883 (steel wool manufacturer) Warrants 53 428 - --------------------------------------------------------------------------------------------------------------- Au Bon Pain Co., Inc. (MA) (1) Loans and Debt Securities 3,432 3,432 (bakery, cafes) Warrants (4) 109 0 - --------------------------------------------------------------------------------------------------------------- Bellefonte Lime Co. (PA) (3) Common Stock (2,869 shares) 16 800 (mineral quarry & production) - --------------------------------------------------------------------------------------------------------------- Brazos Sportswear, Inc. (OH) Loans and Debt Securities 1,871 1,871 (manufacturer and distributor of sportswear) Common Stock (27,137 shares) 198 198 Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Celebrities, Inc. (FL) Loans and Debt Securities 388 388 (radio station) Warrants 12 12 - --------------------------------------------------------------------------------------------------------------- CeraTech Holdings, Inc. (IL) Loans and Debt Securities 1,167 577 (ceramic plate manufacturer) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Cherry Tree Toys, Inc. (OH) Loans and Debt Securities 1,075 1,075 (direct marketer of woodcrafts) Common Stock (117 shares) 0 0 - --------------------------------------------------------------------------------------------------------------- CitiPostal, Inc. (NY) Convertible Preferred Stock (courier network) Series B (30,500 shares) 289 5 - --------------------------------------------------------------------------------------------------------------- Consumer Health Services, Inc. (CO) Convertible Preferred Stock (medical/dental consumer information service) (127,940 shares) 180 0 - --------------------------------------------------------------------------------------------------------------- Convenience Corporation of America (NE) Loans and Debt Securities 4,127 4,127 (convenience stores) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Contemporary Media, Inc. (ID) Loans and Debt Securities 557 557 (radio stations) Warrants 204 263 - --------------------------------------------------------------------------------------------------------------- Cooper Natural Resources, Inc. (TX) Loans and Debt Securities 2,058 2,058 (sodium sulfate producer) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Csabai Canning Factory Rt. (Hungary) Loans and Debt Securities 3,036 3,036 (canning factory) Common Stock (700,000 shares) 700 700 - --------------------------------------------------------------------------------------------------------------- DEH Printed Circuits, Inc. (IL) Warrants 133 192 (circuit board manufacturer) - ---------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Restricted public security The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 17 12 Allied Capital Corporation CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------ Company's Name (State) December 31, 1996 (Type of Business) Investments Cost Value - ------------------------------------------------------------------------------------------------------------------ (in thousands, except number of shares) DeVlieg-Bullard, Inc. (CT) (1) Warrants (4) $ 207 $ 323 (tool manufacturer) - --------------------------------------------------------------------------------------------------------------- Directory Investment Corporation (DC) (3) Common Stock (470 shares) 0 0 (telephone directories) - --------------------------------------------------------------------------------------------------------------- Directory Lending Corporation (DC) (3) Common Stock Series A (1,031 shares) 1 0 (telephone directories) Common Stock Series B (188 shares) 961 0 Common Stock Series C (292 shares) 1,340 0 Preferred Stock Series A (798 shares) 400 585 Preferred Stock Series B (175 shares) 325 0 Preferred Stock Series C (58 shares) 0 0 - --------------------------------------------------------------------------------------------------------------- DMI Furniture, Inc. (KY) (1) Convertible Preferred Stock (furniture manufacturer) (199,920 shares) (4) 500 1,012 - --------------------------------------------------------------------------------------------------------------- El Dorado Communications, Inc. (CA) Loans and Debt Securities 3,987 3,987 (radio stations) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Enviroplan, Inc. (NJ) (2) Loans and Debt Securities 2,464 513 (emissions monitoring systems) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Esquire Communications, Ltd. (NY) (1) Warrants (4) 3 0 (court reporting services) - --------------------------------------------------------------------------------------------------------------- Fairchild Industrial Products Company (NC) Loans and Debt Securities 3,367 3,367 (industrial controls and power transmissions) Warrants 168 168 - --------------------------------------------------------------------------------------------------------------- Genoa Mine Acquisition Corp. (OH) (3) Common Stock (20 shares) 44 800 (limestone mining) - --------------------------------------------------------------------------------------------------------------- Grant Broadcasting Systems II (FL) Warrants 78 1,344 (television stations) - --------------------------------------------------------------------------------------------------------------- Grant Television, Inc. (FL) Loans and Debt Securities 4,107 4,107 (television stations) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Gulf South Medical Supply, Inc. (MS) (1) Loans and Debt Securities 334 334 (medical supplies distributor) Warrants (4) 65 65 - --------------------------------------------------------------------------------------------------------------- Innotech, Inc. (VA) (1) Warrants (4) 29 0 (bifocal lens manufacturer) - --------------------------------------------------------------------------------------------------------------- Julius Koch USA, Inc. (MA) Loans and Debt Securities 2,745 2,745 (cord manufacturer) Warrants 194 194 - --------------------------------------------------------------------------------------------------------------- Kirker Enterprises, Inc. (NJ) Loans and Debt Securities 2,078 2,078 (nail enamel manufacturer) Warrants 203 203 - --------------------------------------------------------------------------------------------------------------- Kirkland's, Inc. (TN) Loans and Debt Securities 3,501 3,501 (retailer of home products) Warrants 54 54 - --------------------------------------------------------------------------------------------------------------- Labor Ready, Inc. (WA) (1) Common Stock (165,242 shares) 1,477 2,183 (temporary labor services) - --------------------------------------------------------------------------------------------------------------- Liberty Business Forms & Systems, Inc. (NY) Loans and Debt Securities 1,904 1,904 (inventory control tags and forms) Warrants 57 57 - ---------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Restricted public security The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 18 13 Allied Capital Corporation CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
- --------------------------------------------------------------------------------------------------------------- Company's Name (State) December 31, 1996 (Type of Business) Investments Cost Value - --------------------------------------------------------------------------------------------------------------- (in thousands, except number of shares) Love Mortgage Co. (DC) Series D Preferred Stock (26,000 shares) $ 360 $ 297 (real estate mortgages) Warrants 200 0 - --------------------------------------------------------------------------------------------------------------- Midview Associates, L.P. (VA) Loans and Debt Securities 199 199 (residential land development) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- Mill-It Striping, Inc. (FL) Warrants 125 0 (highway paint striping) - --------------------------------------------------------------------------------------------------------------- MLX/SinterMet Corp. (GA) (1) Common Stock (5,835 shares-MLX) 241 78 (friction materials manufacturer) - --------------------------------------------------------------------------------------------------------------- Nobel Education Dynamics, Inc. (PA) (1) Preferred Stock (99,734 shares) (4) 750 855 (educational services) Warrants (4) 0 122 - --------------------------------------------------------------------------------------------------------------- Old Mill Holdings, Inc. (PA) (2) Loans and Debt Securities 648 448 (custom embroidered apparel) Warrants 45 0 - --------------------------------------------------------------------------------------------------------------- The Peerless Group, Inc. (TX) (1) Common Stock (126,235 shares) (4) 6 699 (commercial banking software development) Warrants (4) 4 1,001 - --------------------------------------------------------------------------------------------------------------- PIATL Holdings, Inc. (NJ) (3) Loans and Debt Securities 190 190 (environmental consulting) Preferred Stock (276 shares) 160 90 Common Stock (36 shares) 0 0 - --------------------------------------------------------------------------------------------------------------- Pico Products, Inc. (CA) (1) Loans and Debt Securities 3,000 3,000 (manufacturer of satellite/ Warrants (4) 0 0 television components) - --------------------------------------------------------------------------------------------------------------- Quality Software Products Holdings, Common Stock (52,908 shares) 504 188 PLC (UK) (1) (accounting software) - --------------------------------------------------------------------------------------------------------------- Radio One of Atlanta, Inc. (GA) Loans and Debt Securities 2,457 2,457 (radio stations) Warrants 0 0 - --------------------------------------------------------------------------------------------------------------- R-Tex Decoratives Company, Inc. (PA) Loans and Debt Securities 836 836 (decorative ribbon manufacturer) Warrants 32 32 - --------------------------------------------------------------------------------------------------------------- Spa Lending Corporation (DC) (3) Preferred Stock Series A (5,826 shares) 423 423 (health spas) - --------------------------------------------------------------------------------------------------------------- Taco Tico, Inc. (KS) (2) Loans and Debt Securities 1,064 130 (Mexican fast food restaurant) Warrants 28 0 - --------------------------------------------------------------------------------------------------------------- Total Foam, Inc. (CT) (2,3) Loans and Debt Securities 1,617 113 (packaging systems) Common Stock (910 shares) 57 0 - --------------------------------------------------------------------------------------------------------------- Visu-Com, Inc. (MD) (3) Loans and Debt Securities 2,250 1,250 (visual communications products) Preferred Stock (22,425 shares) 223 0 Common Stock (135 shares) 54 0 - --------------------------------------------------------------------------------------------------------------- West Virginia Radio Corporation (WV) Loans and Debt Securities 527 527 (radio station) Warrants 200 0 - ---------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Restricted public security The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 19 14 Allied Capital Corporation CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
- --------------------------------------------------------------------------------------------------------------- Company's Name (State) December 31, 1996 (Type of Business) Investments Cost Value - --------------------------------------------------------------------------------------------------------------- (in thousands, except number of shares and number of loans) Williams Brothers Lumber Company (GA) Loans and Debt Securities $ 278 $ 278 (builders' supply yards) Warrants 15 15 - --------------------------------------------------------------------------------------------------------------- Wincapp Broadcasting, Inc. (PA) Loans and Debt Securities 699 699 (radio station) Warrants 23 23 - --------------------------------------------------------------------------------------------------------------- Z-Spanish Radio Network (CA) Loans and Debt Securities 7,161 7,161 (radio stations) Warrants 3 3 - --------------------------------------------------------------------------------------------------------------- Subtotal $ 86,781 $ 91,891 - --------------------------------------------------------------------------------------------------------------- Loans With No Equity By Industry - --------------------------------------------------------------------------------------------------------------- Auto Repair Shops (6 loans) $ 1,133 $ 1,133 - --------------------------------------------------------------------------------------------------------------- Doughnut Shops (3 loans) 574 574 - --------------------------------------------------------------------------------------------------------------- Drycleaners (2 loans) 485 485 - --------------------------------------------------------------------------------------------------------------- Heating Contractor (1 loan) 267 267 - --------------------------------------------------------------------------------------------------------------- Hotels/Motels (3 loans) 3,771 3,771 - --------------------------------------------------------------------------------------------------------------- HVAC Distributor (1 loan) 439 439 - --------------------------------------------------------------------------------------------------------------- Limestone Mining (1 loan) 659 992 - --------------------------------------------------------------------------------------------------------------- Liquor Store (1 loan) 524 524 - --------------------------------------------------------------------------------------------------------------- Moving/Storage Company (1 loan) 264 264 - --------------------------------------------------------------------------------------------------------------- Pet Products Manufacturer (1 loan) 3,538 3,538 - --------------------------------------------------------------------------------------------------------------- Pizza Shops (5 loans) 560 337 - --------------------------------------------------------------------------------------------------------------- Radio Stations (8 loans) 8,264 8,264 - --------------------------------------------------------------------------------------------------------------- Small Appliances Distributor (1 loan) 250 250 - --------------------------------------------------------------------------------------------------------------- Sporting Goods Manufacturer (1 loan) 2,248 2,248 - --------------------------------------------------------------------------------------------------------------- Cold Food Storage Warehouse (1 loan) (2) 1,309 538 - --------------------------------------------------------------------------------------------------------------- Wholesale Food Distributor (1 loan) 232 232 - --------------------------------------------------------------------------------------------------------------- Other (12 loans) 1,117 730 - --------------------------------------------------------------------------------------------------------------- Subtotal $ 25,634 $ 24,586 - --------------------------------------------------------------------------------------------------------------- Other Investment Assets (5) $ 123 $ 131 - --------------------------------------------------------------------------------------------------------------- Total $112,538 $116,608 ===============================================================================================================
