-----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, C8H6DZcCpSXIUBxwKXPYTG9NRtbEAh/05ccUuOmq3Q2CRcCGRGADp468C1c2UTGm SOSG8OaxGODevc/aWUsOPw== 0000950133-96-000051.txt : 19960125 0000950133-96-000051.hdr.sgml : 19960125 ACCESSION NUMBER: 0000950133-96-000051 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19960124 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED CAPITAL CORP CENTRAL INDEX KEY: 0000003845 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 530245085 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64629 FILM NUMBER: 96506628 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/A 1 ALLIED CAPITAL CORPORATION N-2/A 1 As filed with the Securities and Exchange Commission on January 24, 1996 File No. 33-64629 ================================================================================ 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 /x/ Pre-Effective Amendment No. 2 ----- / / 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: /x/ It is proposed that this filing will become effective (check appropriate box) / / 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 Price Registration Fee - ----------------------------------------------------------------------------------------------------------------------- Common Stock, $1.00 par value 883,655 shares $13.0625 (1) $11,542,874 (1) $3,980.31 (2) Common Stock, $1.00 par value 1,783 shares $13.875 (3) $24,732 (3) $100.00 (2) Common Stock $1.00 par value 132,817 shares $13.625 (4) $1,809,631 (4) $624.01 - -----------------------------------------------------------------------------------------------------------------------
(1) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the "1933 Act"), based on the average of the high and low prices per share on November 27, 1995 on the Nasdaq National Market. (2) Previously paid. (3) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the 1933 Act, based on the average of the high and low prices per share on January 11, 1996 on the Nasdaq National Market. (4) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the 1933 Act, based on the average of the high and low prices per share on January 22, 1996 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 Outside Front Cover Page 3. Fee Table and Synopsis Summary; Fees and Expenses; Available Information 4. Financial Highlights Financial Highlights; Management's Discussion and Analysis of Financial Condition and Results of Operation 5. Plan of Distribution The Offer 6. Selling Shareholders (Not Applicable) 7. Use of Proceeds Use of Proceeds 8. General Description of the Registrant The Company; Public Trading and Net Asset Value Information; Financial Statements 9. Management Management; Custodian, Transfer and Dividend Paying Agent and Registrar 10. Capital Stock, Long-Term Debt, and Other Authorized Classes of Securities; Description of Common Securities Stock; The Company 11. Defaults and Arrears on Senior Securities (Not Applicable) 12. Legal Proceedings (Not Applicable) 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 Outside Front Cover Page 15. Table of Contents Table of Contents 16. General Information and History Not Applicable 17. Investment Objective and Policies The Company 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 Financial Statements
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 PROSPECTUS 885,448 SHARES ALLIED CAPITAL CORPORATION COMMON STOCK ------------------------ Allied Capital Corporation (the "Company") is issuing to the stockholders of record of the outstanding shares of its common stock at the close of business on January 22, 1996 ("the Record Date") non-transferable rights (the "Subscription Rights"). Each stockholder of the Company will be issued one Subscription Right for each whole share of the Company held as of the Record Date, and will be entitled to subscribe for and purchase from the Company up to one (1) authorized but heretofore unissued share of the Company's common stock for each seven (7) Subscription Rights held (the "Primary Subscription"), aggregating a total of 885,448 shares of common stock. Shares of common stock of the Company offered through this Prospectus are referred to as the "Shares." No certificates or other physical rights will be distributed. Stockholders who fully exercise their Subscription Rights will be entitled to the additional privilege of subscribing, subject to certain limitations and subject to allocation or increase, for any Shares not acquired by exercise of Subscription Rights (the "Over-Subscription Privilege"). The Primary Subscription and the Over-Subscription Privilege collectively comprise the "Offer." The Company may, at its sole discretion, increase the number of Shares subject to subscription by up to 15%, or up to 132,817 Shares (the "Additional Shares"), for an aggregate total of 1,018,265 Shares available under the Offer. No fractional Subscription Rights will be issued and no fractional shares will be issued upon exercise of Subscription Rights. Subscription Rights are non-transferable and will not be admitted for trading or quotation on any exchange and therefore may not be purchased or sold. Only persons who are stockholders of the Company on the Record Date may subscribe. 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 Company may offer and sell any Shares not sold in the Offer, including any or all of the Additional Shares, to certain other investors. See "The Offer--Sales of Shares Subsequent to the Offer," page 17. Stockholder inquires should be directed to Shareholder Communications Corporation, the Information Agent and Offering Coordinator, at (800) 221-5724 ext. 331. THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE AVERAGE OF THE LAST REPORTED SALE PRICE OF A SHARE OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET ("NASDAQ") ON THE DATE OF EXPIRATION OF THE OFFER (THE "PRICING DATE") AND EACH OF THE FOUR PRECEDING BUSINESS DAYS. SEE "THE OFFER," PAGE 12. The Offer will 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 FEBRUARY 27, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN. The Company, a Maryland corporation, is a closed-end, management investment company that has elected to be regulated 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 outstanding shares of the Company are quoted on the Nasdaq National Market under the symbol "ALLC." 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," PAGE 24. 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 at the address or telephone number listed above. As indicated at some points in this Prospectus, certain information in the Statement of Additional Information is incorporated in this Prospectus by reference. See page 32 of this Prospectus for the table of contents of the Statement of Additional Information. ------------------------ 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.
- ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- ESTIMATED SUBSCRIPTION ESTIMATED ESTIMATED PROCEEDS TO PRICE(1) SALES LOAD(2) THE COMPANY(3)(4) - ----------------------------------------------------------------------------------------------------- Per Share...................... $12.90 $0.3225 $12.58 - ----------------------------------------------------------------------------------------------------- Total(5)....................... $11,422,279 $285,557 $11,136,722 - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
(Footnotes on the following page) The date of this Prospectus and of the Statement of Additional Information is January 25, 1996. 7 (Footnotes from previous page) (1) The Estimated Subscription Price is computed as 95% of the average of the last reported sale price of the Company's common stock on Nasdaq on January 22, 1996 and each of the four preceding business days. (2) In connection with the Offer, the Company will pay to certain broker-dealers soliciting the exercise of Subscription Rights solicitation fees equal to 2.5% of the Subscription Price for each Share issued as a result of their soliciting efforts. The Company has agreed to indemnify such broker-dealers against certain liabilities under the Securities Act of 1933, as amended. See "The Offer--Soliciting Fees," page 14. (3) Before deduction of offering costs incurred related to this offering, payable by the Company, estimated at $272,304. (4) Funds received prior to the final due date of the Offer will be deposited into a segregated interest-bearing bank account (which interest will be paid to the Company) pending proration and distribution of Shares. (5) Assumes all Subscription Rights are exercised at the Estimated Subscription Price. Pursuant to the Over-Subscription Privilege, the Company may, at its sole discretion, increase the number of Shares subject to the Offer by up to 15%. If the Company increases the number of Shares subject to Subscription by 15%, the aggregate maximum Estimated Subscription Price, Estimated Sales Load, and Estimated Proceeds to the Company will be $13,135,618, $328,390, and $12,807,228, respectively. 2 8 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 businesses. 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 "Management--Investment Adviser" page 28. INVESTMENT OBJECTIVE OF The investment objective of the Company is to provide a high level THE COMPANY 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 18. INVESTMENT As a BDC, the Company's consolidated portfolio includes primarily CONSIDERATIONS 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 opportuni- ties as the Company. Both the Company and its subsidiaries borrow funds from the U.S. Small Business Administration (the "SBA") or 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 22. SECURITIES OFFERED AND The Company is offering to stockholders of record as of the close of SUMMARY OF business on January 22, 1996 (the "Record Date") the right to DISTRIBUTION subscribe for an aggregate of 885,448 Shares of common stock of the Company. Each such stockholder is being issued one (1) Subscription Right for each full share of common stock owned on the Record Date. No fractional Subscription Rights will be issued. The Subscription Rights entitle a stockholder to acquire at the Subscription Price (as defined in this Prospectus) one (1) Share for each seven (7) Subscription Rights held. Subscription Rights may be exercised at any time during the Subscription Period, which commences on January 29, 1996 and ends as of 5:00 p.m., Eastern Standard Time, on February 27, 1996 (the "Expiration Date"), unless extended as described herein. The part of the Offer pursuant to which a stockholder is entitled to purchase up to one (1) Share for each seven (7) Subscription Rights held at the Subscription Price is referred to as the "Primary Subscription." OVER-SUBSCRIPTION In addition, any stockholder who fully exercises all Subscription PRIVILEGE Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for pursuant to the Primary Subscription (the "Over-Subscription Privilege"). Shares acquired through the Over-Subscription Privilege are subject to allotment or increase, which is more fully discussed below under "The Offer--Over- Subscription Privilege," page 12.
3 9 The existence of the Over-Subscription Privilege and the Company's discretionary ability to increase by up to 15% the number of Shares subject to the Offer will result in further dilution to those stockholders who fully exercise their Subscription Rights to subscribe for Shares pursuant to the Primary Subscription but who do not fully exercise their Over-Subscription Privilege. SOLICITING FEES In connection with the Offer, the Company has agreed to pay to broker-dealers who have solicited beneficial owners whose shares of the Company's stock are held by broker-dealers in nominee name, fees equal to 2.5% of the Subscription Price per Share for each Share issued upon the exercise of Subscription Rights as a result of their soliciting efforts. See "The Offer--Soliciting Fees," page 14.
IMPORTANT DATES TO REMEMBER EVENT DATE Record Date.................................................... January 22, 1996 Subscription Period............................... January 29-February 27, 1996* Expiration Date of the Offer................................. February 27, 1996* Pricing Date................................................. February 27, 1996* Subscription Forms and Payment for Shares Due+............... February 27, 1996* Notices of Guaranteed Delivery Due+.......................... February 27, 1996* Subscription Forms pursuant to Notices of Guaranteed Delivery Due...... March 1, 1996* Confirmation to Participants..................................... March 8, 1996* Payment pursuant to Notices of Guaranteed Delivery Due.......... March 22, 1996* Final Collections or Rebates for Shares Due..................... March 22, 1996* *Unless the Offer is extended to a date not later than March 1, 1996. + A stockholder exercising Subscription Rights must deliver to the Subscription Agent by the Expiration Date either (1) a Subscription Form and payment for Shares or (2) a Notice of Guaranteed Delivery. SALES OF SHARES Following the completion of the Offer, the Company may offer and SUBSEQUENT TO THE OFFER sell Shares not sold pursuant to the Offer to other investors. See "The Offer--Sales of Shares Subsequent to the Offer," p. 17. PRINCIPAL TRADING Nasdaq National Market under the symbol "ALLC." See "Public Trading MARKET and Net Asset Value Information," page 11.
FEES AND EXPENSES SHAREHOLDER TRANSACTION EXPENSES Sales Load (as a percentage of offering price)................................. 2.50%(1) Dividend Reinvestment Plan Fees................................................ none(2) ANNUAL EXPENSES (as a percentage of consolidated net assets attributable to common shares(3)) Investment Advisory Fees....................................................... 5.63%(4) Interest Payments on Borrowed Funds............................................ 10.37%(5) Other Expenses................................................................. 2.46%(6) ------ Total Annual Expenses..................................................... 18.46%(7) ======
- --------------- (1) Broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Subscription Rights will receive fees of 2.5% of the Subscription Price per Share for each Share issued as a result of their soliciting efforts. These fees will be borne by the Company and indirectly 4 10 by all of the Company's stockholders, including those who do not exercise their Subscription Rights. In the event that Shares are sold otherwise than through the Offer, a corresponding supplement to this Prospectus will disclose any additional 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) Net assets attributable to common shares equals net assets (i.e., total assets less total liabilities and redeemable preferred stock outstanding) as of September 30, 1995 plus the anticipated net proceeds of the Offer less non-redeemable preferred stock outstanding. (4) Pursuant to Commission requirements, the investment advisory fee in this table is presented as a percentage of net assets; however, the Company's investment advisory fees are based on a formula based on total assets. The fees payable pursuant to the investment advisory agreement (see "Management-- Investment Adviser," page 28) 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 are 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. The investment advisory fee percentage above is based on the actual total assets less the Company's investment in Allied Capital Lending Corporation at September 30, 1995 plus the anticipated net proceeds of this offering, multiplied by 2.5%, divided by consolidated net assets attributable to common shares. This percentage for the year ended December 31, 1994 was 5.36%. At September 30, 1995, 14% of the Company's consolidated total assets were in the form of Interim Investments and cash and cash equivalents. See "The Company--Business of the Company," page 18. (5) The Company had outstanding borrowings of $81.3 million at September 30, 1995. The Interest Payments on Borrowed Funds percentage is based on estimated amounts for the year ended December 31, 1995 divided by consolidated net assets attributable to common shares. This percentage for the year ended December 31, 1994 was 14.15%. (6) The Other Expenses percentage is based on estimated amounts for the year ended December 31, 1995 divided by consolidated net assets attributable to common shares. This percentage for the year ended December 31, 1994 was 3.59%. (7) Annual Expenses as a percentage of consolidated net assets attributable to common shares are higher than the 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 at September 30, 1995, which significantly reduce the consolidated net assets attributable to common shares on which the Annual Expenses percentage is calculated. If the Annual Expenses percentage were calculated instead as a percentage of total assets, Annual Expenses would be 7.57% of consolidated total assets on a pro forma basis after giving effect to the anticipated net proceeds of the present offering.
