-----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, KP1OW4Ew20cADTFb+UKxPJ2fakkFPIl5qzJQ1ZpQ2b0JmFJqfJ4GjMEnJoLneQKw CK8UCW4PoJFDztbIeiih7w== 0000950133-95-000685.txt : 19951201 0000950133-95-000685.hdr.sgml : 19951201 ACCESSION NUMBER: 0000950133-95-000685 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19951129 SROS: NONE 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: N-2 SEC ACT: 1933 Act SEC FILE NUMBER: 033-64629 FILM NUMBER: 95597423 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 N-2 1 ALLIED CAPITAL CORPORATION 1 As filed with the Securities and Exchange Commission on November 29, 1995 File No. 33- ------- ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-2 (Check appropriate box or boxes) /x/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / / Pre-Effective Amendment No. ____ / / Post-Effective Amendment No. ____ ALLIED CAPITAL CORPORATION --------------------------- Exact name of Registrant as Specified in Charter c/o Allied Capital Advisers, Inc. 1666 K Street, N.W., 9th Floor Washington, D.C. 20006-2803 ---------------------------- Address of Principal Executive Offices (Number, Street, City, State, Zip Code) (202) 331-1112 -------------- Registrant's Telephone Number, including Area Code David Gladstone, Chairman and Chief Executive Officer Allied Capital Advisers, Inc. 1666 K Street, N.W., 9th Floor Washington, D.C. 20006-2803 ------------------------------------------------------ Name and Address of Agent for Service (Number, Street, City, State, Zip Code) Copy to: Steven B. Boehm, Esquire Sutherland, Asbill & Brennan 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2404 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the registration statement. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box: / / It is proposed that this filing will become effective (check appropriate box) /x/ when declared effective pursuant to section 8(c) / / This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is - . ------------------ 2
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - ----------------------------------------------------------------------------------------------------------- Proposed Maximum Proposed Maximum Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of Being Registered Registered Share (1) Price (1) Registration Fee - ----------------------------------------------------------------------------------------------------------- Common Stock, $1.00 par value 883,665 shares $13.0625 $11,542,874 $3,980.31 - -----------------------------------------------------------------------------------------------------------
(1) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low prices per share on November 27, 1995 on the Nasdaq National Market. - -------------------------------------------------------------------------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. 3 CROSS REFERENCE SHEET Pursuant to Rule 495(a) under the Securities Act of 1933 Showing the Location of Information Required by Form N-2 in Part A (Prospectus) and Part B (Statement of Additional Information) and Part C (Other Information) of the Registration Statement
ITEM OF FORM N-2 CAPTION OR LOCATION IN PROSPECTUS - ---------------- --------------------------------- PART A: INFORMATION REQUIRED IN A PROSPECTUS 1. Outside Front Cover Outside Front Cover Page 2. Inside Front and Outside Back Cover Page Inside Front and Outside Back Cover Page 3. Fee Table and Synopsis Summary; Fees and Expenses 4. Financial Highlights Financial Highlights 5. Plan of Distribution Plan of Distribution 6. Selling Shareholders (Not Applicable) 7. Use of Proceeds Use of Proceeds 8. General Description of the Registrant The Company; Summary 9. Management Management 10. Capital Stock, Long-Term Debt, and Other Authorized Classes of Securities; Description of Common Securities Stock 11. Defaults and Arrears on Senior Securities (Not Applicable) 12. Legal Proceedings Legal Matters 13. Table of Contents of the Statement of Table of Contents of the Statement of Additional Additional Information Information
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 14. Cover Page Cover Page 15. Table of Contents Table of Contents 16. General Information and History The Company in the Prospectus; Summary in the Prospectus 17. Investment Objective and Policies Investment Objectives and Policies 18. Management Management
4 19. Control Persons and Principal Holders of Control Persons and Principal Holders of Securities Securities 20. Investment Advisory and Other Services Investment Advisory and Other Services 21. Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices 22. Tax Status Tax Status 23. Financial Statements (Not Applicable)
PART C: OTHER INFORMATION 24. Financial Statements and Exhibits Financial Statements and Exhibits 25. Marketing Arrangements (Not Applicable) 26. Other Expenses of Issuance and Other Expenses of Issuance and Distribution Distribution 27. Persons Controlled by or Under Common Persons Controlled by or Under Common Control Control 28. Number of Holders of Securities Number of Holders of Securities 29. Indemnification Indemnification 30. Business and Other Connections of Business and Other Connections of Investment Adviser Investment Adviser 31. Location of Accounts and Records Locations of Accounts and Records 32. Management Services Management Services 33. Undertakings Undertakings
5 PART A INFORMATION REQUIRED IN A PROSPECTUS 6 SUBJECT TO COMPLETION: THE DATE OF ISSUANCE OF THIS PRELIMINARY PROSPECTUS IS , 1995 - ----------- -- PROSPECTUS 883,665 SHARES ALLIED CAPITAL CORPORATION COMMON STOCK ----------------------------- Allied Capital Corporation (the "Company") is affording to the beneficial holders of record of the outstanding shares of its common stock at the close of business on ___________, 199_ ("the Record Date"), the right to subscribe for and purchase from the Company (the "subscription rights") up to one (1) authorized but heretofore unissued share of its common stock for each seven (7) outstanding shares owned by them on the Record Date (the "Offer"). Subscription rights are not transferrable under any circumstances except through additional subscriptions; only persons who were stockholders of the Company on the Record Date may subscribe. A stockholder may subscribe for all of the shares which such stockholder has a right to purchase. Beneficial owners whose shares are held of record by Cede & Co., nominee for The Depository Trust Company ("DTC"), or by any other depository or nominee are also eligible to participate. THE SUBSCRIPTION PRICE PER SHARE IS EQUAL TO [INSERT FORMULA OR PRICE]. The subscription rights Offer may dilute the voting power of the common stock owned by stockholders who do not fully exercise their subscription rights. Stockholders who do not fully exercise their subscription rights should expect, upon completion of the Offer, to own a smaller proportional interest in the Company than before the Offer. THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN STANDARD TIME, ON _______ __, 199__. Allied Capital Corporation (the "Company"), a Maryland corporation, is a closed-end, management investment company that has elected to operate as a business development company. The Company seeks to achieve a high level of current income as well as long-term growth in the value of the Company's net assets by providing debt, mezzanine and equity financing, primarily to small, privately owned growth companies. The Company's investment adviser is Allied Capital Advisers, Inc. ("Advisers"), a registered investment adviser whose principal office is located at 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. Advisers' telephone number is (202) 331-1112. The Company uses a leveraged capital structure by issuing senior securities representing either indebtedness (i.e., borrowings from banks, other institutional lenders, or government agencies) or preferred stock. FOR THE RISKS OF LEVERAGE, SEE "THE COMPANY--RISK FACTORS--LEVERAGE." The outstanding shares of the Company are quoted on the Nasdaq National Market (symbol: ALLC). This Prospectus sets forth concisely the information about the Company that a prospective investor ought to know before investing. It should be retained for future reference. Additional information on the Company has been filed with the U.S. Securities and Exchange Commission (the "Commission") and is available without charge upon written or oral request to the attention of Investor Relations at the address or telephone number listed above. As indicated at some points in this Prospectus, certain of the information in the Statement of Additional Information is incorporated in this Prospectus by reference. See page 28 of this Prospectus for the table of contents of the Statement of Additional Information. 7
========================================================================================================= Underwriting Discounts Proceeds to Price to Public(1) and Commissions(2) the Company(3) - --------------------------------------------------------------------------------------------------------- Per Share . . . . . . . $ __.__ None $__.__ - --------------------------------------------------------------------------------------------------------- Total . . . . . . . . . $___,___,___ None $___,___,___ =========================================================================================================
(1) The common stock will be offered at a price to be determined by reference to, and at a discount from, the market price on or about the date of sale. On December ___, 1995, the latest practicable date, the last sale price of a share of Allied I reported on the Nasdaq National Market was $__.__. (2) This table contemplates only a direct offering of shares to certain members of the public. In the event that shares to which this Prospectus relates are sold to or through underwriters, the corresponding Supplement to this Prospectus will disclose the applicable sales load (i.e., underwriting discounts and commissions). (3) Before deduction of estimated offering costs related to this offering, payable by the Company, aggregating $___________. ---------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus and of the Statement of Additional Information is __________ __, 199_. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OF QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2 8 TABLE OF CONTENTS
PAGE ---- SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 5 FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 6 PUBLIC TRADING AND NET ASSET VALUE INFORMATION . . . . . . . . . . . . 10 THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Subscription Period . . . . . . . . . . . . . . . . . . . . . . 12 Purpose of the Offer . . . . . . . . . . . . . . . . . . . . . . 12 Dilutive Effect . . . . . . . . . . . . . . . . . . . . . . . . 12 How to Subscribe . . . . . . . . . . . . . . . . . . . . . . . . 12 Closing and Delivery . . . . . . . . . . . . . . . . . . . . . . 14 Institutional Investors . . . . . . . . . . . . . . . . . . . . 14 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Business of the Company . . . . . . . . . . . . . . . . . . . . 15 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 19 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 24 Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . 24 AUTHORIZED CLASSES OF SECURITIES . . . . . . . . . . . . . . . . . . . 26 DESCRIPTION OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . 26 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Dividends and Distributions . . . . . . . . . . . . . . . . . . 26 Reinvestment Plan . . . . . . . . . . . . . . . . . . . . . . . 27 REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . 27 CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR . . . . . . 27 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION . . . . . . . 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 28 Liquidity and Capital Resources . . . . . . . . . . . . . . . . 28 Results of Operations . . . . . . . . . . . . . . . . . . . . . 29
3 9 SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. THE COMPANY Allied Capital Corporation (the "Company") provides subordinated debt financing for developing companies, mezzanine financing for leveraged buyout situations, and other types of loans for small, privately owned business. The Company is a closed-end management investment company which has elected to be regulated as a business development company (a "BDC") and is managed by Allied Capital Advisers, Inc. ("Advisers"). See "Investment Adviser," page 25. INVESTMENT OBJECTIVE The investment objective of the Company OF THE COMPANY is to provide a high level of current income and long-term growth on the value of its net assets by providing debt, mezzanine, and equity financing primarily for small, privately owned growth companies. The Company and its two active small business investment company subsidiaries seek to achieve this objective by making long-term investments, which typically are made in the form of debt securities combined with equity features such as conversion privileges, options, or warrants to acquire shares of the issuer. See "The Company - Business of the Company," page 15. INVESTMENT CONSIDERATIONS As a BDC, the Company's consolidated portfolio includes primarily securities issued by small, privately held developing companies that involve a high degree of business and financial risk. The investments of the Company and its subsidiaries as a whole, however, are highly diversified. A large number of entities and individuals compete for the same kinds of venture capital investment opportunities as the Company. Both the Company and its subsidiaries borrow funds from the U.S. Small Business Administration (the "SBA") and other lenders (and one such subsidiary has placed preferred stock with the SBA) to make investments in and loans to small businesses. As a result, the Company is exposed to the risks of leverage, which may be considered a speculative investment technique. See "The Company -- Risk Factors," page 19. SECURITIES OFFERED AND SUMMARY OF 883,665 shares of common stock, $1.00 DISTRIBUTION par value, are being offered by the Company to beneficial owners of shares of such stock outstanding on the Record Date, at the rate of one (1) share for each seven (7) shares so beneficially owned, at a price of $__.__ per share. The rights to subscribe for and purchase such shares are not transferrable under any circumstances (although Additional Subscriptions may be available) and will expire on _____________, 199_. Any stockholder may subscribe for any whole number of shares up to the number for which each stockholder has the right to subscribe. The Company may offer and sell to institutional investors or others any number of the offered shares that are not subscribed for by stockholders either through the Basic Subscription or the Additional Subscription. See "The Offering," page 11. PRINCIPAL TRADING MARKET Nasdaq National Market (symbol: ALLC). See "Public Trading and Net Asset Value Information," page 10.
4 10 FEES AND EXPENSES SHAREHOLDER TRANSACTION EXPENSES Sales Load (as a percentage of offering price) (1) Dividend Reinvestment Plan Fees none(2) ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to common shares(3)) Investment Advisory Fees 5.95%(4) Interest Payments on Borrowed Funds 11.35%(5) Other Expenses 2.12%(6) ------- Total Annual Expenses 19.42%(7) ======
- ------------------- (1) In the event that shares to which this Prospectus relates are sold to or through underwriters, the corresponding Supplement to this Prospectus will disclose the applicable sales load. (2) The expenses of the Dividend Reinvestment Plan are included in stock record expenses, a component of "Other Expenses." The Company has no cash purchase plan. (3) After giving effect to the anticipated net proceeds of the present offering. (4) The fees payable pursuant to the investment advisory agreement (see "Management--Investment Adviser") are 0.625% per quarter (2.5% per annum) of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Capital Lending Corporation owned by the Company, Interim Investments (i.e., short-term U.S. government/agency securities or repurchase agreements collateralized thereby), and cash and cash equivalents. The percentage in the table assumes that none of the Company's consolidated total assets is in the form of Interim Investments or cash and cash equivalents. Investment advisory fees are payable with respect to Interim Investments and cash and cash equivalents at 0.125% per quarter (0.5% per annum) of the quarter-end value of Interim Investments and cash and cash equivalents. At September 30, 1995, 14% of the Company's consolidated total assets were in the form of Interim Investments and cash and cash equivalents, so that Investment Advisory Fees were payable at an annual rate of 4.62% of consolidated net assets attributable to common shares. See "The Company--Business of the Company." (5) The Company had outstanding borrowings of $81.3 million at September 30, 1995, and at the date of this Prospectus. (6) Other Expenses are based on estimated amounts for the year ending December 31, 1995. (7) Annual Expenses are higher than Annual Expenses of most closed-end management investment companies due to the Company's consolidated outstanding borrowings of $81.3 million and consolidated outstanding preferred stock of $7 million which significantly reduce the consolidated net assets attributable to common shares on which the Annual Expenses percentage is calculated.
- ----------------------------------------------------------------------------------------------------------------------------------- EXAMPLE 1 year 3 years 5 years 10 years - ----------------------------------------------------------------------------------------------------------------------------------- You would pay the following expenses over the indicated period on a $1,000 investment, assuming a 5% annual return $ 194 $ 498 $ 715 $1,025 - -----------------------------------------------------------------------------------------------------------------------------------
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of the above table, including the example, is to assist the investor in understanding the various costs that an investor in the Company will bear either directly or indirectly. AVAILABLE INFORMATION The Company has filed with the Commission a registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect to the shares of common stock offered by this Prospectus, which includes this Prospectus plus additional information. The Company also files reports, proxy statements and other information with the Commission under the Securities Exchange Act of 1934. Such reports, proxy statements, and other 5 11 information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain of the Commission's Regional Offices located in Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and Suite 1300, 7 World Trade Center, New York, New York 10006. Copies of these materials can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company also furnishes annual reports to stockholders, which include annual financial information that has been audited and reported on, with an opinion expressed, by independent public accountants, and quarterly reports including unaudited financial information. See "Reports and Independent Public Accountants," page 27. FINANCIAL HIGHLIGHTS The following condensed consolidated financial information of the Company should be read in conjunction with the consolidated financial statements and notes thereto included in this Prospectus. Such consolidated financial statements as of and for the years ended December 31, 1990, 1991, 1992, 1993 and 1994 have been audited by the firm of Matthews, Carter and Boyce, independent public accountants, whose opinion thereon appears at page F-26 below. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations," page 28. SUMMARY BALANCE SHEET INFORMATION (In Thousands)
December 31 Sept. 30 --------------------------------------------------------- -------- 1990* 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ASSETS (unaudited) Investments, at value $112,139 $ 73,480 $ 78,470 $ 94,630 $115,026 $121,819 Cash and cash equivalents 4,956 24,015 40,554 24,358 6,609 10,963 U.S. government securities 0 0 0 12,202 10,210 9,872 Other assets 3,597 6,788 5,799 3,416 3,672 2,936 -------- -------- -------- -------- -------- -------- Total assets $120,692 $104,283 $124,823 $134,606 $135,517 $145,590 ======== ======== ======== ======== ======== ======== LIABILITIES Debentures and notes payable $ 68,350 $ 52,561 $ 69,800 $ 69,800 $ 77,005 $ 81,300 Dividends and distributions payable 206 3,232 3,387 3,580 3,910 165 Accrued interest payable 1,015 784 1,256 1,283 1,393 1,976 Other liabilities 2,752 1,892 3,389 758 2,222 1,911 ------- ------- ------- -------- ------- -------- Total liabilities 72,323 58,469 77,832 75,421 84,530 85,352 ------- ------- ------- -------- ------- -------- Redeemable preferred stock 1,000 1,000 1,000 1,000 1,000 1,000 ------- ------- ------ ------- ------- -------- SHAREHOLDERS' EQUITY Preferred stock 6,000 6,000 6,000 6,000 6,000 6,000 Common stock and paid-in capital 48,187 46,648 47,513 47,714 47,113 47,518 Notes receivable from sale of common stock (1,478) (1,115) (812) (766) (816) (401) Net unrealized appreciation (depreciation) on investments (4,611) (6,451) (5,757) 6,406 1,110 7,661 Distributions in excess of accumulated earnings (729) (268) (953) (1,169) (3,420) (1,540) -------- -------- -------- -------- -------- -------- Total shareholders' equity 47,369 44,814 45,991 58,185 49,987 59,238 -------- -------- -------- -------- -------- -------- Total liabilities and shareholders' equity $120,692 $104,283 $124,823 $134,606 $135,517 $145,590 ======== ======== ======== ======== ======== ========
6 12 SUMMARY INCOME STATEMENT INFORMATION (In Thousands)
Nine Months Year Ended December 31 Ended September 30 ---------------------------------------------- ------------------ 1990(1) 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- INVESTMENT INCOME (unaudited)(unaudited) Interest and dividends $13,945 $13,143 $ 8,913 $10,270 $12,147 $ 7,760 $ 9,724 Premium and other income 135 149 2,422 2,114 69 59 618 ------- ------- ------ ------- ------- ------ ------ Total investment income 14,080 13,292 11,335 12,384 12,216 7,819 10,342 ------ ------ ------ ------ ------ ----- ------ EXPENSES Interest expense 5,554 5,683 5,131 6,346 6,333 4,673 4,994 Investment advisory fee 0 2,717 2,099 2,285 2,356 1,698 2,077 Other operating expenses 2,100 754 1,050 1,453 1,401 594 987 ------ ------- ------- ------- ------- ------- ------- Total expenses 7,654 9,154 8,280 10,084 10,090 6,965 8,058 ------ ------- ------- ------- ------- ------- ------- Net investment income 6,426 4,138 3,055 2,300 2,126 854 2,284 Loss from operations of distributed investment advisory subsidiary, plus spin-off related expenses (278) 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Net investment income 6,148 4,138 3,055 2,300 2,126 854 2,284 Net realized gains on investments 1,962 2,834 4,507 5,943 3,394 2,024 3,584 ------- ------- ------- ------- ------- ------- ------- Net investment income before net unrealized appreciation (depreciation) on investments 8,110 6,972 7,562 8,243 5,520 2,878 5,868 Net unrealized appreciation (depreciation) on investments (5,376) (1,840) 694 12,163 (5,296) 460 6,551 ------- ------- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations $2,734 $5,132 $8,256 $20,406 $ 224 $3,338 $12,419 ======= ======= ======= ======== ======= ======= ======= PER COMMON SHARE AMOUNTS(2) Net investment income $ 1.02 $ 0.68 $ 0.50 $ 0.37 $ 0.34 $ 0.14 $ 0.37 Net realized and unrealized gains (losses) on investments $(0.56) $ 0.16 $ 0.85 $ 2.94 $(0.31) $ 0.40 $ 1.63 Net increase in net assets resulting from operations(3) $ 0.42 $ 0.80 $ 1.31 $ 3.28 $ 0.00 $ 0.51 $ 1.97 Net asset value(4) $ 6.83 $ 6.41 $ 6.53 $ 8.49 $ 7.11 $ 8.41 $ 8.61 Dividends declared(5) $ 4.02(6) $ 1.30 $ 1.32 $ 1.35 $ 1.40 $ 0.60 $ 0.62
- -------------------------- (1) Numbers have been adjusted for the distribution of Allied Capital Advisers, Inc. common shares on December 31, 1990. (2) All per common share figures have been computed assuming that all issuances of the Company's common stock in connection with the Company's dividend reinvestment plan are outstanding for all periods presented. (3) Net increase in net assets resulting from operations is reduced by preferred stock dividends of $203,000 for 1990, $220,000 for 1991, 1992, 1993 and 1994 and $165,000 for the nine months ended September 30, 1995 and 1994 for the purpose of calculating the per common share amount. (4) Total shareholders' equity is reduced by $6 million of preferred stock for the purpose of calculating the per common share amount. (5) Amount represents the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual shares outstanding on the record date for each dividend paid. (6) Includes a $2.75 per common share distribution of shares in Allied Capital Advisers, Inc. on December 31, 1990. 7 13 QUARTERLY FINANCIAL HIGHLIGHTS (In Thousands) (unaudited)
1993 1994 1995 ----------------------------- ----------------------------- ------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total investment income $2,406 $3,425 $3,759 $2,794 $2,594 $2,507 $2,718 $4,397 $3,549 $3,229 $3,564 Net investment income (loss) $131 $885 $1,303 $(19) $204 $131 $518 $1,273 $881 $504 $899 Net increase (decrease) in net assets resulting from operations $282 $ (889) $2,156 $18,857 $752 $2,641 $(55) $(3,114) $2,134 $7,196 $3,089 Preferred stock dividends $55 $55 $55 $55 $55 $55 $55 $55 $55 $55 $55 Net increase (decrease) in net assets resulting from operations available to common shareholders $227 $ (944) $ 2,101 $18,802 $697 $2,586 $(110) $(3,169) $2,079 $7,141 $3,034 Per common share $0.04 $(0.15) $0.34 $3.06 $0.11 $0.42 $(0.02) $(0.52) $0.34 $1.16 $0.49
SENIOR SECURITIES (at end of year, consolidated) Certain information about the various classes of senior securities issued by the Company and its consolidated subsidiaries is set forth in the following table. The shaded areas indicate information which the Commission expressly does not require to be disclosed for certain types of senior securities.