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Restricted public security; (5) Non-income producing The accompanying notes are an integral part of these financial statements. Allied Capital Corporation 20 15 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. Allied Capital Corporation (the Company) is a closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940 (1940 Act). The Company seeks to achieve current income by providing debt, mezzanine and equity financing primarily for small privately-owned growth companies, and through long-term growth on the value of its net assets. The Company has two wholly owned, registered investment company subsidiaries, Allied Investment Corporation (Allied Investment) and Allied Capital Financial Corporation (Allied Financial). Allied Investment and Allied Financial are licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC) and a Specialized Small Business Investment Company (SSBIC), respectively. The Company has an investment advisory agreement with Allied Capital Advisers, Inc. (Advisers) whereby Advisers manages the investments of the Company subject to the supervision and control of the Company's board of directors. Certain directors and officers of Advisers are also directors and officers of the Company. CO-INVESTMENTS. Investments made by the Company are made in participation with a separately organized public closed-end management investment company and two private venture capital partnerships, which are also managed by Advisers in accordance with various exemptive orders issued to the Company by the Securities and Exchange Commission (Commission) permitting co-investments. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany balances and transactions. VALUATION OF INVESTMENTS. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. Cash and cash equivalents are carried at cost which approximates fair value. INTEREST AND DIVIDEND INCOME. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Loan fees and original issue discount are amortized into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. REALIZED GAINS OR LOSSES AND UNREALIZED APPRECIATION OR DEPRECIATION ON INVESTMENTS. Realized gains or losses are measured by the difference between the net proceeds from the sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the change in the valuation of the portfolio. DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are recorded on the ex-dividend date. FEDERAL INCOME TAXES. The Company and its wholly owned subsidiaries' objectives are to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company and its wholly owned subsidiaries annually distribute all of their taxable income to their shareholders; therefore, a federal income tax provision is not required. Allied Capital Corporation 21 16 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition, no provision for deferred income taxes has been made for the unrealized appreciation on investments since the Company and its wholly owned subsidiaries intend to continue to annually distribute all of their taxable income. Dividends declared by the Company in December to shareholders of record on a specified date in such month, but paid during January of the following year, are treated as if the dividends were received by the shareholders on December 31 of the year declared. EARNINGS PER COMMON SHARE. Earnings are defined as the net investment income, net realized gains on investments and net unrealized appreciation or depreciation on investments and are reduced by the preferred stock dividend requirements. The computation of earnings per common share is based on the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect in years where there are earnings. CASH AND CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. At December 31, cash and cash equivalents consisted of the following:
- --------------------------------------------------------- (in thousands) 1996 1995 - --------------------------------------------------------- Cash $ -- $ 802 Repurchase agreements 44,915 21,941 ------------------- Total $44,915 $22,743 =================== - ---------------------------------------------------------
On December 31, 1996, the Company had purchased $44,915,000 of overnight repurchase agreements collateralized by U.S. government securities under agreements to resell on January 2, 1997. Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held for the Company by the bank. RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and 1994 financial statements to conform with the 1996 financial statement presentation. NOTE 2. INVESTMENTS Loans and debt securities have stated interest rates ranging generally from 8 percent to 16 percent, and are generally payable in installments with final maturities from 5 to 10 years from date of issue. At December 31, 1996 and 1995, loans and debt securities with a cost basis of $8,852,000 and $13,084,000, respectively, were not accruing interest. The investments of the Company and its subsidiaries consist primarily of securities issued by privately-owned companies. A majority of the securities held by the Company are subject to restrictions on their resale or are otherwise illiquid and cannot be sold to the public without registration under the Securities Act of 1933. All of the Company's equity securities are non-income producing except for its investments in Allied Capital Lending Corporation (Allied Lending), DMI Furniture Inc., and Quality Software Products Holdings, PLC. Dividends from Allied Lending were $1,586,000, $1,519,000, and $1,706,000 for 1996, 1995 and 1994, respectively. The following industries represent five percent or more of the total value of the investments outstanding at December 31:
- ------------------------------------------------------ 1996 1995 - ------------------------------------------------------ Broadcasting 27% 23% Manufacturing/construction 33% 24% Business development company 10% 12% Retail 14% 13% Service 8% 18% Software 2% 5% - ------------------------------------------------------
Allied Capital Corporation 22 17 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net unrealized appreciation for all securities over cost for federal income tax purposes at December 31:
- ------------------------------------------------------ (in thousands) 1996 1995 - ------------------------------------------------------ Aggregate gross unrealized appreciation in which there is an excess of value over cost $ 17,444 $ 23,925 Aggregate gross unrealized depreciation in which there is an excess of cost over value (12,374) (18,257) ------------------ Net unrealized appreciation $ 5,070 $ 5,668 ================== - ------------------------------------------------------
The aggregate cost of securities at December 31, 1996 and 1995 for federal income tax purposes was $111,538,000 and $117,516,000, respectively. NOTE 3. INVESTMENT ADVISORY AGREEMENT The Company has an investment advisory agreement with Advisers that is approved at least annually by the board of directors or by vote of the holders of a majority of the outstanding shares of the Company. The agreement may be terminated at any time on sixty days' notice, without penalty, by the Company's board of directors or by vote of the holders of a majority of the Company's outstanding common shares and will terminate automatically in the event of its assignment. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments, legal and accounting fees, the fees and expenses of the Company's independent directors and the fees of its officer-directors, the costs of printing and mailing proxy statements and reports to shareholders costs associated with promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or management assistance. As compensation for its services to and the expenses paid for the account of the Company, Advisers is paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a fee was paid equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company, interim investments (i.e., U.S. government securities) and cash and cash equivalents, plus 0.125 percent per quarter of the quarter-end value of consolidated interim investments, cash and cash equivalents. These fees on an annual basis approximate 2.5 percent on consolidated invested assets and 0.5 percent on consolidated interim investments, cash and cash equivalents. In the first quarter of 1995 and in 1994, Advisers was entitled to a fee equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company and consolidated cash and cash equivalents in excess of $2,000,000 in working capital. NOTE 4. DIVIDENDS AND DISTRIBUTIONS The Company's board of directors declared and the Company paid a $0.31 per common share dividend for the fourth quarter, a $0.29 per common share dividend for the third quarter, a $0.27 per common share dividend for the second quarter and a $0.26 per common share dividend for the first quarter of 1996. The Company's board of directors also declared an extra distribution in the fourth quarter of $0.38 per common share, which was paid to shareholders on January 31, 1997, for a total distribution in 1996 equal to $1.51 per common share. Allied Capital Corporation 23 18 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the dividends and distributions of taxable income declared by the board of directors for 1996, 1995 and 1994 were as follows:
- ------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 Per Per Per (in thousands, except per share amounts) Amount Share Amount Share Amount Share - ------------------------------------------------------------------------------------------------------------------ Ordinary income $ 1,407 $0.20 $2,465 $0.40 $1,921 $0.31 Long-term capital gains 9,319 1.31 6,429 1.04 5,630 0.92 Return of capital (tax) -- -- -- -- 1,044 0.17 ------------------------------------------------------------- Total distributions $10,726 $1.51 $8,894 $1.44 $8,595 $1.40 ============================================================= - ------------------------------------------------------------------------------------------------------------------
The 1996 distributions of $1.51 per common share were comprised of cash payments and issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan in the amounts of $1.34 and $0.17, respectively. The 1995 distributions of $1.44 per common share were comprised of cash payments and issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan in the amounts of $1.28 and $0.16, respectively. The 1994 distributions of $1.40 per common share were comprised of cash payments, issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan, and the distribution of shares of Allied Lending in the amounts of $0.76, $0.04, and $0.60, respectively. Amounts represent the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual common shares outstanding on the record date for each dividend paid. The following represents a reconciliation from taxable income to income for financial reporting purposes for the years ended December 31:
- -------------------------------------------------------------------------- (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------- Taxable income $10,946 $ 9,114 $ 7,771 Market discount amortization 807 -- (807) Net realized gains (losses) 2,531 185 (1,049) Net unrealized appreciation (depreciation) on investments (3,499) 6,459 (5,296) Other 608 (441) (395) ---------------------------------- Financial statement income 11,393 15,317 224 Preferred stock dividends (220) (220) (220) ---------------------------------- Amount available for common stockholders $11,173 $15,097 $ 4 ================================== - --------------------------------------------------------------------------
As required by the 1940 Act, the Company is not permitted to make distributions to shareholders unless it meets certain asset coverage requirements with respect to money borrowed and senior securities issued. The Company is in compliance with these requirements. The Company's wholly owned subsidiaries annually distribute all of their taxable income to the Company. In order to make such distributions, the subsidiaries must meet the minimum capital requirements as set forth by the SBA. The subsidiaries are in compliance with these requirements. NOTE 5. DEBT LINE OF CREDIT. The Company has a revolving line of credit agreement with a bank under which it may borrow up to $10,000,000, which bears interest at a rate of one-month LIBOR plus 2.5 percent per annum, payable monthly, and expires on September 30, 1998. As of December 31, 1996 and 1995, the interest on the line of credit was 8.0 percent and 8.2 percent per annum, respectively. The Company must pay an annual commitment fee of $12,500 and a quarterly facility fee of 0.125 percent per annum on the unused portion of the line of credit. As of December 31, 1996, the Company had $10,000,000 available under the revolving line of credit agreement. NOTES. The Company has $20,000,000 of notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The notes are scheduled to mature over a five-year period commencing in 1998 with annual principal payments of $4,000,000. Allied Capital Corporation 24 19 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) LOAN. On April 10, 1995, the Company entered into a loan agreement with OPIC under which the Company may borrow up to $20,000,000 (loan commitment) to provide financing for international projects involving qualifying U.S. small businesses. Loans under this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the applicable period of the borrowing. In addition, OPIC is entitled to receive from the Company a contingent fee at maturity of the loan equal to five percent of the return generated by the OPIC-related investments in excess of seven percent. There are no required principal payments until the OPICloans mature in January 2006. The loan commitment expires on the earlier of the first date on which the amount of the loans equal $20,000,000 or April 10, 1998. As of December 31, 1996, the Company had $11,300,000 available under the loan agreement. SMALL BUSINESS ADMINISTRATION (SBA) DEBENTURES. Debentures are payable to the SBA and represent amounts borrowed pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1996 were as follows:
- ------------------------------------------------------ Year Ending Amount December 31, (in thousands)Interest Rates - ------------------------------------------------------ 1997 $ 7,000 7.950%-10.350% 1998 6,650 8.875%- 9.800% 1999 -- 2000 17,300 8.700%- 9.600% 2001 9,350 9.080% Thereafter 21,000 6.875%- 8.200% ------- Total $61,300 ======= - ------------------------------------------------------
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. NOTE 6. PREFERRED STOCK As of December 31, 1996, Allied Financial had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. Allied Financial has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. NOTE 7. SHAREHOLDERS' EQUITY The Company issued to the common shareholders at the close of business on January 22, 1996, the record date, non-transferable subscription rights that entitled record date shareholders to subscribe for and purchase from the Company up to one authorized, but unissued share of the Company's common stock for each seven subscription rights held. The Company offered a total of 885,448 shares of common stock pursuant to this offer. Shareholders who fully exercised their subscription rights were entitled to the additional privilege of subscribing for shares from the offering not acquired by exercise of subscription rights. The subscription price per common share was $13.11, which equaled 95 percent of the average of the last reported sale price of a share of common stock on the Nasdaq National Market on February 27, 1996 (the expiration date of the offer) and each of the four preceding business days. Shareholders participating in the offering subscribed for 411,961 shares through the primary subscription and 251,749 shares through the oversubscription privilege for a total of 663,710 shares. The Company received net proceeds of $8,264,000 from the rights offering after expenses of $437,000, including a 2.5 percent commission paid to eligible broker/dealers on each share sold as a result of their soliciting efforts. During 1994, the Company paid $1,044,000 in distributions that represented a return of capital for tax purposes. This was charged to additional paid-in capital. The Company has a dividend reinvestment plan (the Plan). Shareholders of record may enroll in the Plan at any time. The Company may instruct the stock transfer agent to buy shares in the open market, or the Company may issue new shares. When the Company issues new shares, the price is equal to the average of the closing sales prices reported for the shares for the five days on which trading in the shares Allied Capital Corporation 25 20 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS takes place immediately prior to and including the dividend payment date. During 1996, the Company issued 93,254 shares at an average price of $14.38 per share. During 1995, the Company issued 45,435 shares at an average price of $12.72 per share. The Company has an incentive stock option plan (the ISOplan) which allows the granting of options to the Company's officers and directors. Under the ISO plan as amended, a maximum of 1,350,000 options may be granted at a price not less than the market value on the date of the grant and may be exercisable over a ten year period. Holders of ten percent or more of the Company's stock must exercise their options within a five-year period. Officers of the Company may borrow from the Company the funds necessary to exercise vested stock options. The loans have varying terms not exceeding ten years and bear interest at the applicable federal interest rate in effect at the date of issue. A summary of the activity in the plan is as follows:
- --------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- Options outstanding at January 1 839,387 701,473 686,847 Options granted 162,135 332,800 50,000 Options exercised (343,989) -- (25,382) Options canceled (45,470) (194,886) (9,992) ------------------------------------------------- Options outstanding at December 31 612,063 839,387 701,473 ================================================= Options available for grant 45,471 162,136 300,050 Options exercisable 379,357 602,824 521,487 ------------------------------------------------- Option prices per share: Granted $ 13.63 $12.38-13.63 $ 14.13 Exercised $13.50-16.38 -- $ 7.34- 8.53 Canceled $12.38-13.63 $12.05-16.50 $14.00-16.50 ------------------------------------------------- - ---------------------------------------------------------------------------
The Company accounts for the ISO plan as required by APB Opinion No. 25, and no compensation cost has been recognized. Had compensation cost for the plan been determined consistent with SFAS No. 123, the Company's net increase in net assets resulting from operations and earnings per common share would have been reduced to the following pro forma amounts for the years ended December 31:
- ------------------------------------------------------------------- (in thousands, except per share amounts) 1996 1995 - ------------------------------------------------------------------- Net increase in net assets resulting from operations: As reported $11,393 $15,317 Pro forma (unaudited) $11,218 $14,861 Earnings per common share: As reported $ 1.61 $ 2.45 Pro forma (unaudited) $ 1.59 $ 2.37 - -------------------------------------------------------------------
Because the method of accounting required by SFAS No. 123 has not been applied to options granted prior to January 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants; risk-free interest rates of 6.4 and 6.0 percent for 1996 and 1995; expected dividend yield of 9 percent for 1996 and 1995; expected life of 5 years for all options granted in 1996 and 1995; expected volatility of 31 percent for 1996 and 1995, respectively. NOTE 8. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding to various prospective and existing portfolio companies totaling $5,116,000 at December 31, 1996. At December 31, 1996, the Company had standby letters of credit and third party guarantees outstanding totaling $433,000. The conditional commitments under the letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. The Company's revolving line of credit has been used as collateral for one of the letters of credit totaling $168,000. Allied Capital Corporation 26 21 Allied Capital Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is party to certain lawsuits in connection with its business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial condition of the Company. NOTE 9. CONCENTRATIONS OF CREDIT RISK The Company and its subsidiaries place their cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. NOTE 10. DISPOSITION OF SUBSIDIARY The Company owned all of the outstanding capital stock of Allied Lending prior to consummation of the initial public offering of Allied Lending shares in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending shares was reduced to 1,580,000 shares, or approximately 36 percent of the Allied Lending shares outstanding at December 31, 1993. The Company declared an extra dividend in December 1994 and distributed on January 6, 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending shares to 1,244,914 shares, or approximately 28 percent of the Allied Lending shares then outstanding. On December 26, 1996 the Company sold 400,000 Allied Lending shares through a private placement, which further reduced its ownership to 844,914 shares, or approximately 16 percent of the Allied Lending shares then outstanding. The Company will attempt to divest itself of all shares of Allied Lending by December 31, 1998. NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------- 1996 (in thousands, except per share amounts) Qtr 1 Qtr 2 Qtr 3 Qtr 4 - ---------------------------------------------------------------------------------------------------------------------------- Total investment income $3,752 $ 4,303 $3,437 $4,373 Net investment income $ 982 $ 1,377 $ 748 $1,288 Net increase (decrease) in net assets resulting from operations $4,442 $ (366) $5,705 $1,612 Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase (decrease) in net assets resulting from operations available to common shareholders $4,387 $ (421) $5,650 $1,557 Per common share $ 0.69 $ (0.06) $ 0.80 $ 0.22 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- 1995 Qtr 1 Qtr 2 Qtr 3 Qtr 4 - ---------------------------------------------------------------------------------------------------------------------------- Total investment income $3,549 $ 3,229 $3,564 $3,784 Net investment income $ 881 $ 504 $ 899 $1,048 Net increase in net assets resulting from operations $2,134 $ 7,196 $3,089 $2,898 Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase in net assets resulting from operations available to common shareholders $2,079 $ 7,141 $3,034 $2,843 Per common share $ 0.34 $ 1.16 $ 0.49 $ 0.46 - ----------------------------------------------------------------------------------------------------------------------------
Allied Capital Corporation 27 22 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Allied Capital Corporation We have audited the consolidated balance sheet of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1996 and 1995, including the consolidated statement of loans and investments as of December 31, 1996, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 1996, and the selected per share data presented as financial highlights for each of the five years in the period ended December 31, 1996. These financial statements and per share data are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and per share data based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and per share data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the examination or confirmation of securities owned at December 31, 1996 and 1995. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the examination or confirmation of securities owned at December 31, 1996 and 1995. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and selected per share data referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 1996, and the selected per share data for each of the five years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include securities valued at $116,608,000 as of December 31, 1996 and $123,184,000 as of December 31, 1995, (70 percent and 83 percent, respectively, of total assets) whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. /s/ Matthews, Carter and Boyce McLean, Virginia February 4, 1997 Allied Capital Corporation 28 23 Allied Capital Corporation DIRECTORS AND OFFICERS*
DIRECTORS OFFICERS William L. Walton(1) William L. Walton Kelly A. Anderson Chairman of the Board & Chairman of the Board & Vice President, Corporate Controller & Chief Executive Officer Chief Executive Officer Assistant Treasurer G. Cabell Williams III(1) G. Cabell Williams III Christina L. DelDonna President & Chief Operating Officer President & Chief Operating Officer Vice President & Assistant Controller Joseph A. Clorety III(2,3) Jon A. DeLuca Robert M. Monk President, Clorety and Company, Inc. Executive Vice President, Treasurer & Vice President Chief Financial Officer Michael I. Gallie(1,2,3) Penni F. Roll Principal, The Millennium Group Katherine C. Marien Vice President, Controller & Executive Vice President Assistant Treasurer David Gladstone John M. Scheurer Suzanne V. Sparrow Warren K. Montouri(2,3) Executive Vice President Vice President, Investor Relations & Investor Assistant Secretary George Stelljes III Guy T. Steuart II(1,3) Executive Vice President Gay S. Truscott President, Steuart Investment Company Vice President Joan M. Sweeney T. Murray Toomey(1) Executive Vice President Peter C. Fisher Attorney at Law Assistant Vice President Thomas H. Westbrook George C. Williams Executive Vice President Kristine M. Lansing Financial Consultant Assistant Vice President & Tricia B. Daniels Assistant Secretary (1) Executive Committee Senior Vice President &Secretary (2) Audit Committee Donna B. Natale (3) Compensation Committee Richard E. Fearon, Jr. Assistant Vice President & Senior Vice President Assistant Secretary *As of March 1, 1997 Philip A. McNeill Arthur S. Cooper Senior Vice President Assistant Secretary Carr T. Preston Thomas R. Salley III Senior Vice President Assistant Secretary
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS The following table sets forth the high and low bid prices of the Company's common stock by calendar quarter during 1996 and 1995 and the distributions per common share. The quotations represent interdealer quotations and do not include markups, markdowns or commissions and may not necessarily represent actual transactions.
- ----------------------------------------------------------------------------------------------- 1996 1995 DISTRIBUTIONS DISTRIBUTIONS HIGH LOW PER SHARE HIGH LOW PER SHARE - ----------------------------------------------------------------------------------------------- FIRST QUARTER $14.25 $13.00 $0.26 $13.50 $11.50 $0.20 SECOND QUARTER $14.38 $13.00 $0.27 $12.00 $11.13 $0.20 THIRD QUARTER $16.00 $13.50 $0.29 $13.75 $11.25 $0.22 FOURTH QUARTER $16.63 $15.25 $0.31 $14.25 $12.25 $0.24 ANNUAL EXTRA DISTRIBUTION $0.38 $0.58 ----- ----- TOTAL DISTRIBUTION $1.51 $1.44 ===== =====
Designed by Curran & Connors, Inc. EX-23 12 CONSENT OF INDEPENDANT ACCOUNTANTS 1 EXHIBIT 23 [MATTHEWS, CARTER AND BOYCE LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS As independent accountants we hereby consent to the incorporation by reference in the registration statement on Form S-8 File No. 33-78394, of our report dated February 4, 1997 incorporated by reference in Allied Capital Corporation's Form 10-K for the year ended December 31, 1996 and to all references to our Firm included in such registration statement. /s/ MATTHEWS, CARTER AND BOYCE McLean, Virginia March 27, 1997 2 [MATTHEW, CARTER AND BOYCE LETTERHEAD] CONSENT OF INDEPENDENT ACCOUNTANTS As independent accountants we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 4, 1997 included in Allied Capital Corporation's Annual Report to shareholders. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ MATTHEWS, CARTER AND BOYCE McLean, Virginia March 27, 1997 EX-27 13 FINANCIAL DATA SCHEDULE.