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 on total assets and 7.57% (as a percentage of consolidated total assets) of total annual expenses.................... $205 $ 551 $ 879 $1,628
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. 5 11 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 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 31. 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-20 below. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations," page 32. SUMMARY BALANCE SHEET INFORMATION (IN THOUSANDS)
DECEMBER 31 -------------------------------------------------------- SEPTEMBER 30 1990(1) 1991 1992 1993 1994 1995 -------- -------- -------- -------- -------- ------------ (UNAUDITED) ASSETS 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)
YEAR ENDED DECEMBER 31 NINE MONTHS ------------------------------------------------------- ENDED SEPTEMBER 30 1990(1) 1991 1992 1993 1994 --------------------------- ------- ------- ------- ------- ------- 1994 1995 ----------- ----------- (UNAUDITED) (UNAUDITED) INVESTMENT INCOME 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(8) Dividends declared(5).............. $ 4.02(6) $ 1.30(7) $ 1.32 $ 1.35 $ 1.40(7) $ 0.60 $ 0.62(8)
- --------------- (1) Numbers have been adjusted for the distribution of Allied Capital Advisers, Inc. common shares on December 31, 1990 to stockholders of the Company. (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 the period. (3) Net increase in net assets resulting from operations is reduced by preferred stock dividends of $203,000 for 1990, $220,000 for each of 1991, 1992, 1993 and 1994 and $165,000 for each nine-month period ended September 30, 1994 and 1995 for the purpose of calculating the per common share amount. (4) Total shareholders' equity is reduced by $6 million of non-redeemable preferred stock for the purpose of calculating the per common share amount. (5) Amount represents the total of the regular 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 so paid. (6) Includes a $2.75 per common share distribution of shares of Allied Capital Advisers, Inc. on December 31, 1990. (7) Includes a tax basis return of capital of $0.25 per share for 1991 and $0.17 per share for 1994. 7 13 (8) Subsequent to September 30, 1995, the Company's Board of Directors declared a regular quarterly dividend of $0.24 per common share or $1,485,000 payable on December 29, 1995 and the year-end distribution of $0.58 per common share or $3,588,000 payable on January 31, 1995. These declarations resulted in total distributions declared for 1995 of $1.44 per common share. Net asset value per common share at September 30, 1995 does not reflect the effect of these dividend declarations, which will reduce net asset value by $5,073,000, or approximately $0.82 per common share. 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 fiscal 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. -----------------------
TOTAL AMOUNT INVOLUNTARY OUTSTANDING ASSET LIQUIDATING AVERAGE EXCLUSIVE OF COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR(9)(10) TREASURY SECURITIES(5) PER UNIT(6) PER UNIT(7) PER UNIT(8) - ------------------------------------- ---------------------- ----------- ----------- ------------ SENIOR NOTES(3) 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 1,673 -- N/A 1993................................. 20,000,000 1,848 -- N/A 1994................................. 20,000,000 1,662 -- N/A 1995(11)............................. 20,000,000 -- -- N/A
8 14
TOTAL AMOUNT INVOLUNTARY OUTSTANDING ASSET LIQUIDATING AVERAGE EXCLUSIVE OF COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR(9)(10) TREASURY SECURITIES(5) PER UNIT(6) PER UNIT(7) PER UNIT(8) - ------------------------------------- ---------------------- ----------- ----------- ------------ BANK LOAN (REVOLVING LINE OF CREDIT) 1986(1).............................. $ 0 $ 0 -- N/A 1986(2).............................. 0 0 -- N/A 1987................................. 2,000,000 3,241 -- N/A 1988................................. 5,000,000 2,812 -- 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 1,662 -- N/A 1995(11)............................. 1,500,000 -- -- N/A SUBORDINATED DEBENTURES(4) 1986(1).............................. $12,500,000 $ 3,066 -- -- 1986(2).............................. 11,300,000 4,259 -- -- 1987................................. 13,700,000 3,241 -- -- 1988................................. 24,350,000 2,812 -- -- 1989................................. 25,350,000 3,116 -- -- 1990................................. 40,450,000 2,232 -- -- 1991................................. 49,800,000 1,942 -- -- 1992................................. 49,800,000 1,673 -- -- 1993................................. 49,800,000 1,848 -- -- 1994................................. 54,800,000 1,662 -- -- 1995(11)............................. 61,300,000 -- -- -- REDEEMABLE CUMULATIVE PREFERRED STOCK(4) 1986(1).............................. $ 0 0 $ 0 N/A 1986(2).............................. 0 0 0 N/A 1987................................. 0 0 0 N/A 1988................................. 0 0 0 N/A 1989................................. 0 0 0 N/A 1990................................. 1,000,000 190 100 N/A 1991................................. 1,000,000 170 100 N/A 1992................................. 1,000,000 152 100 N/A 1993................................. 1,000,000 168 100 N/A 1994................................. 1,000,000 152 100 N/A 1995(11)............................. 1,000,000 -- 100 N/A
9 15
TOTAL AMOUNT INVOLUNTARY OUTSTANDING ASSET LIQUIDATING AVERAGE EXCLUSIVE OF COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR(9)(10) TREASURY SECURITIES(5) PER UNIT(6) PER UNIT(7) PER UNIT(8) - ------------------------------------- ---------------------- ----------- ----------- ------------ NON-REDEEMABLE CUMULATIVE PREFERRED STOCK(4) 1986(1).............................. $1,000,000 $ 284 $ 100 N/A 1986(2).............................. 2,000,000 362 100 N/A 1987................................. 2,000,000 287 100 N/A 1988................................. 5,000,000 240 100 N/A 1989................................. 6,000,000 252 100 N/A 1990................................. 6,000,000 190 100 N/A 1991................................. 6,000,000 170 100 N/A 1992................................. 6,000,000 152 100 N/A 1993................................. 6,000,000 168 100 N/A 1994................................. 6,000,000 152 100 N/A 1995(11)............................. 6,000,000 -- 100 N/A
- --------------- (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) The Company itself was the obligor on $15 million of the senior notes. The Company's small business investment company subsidiaries were the obligors on the remaining $5 million, which is not subject to the asset coverage requirements of the 1940 Act. (4) Issued by the Company's small business investment company subsidiaries to the U.S. Small Business Administration. These categories of senior securities are not subject to the asset coverage requirements of the Investment Company Act of 1940 (the "1940 Act"). (5) Total amount of each class of senior securities outstanding at the end of the year presented. (6) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as the Company's consolidated total assets less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. The asset coverage ratio for a class of senior securities that is preferred stock is calculated as the Company's consolidated total assets less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness, plus the involuntary liquidation preference of the preferred stock (see footnote 7). The Asset Coverage Per Unit is expressed in terms of dollar amounts per share. (7) 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. (8) Not applicable, as senior securities are not registered for public trading. (9) This table does not include U.S. government agency guaranteed loans sold under agreements to repurchase held by Allied Capital Lending 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 financing for its operations and has no intention of resuming this practice in the foreseeable future. (10) As of December 31, 1995, the Company had not borrowed any funds under its $20 million loan agreement, which was entered into as of April 1995, with the Overseas Private Investment Corporation ("OPIC"). Therefore, this class of senior securities is not represented in the table. (11) Amounts outstanding as of December 31, 1995 (unaudited). Financial results as of December 31, 1995 are not available to calculate Asset Coverage Per Unit. 10 16 PUBLIC TRADING AND NET ASSET VALUE INFORMATION Shares of the Company's common stock are traded on the Nasdaq National Market under the 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, the Company's common stock has historically traded at prices substantially in excess of net asset value.
BID PRICE PREMIUM TO AVERAGE AVERAGE NET NET ASSET VALUE ASSET PER COMMON SHARE BID PRICE RANGE VALUE PER COMMON DURING PERIOD ------------------ SHARE DURING ------------------ FISCAL YEAR ENDED 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% 4th Quarter....................... $14.25 $12.25 * * *
*The last determined consolidated net asset value per share was $8.61 as of September 30, 1995. The bid price premium on that date was 51%. Because the Company's net asset value is determined quarterly as of the end of each calendar quarter, and such determination is not yet available for the quarter ended December 31, 1995, the average net asset value and the high/low bid price premiums cannot be calculated. The last sale price for a share of the Company's common stock on Nasdaq on January 22, 1996 was $13.375. 11 17 THE OFFER TERMS OF THE OFFER The Company is offering to its stockholders of record on the Record Date the right to subscribe for Shares. Each Record Date stockholder is being issued one (1) Subscription Right for each share of common stock owned on the Record Date. The number of Subscription Rights to be issued to each stockholder will be rounded down to the nearest whole number of shares and no fractional Subscription Rights will be issued. The Subscription Rights entitle a stockholder to acquire, pursuant to the Primary Subscription at the Subscription Price, one (1) Share for each seven (7) Subscription Rights held. Subscription Rights may be exercised at any time during the Subscription Period, which commences on January 29, 1996, the date of this Prospectus, and ends as of 5:00 p.m., Eastern Standard Time, on February 27, 1996 (the "Expiration Date"), unless extended by the Company until 5:00 p.m. Eastern Standard Time on a date no later than March 5, 1996. In addition, any stockholder who fully exercises all Subscription Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for pursuant to the Primary Subscription. Shares acquired through the Over-Subscription Privilege are subject to allocation or increase, which is more fully discussed below under "Over-Subscription Privilege." Subscription Rights are exercisable through a subscription form ("Subscription Form") which will be provided to all eligible stockholders. No certificates or other physical rights will be issued or distributed. The Subscription Rights are non-transferable. Therefore, only the underlying Shares, and not the Subscription Rights, will be admitted for quotation on the Nasdaq National Market. OVER-SUBSCRIPTION PRIVILEGE If some stockholders do not exercise all of the Subscription Rights issued to them, then any Shares for which subscriptions have not been received from stockholders in the Primary Subscription will be offered by means of the Over-Subscription Privilege to those stockholders who have exercised all of the Subscription Rights issued to them and who wish to acquire additional Shares. Stockholders who exercise all of the Subscription Rights issued to them should also indicate on the Subscription Form how many Shares they wish to acquire through this Over-Subscription Privilege. There is no limit to the number of Shares that may be requested through the Over-Subscription Privilege. If sufficient Shares remain in excess of those for which Subscription Rights are exercised in the Primary Subscription, then all requests for additional Shares will be honored in full. If sufficient Shares are not available to honor all requests for additional Shares in full, then the Company may, in its sole discretion, issue up to an additional 15% of the Shares available through the Offer in order to honor such over-subscriptions. All requests to purchase Shares pursuant to the Over-Subscription Privilege are subject to allocation. To the extent that there are not sufficient Shares to honor all over-subscriptions, the available Shares will be allocated pro rata among those stockholders who over-subscribe based on the number of Subscription Rights originally issued to them by the Company, so that the number of Shares issued to stockholders who subscribe through the Over-Subscription Privilege will be generally in proportion to the number of shares of the Company's common stock owned by them on the Record Date. The percentage of remaining Shares each over-subscribing stockholder may acquire may be rounded up or down to result in delivery of whole Shares. The allocation process may involve a series of allocations in order to ensure that the total number of Shares available for over-subscriptions are distributed on a pro rata basis. THE SUBSCRIPTION PRICE The Subscription Price per Share will be 95% of the average of the last reported sale price of a share of the Company's common stock on Nasdaq on the date of expiration of the Offer (the "Pricing Date") and each of the four preceding business days. Since the Expiration Date of the Offer coincides with the Pricing Date, stockholders exercising their Subscription Rights will not know the Subscription Price per Share at the time 12 18 they exercise their Subscription Rights. It may be more or less than the Estimated Subscription Price of $12.90 per Share. See "Confirmation of Purchase," page 16. SUBSCRIPTION PERIOD The Offer commences on January 29, 1996 and expires at 5:00 p.m., Eastern Standard Time, on February 27, 1996 (the "Expiration Date"), unless extended by the Company until 5:00 p.m. Eastern Standard Time on a date no later than March 5, 1996. The Subscription Rights and the Over-Subscription Privilege will expire on the Expiration Date and may not be exercised after that date. All Subscription Forms must be received by the Subscription Agent no later than the Expiration Date, unless Subscription is effected through a notice of guaranteed delivery, as described herein. As of the date of this Prospectus, the Company last determined its consolidated net asset value per common share to be $8.61 as of September 30, 1995. During the fourth quarter of 1995, the Company declared its regular quarterly dividend of $0.24 per common share, or $1,485,000, and its 1995 annual extra distribution of $0.58 per common share or $3,588,000. Net asset value per common share at September 30, 1995 does not reflect the effect of these dividend declarations, which will reduce net asset value by $5,073,000, or approximately $0.82 per common share. In addition to these dividend declarations, net asset value per common share at December 31, 1995 will be affected by fourth quarter net income, which includes the effects of unrealized appreciation and depreciation in the Company's portfolio of invested assets. As of the date of this Prospectus, 1995 fourth quarter net income has not yet been computed by the Company. The Company has, as required by the Commission's registration form for the Offer, 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 subscribing stockholder will have no right to cancel such subscriptions or rescind a purchase after the Subscription Agent has received payment, except that Subscription Forms and payments 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. The Company is requesting brokers, banks, trust companies 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 Nominees as of the Record Date. 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. 