Involuntary Total Amount Outstanding Liquidating Exclusive of Treasury Asset Coverage Preference Per Average Market Value Class and Year Securities(4) Per Unit(5) Unit(6) Per Unit(7) - ------------------------------------------------------------------------------------------------------------------------------- SENIOR NOTES 1986(1) $ 0 $ 0 -- N/A 1986(2) 0 0 -- N/A 1987 0 0 -- N/A 1988 0 0 -- N/A 1989 0 0 -- N/A 1990 0 0 -- N/A 1991 0 0 -- N/A 1992 20,000,000 30,675 -- N/A 1993 20,000,000 33,850 -- N/A 1994 20,000,000 30,711 -- N/A 1995(3) 20,000,000 32,285 -- N/A
8 14
Involuntary Total Amount Outstanding Liquidating Exclusive of Treasury Asset Coverage Preference Per Average Market Value Class and Year Securities(4) Per Unit(5) Unit(6) Per Unit(7) - ------------------------------------------------------------------------------------------------------------------------------------ BANK LOAN (REVOLVING LINE OF CREDIT) 1986(1) $ 0 $ 0 -- N/A 1986(2) 0 0 -- N/A 1987 2,000,000 3,369 -- N/A 1988 5,000,000 8,507 -- N/A 1989 0 0 -- N/A 1990 0 0 -- N/A 1991 0 0 -- N/A 1992 0 0 -- N/A 1993 0 0 -- N/A 1994 2,205,000 3,386 -- N/A 1995(3) 0 0 -- N/A SUBORDINATED DEBENTURES 1986(1) $ 12,500,000 $ 20,519 -- -- 1986(2) 11,300,000 22,714 -- -- 1987 13,700,000 23,080 -- -- 1988 24,350,000 41,431 -- -- 1989 25,350,000 45,667 -- -- 1990 40,450,000 63,988 -- -- 1991 49,800,000 84,021 -- -- 1992 49,800,000 76,380 -- -- 1993 49,800,000 84,287 -- -- 1994 54,800,000 84,147 -- -- 1995(3) 61,300,000 98,953 -- -- REDEEMABLE CUMULATIVE PREFERRED STOCK 1986(1) 1986(2) $ 0 $ 0 $ 0.00 N/A 1987 0 0 0.00 N/A 1988 0 0 0.00 N/A 1989 0 0 0.00 N/A 1990 0 0 0.00 N/A 1991 1,000,000 158.19 100.00 N/A 1992 1,000,000 168.72 100.00 N/A 1993 1,000,000 153.37 100.00 N/A 1994 1,000,000 169.25 100.00 N/A 1995(3) 1,000,000 153.55 100.00 N/A 1,000,000 161.42 100.00 N/A
9 15
Involuntary Total Amount Outstanding Liquidating Exclusive of Treasury Asset Coverage Preference Per Average Market Value Class and Year Securities(4) Per Unit(5) Unit(6) Per Unit(7) - ------------------------------------------------------------------------------------------------------------------------------------ NON-REDEEMABLE CUMULATIVE PREFERRED STOCK 1986(1) $ 1,000,000 $ 164.15 $ 100.00 N/A 1986(2) 2,000,000 201.01 100.00 N/A 1987 2,000,000 168.46 100.00 N/A 1988 5,000,000 170.15 100.00 N/A 1989 6,000,000 180.15 100.00 N/A 1990 6,000,000 158.19 100.00 N/A 1991 6,000,000 168.72 100.00 N/A 1992 6,000,000 153.37 100.00 N/A 1993 6,000,000 169.25 100.00 N/A 1994 6,000,000 153.55 100.00 N/A 1995(3) 6,000,000 161.48 100.00 N/A
NOTE: Table does not include government agency guaranteed loans sold under agreements to repurchase held by Allied Lending Capital Corporation, a wholly owned subsidiary of the Company until November 23, 1993, for the years 1986 through 1993. This information is omitted as the Company no longer uses this type of senior security to finance its operations and has no intention of resuming this practice in the foreseeable future. - ---------------------- (1) For the fiscal year ended March 31, 1986. (2) In 1986, the Company changed its fiscal year end from March 31 to December 31. This data is as of December 31, 1986. (3) 1995 figures are as of September 30. (4) Total amount of each class of senior securities outstanding at the end of the fiscal year. (5) Asset coverage per unit is the ratio of the value of the Company's total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness in the case of indebtedness, or per share in the case of preferred stock. (6) The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. (7) Not applicable as senior securities are not registered for public trading. PUBLIC TRADING AND NET ASSET VALUE INFORMATION Shares of the Company are traded on the Nasdaq National Market (symbol: ALLC). The following table sets forth, for the periods indicated, high and low bid prices and average net asset values per common share. The Nasdaq bid quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. As the table below indicates, shares of the Company have historically traded at a price substantially in excess of net asset value. 10 16
Bid Price Premium to Average Net Asset Value Average Net Asset Per Common Share Fiscal Year Bid Price Range Value Per Common During Period Ended --------------- Share During ----------------------- December 31 High Low Period High Low ----------- ---- --- -------------------- ---- --- 1993 1st Quarter $15.50 $11.75 $6.55 136% 79% 2nd Quarter $14.50 $11.75 $6.77 114% 66% 3rd Quarter $15.50 $13.25 $7.20 115% 84% 4th Quarter $15.75 $13.25 $7.91 99% 68% 1994 1st Quarter $14.00 $12.25 $8.48 65% 44% 2nd Quarter $14.25 $13.25 $9.03 58% 47% 3rd Quarter $14.50 $13.25 $9.54 52% 39% 4th Quarter $15.50 $12.75 $8.29 87% 54% 1995 1st Quarter $13.50 $11.50 $7.22 87% 59% 2nd Quarter $12.00 $11.125 $7.79 54% 43% 3rd Quarter $13.75 $11.25 $8.45 63% 33%
The last sale price for a share of the Company's common stock in Nasdaq on September 29, 1995 was $13.00. The consolidated net asset value per share on that date was $8.61. The premium was 51%. THE OFFERING The Company is affording to each beneficial owner of the outstanding shares of its common stock (a "stockholder") at the close of business on _____________ __, 199_ (the "Record Date"), the right to subscribe for and purchase from the Company up to one (1) authorized but heretofore unissued share of its common stock for each seven (7) outstanding shares owned by such stockholder on the Record Date ("Subscription Rights"). A stockholder who elects to subscribe for any such number of shares does so as part of the "Basic Subscription." Each stockholder may also subscribe provisionally to purchase from the Company additional authorized but heretofore unissued shares of its common stock in an amount up to once again the number of shares for which that stockholder is entitled to subscribe under the Basic Subscription. A stockholder who elects to subscribe provisionally for any such number of additional shares does so as part of the "Additional Subscription." The Basic Subscription and the Additional Subscription collectively comprise the "Offer." If the Offer is not fully subscribed pursuant to the Basic Subscription, the remaining shares will be allocated pro rata to and for purchase by, those stockholders who elect to subscribe pursuant to the Additional Subscription. The Subscription Rights of the Offer must be exercised no later than _______________ __, 199_. Subscription rights are not transferable under any circumstances; only persons who were stockholders of the Company on the Record Date may subscribe. Beneficial owners whose shares are held of record by Cede and Co., the nominee for The Depository Trust Company ("DTC"), or by any other depository or nominee, are eligible to participate on a similar basis with beneficial owners whose shares are held of record directly with the Company. As summarized above, if some stockholders do not exercise all their Subscription Rights, any shares for which subscriptions have not been received will be offered through the Additional Subscription to the stockholders who have exercised their full Subscription Rights, and who wish to purchase more than the number of shares for which they are eligible under the Basic Subscription. Stockholders must indicate on the subscription form, which must be submitted in order for them to participate in the Offer, the number of shares they want to purchase as part of the Additional Subscription. If sufficient shares remain as a result of unexercised Subscription Rights, all requests for additional shares will be honored in full. If sufficient shares are not available to honor all requests for 11 17 additional shares, the available shares will be allocated among those who request additional shares pro rata based on the number of shares to which their Subscription Rights entitle them. The subscription price per share (the "Subscription Price") for the shares to be issued pursuant to the Subscription Rights is $__________. All valid stockholder subscriptions (i.e., those made pursuant either to the Basic Subscription or the Additional Subscription) received by the Company are irrevocable. A subscription will be disregarded as invalid if it is not signed or accompanied by a check for the total subscription price. A subscription will also be disregarded as invalid if the accompanying check is dishonored or if the subscription form, though properly completed and timely mailed, is not actually received by the Subscription Agent (see below) prior to 5:00 p.m. on the Expiration Date. SUBSCRIPTION PERIOD The offer to stockholders commences on __________ __, 19__, will remain open for 30 days, and expires at 5:00 p.m., Eastern Standard Time, on _______________ __, 199_. The Company has, as required by the Commission's registration form, undertaken to suspend the Offer until it amends this Prospectus if subsequent to the effective date of the Company's registration statement, the Company's net asset value declines more than 10% from its consolidated net asset value last determined prior to the effective date. Accordingly, the Company will notify stockholders of any such decline. A stockholder subscribing under either the Basic Subscription or the Additional Subscription will have no right to cancel such subscriptions or rescind a purchase after the Subscription Agent has received payment, except that subscription forms received during any period that the Offer is suspended as described above will be returned to the stockholder for resubmission once such suspension has ended. PURPOSE OF THE OFFER The Board of Directors of the Company has concluded that additional capital should be raised for the Company through an offering of its common stock. The Company has determined that new investment opportunities exist, but the Company lacks the liquidity to take full advantage of them. This additional capital will permit the Company to continue to grow by increasing its equity base, which will allow the Company to leverage against this additional common equity. DILUTIVE EFFECT The Company expects that there will be no dilution of the net asset value of the Company's common stock because the stock has historically traded, and continues to trade as of the date of this Prospectus, at a price that represents a premium over net asset value. See "Public Trading and Net Asset Value Information." Any stockholder that chooses not to participate in the Offer, however, should expect to own a smaller proportional interest in the Company following the conclusion of the Offer. HOW TO SUBSCRIBE Accompanying this Prospectus is a subscription form and return envelope. The form should be completed by any stockholder wishing to subscribe for and purchase shares offered by this Prospectus as follows: 1. Determine the number of shares for which you are entitled to subscribe by dividing seven (7) into the number of shares that you owned as of the Record Date, as indicated on the subscription form enclosed with this Prospectus. (If the number of shares that you own is not evenly divided by seven (7), you must drop the fraction.) 12 18 2. Fill in the first blank of the form with the number of shares that you desire to subscribe for and purchase pursuant to the Basic Subscription, which may not exceed the number of shares determined pursuant to step 1 above. 3. Fill in the second blank on the subscription form with the number of shares you want to purchase pursuant to the Additional Subscription, which may not exceed the number of shares you are entitled to purchase pursuant to the Basic Subscription. 4. Fill in the third blank of the form with the total subscription price, calculated by multiplying the total number of shares for which you are subscribing by $______, the Subscription Price. 5. Sign and date the form. By signing the form, you confirm that you are the beneficial owner of the number of shares shown on the label beside the signature block and that you have received a copy of this Prospectus. 6. Fill in the address to which certificates should be mailed and your Social Security or other tax identification number. Assume, for example, that you currently own 1,000 shares of the Company. Dividing that number by seven (7) and dropping the fraction would give you 142. In the first blank of the subscription form, you could then enter any number up to 142, which would be your Basic Subscription. If you choose to subscribe for shares under the Additional Subscription, you would enter that number of shares, up to 142 shares in this example, in the second blank. Assuming you decided to purchase 100 shares as part of the Additional Subscription, you would then enter in the second blank 100. You would then multiply the total number of shares you want to purchase, 242 in this example, by $____, the Subscription Price, and enter the total amount in the third blank. After otherwise completing and signing the form, you would send it to the Subscription Agent along with your payment of $_______. Stockholders should mail or deliver the form, together with a check made to the order of "Allied Capital Corporation," in the amount of the total subscription price, to American Stock Transfer & Trust Company ("AST"), the Subscription Agent, at the following address: American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005 Telephone: (212) 936-5100 Shareholder Communication Corporation ("SCC") will act as the Information Agent for the Offer, and as such, will distribute materials and be available to answer questions any stockholders may have regarding the Offer. SCC may be contacted at: Shareholder Communication Corporation 17 State Street, 27th and 28th Floors New York, New York 10004 Telephone: (212) 805-7000 Forms and payments should be mailed or delivered to the Subscription Agent in time to be received no later than 5:00 p.m. on __________ __, 199_, the expiration date. Stockholders who would prefer to remit payment other than by mail should contact SCC for further instructions. For acting as Subscription Agent for the Offer, AST will receive a fee estimated at $______ and will be reimbursed for all out-of-pocket expenses in connection with this offering. For acting as Information Agent for the Offer, SCC will receive a fee estimated at $_______ and will be reimbursed for all of its out-of-pocket expenses in connection with this offering. Stockholders wishing to subscribe 13 19 under the Offer should also consult, as appropriate, their brokers or nominees, which will generally subscribe on behalf of their clients. The Company is requesting brokers and other nominees, collectively "nominees," to transmit a copy of this Prospectus and of the subscription form, with a return envelope, to each person who is a beneficial owner of shares of the common stock held of record by such nominees as of the Record Date. Such nominees will be responsible for tabulating subscriptions received from such beneficial owners, and remitting to the Subscription Agent one subscription form and the total aggregate subscription price of all shares for which a nominee's beneficial owners are subscribing. The Company will pay such nominees their usual and customary charges for transmitting issuer communications to stockholders. CLOSING AND DELIVERY The Subscription Agent will accept any and all valid subscriptions from stockholders for a number of shares equal to or less than 883,665 shares, the total number of shares eligible to be purchased pursuant to the Offer. If any stockholders have validly entered Additional Subscriptions, the Company will accept such Additional Subscriptions to the extent of the number, in the aggregate, of shares not subscribed for pursuant to Basic Subscriptions. If the number of shares not subscribed for pursuant to Basic Subscriptions is smaller than the total number of Additional Shares subscribed for, the Company will allocate such unsubscribed shares, pro rata among the Additional Subscriptions and accept all Additional Subscriptions to the extent of the number, adjusted to the next smaller integral number, of shares resulting from such pro-ration. In the above example, the Company would in any event accept your Basic Subscription to the extent of 142 shares, or $______. Depending on the number of shares subscribed for by other stockholders, the Company would also accept your subscription to the extent of the additional 100 shares for which you have subscribed or some smaller number, possibly as small as zero. If your Additional Subscription has been accepted for some smaller number of shares, the Company would, promptly after the close of the subscription period, send you a check for the amount, without interest, of your subscription in excess of the amount for which your subscription has been accepted. You will then, in due course, receive a certificate for the number of shares for which your subscription has been accepted. The Company will mark "cancelled" and return to subscribers any subscription forms and checks, if any, or return funds, corresponding to subscriptions which have been disregarded as invalid. The Company will also promptly mail to all subscribers for shares pursuant to the Additional Subscription, a check for the amount, if any, corresponding to Additional Subscriptions that have not been accepted as a result of pro-ration. All stockholder subscriptions will be accepted as of the close of business on the expiration date of the offering. Share certificates are expected to be mailed by the Subscription Agent, American Stock Transfer & Trust Company, within thirty days thereafter. In the event that all shares from the Offer are not fully subscribed for after allocating shares pursuant to the Additional Subscription, the Company expects to offer the remaining shares to institutional investors. INSTITUTIONAL INVESTORS During the Subscription Period, the Company may, by means of this Prospectus, offer shares to and solicit indications of interest from banks, insurance companies, pension funds and other institutional investors and to certain individuals in any state in which the offering and sale to such institutional investors is exempt from registration or qualification under the laws of such state. On the day after the expiration date of the stockholder offering, the Company may solicit and accept telephonic subscriptions from any institutional investors who have theretofore indicated interest for any shares offered hereby which were not validly subscribed for by stockholders. Subject to 14 20 prompt payment, certificates for shares so subscribed for by institutions will be mailed or delivered contemporaneously with the mailing of share certificates to stockholder subscribers. EXPENSES NO COMMISSIONS OR OTHER REMUNERATION WILL BE PAID BY THE COMPANY TO ANY BROKER, DEALER OR OTHER PERSON FOR SOLICITING SUBSCRIPTIONS OR OTHERWISE IN CONNECTION WITH THIS OFFERING. The Company will pay all other applicable expenses. Included in such expenses will be the normal charges of brokers and other nominees which are shareholders of record for transmitting offering materials, which will include Prospectuses, subscription warrants and return envelopes, to the beneficial owners of the shares held by them of record. USE OF PROCEEDS The Company anticipates that proceeds of the offering will be used in accordance with the Company's investment objective, to make new investments to small, private growth companies in the form of subordinated debt, mezzanine and equity financings as well as to fund leveraged buyouts, bridge loans, and acquisitions. THE COMPANY ORGANIZATION 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"), which represented 47.6% and 30.1%, respectively, of the Company's consolidated total assets as of September 30, 1995. 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 ("SBIC") under Section 301(c) of the Small Business Administration Act of 1958, as amended ("SBIA"), and Allied Financial is licensed by the SBA as a specialized small business investment company ("SSBIC") under Section 301(d) of the SBIA. 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 of the Company under an investment advisory agreement. BUSINESS OF THE COMPANY The investment objective of the Company is to provide a high level of current income and long-term growth on the value of its net assets by providing debt, mezzanine, and equity financing primarily for small, privately owned growth companies. This objective may be changed by the board of directors of the Company without a vote of a majority of the outstanding voting securities (as defined in the 1940 Act). The Company generally invests in and lends to small businesses directly and through its wholly owned subsidiaries, and also provides financing for leveraged buyouts of such companies, for note purchases and loan restructurings, and for special situations, such as acquisitions, buyouts, recapitalizations, and bridge financings of such companies. The Company also provides financing to private and small public companies through its origination of loans with equity features. Historically, all of the investments of the Company and its subsidiaries (all further references to investments by the Company include those made by its subsidiaries unless otherwise indicated) have been made in domestic small businesses. However, the Company currently intends to begin making investments in conjunction with the Overseas Private Investment Corporation ("OPIC"), which would typically involve investments in businesses that engage, in whole or in part, in overseas operations. Generally, the OPIC-related investments to be made by the Company will 15 21 require that the portfolio company have some affiliation with a U.S.-based business entity. OPIC-related investments ordinarily will be made in countries representing the world's emerging markets. Investments in such countries involve special risks. See "The Company -- Risk Factors -- Foreign Investments," page __. 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 payments of interest only in the early years and payments of principal and interest in the later years, although loan maturities and principal amortization schedules vary. The Company also makes senior loans without equity features. Senior 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 participations acquired 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 short-term securities issued or guaranteed by the U.S. government or an agency or instrumentality thereof, the value of which generally fluctuates with prevailing levels of interest rates, or in repurchase agreements fully collateralized by such securities. The Company usually invests in privately held companies that have been in business for at least one year, have a commercially proven product or service, and seek capital to finance expansion or ownership changes. The Company generally requires that the companies in which it invests demonstrate sales growth, positive cash flow, and profitability, although turnaround situations are also considered. The Company's emphasis is on low- to medium-technology businesses, such as broadcasting, packaging manufacturers, specialty manufacturing, environmental concerns, wholesale distribution, commodities storage, and retail operations. The Company emphasizes the quality of management of the companies in which it invests, and seeks experienced entrepreneurs with a management track record, relevant industry experience, and high integrity. For the first three quarters of 1995, the Company invested approximately $18 million into small private businesses. In the year ended 1994, the Company invested approximately $36 million, which represented a 50% increase from the $24 million that the Company invested in 1993. The invested assets of the Company at September 30, 1995 were $122 million, a 6% increase over December 31, 1994. December 31, 1994 invested assets were approximately $115 million, a 22% increase from the approximately $95 million in invested assets of the Company at December 31, 1993. The Company also restructured several non-performing investments in 1994, with the result that the non-performing assets (valued at cost) decreased 36% from $15.7 million at December 31, 1993 to $10.1 million at December 31, 1994. At September 31, 1995, the Company's non-performing assets at cost were $9.5 million, a 6% decrease from December 31, 1994. The Company's Operation as a BDC As a BDC, the Company may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets (the "70% test"). The principal categories of Qualifying Assets relevant to the business of the Company are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is defined as 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 a small business investment company 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, a BDC which is not wholly owned, is not), and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit. 16 22 (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 count securities described in (1) and (2) above as a Qualifying Asset 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 a small business investment company, making loans to a portfolio company. Managerial assistance is made available to the portfolio companies by the Company's directors and officers who are employees of Allied Advisers, which manages the Company's investments. Each portfolio company is assigned for monitoring purposes to an investment officer and its principals are contacted and counseled if the portfolio company appears to be encountering business or financial difficulties. The Company also provides managerial assistance on a continuing basis to any portfolio company that requests it, whether or not difficulties are perceived. The Company's directors and officers are highly experienced in providing managerial assistance to small businesses. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a "majority of the outstanding voting securities," as defined in the 1940 Act, of the Company. Since the Company made its BDC election, it has not in practice made any substantial change in its structure or, on a consolidated basis, in the nature of its business, 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 its indebtedness has asset coverage to the extent of at least 200%. This limitation is not applicable to the borrowings of the Company's SBIC and SSBIC subsidiaries. In 1992, the Company, Allied Investment, and Allied Financial, together borrowed $20,000,000 from an insurance company on terms requiring the payment of interest at 9.15% per annum and repayment of principal in equal annual installments in the five years 1998 through 2002. At December 31, 1994, the Company had borrowed $2,205,000 under its revolving line of credit agreement, which permits the Company to borrow up to $10 million at the London Inter-Bank Offered Rate ("LIBOR") plus 1.15 percentage points through November 30, 1995. At September 30, 1995, there were no borrowings under this line of credit. The Company anticipates renewing this line of credit for a three-year period under somewhat less favorable terms (i.e., at a higher interest rate). As of September 30, 1995, Allied Investment and Allied Financial had issued subordinated debentures in the aggregate principal amount of $61,300,000 to the SBA that bear interest from 6.875% to 10.35% per annum and require principal payments commencing in 1997 through 2005. Co-Investment with Allied II, Allied Venture, and Allied Technology In accordance with the conditions of several exemptive orders of 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"), private venture capital partnerships managed by Allied 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 Allied Advisers serves as its investment adviser. At September 30, 1995 and December 31, 1994, Allied II had total consolidated assets of $108,684,000 and $101,934,000, respectively, compared to the Company's total consolidated assets of $145,590,000 and $135,517,000, respectively. 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, 17 23 that would be suitable for Allied II or its wholly owned subsidiaries and the Company or its wholly owned subsidiaries to the extent proportionate to the companies' respective consolidated total assets. Securities purchased by the Company or its wholly owned subsidiaries in a co-investment transaction with any of Allied 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 stock. 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 by a note or debenture that is accompanied by an option or warrant to purchase, 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. Allied Investment provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. Allied Financial Allied Financial, as an SSBIC, operates as a small business investment company specializing in the financing of small businesses owned and controlled by socially or economically disadvantaged persons. To determine whether the owners of a small business are socially or economically disadvantaged, the SBA relies on a composite of factors. Business owners who are members of the following groups, among others, are considered socially disadvantaged: African Americans, Hispanic Americans, Native Americans and Asian Pacific Americans. In determining whether the owners of a small business are economically disadvantaged, consideration may be given to factors such as levels of income, location (for instance, urban ghettos, depressed rural areas and areas of high unemployment or underemployment), education level, physical or other special handicap, inability to compete in the marketplace because of prevailing or past restrictive practices or Vietnam-era service in the armed forces, or any other factors that may have contributed to disadvantaged conditions. Allied Financial provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. 