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN FORM 10-K. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 112,538 116,608 0 4,228 44,915 165,751 0 90,600 5,831 96,431 13,299 50,681 7,299 6,198 270 0 0 0 4,070 68,320 1,618 13,996 251 11,470 4,395 10,497 (3,499) 11,393 0 1,627 9,319 0 1,008 0 93 11,139 (3,676) 0 355 0 2,933 7,566 11,470 62,750 8.26 0.63 1.01 0.20 1.31 0 8.54 0 86,700 11.88
EX-28 14 FINANCIAL STATEMENTS. 1 EXHIBIT 28 OMB Approval No. 3245-0063 Expiration Date ANNUAL FINANCIAL REPORT ON SBA FORM 468 (CORPORATE SBICs) - -------------------------------------------------------------------------------- NAME OF LICENSEE: Allied Investment Corporation 03/04-0003 - -------------------------------------------------------------------------------- STREET ADDRESS: 1666 K Street, N.W. - 9th Floor - -------------------------------------------------------------------------------- CITY, STATE AND ZIP CODE: Washington DC 20006 - -------------------------------------------------------------------------------- COUNTY: - -------------------------------------------------------------------------------- EMPLOYER ID NUMBER: 52-1081051 - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED: 12/31/96 - -------------------------------------------------------------------------------- SUMMARY INFORMATION: --------------- A B C --------------- 5 3 1 --------------- A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION 2 = $1 MILLION TO LESS THAN $2 MILLION 3 = $2 MILLION TO LESS THAN $5 MILLION 4 = $5 MILLION TO LESS THAN $10 MILLION 5 = $10 MILLION OR MORE B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"): 1 = AT LEAST 50% OWNED BY BANK OR BHC 2 = AT LEAST 10% AND LESS THAN 50% OWNED BY BANK OR BHC OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK OR BHC): 3 = PUBLICLY OWNED 4 = PRIVATELY OWNED OWNED BY NON-FINANCIAL CORPORATION: 5 = PUBLICLY OWNED 6 = PRIVATELY OWNED OWNED BY INDIVIDUALS: 7 = PUBLICLY OWNED 8 = PRIVATELY OWNED OWNED BY PARTNERSHIP 9 = PUBLICLY OWNED 10 = PRIVATELY OWNED C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED 2 = NON-DIVERSIFIED (SIC CODE____) NOTE: Public reporting burden for this collection of information is estimated to average 17 hours per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: Chief, Administrative Information Branch, U.S. Small Business Administration, Washington, DC 20416, and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503. SBA Form 468.1 (1-95) Previous editions obsolete Page 1C 2 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003
UNREALIZED UNREALIZED ASSETS COST DEPRECIATION APPRECIATION VALUE(1) ------ ----------------------------------------------------------- LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4) - --------------------- Portfolio Securities: 1 Loans 9,388,465 1 332,566 9,721,030 ------------ ----------- ----------- ------------ 2 Debt Securities 38,881,037 5,304,050 1 33,576,988 ------------ ----------- ----------- ------------ 3 Equity Securities 7,727,768 2,646,489 5,874,481 10,955,760 ------------ ----------- ----------- ------------ 4 TOTAL PORTFOLIO SECURITIES 55,997,270 7,950,540 6,207,048 54,253,778 ------------ ----------- ----------- ------------ Assets Acquired in Liquidation of Portfolio Securities: 5 Receivables from Sale of Assets Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 6 Assets Acquired 115,454 98,954 0 16,500 ------------ ----------- ----------- ------------ 7 TOTAL ASSETS ACQUIRED 115,454 98,954 0 16,500 ------------ ----------- ----------- ------------ 8 Operating Concerns Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 9 Notes and Other Securities Received 1,462,410 376,862 107,369 1,192,917 ------------ ----------- ----------- ------------ 10 TOTAL LOANS AND INVESTMENTS 57,575,134 8,426,356 6,314,417 55,463,195 ------------ ----------- ----------- ------------ 11 Less Current Maturities 4,008,787 ------------ 12 Loans and Investments Net of Current Maturities 51,454,408 ------------ Investment in 301(d) Licensee (2): 13 Name 0 ----------------------------------- ------------ License No. ---------------- CURRENT ASSETS -------------- 14 Cash and Cash Equivalents 19,114,819 ----------- 15 Invested Idle Funds 0 19,114,819 ----------- ----------- 16 Interest and Dividends Receivable 852,432 ----------- 17 Notes and Accounts Receivable 363,615 ----------- 18 Receivables from Parent or Other Associates 6,275 ----------- 19 Less: Allowance for Losses (lines 16, 17 & 18) 82,554 1,139,768 ----------- ----------- 20 Current Maturities of Portfolio Securities 4,008,787 ----------- 21 Current Maturities of Assets Acquired 0 ----------- 22 Current Maturities of Operating Concerns Acquired 0 ----------- 23 Current Maturities of Other Securities 0 4,008,787 ----------- ----------- 24 Other (specify) 0 -------------------------- ----------- 25 Other (specify) 0 24,263,374 ------------------------- ----------- ------------ OTHER ASSETS ------------ 26 a. Furniture and Equipment 0 ----------- b. Less: Accumulated Depreciation 0 0 ------------ ----------- 27 Other (specify) Loan Fees Unamortized 643,976 -------------------------- ----------- 28 Other (specify) Prepaid Expenses & other 13,474 657,450 -------------------------- ----------- ------------ 29 TOTAL ASSETS $76,375,232 ------------
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized Depreciation + Unrealized Appreciation = Value) (2) A note to item 13 should include percent owned, cost basis and changes resulting from equity method of accounting. SBA Form 468.1 (1-95) Previous editions obsolete Page 2C 3 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003 LIABILITIES AND CAPITAL ----------------------- LONG-TERM DEBT (Net of Current Maturities) - ------------------------------------------ 30 Notes and Debentures Payable to or Guaranteed by SBA 37,350,000 ----------- 31 Notes and Debentures Payable to Others 3,433,334 40,783,334 ----------- ------------ CURRENT LIABILITIES - ------------------- 32 Accounts Payable and Accrued Expenses 22,373 ----------- 33 Due to Parent or Other Associates 45,951 ----------- 34 Accrued Interest Payable 936,054 ----------- 35 Accrued Taxes Payable 0 ----------- 36 a. Current Maturities of Line 30 5,000,000 ----------- b. Current Maturities of Line 31 0 5,000,000 ----------- ----------- 37 Distributions Payable 2,394,096 ----------- 38 Short-term Notes Payable/Lines of Credit 0 ----------- 39 Other(specify) 0 ------------------------- ----------- 40 Other(specify) 0 8,398,474 ------------------------- ----------- ------------ OTHER LIABILITIES - ----------------- 41 Deferred Credits 565,970 ----------- 42 Other(specify) 0 ------------------------- ----------- 43 Other(specify) 0 565,970 ------------------------- ----------- ------------ 44 TOTAL LIABILITIES 49,747,778 ------------ REDEEMABLE SECURITIES (guaranteed or purchased by SBA) - ------------------------------------------------------ 45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 0 ----------- b. Cumulative Undeclared 4% Dividends 0 0 ----------- ----------- 46 TOTAL REDEEMABLE SECURITIES 0 ------------ CAPITAL - ------- 47 Capital Stock 61 ------------ 48 Paid-in Surplus 15,187,920 15,187,981 ------------ ----------- 49 Restricted Contributed Capital Surplus 0 ----------- 50 Capital Stock and Surplus 15,187,981 ----------- 51 3% Preferred Stock Purchased by SBA 0 ----------- 52 Unrealized Gain (Loss) on Securities Held -2,111,940 ----------- 53 Non-Cash Gains/Income 1,695,375 ----------- 54 Undistributed Net Realized Earnings: a. Restricted (Equal to Cost of Treasury Stock) 0 ------------ b. Unrestricted 11,856,038 ------------ c. Total (54a plus 54b) 11,856,038 ----------- 55 Undistributed Realized Earnings (53 plus 54c) 13,551,413 ----------- 56 Total 26,627,454 ------------ 57 Less: Cost of Treasury Stock 0 ------------ 58 TOTAL CAPITAL 26,627,454 ------------ 59 TOTAL LIABILITIES, REDEEMABLE SECURITIES AND CAPITAL (lines 44 plus 46 plus 58) $76,375,232 ------------
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C 4 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF OPERATIONS REALIZED FOR 12 MONTHS ENDED 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003 INVESTMENT INCOME - ----------------- 1 Interest Income 5,901,035 ---------- 2 Dividend Income 31,331 ---------- 3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0 ---------- 4 Income (Loss) from Investment in Section 301(d) Licensee 0 ---------- 5 Fees for Management Services 0 ---------- 6 Processing and Other Fees 19,592 ---------- 7 Interest on Invested Idle Funds 825,813 ---------- 8 Income from Assets Acquired in Liquidation of Loans and Investments (net of 0 Expenses) 0 -------- ---------- 9 Other Income 6,665 ---------- 10 GROSS INVESTMENT INCOME 6,784,436 ----------- EXPENSES - -------- 11 Interest Expense 3,940,373 ---------- 12 Commitment Fees 0 ---------- 13 Other Financial Cost 0 ---------- 14 Officers' Compensation and Benefits 0 ---------- 15 Employee Compensation and Benefits 0 ---------- 16 Investment Advisory and Management Services 0 ---------- 17 Directors' and Stockholders' Meetings 0 ---------- 18 Advertising and Promotion 0 ---------- 19 Appraisal and Investigation 0 ---------- 20 Communication 0 ---------- 21 Travel 1,781 ---------- 22 Cost of Space Occupied 0 ---------- 23 Depreciation and Amortization 0 ---------- 24 Insurance 5,706 ---------- 25 Payroll Taxes 0 ---------- 26 Other Taxes (excluding income taxes) 1,307 ---------- 27 Provision for Losses on Receivables (excluding loans receivable) 343,876 ---------- 28 Legal Fees 98,444 ---------- 29 Audit and Examination Fees 16,591 ---------- 30 Miscellaneous Expenses (attach schedule) 8,041 ---------- 31 TOTAL EXPENSES 4,416,119 ----------- 32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,368,317 ----------- 33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 761,856 ----------- 34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 3,130,173 ----------- 35 Income Tax Expense (Benefit) 0 ----------- 36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $3,130,173 ----------- 37 Extraordinary Item 0 -------------------- ----------- 38 Cumulative Effect of Change in Accounting Principle 0 ----------- 39 NET INCOME (LOSS) $3,130,173 -----------
(1)Include CHARGE-OFFS (full or partial) of loans and investments which represent realized losses. DO NOT INCLUDE valuation adjustments classified as unrealized appreciation or depreciation. Provide supporting detail for all realized gains and losses on page 14C of this form. SBA Form 468.1 (1-95) Previous editions obsolete Page 4C 5 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/96 (page 1 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar) OPERATING ACTIVITIES: - --------------------- CASH INFLOWS: 1 Interest Received from Portfolio Concerns 4,473,547 ---------- 2 Dividends Received from Portfolio Concerns 23,831 ---------- 3 Other Returns on Capital Received from Portfolio Concerns 0 ---------- 4 Management Services and Other Fees Received 386,525 ---------- 5 Interest on Invested Idle Funds 827,175 ---------- 6 Cash Received from Assets Acquired in Liquidation 0 ---------- 7 Other Operating Cash Receipts 297,432 ---------- CASH OUTFLOWS: 8 Interest Paid 3,788,348 ---------- 9 Commitment Fees and Other Financial Costs 0 ---------- 10 Investment Advisory and Management Fees 0 ---------- 11 Officers, Directors and Employees Compensation and Benefits 0 ---------- 12 Operating Expenditures (excluding compensation and benefits) 150,041 ---------- 13 Income Taxes Paid 0 ---------- 14 Other Operating Cash Disbursements 99,429 ---------- 15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,970,692 ----------- INVESTING ACTIVITIES: - --------------------- Cash Inflows: 16 Loan Principal Payments Received from Portfolio Concerns 20,433,368 ---------- 17 Returns of Capital Received from Portfolio Concerns 195,684 ---------- 18 Net Proceeds from Disposition of Portfolio Securities 5,077,541 ---------- 19 Liquidation of Idle Funds Investments 0 ---------- 20 Other (Specify) 0 ------------------------- ---------- Cash Outflows: 21 Purchase of Portfolio Securities 2,142,559 ---------- 22 Loans to Portfolio Concerns 19,983,547 ---------- 23 Idle Funds Investments 0 ---------- 24 Other (Specify) 0 -------------------------- ---------- 25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,580,487 ----------- FINANCING ACTIVITIES: - --------------------- Cash Inflows: 26 Proceeds from Issuance of SBA-Guaranteed Debentures 0 ---------- 27 Proceeds from Sale of 4% Preferred Stock 0 ---------- 28 Proceeds from Non-SBA Borrowing 600,000 ---------- 29 Proceeds from Sale of Stock 2,100,000 ---------- 30 Other (Specify) 0 -------------------------- ---------- Cash Outflows: 31 Principal Payments on SBA-Guaranteed Debentures 0 ---------- 32 Principal Payments on Non-SBA Borrowing 0 ---------- 33 Redemption of 4% Preferred Stock 0 ---------- 34 Redemption of 3% Preferred Stock 0 ---------- 35 Redemption of Stock (excluding 3% and 4% Preferred) 0 ---------- 36 Dividends Paid 1,833,519 ---------- 37 Other (Specify) 0 -------------------------- ----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C 6 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/96 (page 2 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar) 38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 866,482 ----------- 39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,417,661 ----------- 40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,697,158 ----------- 41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $19,114,819 ----------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED - -------------------------------------------------------- BY (USED IN) OPERATING ACTIVITIES: - ---------------------------------- 42 Net Income (Loss) (page 4C, line 39) 3,130,173 ---------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: 43 Depreciation and Amortization 0 ---------- 44 Provision for Losses on Accounts Receivable 343,876 ---------- 45 Provision for Deferred Income Taxes 0 ---------- 46 (Income) Loss from Investments in Partnerships/Flow-through Entities (excluding income received in cash) 0 ---------- 47 Realized (Gains) Losses on Investments -761,856 ---------- 48 Other (Specify) OID -301,672 ------------------------- ---------- Changes in Operating Assets and Liabilities Net of Noncash Items: 49 (Increase) Decrease in Interest and Dividends Receivable -836,516 ---------- 50 (Increase) Decrease in Other Current Assets 401,420 ---------- 51 Increase (Decrease) in Accounts Payable -18,170 ---------- 52 Increase (Decrease) in Accrued Interest Payable 49,136 ---------- 53 Increase (Decrease) in Accrued Taxes Payable 0 ---------- 54 Increase (Decrease) in Dividends Payable 0 ---------- 55 Increase (Decrease) in Other Current Liabilities -115,445 ---------- 56 Other (Specify) Deferred Credits 79,746 ------------------------ ---------- 57 Other (Specify) 0 ------------------------ ---------- 58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,970,692 ----------
Supplemental disclosure of non-cash financing and investing activities is required. See FASB Statement No. 95, paragraph 32. SBA Form 468.1 (1-95) Previous editions obsolete Page 6C 7 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Allied Investment Corporation (the Company), a wholly owned subsidiary of Allied Capital Corporation (Parent), is a closed-end management investment company under the Investment Company Act of 1940. The Company is licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC). The Company seeks to achieve a high level of current income by providing debt, mezzanine and equity financing for small privately owned growth companies, and through long-term growth on the value of its net assets. Valuation of Investments. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. Cash and cash equivalents are carried at cost which approximates fair value. Interest and Dividend Income. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When collection of interest is in doubt, interest is not accrued or a reserve is established. Loan fees and original issue discount are amortized into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Realized Gains or Losses and Unrealized Appreciation or Depreciation on Investments. Realized gains or losses are measured by the difference between the proceeds from the sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the change in the valuation of the portfolio. Distributions to the Parent. Distributions to the Parent are recorded on the ex-dividend date. Federal Income Taxes. The Company's objective is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company annually distributes all of its taxable income to the Parent; therefore, a federal income tax provision is not required. 8 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 In addition, no provision for deferred income taxes has been made for the unrealized appreciation on investments since the Company intends to continue to annually distribute all of its taxable income. Dividends declared by the Company in December, but paid during January of the following year, are treated as if the dividends were received by the Parent on December 31 of the year declared. Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. NOTE 2. INVESTMENTS Loans and debt securities have stated interest rates ranging generally from 8 percent to 16 percent, and are generally payable in installments with final maturities from 5 years to 10 years from date of issue. There were no accrued interest reserves at December 31, 1996. The following loans and debt securities were not accruing interest at December 31, 1996:
AGGREGATE AMOUNT OF INTEREST NOT DATE INTEREST ACCRUED AT ACCRUAL NET DECEMBER 31, PORTFOLIO SECURITY DISCONTINUED COST 1996 ------------------ ------------ ---- ---- INTEREST NOT ACCRUED: Enviroplan 7/1/96 $ 1,936,801 $ 358,613 Enviroplan 7/1/96 529,966 112,997 Medifit 11/1/94 123,109 223,389 Old Mill 9/22/95 542,577 95,087 Old Mill 9/22/95 114,952 19,352 SunStates Refrigerated Services 12/21/94 15,315 3,783 Total Foam 7/1/93 240,292 107,288
9 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
AGGREGATE AMOUNT OF INTEREST NOT DATE INTEREST ACCRUED AT ACCRUAL NET DECEMBER 31, PORTFOLIO SECURITY DISCONTINUED COST 1996 ------------------ ------------ ---- ---- Total Foam 7/1/93 241,899 106,250 Total Foam 7/1/93 36,000 15,300 Total Foam 7/1/93 45,504 87,240 Total Foam 7/1/93 239,216 106,250 Total Foam 7/1/93 250,000 107,404 Total Foam 7/1/93 250,000 106,250 Total Foam 7/1/93 119,764 50,899 Total Foam 7/1/93 193,118 85,000 -------------- --------------- Total $ 4,878,513 $ 1,585,102 ============== ===============
NOTE 3. INVESTMENT ADVISORY SERVICES The Company's investments are managed by Allied Capital Advisers, Inc. ("Advisers"), an independent publicly traded registered investment adviser. Certain officers of the Company are also officers in Advisers. Pursuant to an advisory agreement with the Parent, Advisers manages the day-to-day activities of the Parent and its wholly owned subsidiaries. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. In exchange, Advisers is reimbursed for its costs incurred in connection with the above through an investment advisory fee paid by the Parent. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments and legal and accounting fees. The Company is required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in 10 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or management assistance. NOTE 4. DIVIDENDS The Company's board of directors declared a dividend of $2,394,096 for the year ended December 31, 1996, which was paid January 30, 1997. This represented all of the Company's taxable income. Pursuant to SBA regulations, retained earnings available for distribution at December 31, 1996 were sufficient to pay this dividend. NOTE 5. DEBT Line of Credit. The Parent, the Company and Allied Capital Financial Corporation have a joint revolving line of credit agreement with a bank under which they may borrow up to a total of $10,000,000, which bears interest at a rate of one-month LIBOR plus 2.5 percent per annum, payable monthly, and expires on September 30, 1998. As of December 31, 1996 the interest on the line of credit was 8.0 percent per annum. As of December 31, 1996, $10,000,000 was available under the revolving line of credit agreement. Notes. The Company has $2,833,333 of notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The notes are scheduled to mature over a five-year period commencing in 1998, with annual principal payments of $566,667. Small Business Administration (SBA) Debentures. Debentures are payable to the SBA and represent amounts borrowed pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1996 were as follows: 11 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
Year Amounts Interest Rates ---- ------- -------------- 1997 $ 5,000,000 7.950% - 10.350% 1998 4,650,000 9.625% - 9.800% 1999 --- --- 2000 7,700,000 8.700% - 9.600% 2001 6,000,000 9.080% thereafter 19,000,000 6.875% - 8.200% ----------- $42,350,000 ===========
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. Unsecured Notes. The Company is offering up to $50,000,000 in unsecured notes to banks ("Lender") which qualify as either a "community development loan" or a "qualified investment" under Community Reinvestment Act (CRA) regulations. The notes are being offered in multiples of $100,000 and the offering terminates December 25, 1997. These unsecured notes expire five years from the date of issuance and pay interest, quarterly in arrears, at the ninety day treasury rate, adjusted monthly, from the date of issuance until the loan proceeds are invested in a small business located in the Lender's CRA assessment area. Once invested, the notes bear a fixed rate of interest equal to the five year Treasury rate. In addition, the Lender is entitled to receive additional interest equal to ten percent of the net realized profits generated by the investment(s) made with the loan from that Lender. The additional interest is calculated and paid annually. If the Company has not invested the note proceeds in the Lender's CRA assessment area within two years of the note date, the Lender's note will be repaid at par plus accrued and unpaid interest. At December 31, 1996, the Company had outstanding borrowings of $600,000 which were paying interest at 5.15 percent and will expire December 30, 2001. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding to various prospective and existing portfolio companies totaling $2,386,055 at December 31, 1996. At December 31, 1996, the Company had standby letters of credit and third party guarantees outstanding totaling $432,595. The conditional commitments under the letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. The Company's revolving line of credit has been used as collateral for one of the letters of credit totaling $168,000. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. NOTE 7. CONCENTRATIONS OF CREDIT RISK The Company places its cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. 12 OMB Approval No. 3245-0063 Expiration Date ANALYSIS OF STOCKHOLDERS' EQUITY AS OF 12/31/96 (page 1 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar)
Part I. CAPITAL STOCK AND PAID-IN SURPLUS CAPITAL PAID-IN --------------------------------- STOCK SURPLUS TOTAL (excluding capital contributed by SBA) ----- ------- ----- (pg 3C, line 47) (pg 3c, line 48) 1 BALANCE AT BEGINNING OF PERIOD 56 16,198,920 16,198,976 ------------ ----------- ----------- 2 ADDITIONS: a. Capital stock issued for cash 5 2,099,995 2,100,000 ------------ ----------- ----------- b. Capital stock issued for services rendered 0 0 0 ------------ ----------- ----------- c. Capital stock Issued for contributed non-cash assets 0 0 0 ------------ ----------- ----------- d. Capitalization of Retained Earnings Available for Distribution 0 0 0 ------------ ----------- ----------- e. Gain on sale of Treasury Stock 0 0 0 ------------ ----------- ----------- f. Other credits (specify) 0 0 0 ---------------- ------------ ----------- ----------- 3 Total additions (sum of 2a through 2f) 5 2,099,995 2,100,000 ------------ ----------- ----------- 4 Subtotal (line 1 plus line 3) 61 18,298,915 18,298,976 ------------ ----------- ----------- 5 DEDUCTIONS: a. Retirement of capital stock 0 0 0 ------------ ----------- ----------- b. Distributions in partial liquidation 0 0 0 ------------ ----------- ----------- c. Loss on sale of Treasury Stock 0 0 0 ------------ ----------- ----------- d. Other debits (specify) Excess distributions 0 3,110,995 3,110,995 -------------------- ------------ ----------- ----------- 6 Total Deductions (sum of 5a through 5d) 0 3,110,995 3,110,995 ------------ ----------- ----------- 7 BALANCE AT END OF PERIOD (line 4 minus line 6)-- totals must agree with lines 47 and 48, page 3C $61 $15,187,920 $15,187,981 ------------ ----------- ----------- - ----------------------------------------------------------------------------------------------------------------------------------- Part II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED ------------------------------- GAINS/ NET REALIZED REALIZED INCOME EARNINGS EARNINGS ------ -------- -------- (1) (2) (1) + (2) 1 BALANCE AT BEGINNING OF PERIOD 1,580,357 8,123,984 9,704,341 ------------ ----------- ----------- 2 ADDITIONS: a. Net investment income 122,001 2,246,316 2,368,317 ------------ ----------- ----------- b. Realized gain (loss) on investments 611,433 150,423 761,856 ------------ ----------- ----------- c. Gain on appreciation of securities distributed in kind 0 /////////// 0 ------------ ----------- ----------- d. Other (specify) Excess distributions 0 3,110,995 3,110,995 -------------------- ------------ ----------- ----------- 3 Total additions (sum of 2a through 2d) 733,434 5,507,734 6,241,168 ------------ ----------- ----------- 4 Subtotal (line 1 plus line 3) 2,313,791 13,631,718 15,945,509 ------------ ----------- ----------- 5 DEDUCTIONS: a. Dividends--Cash //////////// 2,394,096 2,394,096 ------------ ----------- ----------- b. Dividends--Stock //////////// 0 0 ------------ ----------- ----------- c. Dividends--In-kind (at fair value) 0 0 0 ------------ ----------- ----------- d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0 ------------ ----------- ----------- e. Other (specify) 0 0 0 -------------------- ------------ ----------- ----------- 6 Total deductions (sum of 5a through 5e) 0 2,394,096 2,394,096 ------------ ----------- ----------- 7 Total before collection of non-cash gains/income (line 4 minus line 6) 2,313,791 11,237,622 13,551,413 ------------ ----------- ----------- 8 ADJUSTMENT: Collection of non-cash gains/income -618,416 618,416 /////////// ------------ ----------- ----------- 9 BALANCE AT END OF PERIOD (line 7 plus line 8)-- total must agree with lines 53, 54c, and 55, page 3C $1,695,375 $11,856,038 $13,551,413 ------------ ----------- -----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C 13 OMB Approval No. 3245-0063 Expiration Date ANALYSIS OF STOCKHOLDERS' EQUITY AS OF 12/31/96 (page 2 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar) PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD ----------------------------------------- 1 NET UNREALIZED APPRECIATION (DEPRECIATION) AT BEGINNING OF PERIOD -4,069,306 ----------- 2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION a. Portfolio securities: (i) Increases 2,858,517 ----------- (ii) Decreases due to revaluation of securities -3,084,258 ----------- (iii) Decreases due to sale of securities -732,885 ----------- (iv) Decreases due to write-off of securities 0 -958,626 ----------- ----------- b. Assets acquired in liquidation of portfolio securities 0 ----------- c. Operating concerns acquired 0 ----------- d. Notes and other securities received 107,369 ----------- 3 TOTAL (sum of 2a through 2d) -851,257 ----------- 4 Subtotal (line 1 plus line 3) -4,920,563 ----------- 5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION a. Portfolio securities (i) Increases -2,261,707 ----------- (ii) Decreases due to revaluation of securities 375,296 ----------- (iii) Decreases due to sale of securities/repayment of principal 4,855,180 ----------- (iv) Decreases due to write-off of securities 83,751 3,052,520 ----------- ----------- b. Assets Acquired in liquidation of portfolio securities 46,527 ----------- c. Operating concerns acquired 0 ----------- d. Notes and other securities received -290,424 ----------- 6 TOTAL (sum of 5a through 5d) 2,808,623 ----------- 7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT END OF PERIOD (line 4 plus line 6) -2,111,940 ----------- 8 LESS: Estimated future tax expense (benefit) on net unrealized appreciation (depreciation) 0 ----------- 9 UNREALIZED GAIN (LOSS) ON SECURITIES HELD-- total must agree with line 52, page 3C $-2,111,940 -----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 8C 14 OMB Approval No. 3245-0063 Expiration Date I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION II. REGULATORY AND LEVERAGEABLE CAPITAL AS OF 12/31/96 {Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION -------------------------------------------------------------- 1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 11,856,038 ------------- 2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 8,426,356 ------------- 3 ADD: Cumulative Undeclared Dividends on 4% Redeemable Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0 ------------- 4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION 3,429,682 ------------- - --------------------------------------------------------------------------------------------------------------------------- PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL ----------------------------------------------- 1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 15,187,981 ------------- 2 ADD: Unfunded binding commitments from Institutional Investors 0 ------------- 3 LESS: Regulatory Deductions: a. Organizational Expenses Not Approved by SBA (1) ( 0) -------------- b. Capital Stock Issued for Services ( 0) -------------- c. Capital Stock Issued for Non-cash Assests (unless approved by SBA for inclusion in Regulatory Capital or converted to cash) ( 0) -------------- d. Investment in 301(d) Licensee ( 0) -------------- e. Treasury Stock at cost ( 0) -------------- f. Other (specify) ( 0) -------------------- -------------- 4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0) -------------- 5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 15,187,981 ------------- 6 LESS: Unfunded binding commitments from Institutional Investors ( 0) -------------- 7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0) -------------- 8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0) eligible investments in Small Concerns -------------- 9 LESS: Other deductions (specify) 0 ------------------- -------------- 10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 15,187,981 -------------- PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL IMPAIRMENT AND OVERLINE PURPOSES ---------------------------------------------
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS 3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c), LICENSEE WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET UNREALIZED GAINS ON MARKETABLE SECURITIES (see note (2) below). 11 REGULATORY CAPITAL (Part II, line 5) 15,187,981 ------------- 12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0 ------------- 13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus 0 line 12 if line 12 greater than O) ------------- 14 ADD: Net Unrealized Gains on Marketable Securities (3) 0 ------------- 15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14 $0 if line 12 or line 14 greater than O) ------------- - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Deduct only those organizational expenses which were not accepted as reasonable by SBA and which have not been amortized. See example in "Instructions for Preparation of SBA Form 468." (2) Licensee must have positive Retained Earnings Available for Distribution in order to establish an increased overline limit pursuant to 13 CFR 107.303(c). (3) As defined in 13 CFR 107,303(c). Attach a schedule showing the following for each marketable security: name of Small Business Concern, market in which traded, names of market makers for companies not listed on a stock exchange or NASDAQ, class of security, cost, valuation, and unrealized gain or loss in accordance with the requirements of Section 107.303(c). SBA Form 468.1 (1-95) Previous editions obsolete Page 9C 15 OMB Approval No. 3245-0063 Expiration Date ANNUAL FINANCIAL REPORT ON SBA FORM 468 (CORPORATE SBICs) - -------------------------------------------------------------------------------- NAME OF LICENSEE: Allied Capital Financial Corporation 03/03-5163 - -------------------------------------------------------------------------------- STREET ADDRESS: 1666 K Street, NW 9th Floor - -------------------------------------------------------------------------------- CITY, STATE AND ZIP CODE: Washington DC 20006 - -------------------------------------------------------------------------------- COUNTY: - -------------------------------------------------------------------------------- EMPLOYER ID NUMBER: 52-1278855 - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED: 12/31/96 - -------------------------------------------------------------------------------- SUMMARY INFORMATION: --------------- A B C --------------- 5 3 1 --------------- A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION 2 = $1 MILLION TO LESS THAN $2 MILLION 3 = $2 MILLION TO LESS THAN $5 MILLION 4 = $5 MILLION TO LESS THAN $10 MILLION 5 = $10 MILLION OR MORE B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"): 1 = AT LEAST 50% OWNED BY BANK OR BHC 2 = AT LEAST 10% AND LESS THAN 50% OWNED BY BANK OR BHC OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK OR BHC): 3 = PUBLICLY OWNED 4 = PRIVATELY OWNED OWNED BY NON-FINANCIAL CORPORATION: 5 = PUBLICLY OWNED 6 = PRIVATELY OWNED OWNED BY INDIVIDUALS: 7 = PUBLICLY OWNED 8 = PRIVATELY OWNED OWNED BY PARTNERSHIP 9 = PUBLICLY OWNED 10 = PRIVATELY OWNED C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED 2 = NON-DIVERSIFIED (SIC CODE____) NOTE: Public reporting burden for this collection of information is estimated to average 17 hours per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: Chief, Administrative Information Branch, U.S. Small Business Administration, Washington, DC 20416, and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503. SBA Form 468.1 (1-95) Previous editions obsolete Page 1C 16 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Captial Financial Corporation License No. 03/03-5163
UNREALIZED UNREALIZED ASSETS COST DEPRECIATION APPRECIATION VALUE(1) ------ ----------------------------------------------------------- LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4) - --------------------- Portfolio Securities: 1 Loans 17,394,318 352,857 3 17,041,464 ------------ ----------- ----------- ------------ 2 Debt Securities 7,926,705 0 0 7,926,705 ------------ ----------- ----------- ------------ 3 Equity Securities 410,370 281,727 0 128,643 ------------ ----------- ----------- ------------ 4 TOTAL PORTFOLIO SECURITIES 25,731,393 634,584 3 25,096,812 ------------ ----------- ----------- ------------ Assets Acquired in Liquidation of Portfolio Securities: 5 Receivables from Sale of Assets Acquired 235,000 0 0 235,000 ------------ ----------- ----------- ------------ 6 Assets Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 7 TOTAL ASSETS ACQUIRED 235,000 0 0 235,000 ------------ ----------- ----------- ------------ 8 Operating Concerns Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 9 Notes and Other Securities Received 0 0 0 0 ------------ ----------- ----------- ------------ 10 TOTAL LOANS AND INVESTMENTS 25,966,393 634,584 3 25,331,812 ------------ ----------- ----------- ------------ 11 Less Current Maturities 4,092,137 ------------ 12 Loans and Investments Net of Current Maturities 21,239,675 ------------ Investment in 301(d) Licensee (2): 13 Name 0 ----------------------------------- ------------ License No. ---------------- CURRENT ASSETS -------------- 14 Cash and Cash Equivalents 17,585,081 ----------- 15 Invested Idle Funds 0 17,585,081 ----------- ----------- 16 Interest and Dividends Receivable 704,105 ----------- 17 Notes and Accounts Receivable 829,063 ----------- 18 Receivables from Parent or Other Associates 2,791 ----------- 19 Less: Allowance for Losses (lines 16, 17 & 18) 139,294 1,396,665 ----------- ----------- 20 Current Maturities of Portfolio Securities 4,092,137 ----------- 21 Current Maturities of Assets Acquired 0 ----------- 22 Current Maturities of Operating Concerns Acquired 0 ----------- 23 Current Maturities of Other Securities 0 4,092,137 ----------- ----------- 24 Other (specify) 0 -------------------------- ----------- 25 Other (specify) 0 23,073,883 ------------------------- ----------- ------------ OTHER ASSETS ------------ 26 a. Furniture and Equipment 0 ----------- b. Less: Accumulated Depreciation 0 0 ----------- ----------- 27 Other (specify) Loan Fees Unamortized 133,451 -------------------------- ----------- 28 Other (specify) Prepaid Expenses & Other 2,297 135,748 -------------------------- ----------- ------------ 29 TOTAL ASSETS $44,449,306 ------------