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 increase the Company's equity base and allow the Company to continue to grow by leveraging against it. Because the Company, as a BDC, must distribute essentially all of its income to its stockholders each year to avoid unfavorable federal income tax consequences, the Company cannot increase its equity base by retaining net income and must offer its common stock to achieve this goal. The Company's directors have voted unanimously to authorize the Offer. Three of the Company's directors who voted to authorize the Offer are affiliated with Advisers and, therefore, could benefit indirectly from the Offer. The other five directors are not "interested persons" of the Company within the meaning of the Investment Company Act of 1940 (the "1940 Act"). Advisers may also benefit from the Offer because its fee is based on the total assets of the Company. See "Management--Investment Adviser," page 28. It is not possible to state precisely the amount of additional compensation Advisers might receive as a result of the 13 19 Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities, which will fluctuate in value. The Company may, in the future and at its discretion, from time to time, choose to make additional rights offerings for a number of shares and on terms which may or may not be similar to this Offer. DILUTIVE EFFECT The Company expects that the Offer will not result in a reduction of the net asset value per share 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," page 11. Any stockholder who chooses not to participate in the Offer, however, should expect to own a smaller proportional interest in the Company following the expiration of the Offer. The Company may offer and sell any Shares which are not subscribed for through the Primary Subscription or the Over-Subscription Privilege, following expiration of the Offer, to certain other investors. The Company undertakes to update this Prospectus before any such sales are consummated. The existence of the Over-Subscription Privilege and the Company's discretionary ability to increase the number of Shares subject to the Offer will result in additional dilution of interest and voting rights to current stockholders beyond such dilution resulting from stockholders' non-participation in the Primary Subscription. See "Sales of Shares Subsequent to the Offer," page 17. SOLICITING FEES In connection with the Offer, the Company has agreed to pay to certain broker-dealers that have executed and delivered a Soliciting Dealer Agreement fees equal to 2.5% of the Subscription Price per Share for all Shares issued as a result of their soliciting efforts. Shareholder Communications Corporation will provide offering coordinator services, including coordination among soliciting broker-dealers. See "Expenses of the Offer," page 17. SUBSCRIPTION AGENT The Subscription Agent for the Offer is American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005, which will receive, for its administrative, processing, invoicing and other services as Subscription Agent, a fee of $35,000 and reimbursement for all out-of-pocket expenses related to the Offer. The Subscription Agent is also the Company's transfer agent. Stockholders may contact the Subscription Agent at (718) 921-8200. Stockholders should mail or deliver Subscription Forms and acceptable forms of payment for Shares to the Subscription Agent in time to be received by 5:00 p.m. Eastern Standard Time on the Expiration Date by one of the following methods at the following address: BY FIRST CLASS MAIL BY EXPRESS MAIL OR OVERNIGHT COURIER BY HAND American Stock Transfer & Trust Company Corporate Reorganization Department 40 Wall Street, 46th Floor New York, New York 10005 DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE WILL NOT CONSTITUTE DELIVERY FOR PURPOSES OF THE OFFER. IT IS STRONGLY SUGGESTED THAT STOCKHOLDERS USE A DELIVERY METHOD WHICH WILL GUARANTEE DELIVERY BY THE EXPIRATION DATE AND WHICH WILL PROVIDE A RETURN RECEIPT TO THE SENDER. NEITHER THE SUBSCRIPTION AGENT NOR THE COMPANY WILL BE RESPONSIBLE FOR SUBSCRIPTION FORMS OR PAYMENTS THAT ARE NOT SO DELIVERED. 14 20 INFORMATION AGENT AND OFFERING COORDINATOR Shareholder Communications Corporation ("SCC") will act as the Information Agent and Offering Coordinator for the Offer, and as such, will distribute materials and be available to answer questions any stockholders may have regarding the Offer. For acting as Information Agent for the Offer, SCC will receive a fee of $5,000; for acting as Offering Coordinator, SCC will receive a fee of $35,000. SCC will also be reimbursed for all out-of-pocket expenses in connection with the Offer. SCC may be contacted at: Shareholder Communications Corporation 17 State Street, 27th and 28th Floors New York, New York 10004 Telephone: (800) 221-5724, extension 331 Stockholders may also call their Nominees for information with respect to the Offer. HOW TO SUBSCRIBE Subscription Rights may be exercised by stockholders whose shares of the Company's common stock are held in their own name ("Record Owners") by completing the enclosed Subscription Form and delivering it to the Subscription Agent, together with any required payment for the Shares as described below under "Payment for Shares." Stockholders whose shares are held by a Nominee must exercise their Subscription Rights by contacting their Nominees, who can arrange, on a stockholder's behalf, to guarantee delivery of a properly completed and executed Subscription Form and payment for the Shares. A fee may be charged for this service. Subscription Forms must be received by the Subscription Agent prior to 5:00 p.m. Eastern Standard Time on the Expiration Date unless the Offer is extended. If Subscription is to be effected by means of a Notice of Guaranteed Delivery, then Subscription Forms are due not later than three (3) business days following the expiration of the Offer, and full payment for the Shares is due not later than ten (10) business days following the Confirmation Date. See "Payment for Shares," below. PAYMENT FOR SHARES Stockholders who acquire Shares pursuant to the Primary Subscription or the Over-Subscription Privilege may choose between the following methods of payment: (1) If, prior to 5:00 p.m. Eastern Standard Time on the Expiration Date, unless extended, the Subscription Agent has received a Notice of Guaranteed Delivery, by telegram or otherwise, from a Nominee guaranteeing delivery of (a) payment of the full Subscription Price for the Shares subscribed for pursuant to the Primary Subscription and any additional Shares subscribed for through the Over-Subscription Privilege and (b) a properly completed and executed Subscription Form, the subscription will be accepted by the Subscription Agent. The Subscription Agent will not honor a Notice of Guaranteed Delivery if a properly completed and executed Subscription Form is not received by the Subscription Agent by the close of business on the third (3rd) business day after the Expiration Date, unless the Offer is extended, and full payment for the Shares is not received by it by the close of business on the tenth (10th) business day after the Confirmation Date (as defined below). (2) Alternatively, a Record Owner may send payment for the Shares acquired pursuant to the Primary Subscription, together with the Subscription Form, to the Subscription Agent based on the Estimated Subscription Price of $12.90 per Share. To be accepted, such payment, together with the Subscription Form, must be made payable to "Allied Capital Corporation" and received by the Subscription Agent prior to 5:00 p.m. Eastern Standard Time on the Expiration Date, unless the Offer is extended. All payments by a stockholder must be made in United States dollars by money order or check and drawn on a bank located in the United States of America. IF THE SECOND METHOD DESCRIBED ABOVE IS USED, EACH SUBSCRIPTION FORM MUST BE ACCOMPANIED BY FULL PAYMENT IN ORDER TO BE ACCEPTED. 15 21 CONFIRMATION OF PURCHASE Within eight business days following the expiration of the Offer (the "Confirmation Date"), a confirmation will be sent by the Subscription Agent to each stockholder (or, if shares are held by a Nominee, on the Record Date, to such Nominee) showing: (i) the number of Shares acquired through the Primary Subscription; (ii) the number of Shares, if any, acquired through the Over-Subscription Privilege; (iii) the per Share and total Subscription Price for the Shares; and (iv) the amount payable by the stockholder to the Company or any excess to be refunded by the Company to the stockholder, in each case based on the Subscription Price as determined on the Pricing Date. In the case of any stockholder who exercises a right to acquire Shares through the Over-Subscription Privilege, any excess payment which would otherwise be refunded to the Stockholder will be applied by the Company toward payment for Shares acquired through exercise of the Over-Subscription Privilege. Any further payment required from a stockholder must be received by the Subscription Agent within ten (10) business days after the Confirmation Date, and any excess payment to be refunded by the Company to a stockholder will be mailed by the Subscription Agent to the stockholder within ten (10) business days after the Confirmation Date. Issuance and delivery of certificates for the Shares subscribed for are subject to collection of checks and actual payment through any Notice of Guaranteed Delivery. If a stockholder who acquires Shares through the Primary Subscription or Over-Subscription Privilege does not make payment of all amounts due, the Company reserves the right to: (i) apply any payment actually received by it toward the purchase of the greatest number of whole Shares which could be acquired by such stockholder upon exercise of the Primary Subscription or Over-Subscription Privilege; (ii) find other purchasers for such subscribed for and unpaid Shares; or (iii) exercise any and all other rights or remedies to which it may be entitled. DELIVERY OF SHARES Participants in the Company's Dividend Reinvestment Plan, which is administered by the Company's transfer agent (the "Plan"), will have any Shares acquired pursuant to the Primary Subscription and pursuant to the Over-Subscription Privilege credited to their accounts in the Plan. Stock certificates will not be issued for Shares credited to Plan accounts, unless specifically requested. For Record Owners other than Plan participants, stock certificates for all Shares acquired will be mailed promptly after full payment for the Shares subscribed for has cleared, and no later than 30 days after the Expiration Date of the Offer. Stockholders whose shares are held of record by a Nominee on their behalf will have the Shares they acquire credited to the account of such Nominee. In the event that the Offer does not result in all Shares being fully subscribed for after allocating Shares pursuant to the Over-Subscription Privilege, the Company may offer the remaining Shares to certain other investors. See "Sales of Shares Subsequent to the Offer," page 17. A SAMPLE CALCULATION OF A SUBSCRIPTION Assume, for example, that you own 1,000 shares of the Company's common stock as of the Record Date. dividing that number by seven (7) and dropping the fraction gives you 142. Assuming that you elect to exercise all of your Subscription Rights pursuant to the Primary Subscription, in the first blank of the Subscription Form enter 142 Shares and fill in the total estimated subscription price for the Shares, which is 142 multiplied by $12.90, the Estimated Subscription Price per share which totals $1,831.80. If you choose to subscribe for additional Shares pursuant to the Over-Subscription Privilege, enter the number of additional Shares on the next line of the Subscription Form, and again calculate the estimated subscription price by multiplying the number of additional Shares by $12.90. Assuming you decide to purchase 58 shares pursuant to the Over-Subscription Privilege, enter 58 Shares and $748.20 on the second line. Then enter the total 16 22 amount due, $2,580, on the third line of the Form. After otherwise completing and signing the form, send it to the Subscription Agent (or your Nominee if your shares are held by a Nominee) with an acceptable form of payment for this total amount. The Company will, in any event, accept your Primary Subscription to the extent of the 142 shares. Depending on the number of Shares subscribed for by other stockholders, the Company may also accept your over-subscription to the extent of the additional 58 shares for which you have subscribed or some smaller number, possibly as small as zero, and will confirm to you in writing how many Shares you have been allocated in total. If your over-subscription is accepted for some number of Shares that is smaller than the requested number, the Subscription Agent will, 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. If the Subscription Price is lower than the Estimated Subscription Price of $12.90 per share, you will receive a refund; if the Subscription Price is higher than the Estimated Subscription Price, you will be notified of the additional amount due. You will then, in due course, receive a certificate for the number of Shares for which your subscription has been accepted, or otherwise be credited for the Shares if your Shares are held in the Company's Dividend Reinvestment Plan or by a Nominee. Stockholders who are Record Owners. Stockholders who are Record Owners can choose between either option described under "Payment for Shares," page 15. If only a short amount of time is remaining prior to the Expiration Date, option (1) will permit delivery of the Subscription Form and payment after the Expiration Date. Stockholders Whose Shares Are Held Through A Nominee. Stockholders whose shares are held by a Nominee such as a broker, bank or trust company, must contact the Nominee to exercise their Subscription Rights. In that case, the Nominee may complete the Subscription Form on behalf of the stockholder and arrange for proper payment by one of the methods described under "Payment for Shares." Nominees. Nominees should notify the respective beneficial owners of shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Subscription Rights. If the beneficial owner so instructs, the Nominee should complete the Subscription Form and submit it to the Subscription Agent, together with the proper payment described under "Payment for Shares." SALES OF SHARES SUBSEQUENT TO THE OFFER The Company may, by means of a post-effective amendment to this Prospectus, offer and sell any unsubscribed-for shares to banks, insurance companies, pension funds and other institutional investors and to certain individuals ("Additional Offerees") in any state in which the offer and sale to such persons may be made consistent with applicable law. The Company may solicit and accept subscriptions from any Additional Offerees for any Shares offered hereby which were not validly subscribed for by stockholders. It is anticipated that, in general, offers and sales to Additional Offerees, if any, will be made on substantially the same terms as those described above for offers and sales made pursuant to the Offer, although the price of Shares sold to Additional Offerees is expected to differ based on then-prevailing market conditions. Any material differences in the terms of sales to Additional Offerees from those made pursuant to the Offer would be described in a supplement to this Prospectus. EXPENSES OF THE OFFER In connection with the Offer, the Company has agreed to pay to certain broker-dealers who have executed and delivered a Soliciting Dealer Agreement fees equal to 2.5% of the Subscription Price per Share for Shares issued as a result of their soliciting efforts. The Company will also pay all other applicable expenses, including but not limited to the normal charges of brokers and other Nominees for transmitting offering materials, which will include Prospectuses, Subscription Forms, and return envelopes, to the beneficial owners of the shares held by them of record. 17 23 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 may also use proceeds from the Offering to repay any borrowings outstanding under the Company's revolving line of credit. The Company anticipates that substantially all of the proceeds of the offering will be invested in the manner described above within one year, and in any event within two years. 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 under Section 301(c) of the Small Business Investment Act of 1958 (an "SBIC"), and Allied Financial is licensed by the SBA as a specialized small business investment company under Section 301(d) of the Small Business Investment Act of 1958 (an "SSBIC"). As described below, the Company also has a significant ownership interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end management investment company that has elected to be regulated as a BDC and is an SBA-approved small business lending company. Allied Capital Advisers, Inc. ("Advisers") serves as the investment adviser 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 funding from the Overseas Private Investment Corporation ("OPIC"), which would typically involve investments in businesses that engage, in whole or in part, in overseas operations. OPIC is a self-sustaining federal agency whose purpose is to promote economic growth in developing countries by encouraging U.S. private investment in those nations. Generally, the OPIC-related investments to be made by the Company will 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 "Risk Factors--Foreign Investments," page 23. 