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 that it would 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. Accordingly, the Company declared an extra dividend 18 24 in December 1994 and distributed in early January 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending shares to 1,244,914 shares, or 28.5% of the Allied Lending shares then outstanding. In December 1994, in a move unexpected by Allied Lending or the Company, the SBA altered its regulations concerning the 7(a) guaranteed loan program and announced that it would reduce the maximum loan size that it would guarantee under the 7(a) guaranteed loan program from $1 million to $500,000. The Company believes that the significant decline in the market price of Allied Lending shares during December 1994 resulted from the SBA's actions. As Allied Lending had registered, at the Company's expense, 490,000 Allied Lending shares owned by the Company in December 1994 for sale or distribution, the Company chose to distribute a substantial portion of those Allied Lending shares to its stockholders at the end of December 1994 rather than sell those shares at depressed prices. Although the Company recognized a gain on the portion of the Allied Lending shares which were held for sale or distribution, the amount of gain was significantly less than the Company expected due to the decreased market value of the Allied Lending shares at the end of 1994. In addition, because of the decline in the market value of the Allied Lending shares, the Company's unrealized appreciation in this investment at year-end 1994 declined by $4.1 million as compared to the unrealized appreciation in this investment at year end 1993, which negatively affected the Company's net asset value per common share. In mid-October 1995, federal legislation was enacted which removed the $500,000 loan size limit and restored 75% guarantees on loans up to $1 million. In addition, the guaranteed loan program fees were restructured to redirect some of the program's expenses to the participant lenders and participant borrowers. Overall, management expects these changes to be favorable for Allied Lending. Until 1995, the business of Allied Lending consisted solely of making small business loans which are partially guaranteed under the SBA's Guaranteed Loan Program (so-called "7(a) loans"). Allied Lending has been one of the most active non-bank lenders in the 7(a) loan program. Most of the loans made by Allied Lending during 1994 were 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 was 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 product line to include, in addition to 7(a) guaranteed loans, loans that are made in conjunction with guaranteed loans, as well as other types of loans. RISK FACTORS The purchase of the shares offered by this Prospectus involves a number of significant risk and other factors relating to the structure and investment objective of the Company. As a result, there can be no assurance that the Company will achieve its investment objective. AN INVESTMENT IN THE SHARES WILL NOT BE SUITABLE FOR PERSONS WHO DO NOT INTEND, OR HAVE THE RESOURCES, TO HOLD THEM AS A LONG-TERM INVESTMENT. Nature of Investments Consistent with its operation as a BDC, the Company's portfolio is expected to consist primarily of securities issued by small and developing privately held companies. There is generally little or no publicly available information about such companies, and the Company must rely on the diligence of Allied Advisers to obtain the information necessary for the Company's decision to invest in them. Typically, such companies depend for their success on the management talents and efforts of one person or a small group of persons, so that the death, disability or resignation of such person or persons could have a materially adverse impact on them. Moreover, smaller companies frequently have narrower product lines and smaller market shares than larger companies and therefore may be more vulnerable to competitor's 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 19 25 involves a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. Foreign Investments As noted above, the Company intends to make investments with the proceeds of its OPIC loans, see page 22. These investments ordinarily will be made in countries representing the world's emerging or developing markets. Special risks generally are involved in investments in foreign countries, and these risks are often heightened for investments in emerging or developing markets. In general, foreign investments involve risks not ordinarily associated with domestic investing, including: (1) changes in currency exchange rates; (2) possible imposition of market controls or currency exchange controls; (3) possible imposition of withholding taxes on dividends and interest; (4) possible seizure, expropriation or nationalization of assets; (5) more limited financial information or difficulty in interpreting such information because of foreign regulations and accounting standards; (6) lower liquidity and higher volatility in certain foreign markets; (7) the impact of political, social or diplomatic events; (8) the difficulty of evaluating some foreign economic trends; and (9) 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 risks noted above often increase in emerging or developing countries. For example, emerging countries may have more unstable governments than developed countries, and their economies may be based on only a few industries. In addition, foreign investments may be subject to a variety of special restrictions. The Company intends to take steps to reduce or eliminate certain of the above risks. Thus, for example, with respect to a currency risk, the Company may engage in foreign currency transactions. These transactions will be entered into solely to hedge currency risks associated with foreign investments, and not for speculation. The Company also intends to diversify its OPIC-related investments by country and type of business. Long-term Character of Investments It is expected that investments made in accordance with the Company's investment objective will usually yield a high current return from the time they are made but will generally produce a profit, if any, from an accompanying equity feature only after a further five to eight years. There can be no assurance that either a high current return or capital gains will actually be achieved. Illiquidity Most of the investments of the Company 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 under the 1933 Act, which involves delay and expense. Market Price Disparities Shares of closed-end investment companies frequently trade at a discount from net asset value, but there are examples of companies, including the Company, Allied Lending, and Allied II, the shares of which have historically traded at a premium to net asset value. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that a company's net asset value per share will decline. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value. 20 26 Competition A large number of entities and individuals compete for the opportunity to make the kinds of investments proposed to be made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company, Allied II, and their respective subsidiaries. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered by Advisers to be prudent in light of the risks to be assumed. Leverage The Company (including its two small business investment company subsidiaries) intends to continue to borrow funds from and issue senior debt securities to banks, insurance companies, or other lenders and to raise capital from the SBA or other investors up to the limit permitted by the 1940 Act. Such additional borrowings, unless fully offset by redemptions or repurchases of the Company's outstanding senior securities, will cause the Company to be further leveraged with respect to its common stock. When such borrowings occur, the providers of these funds will have fixed dollar claims on the Company's consolidated assets superior to the claims of the holders of the Company's common stock. Any increase in the value of the Company's consolidated investments would cause its consolidated net asset value attributable to common shares to increase more than it would had the borrowings or preferred stock financings not occurred. Decreases in the value of the consolidated investments below their value at the time of acquisition, however, would cause the Company's consolidated net asset value attributable to common shares to decline more sharply than it would if the senior funds had not been borrowed or otherwise obtained. Similarly, any increase in the Company's rate of income in excess of consolidated interest payable on the borrowed funds or dividends payable on the preferred stock would cause its net income to increase more than it would without the leverage, while any decrease in consolidated rate of income would cause net income to decline more sharply than it would had the funds not been borrowed or otherwise obtained for investment. Leverage is thus generally considered a speculative investment technique. Conversely, however, the ability of the Company to achieve its investment objective may depend in part on its ability to achieve additional leverage on favorable terms by borrowing from the SBA, banks, or insurance companies and there can be no assurance that such additional leverage can in fact be achieved. Allied Investment as an SBIC, and Allied Financial, as an SSBIC, currently have 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"), which is also an SBIC and is a subsidiary of Allied II. Beginning with the SBA's 1996 fiscal year commencing on October 1, 1995, Congress has 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 September 30, 1995 and December 31, 1994, respectively, Allied Investment and Allied Financial had outstanding debentures sold to the SBA in the aggregate principal amounts of $61,300,000 and $54,800,000, respectively. At these respective dates, Allied Financial had $7,000,000 of outstanding preferred stock issued to the SBA-$6,000,000 of 3% preferred stock and $1,000,000 of 4% preferred stock. Allied Investment II has not obtained any financial assistance from the SBA to date. As a group, Allied Investment and Allied Financial have received $68,300,000 in leverage and preferred stock investment from the SBA as of September 30, 1995, and as a result, this combined ability to apply for 21 27 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 does 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. On April 10, 1995, the Company entered into a loan agreement with the Overseas Private Investment Corporation ("OPIC") under which the Company may borrow up to $20 million 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% and have a ten year maturity from the date of disbursement. In addition, OPIC is entitled to receive from the Company a contingent fee at maturity of the loan based on five percent (5%) of the return generated by the OPIC-related investments in excess of seven percent (7%). There are no required principal payments until this loan matures ten years from the date of the first disbursement under this loan. The loan agreement expires on the earlier of the first date on which the amount of the loan(s) equal $20 million or April 10, 1998. As of September 30, 1995, there were no outstanding borrowings under this loan agreement. The loan documents require that the Company make representations and covenants about its operations and financial condition as are customary for commercial loans of this type. The Company had outstanding the following sources of financing as of September 30, 1995:
Annual Portfolio Return to Cover Amount Interest or Outstanding Annual Rate of Interest Dividend Class (in thousands) or Dividend Payments Payments ----- -------------- ---------------------- ----------------- Initial Current ------- ------- Senior notes $20,000 9.15% 9.15% 1.50% OPIC loan $0 --- --- 0.00% Bank loan (revolving line of credit) $0 6.213% 7.025% 0.00% Subordinated debentures $61,300 5.5%-10.35% 6.08%-10.35% 4.57% Redeemable preferred stock $1,000 4% 4% 0.03% Non-redeemable preferred $6,000 3% 3% 0.01% stock
Senior Notes As of September 30, 1995, the Company, together with Allied Investment and Allied Financial, had $20 million of 10-year senior notes outstanding to an insurance company, with interest payable semi-annually at the fixed rate of 9.15% per annum. The senior notes are scheduled to mature over a five-year period commencing in 1998, with annual principal payments of $4 million. The senior notes restrict the Company's ability to declare or pay any dividends, purchase, redeem or retire any shares of capital stock, or make any payment or distribution in respect to its capital stock, if after giving effect thereto (i) any default or event of default has occurred or (ii) the total debt of the Company has asset coverage of less than 200%. The senior notes require the Company to maintain a minimum consolidated shareholders' equity of $30 million and a minimum consolidated subordinated debt of $35 million at all times. The Company must also meet the following financial ratios at the end of each fiscal quarter: (a) Consolidated Net Income Available for Interest Charges = at least 1.50 to 1 ------------------------------------------------------ Consolidated Interest Charges (b) Consolidated Total Debt = Not exceeding 2.5 to 1 ---------------------------------- Consolidated Shareholders' Equity
22 28 (c) Consolidated Senior Debt = Not exceeding 1.5 to 1 ---------------------------------- Consolidated Shareholders' Equity
The Company must remain the beneficial owner of 100% of the voting stock of Allied Investment and Allied Financial and will not, or will not permit a consolidated subsidiary to, consolidate with or be a party to a merger with any other corporation. The senior notes permit the Company to incur additional debt as long as the financial covenants above are met and the new debt is junior to the insurance company, and do not restrict the Company's ability to issue additional securities. The terms of the senior notes may be amended with the consent of the insurance company. OPIC Loan. The Company has entered into a loan agreement with OPIC for the Company to make up to $20 million in international investments involving OPIC-qualifying United States small businesses. The terms of this loan provide that the Company may borrow at variable interest rates based on the U.S. Department of Treasury interest rates plus fifty basis points (0.50%) for the applicable period of borrowing by the Company. Bank Loan. The Company currently has a revolving line of credit agreement with a commercial bank under which it may borrow up to $10 million with interest payable monthly at the variable rate of 115 basis points (1.15 percentage points) per annum above the 30-day London Inter-Bank Offered Rate ("LIBOR"), reset daily. There are no required principal payments until this loan matures on November 30, 1995. As of September 30, 1995, there were no borrowings under this agreement. The Company is in the process of negotiating to replace this revolving line of credit with a similar one for a three-year term and a higher interest rate. This line of credit agreement requires the Company to have tangible net worth in excess of total liabilities at all times and to have a ratio of current assets to current liabilities of at least 2 to 1 at all times. The line of credit agreement will not permit the Company or any subsidiary to merge or consolidate with another entity, except that the Company may merge with a subsidiary or any subsidiary may merge with another subsidiary. The current line of credit agreement also does not restrict the Company's ability to issue additional securities or incur additional debt, and permits the modification of its terms upon consent of the lender. Subordinated Debentures. As of September 30, 1995, the Company, through Allied Investment and Allied Financial, had outstanding $61.3 million of 10-year subordinated debentures payable to the SBA, with interest payable semi-annually at various fixed interest rates ranging from 6.08% to 10.35%. The subordinated debentures are scheduled to mature over a 10-year period commencing in 1997, with annual principal payments ranging from $1 million to $8 million. The subordinated debentures also permit the Company to issue additional securities or incur additional debt. Preferred Stock. As of September 30, 1995, the Company, through Allied Financial, has outstanding $1 million of redeemable 4 percent cumulative preferred stock, and $6 million of non-redeemable 3 percent cumulative preferred stock, both issued to the SBA. The redeemable 4 percent cumulative preferred stock must be redeemed by the Company in 2005, and the non-redeemable 3 percent cumulative preferred stock has no required redemption date. Nevertheless, the Company has the option to redeem the non-redeemable 3 percent cumulative preferred stock in whole or in part by paying the SBA the par value of the securities to be redeemed and any dividends accumulated and unpaid to the date of redemption. The cumulative preferred stock also permits the Company to issue additional securities or incur additional debt. Illustration. The following table is provided to assist the investor in understanding the effects of leverage. The figures appearing in the table are hypothetical, and the actual return may be greater or less than those appearing in the table. 23 29 Assumed return on -12% -10% -5% 0% 5% 10% 12% portfolio (net of expenses) Corresponding -18.45% -16.34% -11.06% -5.78% -0.05% 4.79% 6.90% return to common stockholders
Loss of Pass-Through Tax Treatment The Company may cease to qualify for pass-through tax treatment if it is unable to comply with the diversification requirements contained in Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company may also cease to qualify for pass-through treatment, or be subject to a 4% excise tax, if it fails to make certain distributions. Under the 1940 Act, the Company will not be permitted to make distributions to stockholders unless it meets certain asset coverage requirements with respect to money borrowed and senior securities issued. See "Tax Status" in the Statement of Additional Information. Non-availability of pass- through tax treatment would have a materially adverse effect on the total return, if any, obtainable from an investment in the Company's shares. MANAGEMENT BOARD OF DIRECTORS The business of the Company is managed under the supervision of its Board of Directors. For details concerning the persons who make up the Board of Directors at the date of the Prospectus, see the Statement of Additional Information under the caption "Management - Board of Directors." Three of the members of the Board of Directors are also officers of the Company as well as of its investment adviser; and five are non-interested persons, as that term is defined in the 1940 Act (such persons are hereinafter referred to as "non-interested directors"). The responsibilities of the Board of Directors include, among other things, the approval of every loan and other investment to be made by the Company, the quarterly valuation of the Company's assets, and the approval of the terms of the Company's borrowing or other leverage arrangements. The Board, and particularly the non-interested directors, must also, at least annually, approve the investment advisory agreement with the Company's investment adviser and, annually and subject to stockholder ratification, appoint the Company's auditors. The audit and stock option committees of the Board of Directors, comprised exclusively of non-interested directors, respectively review with the auditors the scope of the annual audit and the contents of the audited financial statements and determine option awards to the officers under the Company's incentive stock option plan. Under that plan, options on a total of 1,350,000 shares may be granted. Of the authorized options, the stock option plan committee has to date awarded a number of options, of which a total of 789,387 options are currently outstanding and a total of 518,578 options are currently exercisable. For details of the stock option plan, see the Statement of Additional Information under the caption "Management--Stock Options." The members of the Board of Directors are compensated by fees at the rate of $1,000 per meeting of the Board of the Company or its wholly owned subsidiaries or each separate (i.e., not held on the same day as a full Board meeting) meeting of a committee of such Board which the member attends unless such separate meeting occurs on the same day as a Board meeting, in which case directors receive $500 for attendance at such meeting. There is no duplication of directors' fees and expenses even if some directors also take action on behalf of the Company's wholly owned subsidiaries. The Company's stockholders have approved, subject to further approval by the Commission, a grant to each member of the Board of Directors who is not an employee of the investment adviser a 10-year option to purchase, at the market price on the date of grant, 10,000 shares of the Company. 24 30 Application has been made to the Commission for such approval, and if such approval is granted, these options will be priced on the date of such approval. INVESTMENT ADVISER Advisers, the principal business address of which is 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803, serves as the investment adviser for the Company pursuant to an investment advisory agreement. Under that agreement, Advisers manages the investments of the Company and each of the Company's wholly owned subsidiaries, subject to the supervision and control of the Board of Directors of the Company or the respective subsidiary, and identifies, evaluates, structures, closes, and monitors the investments made by the Company and such subsidiaries. Neither the Company nor any such subsidiary will make any investments that have not been recommended by Advisers. Except as to those investment decisions that require specific approval or ratification by the Company's Board, Advisers has the authority to effect purchases and sales of assets for the Company's account. Advisers also serves as the investment adviser of Allied II, Allied Capital Commercial Corporation ("Allied Commercial") and Business Mortgage Investors, Inc. ("BMI"), both real estate investment trusts ("REITs"), Allied Lending, Allied Venture, and Allied Technology. Some of the directors and officers of Advisers are also directors and officers of the Company. G. Cabell Williams III is the Company's portfolio manager, a position he has held since 1991. From 1981 to 1991, Mr. Williams III held positions of increasing responsibility with Advisers and the Company. The Company pays all of the operating expenses of itself and its wholly owned subsidiaries, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its investment officers and the cost of office space, equipment and other personnel necessary for day-to-day operations. The expenses that are paid by the Company include its share of transaction costs incident to the acquisition and disposition of investments, regular legal and auditing fees and expenses, the fees and expenses of the Company's directors, costs of printing and distributing proxy statements and other communications 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, rather than Advisers, pays expenses associated with litigation and other extraordinary or non-recurring expenses with respect to its operations and investments, as well as expenses of required and optional insurance and bonding. All fees that may, to the extent permitted under SBA regulations, be paid to Advisers by any person in connection with an investment transaction in which the Company participates or proposes to participate are paid over to the Company. Advisers may, however, 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 follow-on managerial assistance. If the Company uses the services of certain professionals on the staff of Advisers for the Company's corporate purposes, the Company will reimburse Advisers for such services at hourly rates calculated to cover the cost of such services, as well as for incidental disbursements. 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 total consolidated assets (other than the Company's investment in Allied Lending and Interim Investments and cash). On an annual basis, such fees are equivalent to 2.5% of the Company's total consolidated assets (other than the Company's investment in Allied Lending and Interim Investments and cash) and 0.5% on Interim Investments and cash. For the purposes of calculating the fee, the values of the Company's assets are determined as of the end of each calendar quarter. The quarterly fee is paid as soon as practicable after the values have been determined. The current advisory agreement, which was approved by stockholders in May 1995, is substantially similar to the prior advisory agreement between the Company and Advisers, and it is anticipated that the advisory fee payable by the Company under the existing agreement will be comparable to the fees paid under the prior agreement. The fee provided for in the investment advisory agreement is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, structuring, closing and monitoring the types of private investments in which the Company will specialize. Other entities managed by 25 31 Advisers, however, pay fees on comparable bases and the Company understands that the fee is not in excess of that frequently paid by private investment funds engaged in similar types of investment, in addition to the substantial participation in profits that such private funds also typically allocate to management. For further details of the compensation of Advisers and the expenses paid respectively by Advisers and the Company, see the Statement of Additional Information under the caption "Investment Advisory and Other Services." AUTHORIZED CLASSES OF SECURITIES Pursuant to the Company's Articles of Incorporation, the following are the authorized classes of securities of the Company and its wholly owned subsidiaries as of September 30, 1995:
(4) (3) Amount Outstanding (2) Amount Held by Exclusive of (1) Amount Registrant for Amounts Shown Title of Class Authorized Its Account Under (3) - --------------------------------------------------------------------------------------------------- ALLIED I: Common Stock 10,000,000 0 6,185,660 ALLIED INVESTMENT: Common Stock 100 0 50.36 ALLIED FINANCIAL: Common Stock 19,800,000 0 131.00 Preferred Stock 200,000 0 Non-Redeemable 3% Cumulative Preferred Stock 60,000 0 60,000.00 Redeemable 4% 10,000 0 10,000.00 Cumulative Preferred Stock ALLIED DEVELOPMENT*: 100 0 10.00