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized Depreciation + Unrealized Appreciation = Value) (2) A note to item 13 should include percent owned, cost basis and changes resulting from equity method of accounting. SBA Form 468.1 (1-95) Previous editions obsolete Page 2C 17 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 LIABILITIES AND CAPITAL ----------------------- LONG-TERM DEBT (Net of Current Maturities) - ------------------------------------------ 30 Notes and Debentures Payable to or Guaranteed by SBA 16,950,000 ----------- 31 Notes and Debentures Payable to Others 2,166,667 19,116,667 ----------- ------------ CURRENT LIABILITIES - ------------------- 32 Accounts Payable and Accrued Expenses 17,457 ----------- 33 Due to Parent or Other Associates 102,750 ----------- 34 Accrued Interest Payable 310,065 ----------- 35 Accrued Taxes Payable 0 ----------- 36 a. Current Maturities of Line 30 2,000,000 ----------- b. Current Maturities of Line 31 0 2,000,000 ----------- ----------- 37 Distributions Payable 4,339,930 ----------- 38 Short-term Notes Payable/Lines of Credit 0 ----------- 39 Other(specify) 0 ------------------------- ----------- 40 Other(specify) 0 6,770,202 ------------------------- ----------- ------------ OTHER LIABILITIES - ----------------- 41 Deferred Credits 158,268 ----------- 42 Other(specify) 0 ------------------------- ----------- 43 Other(specify) 0 158,268 ------------------------- ----------- ------------ 44 TOTAL LIABILITIES 26,045,137 ------------ REDEEMABLE SECURITIES (guaranteed or purchased by SBA) - ------------------------------------------------------ 45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 1,000,000 ----------- b. Cumulative Undeclared 4% Dividends 0 1,000,000 ----------- ----------- 46 TOTAL REDEEMABLE SECURITIES 1,000,000 ------------ CAPITAL - ------- 47 Capital Stock 0 ------------ 48 Paid-in Surplus 9,350,000 9,350,000 ------------ ----------- 49 Restricted Contributed Capital Surplus 273,681 ----------- 50 Capital Stock and Surplus 9,623,681 ----------- 51 3% Preferred Stock Purchased by SBA 6,000,000 ----------- 52 Unrealized Gain (Loss) on Securities Held -634,584 ----------- 53 Non-Cash Gains/Income 446,543 ----------- 54 Undistributed Net Realized Earnings: a. Restricted (Equal to Cost of Treasury Stock) 0 ------------ b. Unrestricted 1,968,529 ------------ c. Total (54a plus 54b) 1,968,529 ----------- 55 Undistributed Realized Earnings (53 plus 54c) 2,415,072 ----------- 56 Total 17,404,169 ------------ 57 Less: Cost of Treasury Stock 0 ------------ 58 TOTAL CAPITAL 17,404,169 ------------ 59 TOTAL LIABILITIES, REDEEMABLE SECURITIES AND CAPITAL (lines 44 plus 46 plus 58) $44,449,306 ------------
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C 18 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF OPERATIONS REALIZED FOR 12 MONTHS ENDED 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 INVESTMENT INCOME - ----------------- 1 Interest Income 3,957,097 ---------- 2 Dividend Income 0 ---------- 3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0 ---------- 4 Income (Loss) from Investment in Section 301(d) Licensee 0 ---------- 5 Fees for Management Services 0 ---------- 6 Processing and Other Fees 18,360 ---------- 7 Interest on Invested Idle Funds 588,154 ---------- 8 Income from Assets Acquired in Liquidation of Loans and Investments (net of 0 Expenses) 0 -------- ---------- 9 Other Income 57,360 ---------- 10 GROSS INVESTMENT INCOME 4,620,971 ----------- EXPENSES - -------- 11 Interest Expense 1,858,935 ---------- 12 Commitment Fees 0 ---------- 13 Other Financial Cost 0 ---------- 14 Officers' Compensation and Benefits 0 ---------- 15 Employee Compensation and Benefits 0 ---------- 16 Investment Advisory and Management Services 0 ---------- 17 Directors' and Stockholders' Meetings 0 ---------- 18 Advertising and Promotion 0 ---------- 19 Appraisal and Investigation 0 ---------- 20 Communication 0 ---------- 21 Travel 0 ---------- 22 Cost of Space Occupied 0 ---------- 23 Depreciation and Amortization 0 ---------- 24 Insurance 3,564 ---------- 25 Payroll Taxes 0 ---------- 26 Other Taxes (excluding income taxes) 1,540 ---------- 27 Provision for Losses on Receivables (excluding loans receivable) 90,972 ---------- 28 Legal Fees 207,927 ---------- 29 Audit and Examination Fees 12,601 ---------- 30 Miscellaneous Expenses (attach schedule) 19,051 ---------- 31 TOTAL EXPENSES 2,194,590 ----------- 32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,426,381 ----------- 33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 2,341,111 ----------- 34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 4,767,492 ----------- 35 Income Tax Expense (Benefit) 0 ----------- 36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $4,767,492 ----------- 37 Extraordinary Item 0 -------------------- ----------- 38 Cumulative Effect of Change in Accounting Principle 0 ----------- 39 NET INCOME (LOSS) $4,767,492 -----------
(1)Include CHARGE-OFFS (full or partial) of loans and investments which represent realized losses. DO NOT INCLUDE valuation adjustments classified as unrealized appreciation or depreciation. Provide supporting detail for all realized gains and losses on page 14C of this form. SBA Form 468.1 (1-95) Previous editions obsolete Page 4C 19 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/96 (page 1 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar) OPERATING ACTIVITIES: - --------------------- CASH INFLOWS: 1 Interest Received from Portfolio Concerns 3,422,104 ---------- 2 Dividends Received from Portfolio Concerns 0 ---------- 3 Other Returns on Capital Received from Portfolio Concerns 0 ---------- 4 Management Services and Other Fees Received 0 ---------- 5 Interest on Invested Idle Funds 588,154 ---------- 6 Cash Received from Assets Acquired in Liquidation 0 ---------- 7 Other Operating Cash Receipts 232,949 ---------- CASH OUTFLOWS: 8 Interest Paid 1,769,581 ---------- 9 Commitment Fees and Other Financial Costs 0 ---------- 10 Investment Advisory and Management Fees 0 ---------- 11 Officers, Directors and Employees Compensation and Benefits 0 ---------- 12 Operating Expenditures (excluding compensation and benefits) 311,993 ---------- 13 Income Taxes Paid 0 ---------- 14 Other Operating Cash Disbursements 0 ---------- 15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,161,633 ----------- INVESTING ACTIVITIES: - --------------------- Cash Inflows: 16 Loan Principal Payments Received from Portfolio Concerns 5,661,536 ---------- 17 Returns of Capital Received from Portfolio Concerns 43,890 ---------- 18 Net Proceeds from Disposition of Portfolio Securities 4,536,162 ---------- 19 Liquidation of Idle Funds Investments 0 ---------- 20 Other (Specify) 0 ------------------------- ---------- Cash Outflows: 21 Purchase of Portfolio Securities 558,877 ---------- 22 Loans to Portfolio Concerns 0 ---------- 23 Idle Funds Investments 0 ---------- 24 Other (Specify) 0 -------------------------- ---------- 25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,682,711 ----------- FINANCING ACTIVITIES: - --------------------- Cash Inflows: 26 Proceeds from Issuance of SBA-Guaranteed Debentures 0 ---------- 27 Proceeds from Sale of 41 Preferred Stock 0 ---------- 28 Proceeds from Non-SBA Borrowing 0 ---------- 29 Proceeds from Sale of Stock 0 ---------- 30 Other (Specify) 0 -------------------------- ---------- Cash Outflows: 31 Principal Payments on SBA-Guaranteed Debentures 0 ---------- 32 Principal Payments on Non-SBA Borrowing 0 ---------- 33 Redemption of 4% Preferred Stock 0 ---------- 34 Redemption of 3% Preferred Stock 0 ---------- 35 Redemption of Stock (excluding 3% and 4% Preferred) 0 ---------- 36 Dividends Paid 3,617,165 ---------- 37 Other (Specify) 0 -------------------------- ----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C 20 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/96 (page 2 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar) 38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -3,617,165 ----------- 39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,227,179 ----------- 40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,357,901 ----------- 41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $17,585,080 ----------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED - -------------------------------------------------------- BY (USED IN) OPERATING ACTIVITIES: - ---------------------------------- 42 Net Income (Loss) (page 4C, line 39) 4,767,492 ---------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: 43 Depreciation and Amortization 0 ---------- 44 Provision for Losses on Accounts Receivable 90,972 ---------- 45 Provision for Deferred Income Taxes 0 ---------- 46 (Income) Loss from Investments in Partnerships/Flow-through Entities (excluding income received in cash) 0 ---------- 47 Realized (Gains) Losses on Investments -2,341,111 ---------- 48 Other (Specify) OID and fee amortized -121,696 ------------------------- ---------- Changes in Operating Assets and Liabilities Net of Noncash Items: 49 (Increase) Decrease in Interest and Dividends Receivable -301,970 ---------- 50 (Increase) Decrease in Other Current Assets 144,269 ---------- 51 Increase (Decrease) in Accounts Payable 6,597 ---------- 52 Increase (Decrease) in Accrued Interest Payable 18,923 ---------- 53 Increase (Decrease) in Accrued Taxes Payable 0 ---------- 54 Increase (Decrease) in Dividends Payable 0 ---------- 55 Increase (Decrease) in Other Current Liabilities 27,843 ---------- 56 Other (Specify) Defr Cred -129,686 ------------------------ ---------- 57 Other (Specify) 0 ------------------------ ---------- 58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $2,161,633 ----------
Supplemental disclosure of non-cash financing and investing activities is required. See FASB Statement No. 95, paragraph 32. SBA Form 468.1 (1-95) Previous editions obsolete Page 6C 21 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Allied Capital Financial Corporation (the Company), a wholly owned subsidiary of Allied Capital Corporation (Parent), is a closed-end management investment company under the Investment Company Act of 1940. The Company is licensed under the Small Business Investment Act of 1958 as a Specialized Small Business Investment Company (SSBIC). The Company seeks to achieve a high level of current income by providing debt, mezzanine and equity financing for small privately owned growth companies, and through long-term growth on the value of its net assets. Valuation of Investments. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. Cash and cash equivalents are carried at cost which approximates fair value. Interest Income. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When collection of interest is in doubt, interest is not accrued or a reserve is established. Loan fees and original issue discount are amortized into interest income using the effective interest method. Realized Gains or Losses and Unrealized Appreciation or Depreciation on Investments. Realized gains or losses are measured by the difference between the proceeds from the sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the change in the valuation of the portfolio. Distributions to the Parent. Distributions to the Parent are recorded on the ex-dividend date. Federal Income Taxes. The Company's objective is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company annually distributes all of its taxable income to the Parent; therefore, a federal income tax provision is not required. 22 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 In addition, no provision for deferred income taxes has been made for the unrealized appreciation on investments, if any, since the Company intends to continue to annually distribute all of its taxable income. Dividends declared by the Company in December, but paid during January of the following year, are treated as if the dividends were received by the Parent on December 31 of the year declared. Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. NOTE 2. INVESTMENTS Loans and debt securities have stated interest rates ranging generally from 8 percent to 16 percent, and are generally payable in installments with final maturities from 5 to 10 years from date of issue. The following loans and debt securities had accrued interest that was fully reserved, or were not accruing interest at December 31, 1996:
AGGREGATE AMOUNT OF INTEREST RESERVED OR NOT DATE INTEREST ACCRUED AT ACCRUAL DECEMBER 31, PORTFOLIO SECURITY DISCONTINUED NET COST 1996 - ---------------------------------------------------------------------------------------------------------- ACCRUED INTEREST FULLY RESERVED: Benfield Services $ 363,161 $ 19,734 Dye, William 220,316 45,653 -------------- -------------- Total $ 583,477 $ 65,387 ============== ==============
23 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
AGGREGATE AMOUNT OF INTEREST RESERVED OR NOT DATE INTEREST ACCRUED AT ACCRUAL DECEMBER 31, PORTFOLIO SECURITY DISCONTINUED NET COST 1996 - ---------------------------------------------------------------------------------------------------------- INTEREST NOT ACCRUED: In the Dough 4/11/94 $ 47,768 $ 26,415 SerpCo, Inc. 7/1/90 161,677 0 Benfield Services 7/27/95 363,161 69,225 Dye, William 8/1/95 220,316 40,477 ECM Enterprises 2/8/95 35,957 6,939 Family Investments 2/8/95 137,614 63,883 In the Dough 4/11/94 67,398 39,186 Patriotic Pizza 8/1/95 76,107 4,222 Randhawa Brothers 2/8/95 105,933 36,516 Randhawa Brothers 2/8/95 121,109 45,814 Randhawa Brothers 2/8/95 95,968 29,403 -------------- -------------- Total $ 1,433,008 $ 362,080 ============== ==============