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 18 24 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 manufacturing, 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. During 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 30, 1995, the Company's non- performing assets at cost were $9.5 million, a 6% decrease from December 31, 1994. Subsequent to September 30, 1995, one additional investment in the Company's portfolio with a net cost of $3.1 million was determined to be non-performing. 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 to include any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than 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, which is not a small business investment company), and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit. 19 25 (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 Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance. Making available significant managerial assistance means, among other things, (i) any arrangement whereby the BDC, through its directors, officers, or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company or (ii) in the case of 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 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 such class of senior security representing indebtedness has asset coverage of at least 200%. This limitation is not applicable to classes of senior securities representing indebtedness of the Company's SBIC and SSBIC subsidiaries. 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 three-month London Inter-Bank Offered Rate ("LIBOR") plus 1.15 percent (1.15%) per annum. At September 30, 1995, there were no borrowings under this line of credit. The Company now has a new line of credit which permits the Company to borrow up to $10,000,000 at one-month LIBOR plus 2.5 percent (2.5%) per annum through September 30, 1998. 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. As a BDC, the Company is entitled to issue senior securities in the form of stock as long as such class of senior security which is a stock has asset coverage of at least 200%. This limitation is not applicable to classes of senior securities issued by the Company's small business investment company subsidiaries and held or guaranteed by the SBA. See "Risk Factors--Leverage," page 24. 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"), both private venture capital partnerships managed by Advisers, neither of which is now making new investments. Allied II is a closed-end management investment company that has elected to be regulated as a BDC and for which Advisers serves as 20 26 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, 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. 21 27 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 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 its Section 7(a) Guaranteed Loan Program (the "7(a) Loan Program") and announced that it would reduce the maximum loan size that it would guarantee under the 7(a) 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 7(a) 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 ability to make loans to include, in addition to 7(a) loans, loans that are made in conjunction with guaranteed 7(a) 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 Advisers to obtain the information necessary for the Company's decision to invest in them. Typically, such companies 22 28 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 competitors' actions and market conditions, as well as general economic downturns. Because these companies will generally have highly leveraged capital structures, reduced cash flow resulting from an adverse competitive development, shift in customer preferences, or an economic downturn may adversely affect the return on, or the recovery of, the Company's investment in them. Investment in such companies therefore involves a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. Foreign Investments As noted above, the Company intends to make investments with the proceeds of its OPIC loans. (See "Leverage--OPIC Loan," page 26.) 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. For example, with respect to a currency risk, the Company plans to make only dollar-denominated investments. In the event that the Company does engage in foreign currency transactions, the Company plans to hedge currency risks associated with foreign investments. 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 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 would involve 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 23 29 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. 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 sharply 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 consolidated 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. Moreover, the costs of borrowing may exceed the income from the portfolio securities purchased with the borrowed funds, and a decline in net asset value may result if the investment performance of the additional securities purchased fails to cover the cost to the Company. Such a decline in net asset value could negatively affect the Company's ability to make common stock dividend payments. Also, if asset coverage for preferred stock or debt securities, other than those issued by the Company's small business investment company subsidiaries, declines to less than 200 percent (200%), the Company may be required to sell a portion of its investments when it may be disadvantageous to do so. Leverage is thus generally considered a speculative investment technique. 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 24 30 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, comprised of $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 subordinated debenture and preferred stock investments from the SBA as of September 30, 1995, and as a result, this combined ability to apply for additional leverage from the SBA will be limited to $21,700,000 due to the $90 million limit. This combined ability to obtain additional leverage assumes that Allied Investment II 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. Therefore, there is no guaranty that Allied Investment or Allied Financial will be able to obtain additional SBA leverage beyond what is currently held. On April 10, 1995, the Company entered into a loan agreement with OPIC under which the Company may borrow up to $20 million to provide financing for international projects involving qualifying U.S. small businesses. The Company had outstanding the following sources of financing as of December 31, 1995:
ANNUAL RATE OF INTEREST ANNUAL PORTFOLIO OR DIVIDEND PAYMENTS RETURN TO COVER AMOUNT ----------------------------------- INTEREST OR DIVIDEND CLASS OUTSTANDING INITIAL AS OF DEC. 31, 1995 PAYMENTS (1) - --------------------------------- ----------- ----------- -------------------- --------------------- Senior notes..................... $20,000,000 9.15% 9.15% 1.26% OPIC loan........................ $ 0 -- -- 0.00% Bank loan (revolving line of credit)(2)..................... $ 1,500,000 8.375% 8.219% 0.09% Subordinated debentures.......... $61,300,000 5.5%-10.35% 6.08%-10.35% 3.29% Redeemable preferred stock....... $ 1,000,000 4% 4% 0.03% Non-redeemable preferred stock... $ 6,000,000 3% 3% 0.12%
(1) The annual portfolio return to cover interest or dividend payments ("Annual Return") is calculated as total estimated 1995 annual interest or dividend payments per class of financing, divided by total assets at September 30, 1995. The total Annual Return needed to cover all classes of financing as of December 31, 1995 combined is 4.79%. (2) Pursuant to the new bank loan effective September 30, 1995. Senior Notes. As of September 30, 1995 and December 31, 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 25 31 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 (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 ("Loan Commitment") in international investments involving OPIC-qualifying United States small businesses ("OPIC Loan"). The OPIC Loan provides 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. 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 the OPIC Loan matures ten years from the date of the first disbursement under the OPIC Loan. The Loan Commitment 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 and December 31, 1995, there were no outstanding borrowings under this loan agreement. OPIC Loan proceeds must be used for investments in projects approved by OPIC or to pay the reasonable expenses of the Company to manage the OPIC funds. The individual investments made with the OPIC funds cannot exceed 75 percent (75%) of the total capital requirements of a single project. No more than 25 percent (25%) of OPIC Loan proceeds can be invested in a single project and no more than 40 percent (40%) in a single country. The Company may consider insuring its investments in OPIC qualified investments against political risk by using OPIC insurance and using other OPIC project financing services, to the extent that doing so is in the best interests of the Company and the projects. The OPIC Loan requires the Company to maintain (a) consolidated shareholders' equity of not less than $35 million, (b) an interest charges coverage ratio of at least 1.1 to 1 on a trailing twelve month basis, (c) a quarterly ratio of total indebtedness to consolidated shareholders' equity not exceeding 3 to 1, and (d) a quarterly ratio of senior debt to consolidated shareholders' equity not exceeding 1.5 to 1. The Company may not declare or pay any dividends on its common stock or purchase, acquire, redeem or retire any of such shares if the Company is in default on the loan or if such dividends, distributions, share purchase or other such share retirement would cause a default. Bank Loan. At September 30, 1995, the Company had a revolving line of credit agreement with a commercial bank under which it was able to borrow up to $10 million with interest payable monthly at the variable rate of 1.15 percent (1.15%) per annum above the three-month London Inter-Bank Offered Rate ("LIBOR"), which expired September 30, 1995. There were no required principal payments until the loan's maturity. As of September 30, 1995, there were no borrowings under this agreement. 26 32 The Company has established a new line of credit effective September 30, 1995. The new line of credit permits the Company to borrow up to $10,000,000 at one-month LIBOR plus 2.5 percent (2.5%) per annum, requires payment of a 0.125% per annum commitment fee on the unused portion of the line, and expires September 30, 1998. There are no required principal repayments until the loan's maturity. As of December 31, 1995, there was $1.5 million outstanding under this agreement. The new line of credit agreement requires that Allied Investment and Allied Financial remain wholly owned subsidiaries of the Company, and does 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. Under the agreement, the Company's ability to issue additional securities is not restricted and the Company may incur additional debt if it is subordinate to the bank and is on terms satisfactory to the bank. In addition, the agreement provides that with respect to any sources of financing maturing prior to the maturity of this new line of credit, the Company can only refinance 75 percent (75%) of such indebtedness and the new maturity must be after the maturity of this line of credit. The financial covenants of this line of credit agreement require Allied Investment and Allied Financial to maintain a ratio of total liabilities to tangible net worth (as defined in the agreement) of not greater than 3.3 to 1. The Company must maintain (a) a ratio of consolidated total liabilities to consolidated tangible net worth of not greater than 3 to 1, (b) consolidated tangible net worth of not less than $40 million, (c) a minimum interest coverage of at least 1.5 to 1 on a trailing four-quarter basis, and (d) a ratio of consolidated collections of the principal or cost-basis portion of its investments to consolidated total indebtedness of not less than 0.05 to 1 on a trailing basis. The Company may not permit the total principal amount of loans and letters of credit outstanding at any one time to exceed the sum of cash and cash equivalents plus 75% of non-cash tangible assets, minus total liabilities (including letters of credit). Subordinated Debentures. As of September 30, 1995 and December 31, 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 and December 31, 1995, the Company, through Allied Financial, had outstanding $1 million of redeemable four percent (4%) cumulative preferred stock, and $6 million of non-redeemable three percent (3%) cumulative preferred stock, both issued to the SBA. The redeemable four percent (4%) cumulative preferred stock must be redeemed by the Company in 2005, and the non-redeemable three percent (3%) cumulative preferred stock has no required redemption date. Nevertheless, the Company has the option to redeem the non-redeemable three percent (3%) 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. Assumed return on portfolio (net of expenses)............... -16% -10% -5% 0% 5% 10% 16% Corresponding return to common stockholders..... -57.34% -40.93% -27.26% -13.58% 0.09% 13.76% 30.17%
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 as a regulated investment company and therefore to 27 33 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--Management Table." Three of the members of the Board of Directors are also officers of the Company as well as of its investment adviser; five are non-interested persons, as that term is defined in the 1940 Act (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 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. Application was made to the Commission for such approval and such approval was granted on December 26, 1995. These options were 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 28 34 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 held positions of increasing responsibility with Advisers and the Company. The Company and each of its wholly owned subsidiaries pay all of their 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 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 and cash equivalents). 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 cash equivalents) and 0.5% on Interim Investments and cash and cash equivalents. For the purposes of calculating the fee, the values of the Company's consolidated assets are determined as of the end of each calendar quarter. The quarterly fee is paid as soon as practicable after the values have been determined. The 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 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 investments, 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." 29 35 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 December 31, 1995:
(4) (3) AMOUNT OUTSTANDING (2) AMOUNT HELD BY EXCLUSIVE OF (1) AMOUNT REGISTRANT OR FOR AMOUNTS SHOWN TITLE OF CLASS AUTHORIZED ITS ACCOUNT UNDER (3) - ------------------------------------------------ --------- ----------------- ------------------ THE COMPANY: Common Stock.................................. 10,000,000 0.00 6,198,138 ALLIED INVESTMENT: Common Stock.................................. 100 54.93 0 ALLIED FINANCIAL: Common Stock.................................. 19,800,000 131.00 0 Preferred Stock(a)............................ 200,000 70,000.00 0 ALLIED DEVELOPMENT(b): Common Stock.................................. 100 10.00 0