____________________________ * Allied Development Corporation is an inactive wholly owned subsidiary of the Company with total assets of less than $35,000. DESCRIPTION OF COMMON STOCK GENERAL The authorized capital stock of the Company is ten million (10,000,000) shares of common stock, $1 par value, of which 6,185,660 shares are outstanding as of the date of this Prospectus. All shares of common stock have equal rights as to earnings, assets, dividends, and voting privileges and, when issued, will be fully paid and nonassessable. Shares of common stock have no preemptive, conversion, or redemption rights and are freely transferable. In the event of liquidation, each share of common stock is entitled to its proportion of the Company's assets after debts and expenses. Each share is entitled to one vote and does not have cumulative voting rights, which means that holders of a majority of the shares, if they so choose, could elect all of the Directors, and holders of less than a majority of the shares would, in that case, be unable to elect any Director. The Company holds annual stockholders' meetings. 26 32 DIVIDENDS AND DISTRIBUTIONS The Company intends to distribute substantially all of its net investment income and net realized short-term capital gains to stockholders quarterly, generally on the last day of March, June, September and December of each year. The Company distributed an in-kind dividend, in the form of shares of Allied Lending at a rate equal to $0.60 per share of the Company's common stock (based on Allied Lending's then-market value of $11.00 per share) on January 6, 1995 to the Company's stockholders of record on December 31, 1994. Since then, quarterly dividends were declared in February, May, and August 1995 and paid on March 29, June 28, and September 29, 1995, respectively, at a rate of $0.20, $0.20, and $0.22, respectively, per share, and a dividend of $0.24 per share was declared on November 8, 1995 for payment on December 29, 1995. The Company may also declare in October, November, or December of any year, for payment during the following January, an additional dividend to distribute any net investment income and short-term capital gains (and long-term capital gains, if any) realized by the Company during the year that had not already been distributed through the quarterly dividends. If the Company's investments do not generate sufficient income to make distributions or dividend payments as determined by the Board of Directors, then the Company may determine to liquidate a portion of its portfolio to fund the distribution. Such payments may include a return of capital to the stockholder, which, in turn, would reduce the stockholder's cost basis in the investment and have other tax consequences. Stockholders should consult their tax advisers for further guidance. REINVESTMENT PLAN The Company has adopted a reinvestment plan pursuant to which the Company's transfer agent, acting as reinvestment plan agent, will reinvest all distributions in additional whole and fractional shares for the account of all stockholders of record who inform the Company or the transfer agent of their preference to participate in this plan before the record date of the distribution. Stockholders may change enrollment status in the reinvestment plan at any time by contacting either the plan agent or the Company. A stockholder's ability to participate in the reinvestment plan may be limited according to how the stockholder's shares are registered. Beneficial owners holding shares in street name may be precluded from participation by the nominee. Stockholders who would like to participate in the reinvestment plan usually must have the shares registered in their own name. Shares issued under the reinvestment plan may be newly issued shares unless the market price of the outstanding shares is less than 110% of their contemporaneous net asset value. The transfer agent may also, as agent for the participant, buy shares in the market. Newly issued shares for reinvestment plan purposes will be valued at the average of the reported closing bid prices of the outstanding shares on the last five trading days prior to the payment date of the distribution, but not less than 95% of the opening bid price on such date. The price in the case of shares bought in the market will be the average actual cost of such shares, including any brokerage commissions. There are no other charges payable in connection with the reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to the stockholders. Any stockholder who has questions about the reinvestment plan may call the Company at (202) 973-6334 and ask for Investor Relations, or contact American Stock Transfer & Trust Company, the plan agent, 40 Wall Street, New York, New York 10005, telephone (800) 937-5449. REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS The Company provides unaudited quarterly consolidated financial statements and audited annual consolidated financial statements to its stockholders. For the year ended December 31, 1995, the independent accountant engaged to audit the Company's consolidated financial statements is the firm of Matthews, Carter and Boyce, which has been the Company's auditors since inception. The selection of independent auditors by the Company's directors will be subject to annual ratification by stockholders at the Company's annual meeting. The consolidated financial statements of the Company included in this Prospectus are included in reliance on the authority of Matthews, Carter and Boyce as experts in auditing and accounting. 27 33 CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR The Company's investments are held under a custodian agreement by The Riggs National Bank of Washington, D.C. at 808 17th Street, N.W., Washington, D.C. 20006, which also provides recordkeeping services. American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, acts as the Company's transfer, dividend paying, and reinvestment plan agent and registrar. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page ---- MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . B-3 Directors and Officers . . . . . . . . . . . . . B-3 Compensation . . . . . . . . . . . . . . . . . . B-4 Compensation Table . . . . . . . . . . . . . . . B-6 Stock Options . . . . . . . . . . . . . . . . . . B-6 SUMMARY COMPENSATION TABLE . . . . . . . . . . . . . . . B-7 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . B-7 INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . B-8 Investment Advisory Agreement . . . . . . . . . B-8 Accounting Services . . . . . . . . . . . . . . . B-10 BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . B-11 TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . B-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Total investments increased by $6.8 million or 5.9% to $121.8 million at September 30, 1995 from $115.0 million at December 31, 1994. This increase was primarily due to valuation changes in the portfolio resulting in net unrealized appreciation of $6.6 million for the nine month period. In the first nine months of 1995, the Company invested approximately $17.8 million in small business concerns, and received repayments and early payoffs from other small businesses of approximately $17.5 million. Cash and cash equivalents increased $4.4 million primarily due to net cash provided by operating activities. On September 27, 1995, the Company had $7.5 million in SBA debentures that matured. The Company obtained new SBA debentures totaling $14.0 million on September 27, 1995. Proceeds from these new debentures were used to repay the matured debentures. During the third quarter of 1995, the Company applied for a forward commitment from the SBA to provide for up to $6 million in financing to its SSBIC subsidiary. The Company will be able to draw $1.3 million from the SBA for this financing; however, the Company must first submit an application to draw on the committed funds and receive SBA approval of that application. The Company has a revolving line of credit for $10 million which expires November 30, 1995. The Company anticipates renewing this line of credit for a three-year term at a higher rate. 28 34 The Company has secured a credit facility with the Overseas Private Investment Corporation ("OPIC") for up to $20 million in financing for international projects involving small businesses. At September 30, 1995, outstanding commitments for future financings were $14 million. Given the availability of the SBA commitment, the OPIC facility, current cash and government securities available at September 30, 1995, and its available line of credit, 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 the remainder of the year. The Company continues to explore obtaining new debt or equity capital sources as well. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994. The net increase in net assets resulting from operations increased 272% to $12.4 million for the nine months ended September 30, 1995 as compared to $3.3 million for the same period in 1994. Earnings per common share for the nine months increased to $1.97 per common share from $0.51 per common share for the same period in 1994. Total investment income increased 32% from $7.8 million to $10.3 million compared with the first nine months of last year. Interest income increased due to a reduction in the Company's non-performing assets since the end of 1994 and an increase in loans and debt securities outstanding. The Company also received a prepayment penalty on the early payoff of a debt in the third quarter of 1995 totaling $60,000. Other income consists primarily of $327,000 of litigation costs from prior periods recovered during the first nine months of 1995 and $130,000 of income from an equity participation in one portfolio company. Expenses increased 16% from $7.0 million to $8.1 million compared with the corresponding period in 1994. Investment advisory fee expense increased due to an increase in investments and other assets upon which the investment advisory fee is based. Net realized gains on investments increased 77% from $2.0 million to $3.6 million for the nine-month periods ended September 30, 1995 and 1994, respectively. The increase in net realized gains resulted from the disposition or early payoff of investments. A few of the early payoffs were due to portfolio companies being sold. Net realized gains are unpredictable; however, the Company exits transactions when it believes the realized gains can be maximized. YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO DECEMBER 31, 1993. Net increase in net assets resulting from operations was $224,000 or approximately breakeven on a per common share basis, as compared to $20.4 million or $3.28 per common share for the year ended December 31, 1993. In December 1994, in a move unexpected by Allied Lending or the Company, the SBA altered its regulations concerning the 7(a) guaranteed loan program and announced that it would place a loan size cap of $500,000 on the loans that it would guarantee under the 7(a) guaranteed loan program. The Company believes that because of the changes in the SBA's guaranteed loan program that were announced in December 1994, the market price of the Company's investment in Allied Lending declined to $10.38 per share at December 31, 1994. At December 31, 1993, the market price for this stock was $15.75 per share. This decline in market value at December 31, 1994 reduced 1994's net increase in net assets resulting from operations by $4.1 million or $0.66 per common share. In mid-October 1995, federal legislation was passed which removed the $500,000 loan size limit and restored 75% guarantees on loans of up to $1 million. In addition, the guaranteed loan program fees were restructured to redirect some of the programs' expenses to the participant lenders and participant borrowers. Overall, these changes are expected to be favorable for Allied Lending. During 1993, the Company recorded realized gains of approximately $9 million and unrealized appreciation of approximately $15 million, resulting from the 1993 initial public offering of the stock of Allied Lending, formerly a wholly owned subsidiary of the Company. 29 35 Investment income remained relatively constant in 1994, even though there was significant growth in invested assets. This is primarily due to the fact that 1993 investment income included approximately $3 million, representing eleven months of Allied Lending's interest income and gains on sales of guaranteed loans, while Allied Lending was a wholly owned subsidiary of the Company. Instead, in 1994, the Company received $1.7 million in dividend income from its residual 36% interest in Allied Lending. As a result, the Company replaced approximately $1.3 million in investment income with income from increased investments in the portfolio. Expenses also remained relatively constant in 1994 as compared to 1993. Interest expense remained stable because the Company's borrowings of $7.0 million occurred late in 1994 and were at interest rates below the level of other borrowings of the Company. The investment advisory fee stayed constant even given the growth in invested assets as the Company was not charged a fee on its investment of approximately $14.9 million in Allied Lending, as was agreed to in conjunction with Allied Lending's 1993 initial public offering. During 1993, the Company was charged an investment advisory fee on the assets of Allied Lending for the approximate eleven months that it was a wholly owned subsidiary. Legal and audit fees and other operating expenses remained constant in total; however, the Company continued to incur legal expenses related to various matters. The Company has now successfully settled most of these matters. For the year ended December 31, 1994, net investment income before net unrealized appreciation (depreciation) on investments, which includes ordinary investment income and realized capital gains and losses but excludes the effect of unrealized appreciation and depreciation, was $5.5 million or $0.89 per share, a 33% decrease from $8.2 million or $1.34 per share in 1993. Realized gains of $3.4 million in 1994 were below expectations, again primarily due to the unexpected decline in the market value of Allied Lending stock. During the fourth quarter of 1994, the Company chose to distribute shares of Allied Lending to its stockholders rather than sell these shares at depressed prices. The gain that was recognized on this transaction reflects the decreased market value at the end of the year, and as a result, depressed the Company's net investment income before net unrealized appreciation (depreciation) on investments. Distributions to stockholders for 1994 were $1.40 per share and were comprised of $1.23 in taxable ordinary and capital gain income and $0.17 per share in a return of capital. The Company's taxable income of $1.26 per share differed significantly from its net investment income before unrealized appreciation (depreciation) on investments of $0.89 per share due to timing differences in the recognition of income for tax purposes versus book purposes. The $0.17 per share return of capital was an unexpected result, again due to the decline of value of Allied Lending stock and its effect on the gain recognition from dividends. YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO DECEMBER 31, 1992. Investment income increased by $1.0 million primarily due to the increase in new investments in 1993. Interest expense increased by $1.2 million, primarily due to the effect of a full year of interest expense experienced on the $20.0 million debt financing secured in 1992. Investment advisory fees increased due to continued growth of the Company's assets on which the advisory fee is based. Legal and audit fees increased by $0.4 million due to the increased cost of litigation. These changes had the net effect of decreasing net investment income by $0.8 million. Net realized gains on investments of $5.9 million in 1993 increased over 1992 due to the gain of $9.2 million from the November 1993 sale of 800,000 shares of Allied Lending, net of losses on and write-offs of investments of $3.3 million. Net investment income before net unrealized appreciation (depreciation) on investments increased to $8.2 million in 1993, an increase of $0.7 million or 9% over 1992. Net unrealized appreciation on investments in 1993 of $12 million resulted principally from the appreciation of the Allied Lending stock retained by the Company, net of the appreciation or depreciation of other investments in the portfolio. The net unrealized appreciation added to what was disclosed in prior years as net realized income resulted in a net increase in net assets resulting from operations of $20.4 million, an increase of 147% over the previous year. 30 36 Distributions paid to stockholders in 1993 of $8.2 million approximate the net investment income before net unrealized appreciation (depreciation) on investments. The distributions were comprised solely of capital gain income. YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO DECEMBER 31, 1991. In 1990, Allied Lending, which was then a wholly owned subsidiary of the Company, held 100% of its loan balances and used the guaranteed portion of its loans as collateral to obtain financing. During 1991, Allied Lending began selling the guaranteed portion of SBA loans in order to finance further origination, which significantly reduced the Company's consolidated investments at December 31, 1992 as compared to December 31, 1991, and simultaneously, decreased investment income by $2.0 million primarily due to a decline in interest income resulting from non-performing loans, offset by the increase in the gain on sales of SBA-guaranteed loans sold by Allied Lending. Total expenses decreased by $0.9 million, primarily due to a decrease in advisory fees. The decline in total assets resulting from Allied Lending's changes in operations caused a corresponding reduction in investment advisory fees when comparing 1991 to 1992. As a result, net investment income decreased by approximately $1.1 million. Net realized gains on investments increased to $4.5 million from $2.8 million in the previous year primarily due to the sale of one investment, Environmental Air Control, Inc. The change in net unrealized appreciation (depreciation) on investments resulted in a minimal decrease in unrealized depreciation of $0.7 million. Increases in realized and unrealized gains offset the decrease in investment income for an overall net increase in net assets resulting from operations of $8.2 million in 1992, an increase of $3.1 million or 61% over the previous year. 31 37 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Consolidated Statement of Financial Position -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 2 Consolidated Statement of Operations -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . F - 3 Consolidated Statement of Changes in Net Assets -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . F - 4 Consolidated Statement of Cash Flows -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . . F - 5 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 6 Consolidated Statement of Loans to and Investments in Small Business Concerns -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 15 Notes to Consolidated Statement of Loans to and Investments in Small Business Concerns . . . . . . . . . . . F - 24 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 26
F - 1 38 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in thousands, except number of shares)
September 30, December 31, ------------- ---------------------- 1995 1994 1993 ---- ---- ---- (unaudited) ASSETS Investments at Value: Loans and debt securities . . . . . . . . . . . . . $ 89,209 $ 84,949 $ 64,248 Equity securities . . . . . . . . . . . . . . . . . 31,517 28,225 27,675 Other investment assets . . . . . . . . . . . . . . 1,093 1,852 2,707 ------- ------- ------- Total investments . . . . . . . . . . . . . 121,819 115,026 94,630 Cash and cash equivalents . . . . . . . . . . . . . . 10,963 6,609 24,358 U.S. government securities . . . . . . . . . . . . . 9,872 10,210 12,202 Other assets . . . . . . . . . . . . . . . . . . . . 2,936 3,672 3,416 ------- ------- ------- Total Assets . . . . . . . . . . . . . . . . $145,590 $135,517 $134,606 ======= ======= ======= LIABILITIES Revolving line of credit . . . . . . . . . . . . . . $ -- $ 2,205 $ -- Debentures and notes payable . . . . . . . . . . . . 81,300 74,800 69,800 Accrued interest payable . . . . . . . . . . . . . . 1,976 1,393 1,283 Investment advisory fee payable . . . . . . . . . . . 731 658 409 Dividends and distributions payable . . . . . . . . . 165 3,910 3,580 Other liabilities . . . . . . . . . . . . . . . . . . 1,180 1,564 349 -------- -------- ------- Total Liabilities . . . . . . . . . . . . . 85,352 84,530 75,421 -------- -------- ------- Redeemable preferred stock . . . . . . . . . . . . . 1,000 1,000 1,000 -------- -------- ------- Commitments and Contingencies SHAREHOLDERS' EQUITY Preferred stock of wholly owned subsidiary, $100 par value; 60,000 shares authorized, issued and outstanding at 9/30/95, 12/31/94 and 12/31/93 . 6,000 6,000 6,000 Common stock, $1 par value; 10,000,000 shares authorized; 6,185,660, 6,152,703 and 6,108,809 share issued and outstanding at 9/30/95, 12/31/94 and 12/31/93, respectively . . . . . . 6,186 6,153 6,109 Additional paid-in capital . . . . . . . . . . . . . 41,332 40,960 41,605 Notes receivable from sale of common stock . . . . . (401) (816) (766) Net unrealized appreciation on investments . . . . . 7,661 1,110 6,406 Distributions in excess of accumulated earnings . . . (1,540) (3,420) (1,169) ------- ------- ------- Total Shareholders' Equity . . . . . . . . 59,238 49,987 58,185 ------- ------- ------- Total Liabilities and Shareholders' Equity $145,590 $135,517 $134,606 ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 2 39 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
For the Nine Months Ended For the Years Ended September 30, December 31, ------------------------ ------------------------------------- (unaudited) 1995 1994 1994 1993 1992 ----------- --------- ----------- --------- --------- Investment Income: Interest . . . . . . . . . . . $ 8,645 $ 6,545 $ 10,401 $ 10,100 $ 8,890 Dividends . . . . . . . . . . . 1,079 1,215 1,746 170 23 Premium and other income . . . 618 59 69 2,114 2,422 ------- ------- -------- -------- ------- Total investment income . . . 10,342 7,819 12,216 12,384 11,335 ------- ------- -------- -------- ------- Expenses: Interest expense . . . . . . . 4,994 4,673 6,333 6,346 5,131 Investment advisory fee . . . . 2,077 1,698 2,356 2,285 2,099 Legal and audit fees . . . . . 499 310 977 1,109 680 Other operating expenses . . . 488 284 424 344 370 ------- ------- -------- -------- ------- Total expenses . . . . . . . 8,058 6,965 10,090 10,084 8,280 ------- ------- -------- -------- ------- Net investment income . . . . . . 2,284 854 2,126 2,300 3,055 Net realized gains on investments 3,584 2,024 3,394 5,943 4,507 ------- ------- -------- -------- ------- Net investment income before net unrealized appreciation (depreciation) on investments 5,868 2,878 5,520 8,243 7,562 Net unrealized appreciation (depreciation) on investments 6,551 460 (5,296) 12,163 694 ------- ------ -------- -------- ------- Net increase in net assets resulting from operations . . . . . . . . . . $ 12,419 $ 3,338 $ 224 $ 20,406 $ 8,256 ====== ====== ======= ======= ======= Earnings per common share . . . . $ 1.97 $ 0.51 $ 0.00 $ 3.28 $ 1.31 ====== ====== ======= ======= ======= Weighted average number of common shares and common share equivalents outstanding. . . 6,207 6,188 6,187 6,161 6,144 ====== ====== ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 3 40 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (in thousands, except per share amounts)
For the Nine Months Ended For the Years Ended September 30, December 31, -------------------------- ------------------------------ (unaudited) 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- Increase in net assets resulting $ 2,284 $ 854 $ 2,126 $ 2,300 $ 3,055 from operations: Net investment income . . . . Net realized gains on investments . . . . . . . . . 3,584 2,024 3,394 5,943 4,507 Net unrealized appreciation (depreciation) on investments 6,551 460 (5,296) 12,163 694 -------- -------- -------- ------- ------- Net increase in net assets resulting from operations . . 12,419 3,338 224 20,406 8,256 -------- -------- -------- ------- ------- Distributions to shareholders from: Net Investment Income . . . . . (2,119) (689) (705) -- (2,703) Excess of net investment income -- (959) (1,216) -- -- Net realized gains . . . . . . (1,704) (2,024) (4,595) (8,239) (5,324) Excess of net realized gains . -- -- (1,035) -- -- Return of capital (tax) . . . . -- -- (1,044) -- -- Preferred stock dividends . . . (165) (165) (220) (220) (220) -------- -------- -------- ------- ------- Net decrease in net assets resulting from distributions to shareholders . . . . . . . . . . (3,988) (3,837) (8,815) (8,459) (8,247) -------- -------- -------- ------- ------- Capital share transactions: Net (increase) decrease in notes receivable from sale of common stock . . . . . . . . 415 (49) (50) 46 303 Issuance of common shares upon the exercise of stock options -- 200 200 201 741 Common shares issued in lieu of cash distributions . . . . . . 405 121 243 -- 124 -------- -------- ------- ------- ------- Net increase in net assets resulting from capital share transactions . . . . . . . . . . 820 272 393 247 1,168 -------- -------- ------- ------- ------- Net increase (decrease) in net assets . . . . . . . . . . . . . 9,251 (227) (8,198) 12,194 1,177 Net assets at beginning of the period . . . . . . . . . . . . . 49,987 58,185 58,185 45,991 44,814 -------- -------- ------- ------- ------- Net assets at the end of period . 59,238 57,958 49,987 58,185 45,991 Preferred stock of wholly owned subsidiary . . . . . . . . . . . 6,000 6,000 6,000 6,000 6,000 -------- -------- ------- ------- ------- Net asset value available to common shareholders . . . . . . . $ 53,238 $ 51,958 $ 43,987 $ 52,185 $ 39,991 ======== ======== ======= ======= ======= Net asset value per common share $ 8.61 $ 8.41 $ 7.11 $ 8.50 $ 6.53 ======== ======== ======= ======= ======= Common shares outstanding at end of period . . . . . . . . . . . . 6,186 6,176 6,186 6,142 6,123 ======== ======== ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 4 41 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
For the Nine Months Ended For the Years Ended September 30, December 31, ------------------------- ---------------------------- (unaudited) 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- Cash Flows from Operating Activities: Net increase in net assets resulting from operations . . . . . . . . . . . . $ 12,419 $3,338 $224 $20,406 $8,256 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net unrealized depreciation (appreciation) on investments . . . (6,551) (460) 5,296 (12,163) (694) Net realized gains on investments . . (3,584) (2,024) (3,394) (5,943) (4,507) Interest . . . . . . . . . . . . . . -- -- (1,159) -- -- Changes in assets and liabilities: Other assets . . . . . . . . . . . . 736 356 (255) 697 685 Accrued interest payable . . . . . . 583 467 110 27 472 Investment advisory fee payable . . . 73 186 249 (125) 26 Other liabilities . . . . . . . . . . (384) 445 1,215 (2,192) 1,819 ------- ------- ------ ------- ------- Net cash provided by operating activities . . . . . . . . . . . . 3,292 2,308 2,286 707 6,057 ------- ------- ------ ------- ------- Cash Flows From Investing Activities: Net increase (decrease) in investments (350) (11,344) (21,135) 3,318 167 Net redemption (purchase) of U.S. government securities . . . . . . . 338 (1,150) 1,992 (12,202) -- U.S. government securities sold under agreements to repurchase . . . . . -- -- -- -- (2,761) Payments on notes receivable . . . . 415 16 150 247 1,044 ------- ------- ------ ------- ------- Net cash provided by (used in) investing activities . . . . . . . 403 (12,478) (18,993) (8,637) (1,550) ------- ------- ------ ------- -------- Cash Flow From Financing Activities: Common stock distributions paid . . . (3,416) (7,139) (8,027) (8,046) (7,748) Preferred stock distributions paid . (220) (220) (220) (220) (220) Proceeds from the issuance of debentures . . . . . . . . . . . . 14,000 7,000 7,000 -- 20,000 Payment of debentures . . . . . . . . (7,500) (2,000) (2,000) -- -- Net borrowings (payments on) revolving line of credit . . . . . (2,205) -- 2,205 -- -- ------- ------- ------ ------- ------- Net cash provided by (used in) financing activities . . . . . . . 659 (2,359) (1,042) (8,266) 12,032 ------- ------- ------ ------- ------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . 4,354 (12,529) (17,749) (16,196) 16,539 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 6,609 24,358 24,358 40,554 24,015 ------- ------- ------ ------- ------- Cash and cash equivalents, end of period . . . . . . . . . . . . . . $ 10,963 $ 11,829 $ 6,609 $ 24,358 $ 40,554 ======= ======= ====== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS F - 5 42 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine months ended September 30, 1995 and 1994 (unaudited) and for the years ended December 31, 1994, 1993, and 1992 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. 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. The Company's objective is to achieve a high level of current income by providing debt, mezzanine and equity financing, primarily for small privately owned growth companies and through long-term growth on the value of its net assets. The Company has two wholly owned, regulated investment company subsidiaries, Allied Investment and 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 Advisers, whereby Advisers manages the investments of the Company subject to the supervision and control of the Company's board of directors. Certain directors and officers of Advisers are also directors and officers of the Company. Co-investments. Investments made by the Company are made in participation with a separately organized public closed-end management investment company and two private venture capital partnerships, which are also managed by the Company's investment adviser, in accordance with various exemptive orders issued to the Company by the Securities and Exchange 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. Investments in companies whose securities are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. U.S. government securities are carried at cost which approximates fair value. Interest income. Interest income is recorded on the accrual basis to the extent that such amounts will be collected. Realized and unrealized gains or losses on investments. Realized gains or losses are measured by the difference between the proceeds of sale and the cost basis of the investment without regard to unrealized gains or losses previously recognized, and include securities written off during the year, net of recoveries. Unrealized gains or losses reflect the difference between cost and value. Distributions to shareholders. Distributions to shareholders are recorded on the ex-dividend date. Federal income taxes. The Company and its wholly owned subsidiaries' policies are to comply with the requirements of the Internal Revenue Code of 1986, as amended, 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. Additionally, no provision for deferred income taxes has been made for unrealized gains on securities since the Company and its wholly owned subsidiaries intend to continue to annually distribute all of their taxable realized capital gains. F - 6 43 Dividends declared by the Company in October, November or December which are payable to shareholders of record on a specified date in such months, but are paid during January of the following year, may be treated as if the dividends were received by the shareholder on December 31 of the year declared. Earnings Per Common Share. Earnings are defined as the net investment income and realized and unrealized gains or losses on investments and are reduced by the preferred stock dividend requirements. The computation of earnings per common share are based on the weighted average number of common shares and common share equivalents outstanding. 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. In addition, earnings per share is computed assuming that all issuances of the Company's common stock in connection with its dividend reinvestment plan are outstanding for all periods presented. During 1995, the Company has issued 32,957 shares of common stock pursuant to the dividend reinvestment plan. The weighted average number of shares and share equivalents outstanding for the three and nine months ended September 30, 1994 have been restated to include the 1996 common stock issuances under the dividend reinvestment plan. In addition, the computation of net assets per common share as of September 30, 1994 has been restated to reflect the issuance of common stock pursuant to the dividend reinvestment plan during 1995. Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of the following:
- -------------------------------------------------------------------------------------------------------------- (in thousands) September 30, December 31, ------------- ------------------------------------- 1995 1994 1993 ----------- ----------- ---------- Cash $ 8,904 $ 4,707 $ 6,083 Repurchase agreements 2,059 1,902 18,275 --------- --------- --------- Total $ 10,963 $ 6,609 $ 24,358 ========= ========= ========= - --------------------------------------------------------------------------------------------------------------
Reclassifications. Certain reclassifications have been made to the 1994, 1993, and 1992 financial statements to conform with the 1995 financial statement presentation. NOTE 2. INVESTMENT ADVISORY AGREEMENT The Company has an investment advisory agreement with Advisers that is approved at least annually by the Board of Directors or by vote of the holders of a majority of the outstanding shares of the Company. The agreement may be terminated at any time on sixty days' notice, without penalty, by the Company's Board of Directors or by vote of the holders of a majority of the Company's outstanding shares and will terminate automatically in the event of its assignment. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's investment 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 audit 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 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 F - 7 44 special investment banking or consulting work performed for that company which is not related to such investment transaction. 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 interim investments, cash and cash equivalents. In the first quarter of 1995, and in 1994, 1993 and 1992, 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 (subsequent to Allied Lending's public offering in November 1993) and cash and cash equivalents in excess of $2,000,000 in working capital. NOTE 3. DIVIDENDS AND DISTRIBUTIONS The Company's Board of Directors declared and the Company paid a $0.22 per share dividend for the third quarter and a $0.20 per share dividend each for the first and second quarters of 1995. The components of the cash dividends and distributions of taxable income declared by the Board of Directors for 1994, 1993 and 1992 are as follows:
- -------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1994 1993 1992 --------------------- -------------------- -------------------- Per Per Per Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- Ordinary income $ 1,921 $ 0.31 $ $ - $ 2,703 $ 0.45 - Long-term capital gains 5,630 0.92 8,239 1.35 5,324 0.87 Return of capital (tax) 1,044 0.17 - - - - ------- ------ -------- ------ -------- ------ Totals $ 8,595 $ 1.40 $ 8,239 $ 1.35 $ 8,027 $ 1.32 ======= ====== ======== ====== ======== ====== - --------------------------------------------------------------------------------------------------------------
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 issuance of shares of Allied Lending in the amounts of $0.76, $0.04, and $0.60, respectively. The 1993 and 1992 distributions of $1.35 and $1.32 per common share, respectively, were paid in cash. Amount represents the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual shares outstanding on the record date for each dividend paid. The following represents a reconciliation from taxable income to income for financial reporting purposes for the years ended December 31: F - 8 45
- -------------------------------------------------------------------------------------------------------------- (in thousands, except per share 1994 1993 1992 amounts) --------------------- ---------------------- --------------------- Per Per Per Amount Share Amount Share Amount Share ------ ----- ------ ----- ------ ----- Taxable income $ 7,771 $ 1.26 $ 8,239 $ 1.35 $ 8,027 $ 1.31 Market discount amortization (807) (0.13) - - - - Realized gains (1,049) (0.17) - - (465) (0.08) Unrealized gains (losses) (5,296) (0.86) 12,163 1.97 694 0.11 Other (395) (0.06) 4 - - - -------- ------- ------ ----- ------- ------ Financial statement income 224 0.04 20,406 3.32 8,256 1.34 Preferred stock dividends (220) (0.04) (220) (0.04) (220) (0.03) -------- ------- -------- ------- --------- ------- Amount available for common shareholders $ 4 $ 0.00 $ 20,186 $ 3.28 $ 8,036 $ 1.31 ======= ====== ======== ====== ======== ====== - --------------------------------------------------------------------------------------------------------------
NOTE 4. 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 the thirty-day LIBOR rate plus 1.15 percent and expires November 30, 1995. As of September 30, 1995, the Company has available $10,000,000 under the revolving line of credit agreement. Senior Notes. The Company has $20,000,000 of senior notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The senior notes are scheduled to mature over a five-year period commencing in 1998 through 2002 with annual principal payments of $4,000,000. Subordinated Debentures. Subordinated debentures are payable to the Small Business Administration (SBA) and represent amounts due to the SBA as a result of borrowings made 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 September 30, 1995 are as follows:
- -------------------------------------------------------------------------------------------------------------- Year Ending December Amount 31, (in thousands) Interest Rates -------------------- -------------- -------------- 1997 $ 7,000 7.95% - 10.35% 1998 6,650 8.875% - 9.80% 2000 17,300 8.70% - 9.60% Thereafter 30,350 6.875% - 9.08% ---------- Total $ 61,300 ========== - --------------------------------------------------------------------------------------------------------------
F - 9 46 OPIC Facility. On April 10, 1995, the Company entered into a loan agreement with the Overseas Private Investment Corporation under which the Company may borrow up to $20 million 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% and have a ten year maturity from the date of disbursement. The loan agreement expires on the earlier of the first date on which the amount of the loan(s) equal $20 million or April 10, 1998. At September 30, 1995, there were no outstanding borrowings under the loan agreement. NOTE 5. PREFERRED STOCK As of September 30, 1995, the Company's subsidiary, Allied Capital Financial Corporation, 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 Capital Financial Corporation 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 6. SHAREHOLDERS' EQUITY During 1994, the Company paid $1,044,000 in distributions that represented a return of capital for tax purposes. This has been 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 instructs the stock transfer agent to buy shares in the open market or to issue new shares. When the Company issues new shares, the price is equal to the average of the closing sales prices reported for the shares for the five days on which trading in the shares takes place immediately prior to the dividend payment date. During the nine month period ended September 30, 1995, the Company issued 32,957 shares at an average price of $12.30 per share. During 1994, the Company issued 18,513 shares at an average price of $13.13 per share. The Company has an incentive stock option plan which allows the granting of options to the Company's officers. Under the 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 grant and may be exercisable over a ten year period. In May 1994, the option plan was amended to permit grants to non-officer directors and each non-officer director of the Company (five in total) received a one-time grant to purchase 10,000 shares at the then current market price, which grants are subject to SEC approval of the Company's application for an exemptive order to permit such grants. 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 generally at the applicable federal interest rate in effect at the date of issue. A summary of the activity in the plan is as follows: F - 10 47
- ------------------------------------------------------------------------------------------------------------------------------------ Nine months ended September 30, Year ended December 31, ------------- --------------------------------------------------------------- 1995 1994 1993 1992 ------------ ------------ ------------ ------------ Options outstanding at 701,473 686,847 496,285 494,809 beginning of period Options granted 282,800 50,000 336,101 86,228 Options exercised - (25,382) (19,169) (59,007) Options cancelled (194,886) (9,992) (126,370) (25,745) --------- --------- ---------- --------- Options outstanding at end of period 789,387 701,473 686,847 496,285 ========= ========= ========== ========= Options available for grant at end of period 212,136 300,050 3,967 138,248 Options exercisable at end of period 518,578 521,487 422,362 457,899 Option price per share: Granted $12.38 $14.13 $13.00 $18.00 Exercised - $7.34 - $8.53 $9.00 - $12.00 $12.00 - $16.50 Cancelled $12.05 - $16.50 $14.00 - $16.50 $14.00 - $18.00 $14.00 - $18.00 - ------------------------------------------------------------------------------------------------------------------------------------
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION The consolidated statement of cash flows excludes the effects of certain noncash investing and financing activities relating to restructuring of investments and the issuance of common shares as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Nine months ended September 30, Year ended December 31, ---------------- ------------------------------------------- 1995 1994 1993 1992 ------------ ----------- ----------- ---------- Issuance of common shares in exchange for notes receivable $ - $ 200 $ 201 $ 741 Issuance of common shares in lieu of cash dividends $ 405 $ 243 $ - $ 124 Issuance of Allied Capital Lending Corporation shares in lieu of cash dividends $ 3,906 $ - $ - $ - - ------------------------------------------------------------------------------------------------------------------------------------
In addition, the Company paid interest in the amount of $4,411,000 for the nine months ended September 30, 1995 and $6,223,000, $6,319,000 and $4,659,000 during 1994, 1993, and 1992, respectively. F - 11 48 NOTE 8. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding at September 30, 1995 to various prospective portfolio companies totaling $13.6 million. At September 30, 1995, the Company had standby letters of credit and third party guarantees outstanding totaling $1.4 million. The letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. Repurchase agreements of $0.9 million have been used as collateral for the letters of credit and guarantees. 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. Allied Lending, formerly a wholly owned subsidiary, originates loans which are 70%-90% guaranteed by the SBA. Lending then sells the guaranteed portion of these loans in the secondary market. The Internal Revenue Service may assert that these transactions subject Allied Lending to a liability for income taxes of up to $845,000 for the year ended December 31, 1992. The Company has agreed to indemnify Allied Lending for this potential liability. Management believes that the Company has valid defenses for the position that such transactions do not subject Allied Lending to a liability for additional income taxes. 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. As of September 30, 1995, the Company had invested in repurchase agreements collateralized by U.S. government securities. These repurchase agreements mature within seven days. Investments in U.S. government securities at September 30, 1995 have maturities from December 1995 to December 1996 with interest rates ranging from 4.25 percent to 6.875 percent. NOTE 10. DISPOSITION OF SUBSIDIARY The Company owned all of the outstanding capital stock of Allied Capital Lending Corporation ("Allied Lending") prior to consummation of the initial public offering of Allied Lending shares in November 1993. As a result of that intial public offering, the Company's ownership of Allied Lending shares was reduced to 1,580,000 shares, or approximately 36% of the Allied Lending shares outstanding at December 31, 1993. The Company has agreed that it would divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's shareholders or otherwise. The Company declared an extra dividend in December 1994 and distributed on January 8, 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% of the Allied Lending shares then outstanding. F - 12 49 NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------- (Unaudited) (in thousands, except per share information) 1995 ------------------------------------------------ Qtr 1 Qtr 2 Qtr 3 ---------- ----------- ---------- Total investment income $ 3,549 $ 3,229 $ 3,564 Net investment income $ 881 $ 504 $ 899 Net increase in net assets resulting from operations $ 2,134 $ 7,196 $ 3,089 Preferred stock dividends $ 55 $ 55 $ 55 Net increase in net assets resulting from operations available to common shareholders $ 2,079 $ 7,141 $ 3,034 Per common share $ 0.34 $ 1.16 $ 0.49 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- 1994 ---------------------------------------------------------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4(1) ---------- ----------- ----------- ------------ Total investment income $ 2,594 $ 2,507 $ 2,718 $ 4,397 Net investment income $ 204 $ 131 $ 518 $ 1,273 Net increase (decrease) in net assets resulting from operations $ 752 $ 2,641 $ (55) $ (3,114) Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase (decrease) in net assets resulting from operations available to common shareholders $ 697 $ 2,586 $ (110) $ (3,169) Per common share $ 0.11 $ 0.42 $ (0.02) $ (0.52) - ----------------------------------------------------------------------------------------------------------------------------------
F - 13 50
- ---------------------------------------------------------------------------------------------------------------------------------- 1993 ---------------------------------------------------------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 ---------- ----------- ----------- ---------- Total investment income $ 2,406 $ 3,425 $ 3,759 $ 2,794 Net investment income (loss) $ 131 $ 885 $ 1,303 $ (19) Net increase (decrease) in net assets resulting from operations $ 282 $ (889) $ 2,156 $ 18,857 Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase (decrease) in net assets resulting from operations available to common shareholders $ 227 $ (944) $ 2,101 $ 18,802 Per common share $ 0.04 $ (0.15) $ 0.34 $ 3.06 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Included in the 1994 fourth quarter income was $0.7 million in interest income resulting from the restructuring of certain non-performing loans that had not been accrued into income in prior periods. Quarterly amounts for 1993 and 1994 have been reclassified to conform with classifications used in the financial statements for 1995. F - 14 51
- ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS (dollars in thousands) SEPTEMBER 30, 1995 DECEMBER 31, 1994 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $930 $930 $933 $933 (radio stations) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ ALLIED CAPITAL LENDING CORPORATION (MD)(1,3,5) Common Stock (1,244,914 shares) 2,996 11,951 3,802 14,906 (small business lender) - ------------------------------------------------------------------------------------------------------------------------------------ ALLIED WASTE INDUSTRIES, INC. (AZ)(1) Loans and Debt Securities 0 0 0 0 (solid waste collection & removal) Warrants 92 1,038 92 92 - ------------------------------------------------------------------------------------------------------------------------------------ AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 1,790 1,790 926 926 (restaurant) Warrants 71 71 71 71 - ------------------------------------------------------------------------------------------------------------------------------------ ARNOLD MOVING CO. (KY) Loans and Debt Securities 298 298 297 297 (moving/storage firm) Warrants 11 11 11 11 - ------------------------------------------------------------------------------------------------------------------------------------ ASW HOLDING CORPORATION (IL) Loans and Debt Securities 831 831 829 829 (steel wool manufacturer) Warrants 53 53 53 53 - ------------------------------------------------------------------------------------------------------------------------------------ ATLANTIC HOMES DEVELOPMENT CORP. (VA) Loans and Debt Securities 0 0 320 320 (real estate development) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ BELLEFONTE LIME CO. (PA)(3) Common Stock (2,869 shares) 16 533 16 104 (mineral quarry & production) - ------------------------------------------------------------------------------------------------------------------------------------ BROADCAST HOLDINGS, INC. (DC)(3) Loans and Debt Securities 3,039 2,900 3,215 2,166 (radio station) - ------------------------------------------------------------------------------------------------------------------------------------ CELEBRITIES, INC. (FL) Loans and Debt Securities 414 414 428 428 (radio station) Warrants 12 12 12 12 - ------------------------------------------------------------------------------------------------------------------------------------ CENTENNIAL MEDIA CORP. (CO)(2) Loans and Debt Securities 2,078 725 2,078 900 (telephone directories) Common Stock (1,803 shares) 948 0 948 0 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $935 $935 (radio stations) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ ALLIED CAPITAL LENDING CORPORATION (MD)(1,3,5) Common Stock (1,244,914 shares) 3,757 18,960 (small business lender) - ------------------------------------------------------------------------------------------------------------------------------------ ALLIED WASTE INDUSTRIES, INC. (AZ)(1) Loans and Debt Securities 1,630 1,630 (solid waste collection & removal) Warrants 92 92 - ------------------------------------------------------------------------------------------------------------------------------------ AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 0 0 (restaurant) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ ARNOLD MOVING CO. (KY) Loans and Debt Securities 295 295 (moving/storage firm) Warrants 11 11 - ------------------------------------------------------------------------------------------------------------------------------------ ASW HOLDING CORPORATION (IL) Loans and Debt Securities 1,362 1,362 (steel wool manufacturer) Warrants 53 53 - ------------------------------------------------------------------------------------------------------------------------------------ ATLANTIC HOMES DEVELOPMENT CORP. (VA) Loans and Debt Securities 0 0 (real estate development) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ BELLEFONTE LIME CO. (PA)(3) Common Stock (2,869 shares) 16 150 (mineral quarry & production) - ------------------------------------------------------------------------------------------------------------------------------------ BROADCAST HOLDINGS, INC. (DC)(3) Loans and Debt Securities 3,302 2,200 (radio station) - ------------------------------------------------------------------------------------------------------------------------------------ CELEBRITIES, INC. (FL) Loans and Debt Securities 437 437 (radio station) Warrants 12 12 - ------------------------------------------------------------------------------------------------------------------------------------ CENTENNIAL MEDIA CORP. (CO)(2) Loans and Debt Securities 1,645 0 (telephone directories) Common Stock (1,803 shares) 948 0 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 15 52
- ------------------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1995 (UNAUDITED) DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ CERATECH CORPORATION (IL) Loans and Debt Securities 1,180 1,180 1,180 1,180 (ceramic plate manufacturer) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,091 1,091 1,146 1,146 (direct marketer of woodcrafts) Common Stock (117 shares) 1 0 1 0 - ------------------------------------------------------------------------------------------------------------------------------------ CITIPOSTAL, INC. (NY)(2) Loans and Debt Securities 0 0 216 216 (courier network) Preferred Stock Series A 0 0 177 177 Convertible Preferred Stock Series B 289 0 289 0 Common Stock (27 shares) 71 0 173 103 Warrants 0 0 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ COAST GAS, INC. (CA) Loans and Debt Securities 2,168 2,168 2,159 2,159 (courier network) Warrants 124 124 124 124 - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (234,583 shares) 116 0 180 54 (medical/dental consumer info. service) Common Stock (127,940 shares) 64 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ CONTEMPORARY MEDIA (ID) Loans and Debt Securities 586 586 602 602 (radio stations) Warrants 204 204 204 204 - ------------------------------------------------------------------------------------------------------------------------------------ DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 2,307 2,307 2,287 2,287 (circuit board manufacturer) Warrants 133 133 133 133 - ------------------------------------------------------------------------------------------------------------------------------------ DEVLIEG-BULLARD INC. (CT)(1) Loans and Debt Securities 2,134 2,134 2,104 2,104 (tool manufacturer) Warrants 275 400 275 275 - ------------------------------------------------------------------------------------------------------------------------------------ DMI FURNITURE, INC. (KY)(1) Convertible Preferred Stock (399,840 shares) 500 279 500 576 (furniture manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ DOGLOO, INC. (CA) Loans and Debt Securities 3,335 3,335 3,307 3,307 (pet products manufacturer) Warrants 0 0 265 265 - ------------------------------------------------------------------------------------------------------------------------------------ EDWARDS HEATING & AIR CONDITIONING (GA) Loans and Debt Securities 2,306 441 2,306 911 (heating & air conditioning Warrants 29 0 29 0 dealer/contractor) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ CERATECH CORPORATION (IL) Loans and Debt Securities 0 0 (ceramic plate manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,022 1,022 (direct marketer of woodcrafts) Common Stock (117 shares) 23 23 - ------------------------------------------------------------------------------------------------------------------------------------ CITIPOSTAL, INC. (NY)(2) Loans and Debt Securities 216 216 (courier network) Preferred Stock Series A 177 177 Convertible Preferred Stock Series B 289 31 Common Stock (27 shares) 173 75 Warrants 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ COAST GAS, INC. (CA) Loans and Debt Securities 0 0 (courier network) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (234,583 shares) 180 54 (medical/dental consumer info. service) Common Stock (127,940 shares) 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ CONTEMPORARY MEDIA (ID) Loans and Debt Securities 0 0 (radio stations) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 0 0 (circuit board manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ DEVLIEG-BULLARD INC. (CT)(1) Loans and Debt Securities 0 0 (tool manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ DMI FURNITURE, INC. (KY)(1) Convertible Preferred Stock (399,840 shares) 500 1,040 (furniture manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ DOGLOO, INC. (CA) Loans and Debt Securities 0 0 (pet products manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ EDWARDS HEATING & AIR CONDITIONING (GA) Loans and Debt Securities 1,776 1,312 (heating & air conditioning Warrants 29 0 dealer/contractor) - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 16 53
- ------------------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1995 DECEMBER 31, 1994 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ ENVIRCO CORP. (NJ) Loans and Debt Securities 0 0 32 188 (clean room equipment manufacturer) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ ENVIROPLAN, INC. (NJ) Loans and Debt Securities 2,443 1,890 2,425 2,425 (emissions monitoring equipment mfg.) Warrants 119 0 120 204 - ------------------------------------------------------------------------------------------------------------------------------------ ESQUIRE COMMUNICATIONS, LTD. (NY)(1) Loans and Debt Securities 2,397 2,397 2,397 2,397 (court reporters) Warrants 3 36 3 3 - ------------------------------------------------------------------------------------------------------------------------------------ FOUNTAINHEAD TECHNOLOGIES, INC. (RI) Loans and Debt Securities 1,180 1,180 1,180 1,180 (non-chlorine water purification sys.) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ GARDEN RIDGE CORP. (TX) Loans and Debt Securities 0 0 3,302 3,302 (home decorating and craft products) Common Stock (61,241 shares) 687 3,469 761 1,236 Warrants 112 1,455 112 145 - ------------------------------------------------------------------------------------------------------------------------------------ GATEWAY HEALTHCARE CORP. (VA) Loans and Debt Securities 853 853 853 853 (medical/supplies distributor) Convertible Preferred Stock (10,725 shares) 497 42 497 42 Warrants 2 0 2 0 - ------------------------------------------------------------------------------------------------------------------------------------ GENOA MINE ACQUISITION CORP. (OH)(3) Capital Stock (20 shares) 44 533 44 44 (limestone mining) - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SOFTWARE INC. (NC) Loans and Debt Securities 1,664 1,664 1,662 1,662 (accounting software development) Warrants 19 626 19 19 - ------------------------------------------------------------------------------------------------------------------------------------ GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,072 1,072 1,064 1,064 (television stations) Warrants 78 448 78 78 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH PLAINS CABLEVISION (TX) Loans and Debt Securities 0 0 129 129 (cable television) Warrants 0 0 14 14 - ------------------------------------------------------------------------------------------------------------------------------------ HOUSTON FOODS COMPANY (IL) Loans and Debt Securities 0 0 0 0 (seasonal gift packages) Convertible Preferred Stock 0 0 0 0 Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ ENVIRCO CORP. (NJ) Loans and Debt Securities 700 700 (clean room equipment manufacturer) Warrants 32 32 - ------------------------------------------------------------------------------------------------------------------------------------ ENVIROPLAN, INC. (NJ) Loans and Debt Securities 1,906 1,906 (emissions monitoring equipment mfg.) Warrants 60 60 - ------------------------------------------------------------------------------------------------------------------------------------ ESQUIRE COMMUNICATIONS, LTD. (NY)(1) Loans and Debt Securities 0 0 (court reporters) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ FOUNTAINHEAD TECHNOLOGIES, INC. (RI) Loans and Debt Securities 0 0 (non-chlorine water purification sys.) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ GARDEN RIDGE CORP. (TX) Loans and Debt Securities 1,821 1,821 (home decorating and craft products) Common Stock (61,241 shares) 387 387 Warrants 112 112 - ------------------------------------------------------------------------------------------------------------------------------------ GATEWAY HEALTHCARE CORP. (VA) Loans and Debt Securities 701 692 (medical/supplies distributor) Convertible Preferred Stock (10,725 shares) 650 199 Warrants 2 0 - ------------------------------------------------------------------------------------------------------------------------------------ GENOA MINE ACQUISITION CORP. (OH)(3) Capital Stock (20 shares) 44 0 (limestone mining) - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SOFTWARE INC. (NC) Loans and Debt Securities 0 0 (accounting software development) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,045 1,045 (television stations) Warrants 78 78 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH PLAINS CABLEVISION (TX) Loans and Debt Securities 142 142 (cable television) Warrants 14 14 - ------------------------------------------------------------------------------------------------------------------------------------ HOUSTON FOODS COMPANY (IL) Loans and Debt Securities 126 126 (seasonal gift packages) Convertible Preferred Stock 7 152 Warrants 3 89 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 17 54