NOTE 3. INVESTMENT ADVISORY SERVICES The Company's investments are managed by Allied Capital Advisers, Inc. ("Advisers"), an independent publicly traded registered investment adviser. Certain officers of the Company are also officers in Advisers. Pursuant to an advisory agreement with the Parent, Advisers manages the day-to-day activities of the Parent and its wholly owned subsidiaries. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. In exchange, Advisers is reimbursed for its costs incurred in connection with the above through an 24 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 investment advisory fee paid by the Parent. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments and legal and accounting fees. The Company is required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or management assistance. NOTE 4. DIVIDENDS The Company's board of directors declared a common stock dividend of $4,119,930 and a preferred stock dividend of $220,000 for the year ended December 31, 1996, which were paid January 30, 1997. Both dividends combined represented all of the Company's taxable income. Pursuant to SBA regulations, retained earnings available for distribution at December 31, 1996 were sufficient to pay these dividends. NOTE 5. DEBT Line of Credit. The Parent, the Company and Allied Investment Corporation have a joint revolving line of credit agreement with a bank under which they may borrow up to a total of $10,000,000, which bears interest at a rate of one-month LIBOR plus 2.5 percent per annum, payable monthly, and expires on September 30, 1998. As of December 31, 1996 the interest on the line of credit was 8.0 percent per annum. As of December 31, 1996, $10,000,000 was available under the revolving line of credit agreement. Notes. The Company has $2,166,667 of notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The notes are scheduled to mature over a five-year period commencing in 1998, with annual principal payments of $433,333. Small Business Administration (SBA) Debentures. Debentures are payable to the SBA and represent amounts borrowed pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1996 were as follows: 25 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
YEAR AMOUNTS INTEREST RATES ---- ------- -------------- 1997 $ 2,000,000 8.500% 1998 2,000,000 8.875% - 9.000% 1999 --- --- 2000 9,600,000 8.700% - 8.875% 2001 3,350,000 9.080% thereafter 2,000,000 6.875% ------------ $ 18,950,000 ============
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. NOTE 6. PREFERRED STOCK As of December 31, 1996, the Company had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. The Company has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. NOTE 7. COMMITMENTS AND CONTINGENCIES The Company had a commitment outstanding to an existing portfolio company totaling $200,000 at December 31, 1996. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. NOTE 8. CONCENTRATIONS OF CREDIT RISK The Company places its cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. 26 OMB Approval No. 3245-0063 Expiration Date ANALYSIS OF STOCKHOLDERS' EQUITY AS OF 12/13/96 (page 1 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar)
PART I. CAPITAL STOCK AND PAID IN SURPLUS CAPITAL PAID-IN --------------------------------- STOCK SURPLUS TOTAL (excluding capital contributed by SBA) ----- ------- ----- (pg 3C, line 47) (pg 3C, line 48) 1 BALANCE AT BEGINNING OF PERIOD 0 9,623,681 9,623,681 ------------ ---------- ---------- 2 ADDITIONS: a. Capital stock issued for cash 0 0 0 ------------ ---------- ---------- b. Capital stock issued for services rendered 0 0 0 ------------ ---------- ---------- c. Capital stock Issued for contributed non-cash sssets 0 0 0 ------------ ---------- ---------- d. Capitalization of Retained Earnings Available for Distribution 0 0 0 ------------ ---------- ---------- e. Gain on sale of Treasury Stock 0 0 0 ------------ ---------- ---------- f. Other credits (specify) 0 0 0 ----------------- ------------ ---------- ---------- 3 Total additions (sum of 2a through 2f) 0 0 0 ------------ ---------- ---------- 4 Subtotal (line 1 plus line 3) 0 9,623,681 9,623,681 ------------ ---------- ---------- 5 DEDUCTIONS: a. Retirement of capital stock 0 0 0 ------------ ---------- ---------- b. Distributions in partial liquidation 0 0 0 ------------ ---------- ---------- c. Loss on sale of Treasury Stock 0 0 0 ------------ ---------- ---------- d. Other debits (specify) Rcls non-cash contrb 0 273,681 273,681 ---------------------- ------------ ---------- ---------- 6 Total Deductions (sum of 5a through 5d) 0 273,681 273,681 ------------ ---------- ---------- 7 BALANCE AT END OF PERIOD (line 4 minus line 6)-- totals must agree with lines 47 and 48, page 3C $0 $9,350,000 $9,350,000 ------------ ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------------ PART II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED ------------------------------- GAINS/ NET REALIZED REALIZED INCOME EARNINGS EARNINGS ------ -------- -------- (1) (2) (1) + (2) 1 BALANCE AT BEGINNING OF PERIOD 57,804 1,921,605 1,979,409 ------------ ---------- ---------- 2 ADDITIONS: a. Net investment income 108,927 2,317,455 2,426,382 ------------ ---------- ---------- b. Realized gain (loss) on investments 364,795 1,976,316 2,341,111 ------------ ---------- ---------- c. Gain on appreciation of securities distributed in kind 0 ////////// 0 ------------ ---------- ---------- d. Other (specify) 0 8,100 8,100 -------------------- ------------ ---------- ---------- 3 Total additions (sum of 2a through 2d) 473,722 4,301,871 4,775,593 ------------ ---------- ---------- 4 Subtotal (line 1 plus line 3) 531,526 6,223,476 6,755,002 ------------ ---------- ---------- 5 DEDUCTIONS: a. Dividends--Cash //////////// 4,339,930 4,339,930 ------------ ---------- ---------- b. Dividends--Stock //////////// 0 0 ------------ ---------- ---------- c. Dividends--In-kind (at fair value) 0 0 0 ------------ ---------- ---------- d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0 ------------ ---------- ---------- e. Other (specify) 0 0 0 --------------------- ------------ ---------- ---------- 6 Total deductions (sum of 5a through 5e) 0 4,339,930 4,339,930 ------------ ---------- ---------- 7 Total before collection of non-cash gains/income (line 4 minus line 6) 531,526 1,883,546 2,415,072 ------------ ---------- ---------- 8 ADJUSTMENT: Collection of non-cash gains/income -84,984 84,984 ////////// ------------ ---------- ---------- 9 BALANCE AT END OF PERIOD (line 7 plus line 8)-- total must agree with lines 53, 54c, and 55, page 3C $446,542 $1,968,530 $2,415,072 ------------ ---------- ----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C 27 OMB Approval No. 3245-0063 Expiration Date ANALYSIS OF STOCKHOLDERS' EQUITY AS OF 12/31/96 (page 2 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar) PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD ----------------------------------------- 1 NET UNREALIZED APPRECIATION (DEPRECIATION) 792,193 AT BEGINNING OF PERIOD ---------- 2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION a. Portfolio securities (i) Increases 0 ------------ (ii) Decreases due to revaluation of securities 0 ------------ (iii) Decreases due to sale of securities -2,274,764 ------------ (iv) Decreases due to write-off of securities 0 -2,274,764 ------------ ---------- b. Assets Acquired in liquidation of portfolio securities 0 ---------- c. Operating concerns acquired 0 ---------- d. Notes and other securities received 0 ---------- 3 TOTAL (sum of 2a through 2d) -2,274,764 ---------- 4 Subtotal (line 1 plus line 3) -1,482,571 ---------- 5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION a. Portfolio securities (i) Increases -112,712 ------------ (ii) Decreases due to revaluation of securities 325,000 ------------ (iii) Decreases due to sale of securities/repayment of principal 258,310 ------------ (iv) Decreases due to write-off of securities 83,986 554,584 ------------ ---------- b. Assets Acquired in liquidation of portfolio securities 293,404 ---------- c. Operating concerns acquired 0 ---------- d. Notes and other securities received 0 ---------- 6 TOTAL (sum of 5a through 5d) 847,988 ---------- 7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT END OF PERIOD (line 4 plus line 6) -634,583 ---------- 8 LESS: Estimated future tax expense (benefit) on net unrealized appreciation (depreciation) 0 ---------- 9. UNREALIZED GAIN (LOSS) ON SECURITIES HELD-- total must agree with line 52, page 3C $-634,583 ----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 8C 28 OMB Approval No. 3245-0063 Expiration Date I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION II. REGULATORY AND LEVERAGEABLE CAPITAL AS OF 12/31/96 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION -------------------------------------------------------------- 1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 1,968,529 ------------- 2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 634,584 ------------- 3 ADD: Cumulative Undeclared Dividends on 4% Redeemable Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0 ------------- 4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION 1,333,945 ------------- - --------------------------------------------------------------------------------------------------------------------------- PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL ----------------------------------------------- 1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 9,350,000 ------------- 2 ADD: Unfunded binding commitments from Institutional Investors 0 ------------- 3 LESS: Regulatory Deductions: a. Organizational Expenses Not Approved by SBA (1) ( 0) -------------- b. Capital Stock Issued for Services ( 0) -------------- c. Capital Stock Issued for Non-cash Assests (unless approved by SBA for inclusion in Regulatory Capital or converted to cash) ( 0) -------------- d. Investment in 301(d) Licensee ( 0) -------------- e. Treasury Stock at cost ( 0) -------------- f. Other (specify) ( 0) -------------------- -------------- 4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0) -------------- 5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 9,350,000 ------------- 6 LESS: Unfunded binding commitments from Institutional Investors ( 0) -------------- 7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0) -------------- 8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0) eligible investments in Small Concerns -------------- 9 LESS: Other deductions (specify) 0 ------------------------------- -------------- 10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 9,350,000 -------------- PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL IMPAIRMENT AND OVERLINE PURPOSES ------------------------------------------------------------------------------
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS 3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c), LICENSEE WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET UNREALIZED GAINS ON MARKETABLE SECURITIES (see note (2) below). 11 REGULATORY CAPITAL (Part II, LIie 5) 9,350,000 ------------- 12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0 ------------- 13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus line 12 if line 12 is 0 greater than 0) ------------- 14 ADD: Net Unrealized Gains on Marketable Securities (3) 0 ------------- 15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14 if line 12 or line $0 14 is greater than 0) ------------- - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Deduct only those organizational expenses which were not accepted as reasonable by SBA and which have not been amortized. See example in "Instructions for Preparation of SBA Form 468." (2) Licensee must have positive Retained Earnings Available for Distribution in order to establish an increased overline limit pursuant to 13 CFR 107.303(c). (3) As defined in 13 CFR 107.303(c). Attach a schedule showing the following for each marketable security: name of Small Business Concern, market in which traded, names of market makers for companies not listed on a stock exchange or NASDAQ, class of security, cost, valuation, and unrealized gain or loss in accordance with the requirements of Section 107.303(c). SBA Form 468.1 (1-95) Previous editions obsolete Page 9C -----END PRIVACY-ENHANCED MESSAGE-----