- --------------- (a) Amount outstanding consists of 60,000 shares of non-redeemable 3% cumulative preferred stock and 10,000 shares of redeemable 4% cumulative preferred stock, both issued to the SBA. (b) Allied Development Corporation is an inactive, wholly owned subsidiary of the Company with total assets of less than $35,000, as of September 30, 1995 and December 31, 1995. 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 6,198,138 shares were outstanding as of December 31, 1995. 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, expenses, and liquidation of preferred stock. 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. 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 30, 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. An additional dividend of $0.58 per share was declared on December 14, 1995 for payment on January 31, 1996 to stockholders of record on December 28, 1995. 30 36 Distributions made by the Company are taxable to stockholders as ordinary income or capital gains; however stockholders not subject to tax on income will not be required to pay tax on amounts distributed to them by the Company. Stockholders will receive notification from the Company at the end of the year as to the amount and nature of the income or gains distributed to them for that year. The distributions from the Company may be subject to the alternative minimum tax under the provisions of the Code. 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 tax basis 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. Under the reinvestment plan, the Company may issue new shares unless the market price of the outstanding shares is less than 110% of their contemporaneous net asset value. Alternatively, the transfer agent may, as agent for the participants, 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 and including 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) 973-6383 and ask for Investor Relations, or contact American Stock Transfer & Trust Company, the plan agent, 40 Wall Street, 46th floor, New York, New York 10005, telephone (718) 921-8200. REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS 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 non-interested 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. 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, 46th floor, New York, New York 10005, acts as the Company's transfer, dividend paying, and reinvestment plan agent and registrar. 31 37 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE ----- MANAGEMENT............................................................................ B-2 Directors and Officers.............................................................. B-2 Compensation........................................................................ B-3 Stock Options....................................................................... B-4 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................................... B-5 INVESTMENT ADVISORY AND OTHER SERVICES................................................ B-5 Investment Advisory Agreement....................................................... B-6 Custodian Services.................................................................. B-8 Accounting Services................................................................. B-8 BROKERAGE ALLOCATION AND OTHER PRACTICES.............................................. B-8 TAX STATUS............................................................................ B-8
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. At September 30, 1995, outstanding commitments for future financings were $14 million. Given the availability of the SBA commitment, the OPIC Loan, 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. See "The Company--Risk Factors--Leverage," page 24. At September 30, 1995, the Company had a revolving line of credit for $10 million. Effective September 30, 1995, the Company established a new line of credit for $10 million for a three-year term. See "The Company--Risk Factors--Leverage--Bank Loan," page 26. The Company has secured a credit facility with the OPIC for up to $20 million in financing for international projects involving small businesses. See "The Company--Risk Factors--Leverage--OPIC Loan," page 26. 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. 32 38 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. 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, 33 39 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. 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. 34 40 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- 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-14 Notes to Consolidated Statement of Loans to and Investments in Small Business Concerns............................................................................ F-18 Report of Independent Accountants..................................................... F-20
F-1 41 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
DECEMBER 31, SEPTEMBER 30, -------------------- 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 shares 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 42 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, ------------------ ----------------------------- 1995 1994 1994 1993 1992 ------- ------- ------- ------- ------- (UNAUDITED) 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 43 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, ------------------ ----------------------------- 1995 1994 1994 1993 1992 ------- ------- ------- ------- ------- (UNAUDITED) Increase in net assets resulting from operations: 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 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 44 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, ------------------ ----------------------------- 1995 1994 1994 1993 1992 ------- ------- ------- ------- ------- (UNAUDITED) 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 45 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 Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial"). Allied Investment and Allied Financial are licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC) and a Specialized Small Business Investment Company (SSBIC), respectively. The Company has an investment advisory agreement with Allied Capital Advisers, Inc. ("Advisers") whereby Advisers manages the investments of the Company subject to the supervision and control of the Company's board of directors. Certain directors and officers of Advisers are also directors and officers of the Company. Co-investments. Investments made by the Company are made in participation with a separately organized public closed-end management investment company and two private venture capital partnerships, which are also managed by 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. 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. F-6 46 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 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 the first nine months of 1995, the Company issued 32,957 shares of common stock pursuant to the dividend reinvestment plan. The common shares outstanding and the weighted average number of shares and share equivalents outstanding for all prior periods presented have been restated to include the 1995 common stock issuances during the first nine months of 1995 under the dividend reinvestment plan. 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:
DECEMBER 31, SEPTEMBER 30, ------------------- 1995 1994 1993 ------------- ------- ------- (IN THOUSANDS) 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 special investment banking or consulting work performed for that F-7 47 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 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 Capital Lending Corporation ("Allied Lending") owned by the Company, interim investments (i.e., U.S. government securities or repurchase agreements) 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:
1994 1993 1992 --------------- --------------- --------------- PER PER PER AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE ------ ----- ------ ----- ------ ----- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. F-8 48 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 The following represents a reconciliation from taxable income to income for financial reporting purposes for the years ended December 31:
1994 1993 1992 ----------------- ----------------- ---------------- PER PER PER AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE ------- ------ ------- ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. As of September 30, 1995, the Company had a revolving line of credit agreement with a bank under which it could borrow up to $10,000,000, which charged interest at the three-month LIBOR rate plus 1.15 percent per annum and expired September 30, 1995. No borrowings were outstanding at the time the agreement expired. The Company has established a new line of credit effective September 30, 1995 which permits the Company to borrow up to $10,000,000 at one-month LIBOR plus 2.5 percent per annum and expires September 30, 1998. 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 U.S. 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:
AMOUNT YEAR ENDING DECEMBER 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 ===========
OPIC Loan. 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 ("Loan Commitment") to F-9 49 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 provide financing for international projects involving qualifying U.S. small businesses. Loans under this agreement bear interest at the U.S. Department of Treasury interest rate plus 0.5 percent and have a ten year maturity from the date of first disbursement. The Loan Commitment 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 Financial, had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. Allied Financial has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. NOTE 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. The Company's stockholders approved a one-time grant of options to each member of the Board of Directors who is not an employee of the investment adviser to purchase 10,000 shares of the Company's common stock and such grants were subject to Commission approval. Such approval was granted by the Commission on December 26, 1995 and the options were granted at the current market price as of that date. Holders of ten percent or more of the Company's stock must exercise their options within a five-year period. F-10 50 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 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:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- 1995 1994 1993 1992 ------------- ------------- ------------- ------------- Options outstanding at beginning of period...................... 701,473 686,847 496,285 494,809 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:
NINE MONTHS YEAR ENDED DECEMBER ENDED 31, SEPTEMBER 30, -------------------- 1995 1994 1993 1992 ------------- ---- ---- ---- (IN THOUSANDS) 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 Lending 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. 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. F-11 51 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 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 Lending prior to consummation of the initial public offering of Allied Lending shares in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending shares was reduced to 1,580,000 shares, or approximately 36% 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 6, 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending shares to 1,244,914 shares, or approximately 28% of the Allied Lending shares then outstanding. NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
1995 ---------------------------- QTR 1 QTR 2 QTR 3 ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 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
F-12 52 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1994 ---------------------------------------- QTR QTR 1 QTR 2 QTR 3 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)
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-13 53 CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 COMPANY'S NAME (STATE) ----------------- ----------------- ----------------- (TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE - ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- ------- (UNAUDITED) AGPAL BROADCASTING, Loans and Debt Securities $ 930 $ 930 $ 933 $ 933 $ 935 $ 935 INC. (OR) Warrants 0 0 0 0 0 0 (radio stations) ALLIED CAPITAL LENDING Common Stock (1,244,914 shares) 2,996 11,951 3,802 14,906 3,757 18,960 CORPORATION (MD)(1,3,5) (small business lender) ALLIED WASTE Loans and Debt Securities 0 0 0 0 1,630 1,630 INDUSTRIES, INC. Warrants 92 1,038 92 92 92 92 (AZ)(1) (solid waste collection & removal) AMERICAN BARBECUE & Loans and Debt Securities 1,790 1,790 926 926 0 0 GRILL (KS) Warrants 71 71 71 71 0 0 (restaurant) ARNOLD MOVING CO. (KY) Loans and Debt Securities 298 298 297 297 295 295 (moving/storage firm) Warrants 11 11 11 11 11 11 ASW HOLDING CORPORATION Loans and Debt Securities 831 831 829 829 1,362 1,362 (IL) Warrants 53 53 53 53 53 53 (steel wool manufacturer) ATLANTIC HOMES Loans and Debt Securities 0 0 320 320 0 0 DEVELOPMENT CORP. Warrants 0 0 0 0 0 0 (VA) (real estate development) BELLEFONTE LIME CO. Common Stock (2,869 shares) 16 533 16 104 16 150 (PA)(3) (mineral quarry & production) BROADCAST HOLDINGS, Loans and Debt Securities 3,039 2,900 3,215 2,166 3,302 2,200 INC. (DC)(3) (radio station) CELEBRITIES, INC. (FL) Loans and Debt Securities 414 414 428 428 437 437 (radio station) Warrants 12 12 12 12 12 12 CENTENNIAL MEDIA CORP. Loans and Debt Securities 2,078 725 2,078 900 1,645 0 (CO)(2) Common Stock (1,803 shares) 948 0 948 0 948 0 (telephone directories) CERATECH CORPORATION Loans and Debt Securities 1,180 1,180 1,180 1,180 0 0 (IL) Warrants 0 0 0 0 0 0 (ceramic plate manufacturer) CHERRY TREE TOYS, INC. Loans and Debt Securities 1,091 1,091 1,146 1,146 1,022 1,022 (OH) Common Stock (117 shares) 1 0 1 0 23 23 (direct marketer of woodcrafts) CITIPOSTAL, INC. Loans and Debt Securities 0 0 216 216 216 216 (NY)(2) Preferred Stock Series A 0 0 177 177 177 177 (courier network) Convertible Preferred Stock Series B 289 0 289 0 289 31 Common Stock (27 shares) 71 0 173 103 173 75 Warrants 0 0 7 7 7 7 COAST GAS, INC. (CA) Loans and Debt Securities 2,168 2,168 2,159 2,159 0 0 (courier network) Warrants 124 124 124 124 0 0 CONSUMER HEALTH Convertible Preferred Stock (234,583 shares) 116 0 180 54 180 54 SERVICES, INC. (CO) Common Stock (127,940 shares) 64 0 0 0 0 0 (medical/dental consumer info. service) CONTEMPORARY MEDIA (ID) Loans and Debt Securities 586 586 602 602 0 0 (radio stations) Warrants 204 204 204 204 0 0 DEH PRINTED CIRCUITS, Loans and Debt Securities 2,307 2,307 2,287 2,287 0 0 INC. (IL) Warrants 133 133 133 133 0 0 (circuit board manufacturer) DEVLIEG-BULLARD INC. Loans and Debt Securities 2,134 2,134 2,104 2,104 0 0 (CT)(1) Warrants 275 400 275 275 0 0 (tool manufacturer) DMI FURNITURE, INC. Convertible Preferred Stock (399,840 shares) 500 279 500 576 500 1,040 (KY)(1) (furniture manufacturer) DOGLOO, INC. (CA) Loans and Debt Securities 3,335 3,335 3,307 3,307 0 0 (pet products Warrants 0 0 265 265 0 0 manufacturer) EDWARDS HEATING & AIR Loans and Debt Securities 2,306 441 2,306 911 1,776 1,312 CONDITIONING (GA) Warrants 29 0 29 0 29 0 (heating & air conditioning dealer/contractor) ENVIRCO CORP. (NJ) Loans and Debt Securities 0 0 32 188 700 700 (clean room equipment Warrants 0 0 0 0 32 32 manufacturer) ENVIROPLAN, INC. (NJ) Loans and Debt Securities 2,443 1,890 2,425 2,425 1,906 1,906 (emissions monitoring Warrants 119 0 120 204 60 60 equipment mfg.) ESQUIRE COMMUNICATIONS, Loans and Debt Securities 2,397 2,397 2,397 2,397 0 0 LTD. (NY)(1) Warrants 3 36 3 3 0 0 (court reporters)
F-14 54
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 COMPANY'S NAME (STATE) ----------------- ----------------- ----------------- (TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE - ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- ------- (UNAUDITED) FOUNTAINHEAD Loans and Debt Securities 1,180 1,180 1,180 1,180 0 0 TECHNOLOGIES, INC. Warrants 0 0 0 0 0 0 (RI) (non-chlorine water purification sys.) GARDEN RIDGE CORP. (TX) Loans and Debt Securities 0 0 3,302 3,302 1,821 1,821 (home decorating and Common Stock (61,241 shares) 687 3,469 761 1,236 387 387 craft products) Warrants 112 1,455 112 145 112 112 GATEWAY HEALTHCARE Loans and Debt Securities 853 853 853 853 701 692 CORP. (VA) Convertible Preferred Stock (10,725 shares) 497 42 497 42 650 199 (medical/supplies Warrants 2 0 2 0 2 0 distributor) GENOA MINE ACQUISITION Capital Stock (20 shares) 44 533 44 44 44 0 CORP. (OH)(3) (limestone mining) GLOBAL SOFTWARE INC. Loans and Debt Securities 1,664 1,664 1,662 1,662 0 0 (NC) Warrants 19 626 19 19 0 0 (accounting software development) GRANT BROADCASTING Loans and Debt Securities 1,072 1,072 1,064 1,064 1,045 1,045 SYSTEMS II (FL) Warrants 78 448 78 78 78 78 (television stations) HIGH PLAINS CABLEVISION Loans and Debt Securities 0 0 129 129 142 142 (TX) Warrants 0 0 14 14 14 14 (cable television) HOUSTON FOODS COMPANY Loans and Debt Securities 0 0 0 0 126 126 (IL) Convertible Preferred Stock 0 0 0 0 7 152 (seasonal gift Warrants 0 0 0 0 3 89 packages) INNOTECH, INC. (VA) Warrants 29 29 29 29 29 29 (bifocal lens manufacturer) ISOTECHNOLOGIES, INC. Convertible Debt Securities 602 602 609 609 580 435 (NC) (orthopedic equipment) JACKSON PRODUCTS, INC. Loans and Debt Securities 0 0 856 856 839 839 (MI) Common Stock 0 0 230 303 173 173 (safety equipment manufacturer) JARAD BROADCASTING (NY) Loans and Debt Securities 0 0 0 0 2,111 2,111 (radio station) Warrants 0 0 0 0 73 73 JUNE BROADCASTING (NJ) Loans and Debt Securities 0 0 0 0 1,346 1,346 (radio station) Warrants 58 1,680 58 582 58 58 KIRKER ENTERPRISES (NJ) Loans and Debt Securities 2,131 2,131 0 0 0 0 (chemical manufacturer) Warrants 203 203 0 0 0 0 LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 736 736 736 732 732 (real estate mortgages) Convertible Debentures 0 0 0 0 197 197 Warrants 200 0 200 0 205 19 MARKINGS & EQUIPMENT Loans and Debt Securities 0 0 0 0 1,613 975 CORP. (FL)(2) Warrants 0 0 0 0 0 0 (highway striping) MASTER POWER, INC. (MD) Loans and Debt Securities 286 286 285 285 348 348 (power tool Preferred Stock (37,097 shares) 7 7 7 7 7 7 manufacturer) Warrants 4 4 4 4 4 4 MAXTEC INTERNATIONAL Loans and Debt Securities 0 0 85 85 161 161 CORP. (IL) Warrants 0 0 7 7 7 7 (electronic test instruments) MEDIFIT OF AMERICA, Loans and Debt Securities 895 895 1,584 1,584 1,501 1,501 INC. (NJ) Warrants 93 0 93 0 93 93 (physical rehabilitation) MILL-IT STRIPING (FL) Loans and Debt Securities 125 125 125 125 0 0 (highway paint Warrants 125 0 125 125 0 0 striping) MIDVIEW ASSOCIATES (VA) Loans and Debt Securities 282 282 0 0 0 0 (real estate Warrants 0 0 0 0 0 0 development) MLX/SINTERMET CORP. Common Stock (5,835 shares-MLX) 241 61 241 24 241 31 (GA)(1) (friction materials manufacturer) MONTGOMERY TANK LINES Common Stock 0 0 0 0 62 92 (FL) Warrants 0 0 0 0 46 346 (tank truck carrier) NOBEL EDUCATION Loans and Debt Securities 2,250 2,250 0 0 0 0 DYNAMICS (PA)(1) Preferred Stock (398,936 shares) 750 1,047 0 0 0 0 (education) Warrants 0 345 0 0 0 0 OLD MILL HOLDINGS, INC. Loans and Debt Securities 657 657 545 545 0 0 (NY) Warrants 45 0 35 35 0 0 (custom embroidery of apparel)