- ------------------------------------------------------------------------------------------------------------------------------------ SEPTEMBER 30, 1995 DECEMBER 31, 1994 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ INNOTECH, INC. (VA) Warrants 29 29 29 29 (bifocal lens manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ ISOTECHNOLOGIES, INC. (NC) Convertible Debt Securities 602 602 609 609 (orthopedic equipment) - ------------------------------------------------------------------------------------------------------------------------------------ JACKSON PRODUCTS, INC. (MI) Loans and Debt Securities 0 0 856 856 (safety equipment manufacturer) Common Stock 0 0 230 303 - ------------------------------------------------------------------------------------------------------------------------------------ JARAD BROADCASTING (NY) Loans and Debt Securities 0 0 0 0 (radio station) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ JUNE BROADCASTING (NJ) Loans and Debt Securities 0 0 0 0 (radio station) Warrants 58 1,680 58 582 - ------------------------------------------------------------------------------------------------------------------------------------ KIRKER ENTERPRISES (NJ) Loans and Debt Securities 2,131 2,131 0 0 (chemical manufacturer) Warrants 203 203 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 736 736 736 (real estate mortgages) Convertible Debentures 0 0 0 0 Warrants 200 0 200 0 - ------------------------------------------------------------------------------------------------------------------------------------ MARKINGS & EQUIPMENT CORP. (FL)(2) Loans and Debt Securities 0 0 0 0 (highway striping) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ MASTER POWER, INC. (MD) Loans and Debt Securities 286 286 285 285 (power tool manufacturer) Preferred Stock (37,097 shares) 7 7 7 7 Warrants 4 4 4 4 - ------------------------------------------------------------------------------------------------------------------------------------ MAXTEC INTERNATIONAL CORP. (IL) Loans and Debt Securities 0 0 85 85 (electronic test instruments) Warrants 0 0 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ MEDIFIT OF AMERICA, INC. (NJ) Loans and Debt Securities 895 895 1,584 1,584 (physical rehabilitation) Warrants 93 0 93 0 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ INNOTECH, INC. (VA) Warrants 29 29 (bifocal lens manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ ISOTECHNOLOGIES, INC. (NC) Convertible Debt Securities 580 435 (orthopedic equipment) - ------------------------------------------------------------------------------------------------------------------------------------ JACKSON PRODUCTS, INC. (MI) Loans and Debt Securities 839 839 (safety equipment manufacturer) Common Stock 173 173 - ------------------------------------------------------------------------------------------------------------------------------------ JARAD BROADCASTING (NY) Loans and Debt Securities 2,111 2,111 (radio station) Warrants 73 73 - ------------------------------------------------------------------------------------------------------------------------------------ JUNE BROADCASTING (NJ) Loans and Debt Securities 1,346 1,346 (radio station) Warrants 58 58 - ------------------------------------------------------------------------------------------------------------------------------------ KIRKER ENTERPRISES (NJ) Loans and Debt Securities 0 0 (chemical manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ LOVE MORTGAGE CO. (DC) Loans and Debt Securities 732 732 (real estate mortgages) Convertible Debentures 197 197 Warrants 205 19 - ------------------------------------------------------------------------------------------------------------------------------------ MARKINGS & EQUIPMENT CORP. (FL)(2) Loans and Debt Securities 1,613 975 (highway striping) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ MASTER POWER, INC. (MD) Loans and Debt Securities 348 348 (power tool manufacturer) Preferred Stock (37,097 shares) 7 7 Warrants 4 4 - ------------------------------------------------------------------------------------------------------------------------------------ MAXTEC INTERNATIONAL CORP. (IL) Loans and Debt Securities 161 161 (electronic test instruments) Warrants 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ MEDIFIT OF AMERICA, INC. (NJ) Loans and Debt Securities 1,501 1,501 (physical rehabilitation) Warrants 93 93 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 18 55
SEPTEMBER 30, 1995 DECEMBER 31, 1994 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ MILL-IT STRIPING (FL) Loans and Debt Securities 125 125 125 125 (highway paint striping) Warrants 125 0 125 125 - ------------------------------------------------------------------------------------------------------------------------------------ MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 282 282 0 0 (real estate development) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ MLX/SINTERMET CORP. (GA)(1) Common Stock (5,835 shares-MLX) 241 61 241 24 (friction materials manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ MONTGOMERY TANK LINES (FL) Common Stock 0 0 0 0 (tank truck carrier) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ NOBEL EDUCATION DYNAMICS (PA)(1) Loans and Debt Securities 2,250 2,250 0 0 (education) Preferred Stock (398,936 shares) 750 1,047 0 0 Warrants 0 345 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ OLD MILL HOLDINGS, INC. (NY) Loans and Debt Securities 657 657 545 545 (custom embroidery of apparel) Warrants 45 0 35 35 - ------------------------------------------------------------------------------------------------------------------------------------ PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 200 100 (video stores) - ------------------------------------------------------------------------------------------------------------------------------------ PIATL HOLDINGS, INC. (NJ)(3) Loans and Debt Securities 167 167 148 148 (environmental consulting) Preferred Stock (36 shares) 267 44 267 106 Common Stock (36 shares) 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 529 533 665 665 (plastic bag manufacturer) Warrants 28 486 28 487 - ------------------------------------------------------------------------------------------------------------------------------------ PROVIDENTIAL CORPORATION (CA)(1) Common Stock (52,794 shares) 1,000 211 1,000 211 (shared appreciation reverse mortgages) - ------------------------------------------------------------------------------------------------------------------------------------ RADIO ONE (GA) Loans and Debt Securities 2,280 2,280 0 0 (radio stations) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ MILL-IT STRIPING (FL) Loans and Debt Securities 0 0 (highway paint striping) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 0 0 (real estate development) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ MLX/SINTERMET CORP. (GA)(1) Common Stock (5,835 shares-MLX) 241 31 (friction materials manufacturer) - ------------------------------------------------------------------------------------------------------------------------------------ MONTGOMERY TANK LINES (FL) Common Stock 62 92 (tank truck carrier) Warrants 46 346 - ------------------------------------------------------------------------------------------------------------------------------------ NOBEL EDUCATION DYNAMICS (PA)(1) Loans and Debt Securities 0 0 (education) Preferred Stock (398,936 shares) 0 0 Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ OLD MILL HOLDINGS, INC. (NY) Loans and Debt Securities 0 0 (custom embroidery of apparel) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 (video stores) - ------------------------------------------------------------------------------------------------------------------------------------ PIATL HOLDINGS, INC. (NJ)(3) Loans and Debt Securities 293 393 (environmental consulting) Preferred Stock (36 shares) 266 0 Common Stock (36 shares) 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 813 813 (plastic bag manufacturer) Warrants 28 506 - ------------------------------------------------------------------------------------------------------------------------------------ PROVIDENTIAL CORPORATION (CA)(1) Common Stock (52,794 shares) 1,000 277 (shared appreciation reverse mortgages) - ------------------------------------------------------------------------------------------------------------------------------------ RADIO ONE (GA) Loans and Debt Securities 0 0 (radio stations) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 19 56
SEPTEMBER 30, 1995 DECEMBER 31, 1994 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 905 905 902 902 (decorative ribbon manufacturer) Warrants 32 0 32 32 - ------------------------------------------------------------------------------------------------------------------------------------ SALTON/MAXIM HOUSEWARES, INC. (IL)(1,2) Loans and Debt Securities 0 0 0 0 (small appliance distributor) Common Stock 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ SPA LENDING CORPORATION (DC)(3) Preferred Stock Series A (5,578 shares) 398 398 398 398 (health spas) Preferred Stock Series B (8,755 shares) 506 424 506 506 Preferred Stock Series C (14,092 shares) 1,680 0 1,680 632 Common Stock (6,208 shares) 413 0 413 0 - ------------------------------------------------------------------------------------------------------------------------------------ SUNSTATES REFRIGERATED SERVICES, INC. (GA)(3) Loans and Debt Securities 2,778 2,778 2,799 2,799 (cold food storage) Preferred Stock (43,884 shares) 193 193 204 204 Common Stock (163 shares) 145 145 145 137 - ------------------------------------------------------------------------------------------------------------------------------------ TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,189 382 1,188 382 (Mexican fast food restaurant) Warrants 28 0 28 0 - ------------------------------------------------------------------------------------------------------------------------------------ TIMBERCREEK COMPANY (NY)(3) Loans and Debt Securities 2,248 2,248 1,537 1,537 (archery equipment) Common Stock 0 0 17 0 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FOAM, INC. (CT)(2,3) Loans and Debt Securities 1,744 174 1,744 174 (packaging systems) Common Stock (910 shares) 57 0 57 0 - ------------------------------------------------------------------------------------------------------------------------------------ TPG HOLDINGS, INC. (TX) Loans and Debt Securities 2,179 2,179 2,407 2,407 (commercial banking software development) Warrants 13 2,120 13 2,120 - ------------------------------------------------------------------------------------------------------------------------------------ TOWER BROADCASTING (MN) Loans and Debt Securities 0 0 0 0 (radio station) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ VISTECH CORPORATION (FL) Loans and Debt Securities 0 0 0 0 (computer vision products) Warrants 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,248 1,500 2,244 1,500 (visual communications products) Preferred Stock 0 0 0 0 Common Stock (270 shares) 277 0 277 0 - ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 0 0 (decorative ribbon manufacturer) Warrants 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ SALTON/MAXIM HOUSEWARES, INC. (IL)(1,2) Loans and Debt Securities 250 125 (small appliance distributor) Common Stock 0 118 - ------------------------------------------------------------------------------------------------------------------------------------ SPA LENDING CORPORATION (DC)(3) Preferred Stock Series A (5,578 shares) 0 0 (health spas) Preferred Stock Series B (8,755 shares) 0 0 Preferred Stock Series C (14,092 shares) 0 0 Common Stock (6,208 shares) 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ SUNSTATES REFRIGERATED SERVICES, INC. (GA)(3) Loans and Debt Securities 2,234 2,234 (cold food storage) Preferred Stock (43,884 shares) 0 0 Common Stock (163 shares) 35 0 - ------------------------------------------------------------------------------------------------------------------------------------ TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,188 199 (Mexican fast food restaurant) Warrants 28 0 - ------------------------------------------------------------------------------------------------------------------------------------ TIMBERCREEK COMPANY (NY)(3) Loans and Debt Securities 762 762 (archery equipment) Common Stock 17 17 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FOAM, INC. (CT)(2,3) Loans and Debt Securities 1,570 369 (packaging systems) Common Stock (910 shares) 57 0 - ------------------------------------------------------------------------------------------------------------------------------------ TPG HOLDINGS, INC. (TX) Loans and Debt Securities 1,463 1,463 (commercial banking software development) Warrants 13 2,120 - ------------------------------------------------------------------------------------------------------------------------------------ TOWER BROADCASTING (MN) Loans and Debt Securities 358 358 (radio station) Warrants 19 19 - ------------------------------------------------------------------------------------------------------------------------------------ VISTECH CORPORATION (FL) Loans and Debt Securities 7 0 (computer vision products) Warrants 8 0 - ------------------------------------------------------------------------------------------------------------------------------------ VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,239 1,270 (visual communications products) Preferred Stock 224 0 Common Stock (270 shares) 54 0 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 20 57
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ COMPANY'S NAME (STATE) INVESTMENTS (4) COST VALUE COST VALUE COST VALUE (TYPE OF BUSINESS) - ------------------------------------------------------------------------------------------------------------------------------------ WEATHERTECH DISTRIBUTING CO. (AL) Loans and Debt Securities 84 84 169 169 259 259 (HVAC wholesale distributor) Warrant 14 960 14 960 14 440 - ------------------------------------------------------------------------------------------------------------------------------------ WEST VIRGINIA RADIO CORP. (WV) Loans and Debt Securities 582 582 599 599 599 599 (radio station) Warrants 200 0 200 78 200 200 - ------------------------------------------------------------------------------------------------------------------------------------ WILLIAMS BROTHERS LUMBER (GA) Loans and Debt Securities 830 830 378 378 376 376 (builders' supply yards) Warrants 15 1,614 15 2,017 15 1,004 - ------------------------------------------------------------------------------------------------------------------------------------ WINCAPP BROADCASTING INC. (PA) Debt Securities 694 694 690 690 692 692 (radio station) Warrants 23 23 23 23 23 23 - ------------------------------------------------------------------------------------------------------------------------------------ Z-SPANISH RADIO NETWORK (CA) Loans and Debt Securities 2,983 2,983 2,606 2,606 0 0 (radio station) Warrants 3 3 2 2 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ SUBTOTAL $78,313 $87,984 $75,838 $81,773 $52,447 $61,962 ====================================================================================================================================
(1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. F - 21 58
- ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS (dollars in thousands) SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ LOANS WITH NO EQUITY COST VALUE COST VALUE COST VALUE (TYPE OF BUSINESS) (a) - ------------------------------------------------------------------------------------------------------------------------------------ Accounting Services (1 Loan) $179 $179 $182 $182 $186 $186 - ------------------------------------------------------------------------------------------------------------------------------------ Adult Care Facility (2 Loans) 1,936 1,936 606 527 424 424 - ------------------------------------------------------------------------------------------------------------------------------------ Asbestos Removal 0 0 16 0 27 22 - ------------------------------------------------------------------------------------------------------------------------------------ Auto Repair Shops (11 Loans) 1,590 1,519 1,729 1,675 1,926 1,926 - ------------------------------------------------------------------------------------------------------------------------------------ Chemical Manufacturer (1 Loan) 6 6 4 4 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ Clean Room Equipment Manufacturer (1 Loan) 66 0 0 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Coin Laundromats 0 0 77 77 92 92 - ------------------------------------------------------------------------------------------------------------------------------------ Computer Hardware & Software Distributor 0 0 0 0 207 207 - ------------------------------------------------------------------------------------------------------------------------------------ Contract Nursing Agency (1 Loan) 159 50 0 0 159 79 - ------------------------------------------------------------------------------------------------------------------------------------ Doughnut Shops (4 Loans) 735 735 690 690 1,451 1,451 - ------------------------------------------------------------------------------------------------------------------------------------ Drycleaners (1 Loan) 133 133 149 149 252 252 - ------------------------------------------------------------------------------------------------------------------------------------ Federal Government Contractors (1 Loan) 207 104 207 207 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Fried Chicken Restaurants (2 Loans) 1,436 1,436 1,563 1,563 1,712 1,712 - ------------------------------------------------------------------------------------------------------------------------------------ Gas Stations (1 Loan) 363 363 364 364 368 368 - ------------------------------------------------------------------------------------------------------------------------------------ Grocery Stores (1 Loan) 170 170 177 177 573 573 - ------------------------------------------------------------------------------------------------------------------------------------ Health Spas 0 0 0 0 2,333 988 - ------------------------------------------------------------------------------------------------------------------------------------ Hotels/Motels (6 Loans) 9,077 9,077 9,157 8,505 6,941 6,280 - ------------------------------------------------------------------------------------------------------------------------------------ Hotel In-room Services 0 0 0 0 685 685 - ------------------------------------------------------------------------------------------------------------------------------------ Limestone Mining (1 Loan) 834 1,310 939 939 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Liquor Store (1 Loan) 531 531 535 535 539 539 - ------------------------------------------------------------------------------------------------------------------------------------ Pizza Shops (24 Loans) 1,390 745 2,117 1,936 2,946 2,332 - ------------------------------------------------------------------------------------------------------------------------------------ Publishing Company 0 0 1,000 1,000 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Radio Stations (10 Loans) 11,408 11,408 10,786 10,749 9,905 9,836 - ------------------------------------------------------------------------------------------------------------------------------------ Restaurants 0 0 0 0 28 28 - ------------------------------------------------------------------------------------------------------------------------------------ Retail Shops (1 Loan) 529 1,068 544 1,083 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Small Appliances Distributor (1 Loan) 250 250 250 250 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Telephone Directories (1 Loan) 1,000 1,000 0 0 50 50 - ------------------------------------------------------------------------------------------------------------------------------------ Television Station (1 Loan) 125 125 125 125 1,125 1,125 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Number of loans as of September 30, 1995. F - 22 59
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ LOANS WITH NO EQUITY COST VALUE COST VALUE COST VALUE (TYPE OF BUSINESS) (a) - ------------------------------------------------------------------------------------------------------------------------------------ Tobacco Shop 0 0 0 0 154 154 - ------------------------------------------------------------------------------------------------------------------------------------ Travel Agency (1 Loan) 138 69 138 69 138 138 - ------------------------------------------------------------------------------------------------------------------------------------ Video Store 0 0 0 0 18 18 - ------------------------------------------------------------------------------------------------------------------------------------ Warehouse 0 0 0 0 40 40 - ------------------------------------------------------------------------------------------------------------------------------------ Wholesale Food Distributor (1 Loan) 232 232 232 232 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Yogurt Shops (3 Loans) 296 296 363 363 449 449 - ------------------------------------------------------------------------------------------------------------------------------------ SUBTOTAL $32,790 $32,742(b) $31,950 $31,401 $32,735 $29,961 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER INVESTMENT ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ Pledged repurchase agreements $865 $865 $1,217 $1,217 $1,342 $1,342 - ------------------------------------------------------------------------------------------------------------------------------------ Other investment assets 2,012 228 2,053 635 1,700 1,365 - ------------------------------------------------------------------------------------------------------------------------------------ SUBTOTAL $2,877 $1,093 $3,270 $1,852 $3,042 $2,707 - ------------------------------------------------------------------------------------------------------------------------------------ GRAND TOTAL $113,980 $121,819 $111,058 $115,026 $88,224 $94,630 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Number of loans as of September 30, 1995; (b) Includes 3 loans totaling $5,191 which are non-qualifying assets for BDC purposes at September 30, 1995. F - 23 60 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS As of September 30, 1995 (unaudited) and December 31, 1994 and 1993 A. COMPANIES HOLDING LOANS AND INVESTMENTS The loans and other investments listed are held by the Company and its wholly owned subsidiaries. B. LOANS AND DEBT SECURITIES The loans and debt securities included in investments bear interest at an annual rate ranging from 4 percent to 16.75 percent, and are generally payable in installments with final maturities from five to twenty years from date of issue. At September 30, 1995, of the aggregate cost of investments of $113,980,000, investments totaling approximately $9,519,000 are not accruing interest. C. VALUATION 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 equals or exceeds cost. Common stock investments that are traded on the over-the-counter market have been valued at the prevailing bid price, less a discount where appropriate. D. RESTRICTED SECURITIES The portfolios of the Company and its subsidiaries consist primarily of securities issued by privately held companies. The major portion of the assets of the Company and its subsidiaries consists of securities that are subject to restrictions on the resale or are otherwise illiquid. A majority of the securities held by the Company cannot be sold to the public without registration under the Securities Act of 1933. In connection with the Company's investments in securities with publicly traded companies, the securities held with the following companies are subject to restrictions on their sale: Allied Capital Lending Corporation; DeVlieg-Bullard, Inc.; DMI Furniture, Inc.; Garden Ridge Corporation; MLX/SinterMet Corp.; Nobel Education Dynamics; Esquire Communications, Ltd. and Providential Corporation. F - 24 61 E. DIVERSIFICATION OF LOANS AND INVESTMENTS The following industries represent 5 percent or more of the total value of the loans and investments outstanding at the dates indicated:
- ----------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, ------------- ------------------------- 1995 1994 1993 1992 ---- ---- ---- ---- Restaurants * * * 7% Hotels and Motels 7% 7% 7% 10% Manufacturing 16% 12% 6% * Pizza Shops * * * 5% Radio Stations 20% 17% 20% 12% Registered Investment Company 10% 13% 19% * Software Development 5% 5% * * * Less than 5%. - -----------------------------------------------------------------------------------------------------------------------------------
F. NET UNREALIZED APPRECIATION (DEPRECIATION) The net unrealized appreciation (depreciation) for all securities based on cost for Federal income tax purposes is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------- September 30, December 31, (in thousands) 1995 1994 ------------- ------------ Aggregate gross unrealized appreciation in which there is an excess of value over cost $ 22,625 $14,036 Aggregate gross unrealized depreciation in which there is an excess of cost over value (17,061) (15,191) -------- -------- Net unrealized appreciation (depreciation) $ 5,564 $(1,155) ======== ======== - -----------------------------------------------------------------------------------------------------------------------------------
The aggregate cost of securities for federal income tax purposes was $115,212,000 and $113,323,000 at September 30, 1995 and December 31, 1994, respectively. F - 25 62 [AUDITORS OPINION TO BE PROVIDED BY AMENDMENT] F - 26 63 ====================================================== ================================================ No dealer, salesman or other person has been authorized to give any information or to make any 883,665 SHARES representations not contained in this Prospectus in connection with the offer contained herein, and, if given or made, such information or representation ALLIED CAPITAL must not be relied upon as having been authorized by CORPORATION the Company, the Company's investment adviser or any underwriter. This Prospectus does not constitute an COMMON STOCK offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. ------------- PROSPECTUS ----------------------- ________ __, 199_ ------------- ====================================================== ================================================
64 PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 65 SUBJECT TO COMPLETION Date of issuance of this preliminary SAI: November __, 1995 883,665 SHARES ALLIED CAPITAL CORPORATION COMMON STOCK --------------- STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information is not a prospectus. It should be read with the prospectus dated ______________ ___, 1995 relating to this offering (the "Prospectus"), which may be obtained by calling the Company at (202) 331-1112 and asking for Investor Relations. Terms not defined herein have the same meaning as given to them in the Prospectus. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may any offers to buy be accepted prior to the time the registration statement becomes effective. This Statement of Additional Information does not constitute a prospectus. 66 TABLE OF CONTENTS
Page ---- MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4 Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-6 SUMMARY COMPENSATION TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-7 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . B-7 INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8 Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8 Custodian Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-10 Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-10 BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11 TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11
B - 2 67 MANAGEMENT DIRECTORS AND OFFICERS The directors and officers of the Company are listed below together with their respective positions with the Company and a brief statement of their principal occupations during the past five years and any positions held with affiliates of the Company:
Position(s) Held Name, Address, and With the Age Company Principal Occupation(s) During Past Five (5) Years ------------------------ --------------- -------------------------------------------------------------- David Gladstone* Chairman of the Employed by the Company or Advisers since 1974; Chairman and (Age 53) Board and Chief Chief Executive Officer of Allied II, Allied Commercial, Executive Allied Lending, and Advisers; Director, President, and Chief Officer Executive Officer of BMI; Director of Riggs National Corporation; Trustee of The George Washington University. He has served as a director of the Company since 1976. George C. Williams* Vice Chairman of Employed by the Company or Advisers since 1959; Vice Chairman (Age 69) the Board of Allied II, Allied Commercial, Allied Lending, and Advisers; Chairman of BMI. He has served as a director of the Company since 1964. He is the father of G. Cabell Williams III. Joseph A. Clorety III Director President of Clorety & Company, Inc. (registered investment (Age 53) adviser) for more than the past five years. He has served as a director of the Company since 1984. Michael I. Gallie Director Principal of The Millenium Group Inc. (financial and (Age 49) management consulting firm) for the past five years; President of Economic Development Finance Corporation from 1987 to 1990; Trustee and Chairman of Investment Committee of the District of Columbia Retirement Board from 1991 to 1995. He has served as a director of the Company since 1994. Warren K. Montouri Director Private investor for more than the past five years; Director (Age 66) of NationsBank, N.A. He has served as a director of the Company since 1986. Guy T. Steuart II Director Director and President of Steuart Investment Company (Age 64) (manages, operates, and leases real and personal property and holds stock in operating subsidiaries engaged in various manufacturing and service businesses) for more than the past five years; Trustee Emeritus of Washington and Lee University. He has served as a director of the Company since 1984.