F-15 55
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 COMPANY'S NAME (STATE) ----------------- ----------------- ----------------- (TYPE OF BUSINESS) INVESTMENTS(4) COST VALUE COST VALUE COST VALUE - ----------------------- --------------------------------------------- ------- ------- ------- ------- ------- ------- (UNAUDITED) PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 200 100 200 100 (video stores) PIATL HOLDINGS, INC. Loans and Debt Securities 167 167 148 148 293 393 (NJ)(3) Preferred Stock (36 shares) 267 44 267 106 266 0 (environmental Common Stock (36 shares) 0 0 0 0 0 0 consulting) POLYFLEX/B & L HOLDINGS Loans and Debt Securities 529 533 665 665 813 813 (MS) Warrants 28 486 28 487 28 506 (plastic bag manufacturer) PROVIDENTIAL Common Stock (52,794 shares) 1,000 211 1,000 211 1,000 277 CORPORATION (CA)(1) (shared appreciation reverse mortgages) RADIO ONE (GA) Loans and Debt Securities 2,280 2,280 0 0 0 0 (radio stations) Warrants 0 0 0 0 0 0 R-TEX DECORATIVES Loans and Debt Securities 905 905 902 902 0 0 COMPANY, INC. (PA) Warrants 32 0 32 32 0 0 (decorative ribbon manufacturer) SALTON/MAXIM Loans and Debt Securities 0 0 0 0 250 125 HOUSEWARES, INC. Common Stock 0 0 0 0 0 118 (IL)(1,2) (small appliance distributor) SPA LENDING CORPORATION Preferred Stock Series A (5,578 shares) 398 398 398 398 0 0 (DC)(3) Preferred Stock Series B (8,755 shares) 506 424 506 506 0 0 (health spas) Preferred Stock Series C (14,092 shares) 1,680 0 1,680 632 0 0 Common Stock (6,208 shares) 413 0 413 0 0 0 SUNSTATES REFRIGERATED Loans and Debt Securities 2,778 2,778 2,799 2,799 2,234 2,234 SERVICES, INC. Preferred Stock (43,884 shares) 193 193 204 204 0 0 (GA)(3) Common Stock (163 shares) 145 145 145 137 35 0 (cold food storage) TACO TICO, INC. (KS)(2) Loans and Debt Securities 1,189 382 1,188 382 1,188 199 (Mexican fast food Warrants 28 0 28 0 28 0 restaurant) TIMBERCREEK COMPANY Loans and Debt Securities 2,248 2,248 1,537 1,537 762 762 (NY)(3) Common Stock 0 0 17 0 17 17 (archery equipment) TOTAL FOAM, INC. Loans and Debt Securities 1,744 174 1,744 174 1,570 369 (CT)(2,3) Common Stock (910 shares) 57 0 57 0 57 0 (packaging systems) TPG HOLDINGS, INC. (TX) Loans and Debt Securities 2,179 2,179 2,407 2,407 1,463 1,463 (commercial banking Warrants 13 2,120 13 2,120 13 2,120 software development) TOWER BROADCASTING (MN) Loans and Debt Securities 0 0 0 0 358 358 (radio station) Warrants 0 0 0 0 19 19 VISTECH CORPORATION Loans and Debt Securities 0 0 0 0 7 0 (FL) Warrants 0 0 0 0 8 0 (computer vision products) VISU-COM, INC. (MD)(3) Loans and Debt Securities 2,248 1,500 2,244 1,500 2,239 1,270 (visual communications Preferred Stock 0 0 0 0 224 0 products) Common Stock (270 shares) 277 0 277 0 54 0 WEATHERTECH Loans and Debt Securities 84 84 169 169 259 259 DISTRIBUTING CO. (AL) Warrant 14 960 14 960 14 440 (HVAC wholesale distributor) WEST VIRGINIA RADIO Loans and Debt Securities 582 582 599 599 599 599 CORP. (WV) Warrants 200 0 200 78 200 200 (radio station) WILLIAMS BROTHERS Loans and Debt Securities 830 830 378 378 376 376 LUMBER (GA) Warrants 15 1,614 15 2,017 15 1,004 (builders' supply yards) WINCAPP BROADCASTING Debt Securities 694 694 690 690 692 692 INC. (PA) Warrants 23 23 23 23 23 23 (radio station) Z-SPANISH RADIO NETWORK Loans and Debt Securities 2,983 2,983 2,606 2,606 0 0 (CA) Warrants 3 3 2 2 0 0 (radio station) ------- ------- ------- ------- ------- ------- 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 assets for BDC purposes at September 30, 1995 F-16 56 CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 LOANS WITH NO EQUITY --------------------- --------------------- --------------------- (TYPE OF BUSINESS) (A) COST VALUE COST VALUE COST VALUE - --------------------------------------------- -------- -------- -------- -------- -------- -------- (UNAUDITED) 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 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 approximately $5.2 million which are non-qualifying assets for BDC purposes at September 30, 1995 F-17 57 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 Inc.; Esquire Communications, Ltd. and Providential Corporation. 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:
DECEMBER 31, SEPTEMBER 30, ---------------------- 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-18 58 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS (CONTINUED) AS OF SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 AND 1993 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, 1995 1994 ------------- ------------ (IN THOUSANDS) 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-19 59 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Allied Capital Corporation We have audited the consolidated statement of financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1994 and 1993, including the consolidated statement of loans to and investments in small business concerns as of December 31, 1994, and the related consolidated statements of operations, cash flows, and changes in net assets for each of the three years in the period ended December 31, 1994, and the selected per share data presented as financial highlights for each of the five years in the period ended December 31, 1994. These financial statements and per share data are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements and per share data based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and per share data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the examination or confirmation of securities owned at December 31, 1994 and 1993. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected per share data referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations, cash flows, and changes in net assets for each of the three years in the period ended December 31, 1994, and the selected per share data for each of the five years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include securities valued at $115,026,000 as of December 31, 1994 and $94,630,000 as of December 31, 1993, (85 percent and 70 percent, respectively, of total assets) whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. MATTHEWS, CARTER AND BOYCE McLean, Virginia February 10, 1995 F-20 60 =================================================================== NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE COMPANY'S INVESTMENT ADVISER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES 885,448 SHARES 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. ALLIED CAPITAL ----------------- TABLE OF CONTENTS CORPORATION
PAGE ------ Summary................................ 3 Fees and Expenses...................... 4 Available Information.................. 6 Financial Highlights................... 6 Public Trading and Net Asset Value Information.......................... 11 COMMON STOCK The Offer.............................. 12 Use of Proceeds........................ 18 The Company............................ 18 Management............................. 28 Authorized Classes of Securities....... 30 Description of Common Stock............ 30 Reports and Independent Public Accountants.......................... 31 PROSPECTUS Custodian, Transfer and Dividend Paying Agent and Registrar.................. 31 JANUARY 25, 1996 Table of Contents of Statement of Additional Information............... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 32 Financial Statements................... F-1
=================================================================== 61 ALLIED CAPITAL CORPORATION HIGHLIGHTS OF THE OFFERING ALLIED CAPITAL CORPORATION (the "Company") is issuing to its existing stockholders non-transferable rights ("Subscription Rights") which entitle the holders thereof to purchase new shares of the Company at a discounted price to the Company's market price. Each stockholder will be issued one Subscription Right for each share of the Company held as of January 22, 1996, the Record Date. Each seven Subscription Rights will entitle stockholders to purchase one new share of the Company's common stock (1-for-7) at a discounted price. EXCLUSIVE OPPORTUNITY TO PURCHASE NEW SHARES AT A DISCOUNT TO THE CURRENT MARKET VALUE The pricing structure provides current stockholders with a unique and exclusive opportunity to purchase additional shares of the Company's stock at 95% of the average of the last reported sales price of a share of the Company's common stock on the Nasdaq National Market on the Pricing Date and the four preceding business days. This pricing formula provides the stockholder with a subscription price below the then-current market price. See the dilution section in the Prospectus for more information. The Company expects that there will be no dilution to the Company's net asset value because the Company's shares have historically traded, and continue to trade as of the date of this Prospectus, at a premium to the last reported net asset value. Stockholders who choose not to participate in the Offer, however should expect to own a smaller proportional interest in the Company following the expiration of the Offer. INCREMENTAL PROCEEDS MAY REDUCE EXPENSE RATIO AND INCREASE STOCK LIQUIDITY Proceeds from a well-subscribed offering may reduce the Company's expense ratio, thus benefiting both participating and non-participating stockholders. Additional shares issued as a result of the completion of the rights offering may also increase the liquidity of the shares. INVESTMENT ADVISER WITH AN ESTABLISHED TRACK RECORD IN MANAGING THE COMPANY The Company's investment adviser is Allied Capital Advisers, Inc. ("Advisers"). Advisers is a registered investment adviser with more than $600 million under management and whose management team has more than 35 years of experience managing Allied Capital Corporation's portfolio of private small business investments. CONTACT THE INFORMATION AGENT FOR MORE INFORMATION For additional information on the rights offering, please contact SHAREHOLDER COMMUNICATIONS CORPORATION, THE INFORMATION AGENT AND OFFERING COORDINATOR AT (800) 221-5724 EXTENSION 331. You may also contact your bank, broker or other nominee. (NOT PART OF THE PROSPECTUS) ALLIED CAPITAL CORPORATION QUESTIONS AND ANSWERS WHY SHOULD I EXERCISE MY SUBSCRIPTION RIGHTS? Allied Capital Corporation believes that an increase in the assets of the Company at this time will permit the Company to invest in additional small private businesses, as well as to leverage against this additional capital and continue the growth of the Company. WHAT AM I BUYING? The Company first offered its shares to the public in January 1960, and currently operates as a business development company. The investment objective of the Company is to provide a high level of current income and long-term growth in the value of its net assets by providing debt, mezzanine, and equity financing primarily for small privately owned growth companies. HOW MUCH DID THE COMPANY DECLARE IN DIVIDENDS AND DISTRIBUTIONS FOR 1995? The Company declared dividends totaling $1.44 per share for 1995, including a $0.58 per share year-end extra distribution. WHAT WILL BE THE PRICE OF THE NEW SHARES? The purchase price per share (the "Subscription Price") will be 95% of the average of the last reported sales price of a share of the Company's common stock on the Nasdaq National Market on the Expiration Date of the Offer and the four preceding business days. Therefore, Record Date stockholders have the opportunity to purchase new shares below the market price in the rights offering. CAN STOCKHOLDERS SUBSCRIBE FOR ADDITIONAL SHARES AT THE DISCOUNTED PRICE? Stockholders who fully exercise all of the Subscription Rights issued to them may also request to purchase additional shares at the same discounted price pursuant to the Over-Subscription Privilege. This privilege makes shares not purchased by other stockholders available to those who wish to acquire more than their entitlement through the exercise of Subscription Rights. These shares will be allocated to stockholders requesting over-subscription shares following the expiration of the offering on a pro rata basis, based on the number of Subscription Rights issued. WHAT IF I HOLD FRACTIONAL SHARES? Subscription Rights will only be issued for whole shares, not fractional shares. Also, no fractional shares will be issued as a result of allocation or proration. CAN I SELL MY SUBSCRIPTION RIGHTS? No. The Subscription Rights are non-transferable and have no resale value. (NOT PART OF THE PROSPECTUS) 62 These Questions and Answers and Highlights of the Offering should be read in conjunction with the accompanying Prospectus relating to Allied Capital Corporation's rights offering. The Prospectus contains more detailed information, including special risk considerations about the rights offering and the Company. These Questions and Answers and Highlights of the Offering are qualified in their entirety by reference to the information included in the Prospectus. Investment in the Company, which invests in small private businesses, involves a high degree of business and financial risk. The Company and its subsidiaries borrow funds, and as a result are exposed to the risks of leverage. In addition, an immediate dilution of each stockholder's proportional share of the Company will be experienced as the number of shares outstanding after the offering will increase. Such dilution will disproportionately affect those stockholders who do not fully exercise their Subscription Rights and should expect that they will, at the completion of the offering, own a smaller proportional interest in the Company than they owned prior to the offering. (NOT PART OF THE PROSPECTUS) [ALLIED CAPITAL LOGO] ALLIED CAPITAL ALLIED CAPITAL CORPORATION RIGHTS OFFERING An Exclusive Opportunity for Stockholders IMPORTANT DATES: Record Date January 22, 1996 Subscription Period January 29 to February 27, 1996* Expiration/Pricing Date February 27, 1996* *unless extended (NOT PART OF THE PROSPECTUS) 63 PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 64 885,448 SHARES ALLIED CAPITAL CORPORATION COMMON STOCK --------------- STATEMENT OF ADDITIONAL INFORMATION January 25, 1996 This Statement of Additional Information is not a prospectus. It should be read with the prospectus dated January 25, 1996 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. TABLE OF CONTENTS
Page in the Statement Location of of Additional Related Disclosure Information in the Prospectus ----------- ----------------- MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2 28 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . B-2 -- Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3 -- Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4 -- CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . B-5 -- INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . B-5 -- Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . B-6 28-29 Custodian Services . . . . . . . . . . . . . . . . . . . . . . . . . B-8 31 Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . B-8 31 BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . B-8 -- TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8 30-31
B - 1 65 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: MANAGEMENT TABLE
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 (see below). 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. 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.
B - 2 66
Position(s) Held Name, Address, and With the Age Company Principal Occupation(s) During Past Five (5) Years ------------------------ --------------- -------------------------------------------------------------- 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 (see above). 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. 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. 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 approved a one-time grant of options to each member of the Board of Directors who is not an employee of the investment adviser to purchase 10,000 shares of the Company's common stock pursuant to the Company's Stock Option Plan and such grants were subject to Commission approval. Such approval was granted by the Commission on December 26, 1995 and the options were granted at the current market price as of that date. B - 3 67 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. 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 plan ("LTIP") payouts. 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
B - 4 68
Long-Term Compensation -------------------------------------- Awards Payouts ----------------------------------- ------------- Securities Restricted Underlying Names and Principal Position Year Stock Award(s) Options/SARs LTIP Payouts - -------------------------------------------------------------------------------------------------------------- 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. Clorety 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 518,578 shares of 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. 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). B - 5 69 Advisers currently 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 REIT. 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. 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 cash equivalents 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 cash equivalents 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 B - 6 70 (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 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 consolidated total assets (less the Company's investment in Allied Lending and the Company's consolidated Interim Investments and cash and cash equivalents) and 0.5% of the Company's Interim Investments and cash and cash equivalents. 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. B - 7 71 Under the former agreement, during 1992, 1993 and 1994, Advisers waived most of its fee on the Company's consolidated Interim Investments and cash and cash equivalents, as the Company had excess Interim Investments and cash and cash equivalents obtained with debt capital. The total fees waived on Interim Investments and cash and cash equivalents 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. 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 has elected 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") and continues to maintain that status. If the Company 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% B - 8 72 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. The Company 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. 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. B - 9 73 Other than distributions properly designated as "Capital gain dividend" as described below, 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. 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. B - 10 74 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 - 11 75 PART C OTHER INFORMATION 76 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS 1. Financial Statements The following financial statements of Allied Capital Corporation (the "Registrant" or "Company") 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 * c. None d.1 Specimen certificate of Registrant's Common Stock, par value $1.00, the rights of holders of which are defined in Exhibits a and b (2) d.2 Form of Subscription Form by which stockholders of Registrant's common stock may exercise their non-transferable Subscription Rights and Over-Subscription Privileges * C - 1 77 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 * f.8 Unsecured Line of Credit Agreement between The Riggs National Bank of Washington, D.C. and the Registrant dated December 18, 1995 * g. Investment Advisory Agreement between Registrant and Allied Capital Advisers, Inc. (4) h. Form of Soliciting Dealer Agreement between the Registrant and Dealers * 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 78 k.1. Tax Indemnification Agreement dated November 12, 1993 between the Registrant and Allied Capital Lending Corporation (5) k.2. Letter Agreement dated November 16, 1993 among Allied Capital Lending Corporation, the Registrant and Lehman Brothers Inc. (6) k.3 Form of Offering Coordinator/Information Agent Agreement between the Registrant and Shareholder Communications Corporation * k.4 Form of Subscription Agency Agreement between the Registrant and American Stock Transfer & Trust Company * 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. None q. None r. Financial Data Schedule * s. Powers of Attorney of certain signatories of this registration statement (11) - ----------- * 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 4(a) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 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 79 (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 Company's initial registration statement on Form N-2 (File No. 33-64629), filed with the Commission on November 29, 1995. (12) Incorporated by reference to such Exhibit filed with Registration Statement No. 33-64629 on Pre-Effective Amendment No. 1 filed with the Commission on January 12, 1996. 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 . . . . . . . . . . . . $ 4,704 NASD Filing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700 Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,500 Information Agent's Fees and Expenses . . . . . . . . . . . . . . . . . . . 50,000 Transfer Agent's and Registrar's Fees and Expenses . . . . . . . . . . . . 40,000 Expenses of Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Printing and Conversion Expenses . . . . . . . . . . . . . . . . . . . . . 48,000 Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Auditor's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 5,400 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,304
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 80 Allied Capital Corporation II* - Maryland Subsidiaries: ------------ Allied Investment Corporation II - Maryland 100% Allied Financial Corporation II - Maryland 100% Allied Capital Commercial Corporation* - Maryland Subsidiaries: ------------ ALCC 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 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 December 31, 1995:
Number of Title of Class Record Holders -------------- -------------- Common Stock 1,400* 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 81 LIBOR +2.5% Revolving Line of Credit 1 10-Year 9.15% Senior Notes 1 (The Company, Allied Investment and Allied Financial)
-------------------- * Estimate. The Company 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 82 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 83 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 84 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 85 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 86 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. a. The Registrant undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (1) To include any prospectus required by Section 10(a)(3) of the 1933 Act; (2) To reflect in the prospectus any fact or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (3) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; b. The Registration undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and c. The Registrant undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 5. Not Applicable. 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 87 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 24th day of January , 1996. 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 --------- ----- ---- * Chairman of the Board and Chief - -------------------------- Executive Officer (Principal --------- David Gladstone Executive Officer) and Director * Vice Chairman of the Board and - -------------------------- Director --------- George C. Williams * President and Chief Operating - -------------------------- 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 * Vice President, Treasurer and - -------------------------- 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 January 24, 1996, pursuant to the Powers of Attorney filed on November 29, 1995, as Exhibit (s) to the initial registration statement. 88 EXHIBIT INDEX
Exhibit Number Page - ------ ---- b. By-laws of the Registrant, as amended * d.2 Form of Subscription Form by which stockholders of Registrant's common stock may exercise their non-transferable Subscription Rights and Over-Subscription Privileges * f.1 Form of SBA subordinated debentures comprising the long-term debt of Registrant's wholly owned subsidiary, Allied Investment Corporation * 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.7 Loan Agreement between Overseas Private Investment Corporation and Registrant, dated April 10, 1995 * f.8 Unsecured Line of Credit Agreement between The Riggs National Bank of Washington, D.C. and the Registrant dated December 18, 1995 * h. Form of Soliciting Dealer Agreement between the Registrant and Dealers * 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 * k.3 Form of Offering Coordinator/Information Agent Agreement between the Registrant and Shareholder Communications Corporation * k.4 Form of Subscription Agency Agreement between the Registrant and American Stock Transfer & Trust Company * 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 * n. Consent of Matthews, Carter and Boyce, independent accountants * r. Financial Data Schedule *
EX-99.B 2 BYLAWS 1 EXHIBIT B --------------------------- ALLIED CAPITAL CORPORATION -------------------------- (a Maryland corporation) ------------------- BYLAWS ------------------- As adopted by the Board of Directors on December 21, 1990 and as amended by the Board of Directors on May 7, 1992, October 19, 1994 and November 8, 1995. 2 TABLE OF CONTENTS
Page ---- ARTICLE I - OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1. Office . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Additional Offices . . . . . . . . . . . . . . . . . . . 1 ARTICLE II - MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . 1 Section 1. Time and Place . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Annual Meeting . . . . . . . . . . . . . . . . . . . . . 1 Section 3. Notice of Annual Meeting . . . . . . . . . . . . . . . . 1 Section 4. Special Meetings . . . . . . . . . . . . . . . . . . . . 1 Section 5. Notice of Special Meeting . . . . . . . . . . . . . . . 2 Section 6. General Powers . . . . . . . . . . . . . . . . . . . . . 2 Section 7. Presiding Officer; Statement of Affairs; Order of Business. . . . . . . . . . . . . . . . . . . . . . . 2 Section 8. Quorum; Adjournments . . . . . . . . . . . . . . . . . . . 3 Section 9. Voting . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 10. Action By Consent . . . . . . . . . . . . . . . . . . . 3 ARTICLE III - DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 1. General Powers; Number; Tenure . . . . . . . . . . . . . . 4 Section 2. Vacancies . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3. Removal; Resignation . . . . . . . . . . . . . . . . . . 4 Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . 5 Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . 5 Section 6. Regular Meetings . . . . . . . . . . . . . . . . . . . . . 5 Section 7. Special Meetings . . . . . . . . . . . . . . . . . . . . . 5 Section 8. Quorum; Adjournments . . . . . . . . . . . . . . . . . . 5 Section 9. Compensation . . . . . . . . . . . . . . . . . . . . . . 5 Section 10. Action by Consent . . . . . . . . . . . . . . . . . . . 5 Section 11. Meetings by Telephone or Similar Communications . . . . . 6 ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 1. Executive Committee . . . . . . . . . . . . . . . . . . . 6 Section 2. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3. Procedure; Meetings . . . . . . . . . . . . . . . . . . 6 Section 4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 5. Other Committees . . . . . . . . . . . . . . . . . . . . . 7 Section 6. Vacancies; Changes; Discharges . . . . . . . . . . . . . . 7 Section 7. Compensation . . . . . . . . . . . . . . . . . . . . . . . 7 Section 8. Action by Consent . . . . . . . . . . . . . . . . . . . . 7 Section 9. Meetings by Telephone or Similar Communications . . . . . 7 Section 10. Audit Committee . . . . . . . . . . . . . . . . . . . . 7
i 3 Section 11. Advisory Committee . . . . . . . . . . . . . . . . . . . . 8 ARTICLE V - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 1. Form; Delivery . . . . . . . . . . . . . . . . . . . . . . 8 Section 2. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VI - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 1. Designations . . . . . . . . . . . . . . . . . . . . . . . 9 Section 2. Term of Office; Removal . . . . . . . . . . . . . . . . . 9 Section 3. Compensation . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4. The Chairman of the Board . . . . . . . . . . . . . . . . 9 Section 5. The Vice Chairman . . . . . . . . . . . . . . . . . . . 10 Section 6. The President . . . . . . . . . . . . . . . . . . . . . 10 Section 7. The Vice Presidents . . . . . . . . . . . . . . . . . . 10 Section 8. The Secretary . . . . . . . . . . . . . . . . . . . . . 10 Section 9. The Assistant Secretary . . . . . . . . . . . . . . . . 11 Section 10. The Treasurer . . . . . . . . . . . . . . . . . . . . . 11 Section 11. The Assistant Treasurer . . . . . . . . . . . . . . . . 11 ARTICLE VII - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND ADVISORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 1. Generally . . . . . . . . . . . . . . . . . . . . . . . 11 Section 2. Limitation for Disabling Conduct . . . . . . . . . . . . 12 Section 3. Advisory Committee Members . . . . . . . . . . . . . . . 13 ARTICLE VIII - STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . 14 Section 1. Form; Signatures; Statements . . . . . . . . . . . . . . 14 Section 2. Registration of Transfer . . . . . . . . . . . . . . . . 14 Section 3. Registered Stockholders . . . . . . . . . . . . . . . . 14 Section 4. Record Date . . . . . . . . . . . . . . . . . . . . . . 15 Section 5. Lost, Stolen or Destroyed Certificates . . . . . . . . . 15 ARTICLE IX - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 15 Section 1. Dividends . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2. Reserves . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 3. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . 16 Section 4. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE X - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 16 CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ii 4 BYLAWS ------ ARTICLE I OFFICES Section 1. Office. The principal office of the Corporation shall be: 5422 Albia Road, Bethesda, Maryland 20816; the Corporation shall also have an office at 1666 K Street, N.W., Washington, D.C. 20006-2803. Section 2. Additional Offices. The Corporation may also have offices at such other places, both within and without the State of Maryland, as the stockholders may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Time and Place. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Maryland, as the Board of Directors may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. Annual meetings of stockholders, commencing with the year 1991, shall be held each year on the second Thursday of May, at 10:00 a.m., or at such other date and time within thirty-one (31) days of such date, as shall be designated by the Board of Directors and stated in the notice of the meeting. At such annual meeting, the stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. Notice of Annual Meeting. Written notice of the annual meeting, stating the place, date and time thereof, shall be given to each stockholder entitled to vote at such meeting not less than 10 (unless a longer period is required by law) nor more than 90 days prior to the meeting. Section 4. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by the Chairman of the Board, if any, or the President and shall be called by the Chairman of the Board, if any, the President or the Secretary either (i) at the request in writing of a majority of the Board of Directors, or, except as expressly set forth below, (ii) at the request in writing of stockholders entitled to not less than 30% of all the votes entitled to be cast at such meeting. Such request by stockholders shall state the purpose or purposes of such meeting and the matters to be acted on thereat. If the request is made by the stockholders, the President or Secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing such notice of the meeting, and, upon payment to the Corporation of such costs by such stockholders, the President or Secretary 5 shall give notice stating the purpose or purposes of the meeting, as required by these Bylaws, to all stockholders entitled to vote at such meeting. Notwithstanding the foregoing, no special meeting need be called upon request of the holders of shares entitled to cast less than a majority of all votes entitled to be cast at such meeting to consider any matter which is substantially the same as a matter voted upon at any annual meeting or special meeting of stockholders held during the preceding twelve (12) calendar months. Section 5. Notice of Special Meeting. Written notice of a special meeting, stating the place, date and time thereof and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than 10 (unless a longer period is required by law) nor more than 90 days prior to the meeting. Section 6. General Powers. The business and affairs of the Corporation shall be managed by its stockholders, which may exercise all powers of the Corporation and perform all lawful acts and things on behalf of the Corporation. Section 7. Presiding Officer; Statement of Affairs; Order of Business. (a) Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or, if he is not present (or, if there is none), by the President, or, if he is not present, by a Vice President, or, if he is not present, by such person as may have been chosen by the Board of Directors, or if none of such persons is present, by a chairman to be chosen by the stockholders owning a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at the meeting and who are present in person or represented by proxy. The Secretary of the Corporation, or, if he is not present, an Assistant Secretary, or, if he is not present, such person as may be chosen by the Board of Directors, or if none of such persons is present, then such person as may be chosen by the stockholders owning a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at the meeting and who are present in person or represented by proxy shall act as secretary of the meeting. (b) The following order of business, unless otherwise ordered at the meeting, shall be observed as far as practicable and consistent with the purposes of the meeting: 1. Call of the meeting to order. 