B - 3 68
Position(s) Held Name, Address, and With the Age Company Principal Occupation(s) During Past Five (5) Years ------------------------ --------------- -------------------------------------------------------------- T. Murray Toomey Director Attorney in private practice for more than the past five (Age 71) years; Director of The National Capital Bank of Washington; Director of Federal Center Plaza Corporation; Director of The Donohoe Companies, Inc.; Trustee of The Catholic University of America. He has served as a director of the Company since 1959. G. Cabell Williams III* Director, Executive Vice President of Allied II, Allied Commercial, (Age 41) President, and Allied Lending Corporation, BMI, and Advisers; Director of Chief Operating Environmental Enterprises Assistance Fund. Since 1981, he Officer has held positions with the Company and with Advisers, Allied II, Allied Commercial, Allied Lending, and BMI after their inception. He has served as a director of the Company since 1993. He is the son of George C. Williams. Jon A. DeLuca Senior Vice Employed by Advisers since 1994. Senior Vice President, (Age 33) President, Treasurer, and Chief Financial Officer of Allied II, Allied Treasurer, and Commercial, Allied Lending, BMI, and Advisers since 1994; Chief Financial Manager of Entrepreneurial Services at Coopers & Lybrand from Officer 1986 to 1994. William F. Dunbar Executive Vice Employed by the Company or Advisers since 1987; President and (Age 36) President Chief Operating Officer of Allied II; Executive Vice President of Allied Commercial, Allied Lending, BMI, and Advisers. Thomas R. Salley General Counsel Employed by Advisers since 1988; General Counsel and (Age 38) and Secretary Secretary of Allied II, Allied Lending, Allied Commercial, BMI, and Advisers. Joan M. Sweeney Executive Vice Employed by Advisers since 1993; President and Chief (Age 36) President Operating Officer of Advisers; Executive Vice President of Allied II, Allied Commercial, Allied Lending, and BMI; Senior Manager at Ernst & Young from 1990 to 1993.
* "Interested persons" as defined in the 1940 Act. COMPENSATION The Company has no employees and does not pay any cash compensation to any of its officers, other than directors' fees to those of its officers who are also directors. All of the Company's officers are employed by Allied Advisers, the Company's investment adviser, which pays their cash compensation. The Company, from time to time, grants stock options to its officers under the Company's Stock Option Plan. B - 4 69 During 1994, each director received a fee of $1,000 for each meeting of the Board of Directors of the Company and its wholly owned subsidiaries or each separate committee meeting attended. There is no duplication of directors' fees and expenses even though some directors also take action on behalf of the Company's wholly owned subsidiaries. Aggregate directors' fees for 1994 were $97,000. In addition, on May 5, 1994, the Company's stockholders approved a one-time grant of options to each non-officer director to purchase 10,000 shares of the Company's common stock pursuant to the Company's Stock Option Plan. Such grants are subject to Commission approval, and an application for an exemptive order of the Commission permitting such grants has been submitted to the Commission by the Company. If the exemptive order is granted, the options will be priced at the then-current market value as of the date of approval. As there can be no assurance that the Commission will approve the Company's application for an exemptive order, such grants have not been included in the following table. The following table sets forth certain details of compensation paid to directors during 1994, as well as compensation paid for serving as a director of the two other investment companies to which the Company may be deemed to be related. B - 5 70 COMPENSATION TABLE
Aggregate Pension Or Estimated Total Compensation Compensation From Retirement Benefits Annual From Company and the Accrued as Part of Benefits Upon Related Companies Name and Position Company(1) Company Expenses Retirement Paid to Directors(2) - -------------------------------------------------------------------------------------------------------------- David Gladstone $9,500 $0 $0 $28,000 Director George C. Williams 12,000 0 0 29,000 Director G. Cabell Williams III 10,000 0 0 10,000 Director Joseph A. Clorety III 10,500 0 0 10,500 Director Guy T. Steuart II 13,500 0 0 13,500 Director Warren K. Montouri 10,500 0 0 10,500 Director T. Murray Toomey 12,000 0 0 12,000 Director Michael I. Gallie 8,000 0 0 8,000 Director
- ------------------------------------ (1) Consists only of directors' fees. (2) Includes amounts paid as compensation to directors by Allied II and Allied Lending, the other companies in the fund complex. STOCK OPTIONS No stock options were granted during 1994. The following chart summarizes the grant of options to directors during the past three fiscal years including the securities underlying those options or stock appreciation rights ("SARs"), and any long term incentive payouts ("LTIP"). B - 6 71 SUMMARY COMPENSATION TABLE
Long-Term Compensation -------------------------------------- Awards Payouts ----------------------------------- ------------- Securities Restricted Underlying Names and Principal Position Year Stock Award(s) Options/SARs LTIP Payouts - -------------------------------------------------------------------------------------------------------------- David Gladstone 1992 $0 0 $0 Director 1993 0 50,610 0 1994 0 0 0 George C. Williams 1992 $0 0 $0 Director 1993 0 5,556 0 1994 0 0 0 G. Cabell Williams III 1992 $0 0 $0 Director 1993 0 48,963 0 1994 0 0 0 Joseph A. Clorey III 1992 $0 0 $0 Director 1993 0 0 0 1994 0 0 0 Guy T. Steuart II 1992 $0 0 $0 Director 1993 0 0 0 1994 0 0 0 Warren K. Montouri 1992 $0 0 $0 Director 1993 0 0 0 1994 0 0 0 T. Murray Toomey 1992 $0 0 $0 Director 1993 0 0 0 1994 0 0 0 Michael I. Gallie 1992 $0 0 $0 Director 1993 0 0 0 1994 0 0 0
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of September 30, 1995, there were 6,185,660 shares of the Company's common stock outstanding. The Company knows of no person who owned beneficially five percent or more of its shares at that date. At that date, the Company's directors and officers as a group, 30 in number, beneficially owned 1,166,373 shares, which includes for this purpose 602,906 shares underlying unexercised stock options granted under the Company's Stock Option Plan that would be exercisable within sixty days of that date. Those 1,166,373 shares represent 17.26% of the shares that would be outstanding if all of those options were exercised. B - 7 72 INVESTMENT ADVISORY AND OTHER SERVICES Subject to the supervision and control of its Board of Directors, the investments of the Company are managed by Allied Capital Advisers, Inc., a publicly owned investment adviser located at 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006-2803, telephone (202) 331-1112. Advisers is registered with the Commission under the Investment Advisers Act of 1940. The shares of Advisers are traded on the Nasdaq National Market (symbol: ALLA). Advisers has thirty-eight (38) investment and other professionals, as well as thirty-four (34) other employees. David Gladstone and George C. Williams have 55 years of combined experience in making the types of investments proposed to be made by the Company. Mr. Gladstone holds an MBA degree from the Harvard Business School and worked for Price Waterhouse and ITT Corporation before joining the Allied Capital organization in 1974. He is the author of Venture Capital Handbook and Venture Capital Investing, both published by Simon & Schuster/Prentice Hall. Mr. Williams is a past President of the National Association of Small Business Investment Companies and has lectured as a resident executive at the McIntyre School of Commerce at the University of Virginia. All investments of the Company must be approved by a credit committee composed of the senior investment officers of Allied Advisers, including David Gladstone, George C. Williams, and G. Caball Williams III. Additionally, the Board of Directors reviews and approves every investment made by the Company. David Gladstone, George C. Williams, and G. Cabell Williams III are interested persons and affiliated persons, as those terms are defined in the 1940 Act, of the Company and its investment adviser. Advisers is at this time a party to investment advisory agreements with the Company and with Allied II and Allied Lending, both business development companies which, directly or through one or more small business investment company subsidiaries, specialize in loans with equity features to and equity investments in small business concerns. Advisers is the general partner of a private limited partnership which itself is the general partner of two privately funded venture capital limited partnerships, Allied Venture and Allied Technology, engaging in the same business as the Company and Allied II but no longer making new investments. Advisers serves as the investment adviser to those two limited partnerships. All of these entities co-invest with one another. In addition, Advisers is the investment manager of Allied Commercial, a publicly held real estate investment trust (a "REIT"), and the co-manager of BMI, a privately held real estate investment trust. Allied Commercial and BMI participate with one another in buying interest paying business loans secured by real estate. At September 30, 1995, total assets under Advisers' management approximated $639 million. INVESTMENT ADVISORY AGREEMENT In May 1995, the Company's stockholders approved a new investment advisory agreement (the "current agreement"). The current 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 the holders of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Company. The current agreement may, however, be terminated at any time on (60) sixty days' notice, without the payment of any penalty, by the Board of Directors or by vote of a majority of the Company's outstanding voting securities, as defined, and will terminate automatically in the event of its assignment. B - 8 73 The terms of the current agreement are virtually identical to those of the investment advisory agreement between the Company and Advisers that it replaced ("former agreement") except as to the calculation of the investment advisory fee and to the extent clarifying changes were made regarding the nature of professional or technical fees and expenses to be paid by the Company. The terms of the current agreement regarding calculation of the investment advisory fee are intended to reflect Advisers' practice of generally imposing a significantly lower fee on the Company's cash and Interim Investments than the fee applicable to the Company's invested assets, which Advisers has effected by waiving portions of the investment advisory fee applicable to the Company's cash and Interim Investments. In the current agreement the provisions of the former agreement concerning the transaction costs to acquire or dispose of an investment were clarified to describe the nature of professional or technical fees and expenses to be paid by the Company and to provide that those fees and expenses included items such as credit reports, title searches, fees of accountants or industry-specific technical experts, and transaction-specific travel expenses. The effect of those clarifications and the replacement of the former agreement does not result in the imposition of any new fee or expense to be paid by the Company or its stockholders. Replacement of the former agreement with the current agreement is expected to result in an advisory fee that is lower than that provided under the former agreement (absent waiver by Advisers of any portion of its fee) and approximately the same as that provided in recent practice when Advisers waives a portion of its fee annually. The terms of the current agreement are summarized below. Pursuant to the current agreement, Advisers manages the investments of the Company, subject to the supervision and control of the Board of Directors. Specifically, Advisers identifies, evaluates, structures, closes, and monitors the investments made by the Company. The Company will not make any investments that have not been recommended by Advisers as long as the current agreement remains in effect. Advisers has the authority to effect acquisitions and dispositions of investments for the Company's account, subject to approval by the Company's Board of Directors. The current 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 investment officers and the cost of office space, equipment, and other personnel necessary for day-to-day operations. The expenses that are paid by the Company include the Company's share of transaction costs (including legal and auditing) incident to the acquisition and disposition of investments, regular legal and auditing fees and expenses, the fees and expenses of the Company's directors, the costs of printing and distributing proxy statements and other communications to stockholders, the costs of promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company, rather than Advisers, is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses with respect to its operations and investments, as well as expenses of required and optional insurance and bonding. Advisers is, however, 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 the Company's such investment transaction or follow-on managerial assistance. Advisers will report to the Board of Directors not less often than quarterly all fees received by Advisers from any source whatever and whether, in its opinion, any such fee is one that Advisers is entitled to retain under the provisions of the current agreement. In the event that any member of the Board of Directors should disagree, the matter will be conclusively resolved by a majority of the Board of Directors, including a majority of the independent Directors. If the Company uses the services of attorneys or paraprofessionals on the staff of Advisers for the Company's corporate purposes in lieu of outside counsel, the Company will reimburse Advisers for such services at hourly rates calculated to cover the cost of such services, as well as for incidental disbursements by Advisers in connection with such services. As compensation for its services to and the expenses paid for the account of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end value of the Company's B - 9 74 consolidated total assets (less the Company's investment in Allied Lending and the Company's consolidated Interim Investments and cash) and 0.125% per quarter of the quarter-end value of the Company's Interim Investments and cash. The current agreement provides specifically that the fee to Advisers will not apply to the Company's investment in Allied Lending, as required by the SEC's 1993 exemptive order permitting the stepwise spinoff of Allied Lending. Such fees on an annual basis are equivalent to 2.5% of the Company's total consolidated assets (less the Company's investment in Allied Lending and the Company's consolidated Interim Investments and cash) and 0.5% of the Company's Interim Investments and cash. Pursuant to the terms of the former agreement, as compensation for its services to and the expenses paid for the account of the Company, Allied Advisers was entitled to be paid, quarterly in arrears, a fee equal to the sum of 0.625% per quarter of each quarter-end value of the Company's consolidated assets less the Company's investment in Allied Lending. Such fees on an annual basis were equivalent to 2.5% of the Company's consolidated invested assets less the Company's investment in Allied Lending. For the purposes of calculating the fee, the values of the Company's assets are determined as of the end of each calendar quarter. The quarterly fee was paid as soon as practicable after the values had been determined. The total amounts paid to Advisers under the former agreement for the last three fiscal years were $2,125,000 for 1992, $2,160,000 for 1993, and $2,605,000 for 1994. Under the former agreement, during 1992, 1993 and 1994, Advisers waived most of its fee on the Company's consolidated Interim Investments and cash, as the Company had excess Interim Investments and cash obtained with debt capital. The total fees waived on Interim Investments and cash were: $724,000 for 1992, $671,000 for 1993, and $527,000 for 1994. The fee to Advisers provided for by the current agreement is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, evaluating, structuring, closing, and monitoring the types of private investments in which the Company specializes. The rate of compensation paid by the Company to Advisers is substantially the same as that paid by Allied II, with which Advisers has also negotiated a new investment advisory agreement. The Company also understands that the fee to Advisers provided for by the current agreement is not in excess of that frequently paid by private investment funds engaged in similar types of investments. Such private funds also typically allocate to management a substantial participation in profits. CUSTODIAN SERVICES Under a Custodian Agreement, The Riggs National Bank of Washington, D.C., whose principal business address is 808 17th street, N.W., Washington, D.C. 20006, holds all securities of the Company, provides recordkeeping services, and serves as the Company's custodian. ACCOUNTING SERVICES The firm of Matthews, Carter and Boyce is the independent accountant for the Company for the year ending December 31, 1995. Its business address is: 8200 Greensboro Drive, Suite 1000, McLean, Virginia 22102-3864. Their phone number is (703) 761-4600. Matthews, Carter and Boyce is also the independent accountant for the Company's subsidiaries, Allied Investment Corporation, Allied Capital Financial Corporation, and Allied Development Corporation. B - 10 75 Matthews, Carter and Boyce, or its predecessor, has served as the Company's independent accountants since its inception and has no financial interest in the Company. The expense recorded during the fiscal year ended December 31, 1994, for the professional services provided to the Company by Matthews, Carter and Boyce consisted of fees for audit services (which included the audit of the consolidated financial statements of the Company and its subsidiaries and review of the filings by the Company of reports and registration statements with the Commission, the SBA or other regulatory authorities) and for non-audit services (the fees for the latter aggregating approximately 17% of the fees for audit services). The non-audit services, which were arranged for by management without prior consideration by the Board of Directors, consisted of non-audit related consultation and the preparation of tax returns for the Company and its subsidiaries. BROKERAGE ALLOCATION AND OTHER PRACTICES Since the Company generally acquires and disposes of its investments in privately negotiated transactions, it infrequently uses brokers. TAX STATUS The Company intends to qualify for and elect for each taxable year to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If the Company qualifies as a regulated investment company and distributes to stockholders annually in a timely manner at least 90% of its "investment company taxable income," as defined in the Code (i.e., net investment income, including accrued original issue discount, and net short-term capital gains) (the "90% Distribution Requirement"), it will not be subject to federal income tax on the portion of its investment company taxable income and net capital gains (net long-term capital gain in excess of net short-term capital loss) distributed to stockholders as required under the Code. In addition, if the Company distributes in a timely manner 98% of its capital gain net income for each one-year period ending on December 31, and distributes 98% of its net ordinary income for each calendar year (as well as any income not distributed in prior years), it will not be subject to the 4% nondeductible federal excise tax imposed with respect to certain undistributed income of regulated investment companies. If the Company qualifies as a regulated investment company as it intends to do, it generally will endeavor to distribute to stockholders all of its investment company taxable income and its net capital gain, if any, for each taxable year so that the Company will not incur income and excise taxes on its earnings. In order to qualify as a regulated investment company for federal income tax purposes, the Company must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale of stock or securities, or other income derived with respect to its business of investing in such stock or securities (the "90% Income Test"); (b) derive in each taxable year less than 30% of its gross income from the sale of stock or securities held for less than three months (the "30% Limitation"); and (c) diversify its holdings so that at the end of each quarter of the taxable year (i) at least 50% of the value of the Company's assets consists of cash, cash items, U.S. government securities, and other securities if such other securities of any one issuer do not represent more than 5% of the Company's assets or 10% of the outstanding voting securities of the issuer, and (ii) no more than 25% of the value of the Company's assets is invested in the securities of one issuer (other than U.S. government securities and securities of other regulated investment companies) or of two or more issuers that are controlled (as determined under applicable Code rules) by the Company and are engaged in the same or similar trades or businesses. Allied Lending, formerly a wholly owned subsidiary of the Company, originates loans which are 70%-90% guaranteed by the SBA. Allied Lending then sells the guaranteed portion of these loans in the secondary market. B - 11 76 The Internal Revenue Service may assert that these transactions subject Allied Lending to a liability for income taxes of up to $845,000 for the year ended December 31, 1992. The Company has agreed to indemnify Allied Lending for this potential liability. Management believes that the Company has valid defenses for the position that such transactions do not subject Allied Lending to a liability for additional income taxes. If the Company acquires or is deemed to have acquired debt obligations that were issued originally at a discount or that otherwise are treated under applicable tax rules as having original issue discount, it will be required to include in income each year a portion of the original issue discount that accrues over the life of the obligation regardless of whether cash representing such income is received by the Company in the same taxable year and to make distributions accordingly. Although the Company presently does not expect to do so, it is authorized to borrow funds and to sell assets in order to satisfy its distribution requirements. However, under the 1940 Act, the Company will not be permitted to make distributions to stockholders while the Company's debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. Moreover, the Company's ability to dispose of assets to meet its distribution requirements may be limited by other requirements relating to its status as a regulated investment company, including the 30% Limitation and the diversification requirements. If the Company disposes of assets in order to meet its distribution requirements, it may make such dispositions at times which, from an investment standpoint, are not advantageous. If the Company fails to satisfy the 90% Distribution Requirement or otherwise fails to qualify as a regulated investment company in any taxable year, it will be subject to tax in such year on all of its taxable income, regardless of whether the Company makes any distributions to its stockholders. In addition, in that case, all of the Company's distributions to its stockholders will be characterized as ordinary income (to the extent of the Company's current and accumulated earnings and profits). In contrast, as explained below, if the Company qualifies as a regulated investment company, a portion of its distributions may be characterized as long-term capital gain in the hands of stockholders. For any period during which the Company qualifies as a regulated investment company for tax purposes, dividends to stockholders of the Company's investment company taxable income will be taxable as ordinary income to stockholders to the extent of the Company's current or accumulated earnings and profits. Distributions of the Company's net capital gain properly designated by the Company as "capital gain dividends" will be taxable to stockholders as a long-term capital gain regardless of the stockholder's holding period for his or her shares. To the extent that the Company retains any net capital gain, it may designate such retained gain as "deemed distributions" and pay a tax thereon for the benefit of its stockholders. In that event, the stockholders will be required to report their share of retained net capital gain on their tax returns as if it had been distributed to them and report a credit for the tax paid thereon by the Company. The amount of the deemed distribution net of such tax would be added to the stockholder's cost basis for his shares. Since the Company expects to pay tax on net capital gain at the regular corporate tax rate of 35% and the maximum rate payable by individuals on net capital gain is 28%, the amount of credit that individual stockholders may report would exceed the amount of tax that they would be required to pay on net capital gain. Stockholders who are not subject to federal income tax or tax on capital gains should be able to file a Form 990T or an income tax return on the appropriate form that allows them to recover the taxes paid on their behalf. B - 12 77 Any dividend declared by the Company in October, November, or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by the stockholders on December 31 of the year in which the dividend was declared. Investors should be careful to consider the tax implications of buying shares just prior to a distribution. Even if the price of the shares includes the amount of the forthcoming distribution, the stockholder generally will be taxed upon receipt of the distribution and will not be entitled to offset the distribution against the tax basis in his shares. A stockholder may recognize taxable gain or loss if he sells or exchanges his shares. Any gain arising from (or, in the case of distributions in excess of earnings and profits, treated as arising from) the sale or exchange of shares generally will be a capital gain or loss except in the case of dealers or certain financial institutions. This capital gain or loss normally will be treated as a long-term capital gain or loss if the stockholder has held his shares for more than one year; otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or exchange of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received with respect to such shares and, for this purpose, the special rules of Section 246(c)(3) and (4) of the Code generally apply in determining the holding period of shares. Net capital gain of noncorporate taxpayers is currently subject to a maximum federal income tax rate of 28% while other income may be taxed at rates as high as 39.6%. Corporate taxpayers are currently subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Tax rates imposed by states and local jurisdictions on capital gain and ordinary income may differ. The Company may be required to withhold U.S. federal income tax at the rate of 31% of all taxable dividends and distributions payable to stockholders who fail to provide the Company with their correct taxpayer identification number or to make required certifications, or regarding whom the Company has been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax, and any amounts withheld may be credited against a stockholder's U.S. federal income tax liability. Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply to distributions to stockholders that are nonresident aliens or foreign partnerships, trusts, or corporations. Foreign investors should consult their tax advisors with respect to the possible U.S. federal, state, and local tax consequences and foreign tax consequences of an investment in the Company. The Company will send to each of the stockholders, as promptly as possible after the end of each fiscal year, a notice detailing, on a per share and per distribution basis, the amounts includible in such stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year's distributions generally will be reported to the Internal Revenue Service. Distributions may also be subject to additional state, local, and foreign taxes depending on each stockholder's particular situation. Stockholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Company, including the possible effect of any pending legislation or proposed regulation. B - 13 78 PART C OTHER INFORMATION 79 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS 1. Financial Statements The following financial statements are included in the Prospectus (Part A of this Registration Statement): Consolidated Statement of Financial Position -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 Consolidated Statement of Operations -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Consolidated Statement of Changes in Net Assets -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Consolidated Statement of Cash Flows -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Consolidated Statement of Loans to and Investments in Small Business Concerns -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 Notes to Consolidated Statement of Loans to and Investments in Small Business Concerns Report of Independent Accountants 2. Exhibits a. Articles of Incorporation of the Registrant (1) b. By-laws of the Registrant, as amended (2) c. None d. Specimen certificate of Registrant's Common Stock, par value $1.00, the rights of holders of which are defined in Exhibits a and b * C - 1 80 e. Registrant's dividend reinvestment plan (7) f.1 Form of SBA subordinated debentures comprising the long-term debt of Registrant's wholly-owned subsidiary, Allied Investment Corporation * f.2 Form of preferred stock agreement for 3 percent cumulative preferred stock, $100 par value, of Allied Capital Financial Corporation, the rights of the holder of which are defined in Exhibit f.4 (9) f.3 Form of preferred stock agreement for 4 percent preferred stock, $100 par value, of Allied Capital Financial Corporation, the rights of the holder of which are defined in Exhibit f.4 (10) f.4 Excerpts from Articles of Incorporation and By-laws of Allied Capital Financial Corporation that define rights of holder of preferred stock * f.5 Form of SBA subordinated debentures comprising the long-term debt of Registrant's wholly owned subsidiary, Allied Capital Financial Corporation * f.6 Note Agreement between Massachusetts Mutual Life Insurance Company and the Registrant, Allied Investment Corporation, and Allied Capital Financial Corporation dated April 30, 1992 and amendments (3) f.7 Loan Agreement between Overseas Private Investment Corporation and Registrant, dated April 10, 1995 * g. Investment Advisory Agreement between Registrant and Allied Capital Advisers, Inc. (4) h. None i. Registrant's Incentive Stock Option Plan, as amended in May 1994 (8) j.1. Custodian Agreement between The Riggs National Bank of Washington, D.C., and the Registrant, dated June 27, 1989 * j.2. Custodian Agreement between The Riggs National Bank of Washington, D.C., and Allied Investment Corporation, dated June 27, 1989 * j.3 Custodian Agreement between The Riggs National Bank of Washington, D.C., and Allied Capital Financial Corporation, dated June 27, 1989 * C - 2 81 k.1. Tax Indemnification Agreement dated November 12, 1993 between the Company and Allied Capital Lending Corporation (5) k.2. Letter Agreement dated November 16, 1993 among Allied Capital Lending Corporation, the Company and Lehman Brothers Inc. (6) l. Opinion of the firm of Sutherland, Asbill & Brennan, as to the legality of the common stock being registered, and Consent to the use of such Opinion * m. None n. Consent of Matthews, Carter and Boyce, independent accountants * o. None p. Non-Transferable Subscription Form * q. None r. Financial Data Schedule (11) s. Powers of Attorney of certain signatories of this registration statement ** - ----------- * To be filed by pre-effective amendment. ** Filed herewith. (1) Incorporated by reference to Exhibit D to the Company's definitive proxy statement filed on April 11, 1991. (2) Incorporated by reference to Exhibit E to the Company's definitive proxy statement filed on April 11, 1991. (3) 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. (4) Incorporated by reference to Exhibit A to the Company's definitive proxy statement filed on March 30, 1995. (5) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference to an exhibit of the same number filed with the Company's Form 8-K dated November 19, 1993. C - 3 82 (7) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (8) Incorporated by reference to Exhibit A to the Company's definitive proxy statement with respect to an annual meeting of stockholders held on May 5, 1994. (9) Incorporated by reference to such Exhibit filed with Registration Statement No. 33-22200. (10) Incorporated by reference to such Exhibit filed with Registration Statement No. 34501 or Pre-Effective Amendment No. 1 thereto. (11) Incorporated by reference to the Exhibit filed with the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 1995, filed on November 14, 1995. ITEM 25. MARKETING ARRANGEMENTS None. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses in connection with the distribution of the securities being offered hereby, other than underwriting discounts and commissions, are estimated as follows: Securities and Exchange Commission Registration Fee . . . . . . . . . . . . $3,980.31 Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . Federal Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer Agent's and Registrar's Fees and Expenses . . . . . . . . . . . . Expenses of Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . Printing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Auditor's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $________
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL Allied Capital Corporation (the Registrant)* - Maryland Subsidiaries: ------------ Allied Investment Corporation - Maryland 100% Allied Capital Financial Corporation - Maryland 100% Allied Development Corporation - District of Columbia 100%
C - 4 83 Allied Capital Corporation II* - Maryland Subsidiaries: ------------ Allied Investment Corporation II - Maryland 100% Allied Financial Corporation II - Maryland 100% Allied Capital Commercial Corporation* - Maryland Subsidiaries: ------------ Jasper Montgomery Holdings, Inc. - Maryland 100% ALCC Acceptance Corporation - Maryland 100% Allied Capital Lending Corporation* - Maryland Subsidiary: ---------- ACLC Limited Partnership - Maryland 99% Business Mortgage Investors, Inc.* - Maryland Subsidiaries: ------------ BMI Holdings, Inc. - Maryland 100% BMI Acceptance Corporation - Maryland 100% Allied Capital Funding, L.L.C.** - Delaware Allied Capital Mortgage Corporation* - Maryland Allied Capital Advisers, Inc. - Maryland Subsidiary: ---------- Allied Capital Property Corporation - Maryland 100%
- ------------- * Each of these entities is, like the Registrant, advised by Allied Capital Advisers, Inc. ("Advisers"). By so including these entities herein, the Registrant does not concede, however, that it and such other entities are controlled by Allied Advisers. ** The members of Allied Capital Funding, L.L.C. are ALCC Acceptance Corporation and BMI Acceptance Corporation. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following table presents the number of record holders of each class of securities of the Company outstanding as of September 30, 1995:
Number of Title of Class Record Holders -------------- -------------- Common Stock 1,800* Non-Redeemable 3% Cumulative Preferred Stock 1 (Allied Financial) Redeemable 4% Cumulative Preferred Stock 1 (Allied Financial) 10-Year Subordinated Debentures 1 (Allied Investment and Allied Financial)
C - 5 84 LIBOR +1.15% Revolving Line of Credit 1 10-Year 9.15% Senior Notes 1 (The Company, Allied Investment and Allied Financial)
-------------------- * Estimate. The Company also estimates that there are a total of 9,000 beneficial owners of its common stock. ITEM 29. INDEMNIFICATION The Annotated Code of Maryland, Corporations and Associations, Section 2-418 provides that a Maryland corporation may indemnify any director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise or employee benefit plan, made a party to any proceeding by reason of service in that capacity unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; or the director actually received an improper personal benefit in money, property or services; or, in the case of any criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the director in connection with the proceeding, but if the proceeding was one by or in the right of the corporation, indemnification may not be made in respect of any proceeding in which the director shall have been adjudged to be liable to the corporation. Such indemnification may not be made unless authorized for a specific proceeding after a determination has been made, in the manner prescribed by the law, that indemnification is permissible in the circumstances because the director has met the applicable standard of conduct. On the other hand, the director must be indemnified for expenses if he has been successful in the defense of the proceeding or as otherwise ordered by a court. The law also prescribes the circumstances under which the corporation may advance expenses to, or obtain insurance or similar cover for, directors. The law also provides for comparable indemnification for corporate officers and agents. The Articles of Incorporation of the Company provide that its directors and officers shall, and its agents in the discretion of the Board of Directors may, be indemnified to the fullest extent permitted from time to time by the laws of Maryland. The Company's Bylaws also, however, provide that the Company may not indemnify any director or officer against liability to the Registrant or its security holders to which he might otherwise be subject by reason of such person's willful C - 6 85 misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of such disabling conduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described above, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person in the successful defense of an action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of the court of the issue. The Registrant, in conjunction with its investment adviser and other entities managed thereby, carries liability insurance for the benefit of its directors and officers on a claims-made basis of up to $2,500,000, subject to a $200,000 retention and the other terms thereof. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Allied Capital Advisers, Inc., the investment adviser of the Registrant, is engaged in the business of identifying, evaluating, structuring, closing, and monitoring the investments made by the Registrant as well as other public and private entities engaged in small business finance. Certain information about the activities of each director or executive officer of Allied Capital Advisers, Inc., at any time during the past two fiscal years is set forth below:
NAME AND PRINCIPAL BUSINESS ADDRESS* OF EACH COMPANY WITH WHICH THE NAMED PERSON HAS HAD ANY CONNECTION, AND THE NATURE OF SUCH NAME CONNECTION. ---- -------------------------------------- David Gladstone Chairman of the Board and Chief Executive Officer, Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation
C - 7 86 II, Allied Capital Lending Corporation, and Allied Capital Commercial Corporation; Director, President and Chief Executive Officer, Business Mortgage Investors, Inc.; Director, Riggs National Corporation, 808 17th Street, N.W., Washington, DC 20006. George C. Williams Vice Chairman of the Board, Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation, and Allied Capital Commercial Corporation; Chairman, Business Mortgage Investors, Inc.; Director, Golden Eagle/Satellite Archery, Inc., 1111 Corporate Drive, Farmington, NY 14425. Brooks H. Browne Director, Allied Capital Advisers, Inc.; President, Environmental Enterprises Assistance Fund, 1901 N. Moore Street, Suite 1004, Arlington, VA 22209 (since 1993). Robert E. Long Director, Allied Capital Advisers, Inc.; Chairman and Chief Executive Officer, Southern Starr Broadcasting Group, Inc., 99 Canal Center Plaza, Suite 220, Alexandria, VA 22314; Director, American Heavy Lift Shipping Company, 365 Canal Street, New Orleans, LA 70130, Global Travel, Inc., 1911 N. Fort Meyer Drive, Arlington, VA 22209, CSC Scientific, Inc., 8315 Lee Highway, Fairfax, VA 22031, Outer Seal Building Products, Inc., 5114 College Avenue, College Park, MD 20740, Business News Network, Inc., 99 Canal Center Plaza, Suite 220, Alexandria, VA 22314, and Ambase Corporation, 51 Weavers Street, Greenwich, CT 06831. William L. Walton Director, Allied Capital Advisers, Inc.; Director and President, Education Partners, Inc.; Director, Odyssey Publishing Co.; Chairman, Success Lab, Inc.; and President, Language Odyssey (all located at 401 N. Michigan Avenue, Suite 3370, Chicago, IL 60611). Joan M. Sweeney Director, President, and Chief Operating Officer, Allied Capital Advisers, Inc.; Executive Vice President, Allied Capital Corporation, Allied Capital Corporation
C - 8 87 II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc. William F. Dunbar Executive Vice President, Allied Capital Advisers, Inc.; President and Chief Operating Officer, Allied Capital Corporation II; Executive Vice President, Allied Capital Corporation, Allied Capital Commercial Corporation, Allied Capital Lending Corporation, and Business Mortgage Investors, Inc. Katherine C. Marien Executive Vice President, Allied Capital Advisers, Inc.; President and Chief Operating Officer, Allied Capital Lending Corporation; Executive Vice President, Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc. John M. Scheurer Executive Vice President, Allied Capital Advisers, Inc.; President and Chief Operating Officer, Allied Capital Commercial Corporation; Executive Vice President, Allied Capital Corporation, Allied Capital Corporation II, and Allied Capital Lending Corporation; Executive Vice President and Chief Operating Officer, Business Mortgage Investors, Inc. George Stelljes III Executive Vice President, Allied Capital Advisers, Inc.; Senior Vice President, Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Commercial Corporation, Allied Capital Lending Corporation, and Business Mortgage Investors, Inc.; Director, Total Foam, Inc., 80 Rowe Avenue, Unit B, Milford, CT 06460, Visu-Com, Inc., 1207 Bernard Drive, Baltimore, MD 21203, and Centennial Media Corporation, 6061 S. Willow Drive, Suite 232, Englewood, CO 80111. G. Cabell Williams III Executive Vice President, Allied Capital Advisers, Inc.; President and Chief Operating Officer, Allied Capital Corporation; Executive Vice President, Allied Capital Corporation II, Allied Capital Commercial Corporation, Allied Capital Lending Corporation and Business
C - 9 88 Mortgage Investors, Inc. Director, President, and Treasurer, Broadcast Holdings, Inc., 1025 Vermont Avenue, N.W., Suite 1030, Washington, DC 20005 and Georgetown Broadcasting Company, Inc., 1416 Highmarket Street, Georgetown, SC 29442; Director, Garden Ridge Corporation, 19411 Atrium Place, Suite 170, Houston, TX 77084; Director, Environmental Enterprises Assistance Fund, 1901 N. Moore Street, Suite 1004, Arlington, VA 22209. Jon A. DeLuca Senior Vice President, Treasurer and Chief Financial Officer, Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc. Manager, Entrepreneurial Services, Coopers & Lybrand (1986-1994). Thomas R. Salley General Counsel and Secretary, Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc.
- ---------------- * The business address of Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc., is c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. ITEM 31. LOCATIONS OF ACCOUNTS AND RECORDS All of the accounts and records of the Registrant, including all the accounts, books and documents required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder, are maintained by Allied Capital Advisers, Inc., 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. ITEM 32. MANAGEMENT SERVICES Other than with its investment adviser, the Registrant is not a party to any contract pursuant to which any person performs management-related services to the Registrant. C - 10 89 ITEM 33. UNDERTAKINGS 1. The Registrant undertakes to suspend the offering of shares until the Prospectus is amended if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than ten percent from its net asset value as of the effective date of the Registration Statement or (2) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus. 2. Not Applicable. 3. The Registrant undertakes in the event that the securities being registered are to be offered to existing shareholders pursuant to warrants or rights and any securities are to be offered to the public, to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by underwriters during the subscription period, the amount of unsubscribed securities to be purchased by underwriters, and the terms of any subsequent reoffering thereof. The Registrant further undertakes that if any public offering by the underwriters of the securities being registered is to be made on terms differing from those set forth on the cover page of the prospectus, the Registrant shall file a post-effective amendment to set forth the terms of such offering. 4. Not applicable. 5. a. The Registrant undertakes that, for the purpose of determining any liability under the 1933 Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; b. The Registrant undertakes that for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. 6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. C - 11 90 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, and District of Columbia, on the 27th day of November, 1995. ALLIED CAPITAL CORPORATION By: /s/ T.R. Salley ----------------------------- Thomas R. Salley General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David Gladstone Chairman of the Board and Chief November 27, 1995 - ------------------- Executive Officer (Principal ------------------- David Gladstone Executive Officer) and Director * Vice Chairman of the Board and - ------------------ Director -------------------- George C. Williams /s/ G. Cabell Williams President and Chief Operating November 27, 1995 - ---------------------- Officer and Director ------------------- G. Cabell Williams III * Director - --------------------- -------------------- Joseph A. Clorety III * Director - --------------------- -------------------- Michael I. Gallie * Director - --------------------- -------------------- Warren K. Montouri * Director - --------------------- -------------------- Guy T. Steuart II * Director - --------------------- -------------------- T. Murray Toomey /s/ Jon A DeLuca Vice President, Treasurer and November 29, 1995 - ---------------- Chief Financial Officer ------------------- Jon A. DeLuca (Principal Financial Officer and Principal Accounting Officer)
* By: /s/ T.R. Salley --------------- Thomas R. Salley, Attorney-in-Fact and Agent, on November 29, 1995, pursuant to the Powers of Attorney filed herewith. 91 EXHIBIT INDEX Exhibit Number Page - ------- ---- (s) Powers of Attorney of certain signatories of this registration statement EX-24.S 2 POWERS OF ATTORNEY 1 Exhibit (s) Powers of Attorney of certain signatories of this registration statement 2 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints G. Cabell Williams III and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ David Gladstone ----------------------------- David Gladstone 3 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ George C. Williams ----------------------------- George C. Williams 4 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ G. Cabell Williams ----------------------------- G. Cabell Williams III 5 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ Joseph A. Clorety III ----------------------------- Joseph A. Clorety III 6 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ Michael Gallie ----------------------------- Michael I. Gallie 7 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ Warren K. Montouri ----------------------------- Warren K. Montouri 8 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ Guy T. Steuart II ----------------------------- Guy T. Steuart II 9 POWER OF ATTORNEY The undersigned Director of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ T. Murray Toomey ----------------------------- T. Murray Toomey 10 POWER OF ATTORNEY The undersigned officer of Allied Capital Corporation, a Maryland corporation (the "Company"), hereby constitutes and appoints David Gladstone, G. Cabell Williams III, and Thomas R. Salley and each of them (with full power to each of them to act alone), his true and lawful attorney-in-fact and agent, with full power of substitution to each, for him and on his behalf and in his name, place, and stead, to execute and file any of the documents referred to below relating to: (i) registration under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and sale of shares of common stock newly issued or reissued by the Company or (ii) registration under the 1933 Act of the offer and purchase of units of other classes of outstanding securities previously issued by the Company. Such documents shall include, but shall not be limited to, registration statements on any form or forms under the 1933 Act, and any and all amendments and supplements thereto, with all exhibits and all instruments necessary or appropriate in connection therewith, each of said attorneys-in-fact and agents and his or her substitutes being empowered to act with or without the others or other, and to have full power and authority to do or cause to be done in the name and on behalf of the undersigned each and every act and thing requisite and necessary or appropriate with respect thereto to be done in and about the premises in order to effectuate the same, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this 21st day of November, 1995. /s/ Jon A DeLuca ----------------------------- Jon A. DeLuca -----END PRIVACY-ENHANCED MESSAGE-----