2. Presentation of proof of mailing of the notice of the meeting and, if the meeting is a special meeting, the call thereof. 3. Presentation of proxies. 4. Announcement that a quorum is present. 5. Reading and approval of the minutes of the previous meeting. 6. Reports, if any, of officers. 6 7. Submission of statement of affairs by Treasurer, if the meeting is an annual meeting. 8. Election of directors, if the meeting is an annual meeting or a meeting called for that purpose. 9. Miscellaneous business. 10. Adjournment. Section 8. Quorum; Adjournments. The presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall be necessary to, and shall constitute a quorum for, the transaction of business at all meetings of the stockholders, except as otherwise provided by statute or by the Articles of Incorporation. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, until a quorum shall be present or represented. Even if a quorum shall be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time for good cause, without notice of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, until a date which is not more than 30 days after the date of the original meeting. At such adjourned meeting, at which a quorum shall be present in person or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than 30 days, or, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. Voting. (a) At any meeting of stockholders, every stockholder having the right to vote shall be entitled to vote in person or by proxy. Except as otherwise provided by law or the Articles of Incorporation, each stockholder of record shall be entitled to one vote for each share of capital stock registered in his or its name on the books of the Corporation, on each matter submitted to a vote at a meeting of stockholders, except that no stockholder shall be entitled to vote in respect of any shares of capital stock if any installment payable thereon is overdue and unpaid. (b) Except as otherwise provided by law or the Articles of Incorporation, a majority of the votes cast at a meeting of stockholders, duly called and at which a quorum is present, shall be sufficient to take or authorize action upon any matter which may properly come before such meeting. Section 10. Action By Consent. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a written 3 7 consent, setting forth such action, is signed by all the stockholders entitled to vote on the subject matter thereof and any other stockholders entitled to notice of a meeting of stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consent and waiver are filed with the records of the Corporation. Such written consent shall be filed with the minutes of meetings of stockholders. ARTICLE III DIRECTORS Section 1. General Powers; Number; Tenure. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all powers of the Corporation and perform all lawful acts and things which are not by law, the Articles of Incorporation or these Bylaws directed or required to be exercised or performed by, or are conferred upon or reserved to, the stockholders. The number of directors shall be that provided in the Articles of Incorporation until increased or decreased pursuant to the following provisions, but shall never be less than 3 unless otherwise permitted by law. A majority of the entire Board of Directors may, at any time and from time to time, increase or decrease the number of directors of the Corporation as set forth in the Articles of Incorporation, subject to the foregoing limitation. The tenure of office of a director shall not be affected by any decrease in the number of directors so made by the Board. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until the next succeeding annual meeting or until his successor is elected and shall qualify. Directors need not be stockholders. Section 2. Vacancies. Any vacancy occurring in the Board of Directors for any cause other than by reason of an increase in the number of directors may, unless otherwise provided in these Bylaws, be filled by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum. Any vacancy occurring by reason of an increase in the number of the directors may, unless otherwise provided in these Bylaws, be filled by action of a majority of the directors constituting the entire Board of Directors. A director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of the stockholders or until his successor is elected and shall qualify. If there are no directors in office, any officer or stockholder may call a special meeting of stockholders in accordance with the provisions of the Articles of Incorporation or these Bylaws, at which meeting such vacancies shall be filled. Section 3. Removal; Resignation. (a) Except as otherwise provided by law or the Articles of Incorporation, at any meeting of stockholders, duly called and at which a quorum is present, the stockholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast thereon, remove any director or directors from office with or without cause and may elect a successor or successors to fill any resulting vacancy or vacancies for the unexpired terms of any removed director or directors. 4 8 (b) Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, a resignation shall take effect upon delivery thereof to the Board of Directors or the designated officer. It shall not be necessary for a resignation to be accepted before it becomes effective. Section 4. Place of Meetings. The Board of Directors may hold meetings, annual, regular or special, either within or without the State of Maryland. Section 5. Annual Meeting. The annual meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. Section 6. Regular Meetings. Additional regular meetings of the Board of Directors may be held without notice, at such time and place as may from time to time be determined by the Board of Directors. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, if any, the President or by 2 or more directors on at least 2 days' notice to each director, if such notice is delivered personally or sent by telegram or telecopy, or on at least 3 days' notice, if sent by mail. Special meetings shall be called by the Chairman of the Board, if any, the President or the Secretary in like manner and on like notice on the written request of one-half or more of the number of directors then in office. Except as otherwise provided by law, the Articles of Incorporation or Article X of these Bylaws, any such notice need not state the purpose or purposes of such meeting. Section 8. Quorum; Adjournments. At all meetings of the Board of Directors, a majority of the number of directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law or the Articles of Incorporation. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Compensation. Directors shall be entitled to such compensation for their services as directors and to such reimbursement for any reasonable expenses incurred in attending directors' meetings as may from time to time be fixed by the Board of Directors. The compensation of directors (if any) may be on such basis as is determined by the Board of Directors. Any director may waive compensation for any meeting. Any director receiving compensation under these provisions shall not be barred from serving the Corporation in any other capacity and receiving compensation and reimbursement for reasonable expenses for such other services. Section 10. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a written consent to such action is signed by all members of the Board of Directors and such written consent is filed with the minutes of the proceedings of the Board (except for those instances where the Investment Company Act of 1940 requires actions be taken by the 5 9 Corporation's Board of Directors in person, including without limitation the selection of independent auditors and the approval of an Investment Agreement.) Section 11. Meetings by Telephone or Similar Communications. The Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment by means of which all directors participating in the meeting can hear each other at the same time, and participation by such means shall be conclusively deemed to constitute presence in person at such meeting (except for those instances where the Investment Company Act of 1940 requires actions be taken by the Corporation's Board of Directors in person, including without limitation the selection of independent auditors and the approval of an Investment Agreement.) ARTICLE IV COMMITTEES Section 1. Executive Committee. The Board of Directors may appoint an Executive Committee consisting of not less than 2 directors, one of whom shall be designated as Chairman of the Executive Committee. The Chairman of the Board and the President shall be elected members of the Executive Committee. Each member of the Executive Committee shall continue as a member thereof until the expiration of his term as a director, or his earlier resignation as a member or as a director, unless sooner removed as a member or as a director. Section 2. Powers. The Executive Committee shall have and may exercise those rights, powers and authority of the Board of Directors as may from time to time be granted to it by the Board of Directors (except the power to declare dividends or distributions on stock, to issue stock but only to the extent permitted by law, to recommend to stockholders any action requiring stockholders' approval, to amend these Bylaws or to approve any merger or share exchange which does not require stockholders' approval) and may authorize the seal of the Corporation to be affixed to all papers which may require the same. Section 3. Procedure; Meetings. The Executive Committee shall fix its own rules of procedure and shall meet at such times and at such place or places as may be provided by such rules or as the members of the Executive Committee shall provide. The Executive Committee shall keep regular minutes of its meetings and deliver such minutes to the Board of Directors. The Chairman of the Executive Committee, or, in his absence, a member of the Executive Committee chosen by a majority of the members present, shall preside at the meetings of the Executive Committee, and another member thereof chosen by the Executive Committee shall act as Secretary of the Executive Committee. Section 4. Quorum. A majority of the Executive Committee shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the members thereof shall be required for any action of the Executive Committee. In the absence of any member of the Executive Committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in the place of such absent member. 6 10 Section 5. Other Committees. The Board of Directors, by resolutions adopted by a majority of the whole Board, may appoint directors, as it shall deem advisable and impose upon such committee or committees such functions and duties, and grant such rights, powers and authority, as the Board of Directors shall prescribe (except the power to declare dividends or distributions on stock, to issue stock except to the extent permitted by law, to recommend to stockholders any action requiring stockholders' approval, to amend these Bylaws or to approve any merger or share exchange which does not require stockholders' approval). Section 6. Vacancies; Changes; Discharges. The Board of Directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. Section 7. Compensation. Members of any committee shall be entitled to such compensation for their services as members of any such committee and to such reimbursement for any reasonable expenses incurred in attending committee meetings as may from time to time be fixed by the Board of Directors. The compensation (if any) of members of any committee may be on such basis as is determined by the Board of Directors. Any member may waive compensation for any meeting. Any committee member receiving compensation under these provisions shall not be barred from serving the Corporation in any other capacity and from receiving compensation and reimbursement of reasonable expenses for such other services. Section 8. Action by Consent. Any action required or permitted to be taken at any meeting of any committee of the Board of Directors may be taken without a meeting if a written consent to such action is signed by all members of the committee and such written consent is filed with the minutes of its proceedings. Section 9. Meetings by Telephone or Similar Communications. The members of any committee which is designated by the Board of Directors may participate in a meeting of such committee by means wof a conference telephone or similar communications equipment by means of which all members participating in the meeting can hear each other at the same time, and participation by such means shall be conclusively deemed to constitute presence in person at such meeting. Section 10. Audit Committee. The Board of Directors may appoint from its membership an Audit Committee with an odd number of, but not less than three, members, one of whom shall be designated chairman. The duties of the said Audit Committee shall be as follows: (1) to issue instructions to and receive reports from outside accounting firms and to serve as the liaison between the Corporation and the said firms; (2) to review all potential conflict-of-interest situations arising 7 11 in respect of the Corporation's affairs and involving the Corporation's affiliates or employees, and to make a report, verbal or written, to the full Board of Directors with recommendations for their resolutions. The Audit Committee shall act by majority vote of its members. Meetings of this said Committee may be convened by any one of its members or by the Chairman of the Board of Directors upon the same notice as for meetings of the full Board. Section 11. Advisory Committee. (a) The Board of Directors may appoint individuals of its selection to an Advisory Committee to assist the Board of Directors in the conduct of its duties and responsibilities. The Advisory Committee may meet in conjunction with meetings of the Board of Directors and shall serve as advisers and counselors to the Board of Directors as the members thereof shall determine best serves the Corporation's interests. (b) The Board of Directors, by resolutions adopted by a majority of the whole Board, may appoint an Advisory Committee complying with the terms of Section 2(a)(i) of the Investment Company Act of 1940, as amended, and the regulations promulgated thereunder, to provide advice and counsel in respect to investment and loan transactions entered or contemplated by the Corporation or its subsidiaries. The Advisory Committee will be subject to the terms of Sections 6 (Vacancies; Changes; Discharges), 7 (Compensation), and 9 (Meetings by Telephone or Similar Communications) set out above. The Advisory Committee may be composed of up to five persons, who shall not be directors, officers, employees or agents of the Corporation or any subsidiary or investment adviser thereof. Advisory Committee members shall be entitled to indemnification under Article VII below. The Advisory Committee and its members will have no voting power and no authority, as agent or otherwise, to act on behalf of the Corporation, in respect of any matter; and directors shall be under no obligation to accept or reject any particular item of advice or counsel provided thereby. The Advisory Committee may be invited to hold meetings jointly with meetings of directors. Any one or more members of the Advisory Committee may be invited to attend meetings of the directors and may be offered access to the same information and materials otherwise provided only to directors. The Advisory Committee may render its advice in written or verbal form, and the same may or may not be recorded. ARTICLE V NOTICES Section 1. Form; Delivery. Whenever, under the provisions of law, the Articles of Incorporation or these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean exclusively personal notice unless otherwise specifically provided, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or its post office address as it appears on the records of the Corporation, with postage thereon prepaid. Any such notice shall be deemed to have been given at the time it is deposited in the United States mail. Notice to a director may also be given personally or by telegram or telecopy sent to his address as it appears on the records of the Corporation. Section 2. Waiver. Whenever any notice is required to be given under the provisions of law, the Articles of Incorporation or these Bylaws, a written waiver thereof, signed by the person or persons entitled to said notice and filed with the records of the meeting, whether before or after the time stated therein, shall be conclusively deemed to be equivalent to such notice. In addition, any stockholder who attends a meeting of stockholders in person, or is represented at such meeting by proxy, without protesting at the commencement of the meeting the lack of notice thereof to him, or any director who attends a meeting of the Board of Directors without protesting at the commencement of the meeting such lack of notice, shall be conclusively deemed to have waived notice of such meeting. 8 12 ARTICLE VI OFFICERS Section 1. Designations. From and after the date of adoption of these Bylaws, the officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors may also choose a Chairman of the Board, a Vice President or Vice Presidents, one or more Assistant Secretaries and/or Assistant Treasurers and such other officers and/or agents as they shall deem necessary or appropriate. All officers of the Corporation shall exercise such powers and perform such duties as shall from time to time be determined by the Board of Directors. Any number of offices (except those of President and Vice President) may be held by the same person, unless the Articles of Incorporation or these Bylaws otherwise provide, but no person shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, the Articles of Incorporation or these Bylaws to be executed, acknowledged or verified by two or more officers. Section 2. Term of Office; Removal. The Board of Directors at its annual meeting, after each annual meeting of stockholders, shall choose a President, a Secretary and a Treasurer. The Board of Directors may also choose a Vice President or Vice Presidents, one or more Assistant Secretaries and/or Assistant Treasurers, and such other officers and agents as it shall deem necessary or appropriate. The officers of the Corporation shall hold office until their successors are chosen and shall qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the directors then in office when, in their judgment, the best interests of the Corporation will be served thereby. Such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any vacancy occurring in any office of the Corporation may be filled for the unexpired portion of the term by the Board of Directors. Section 3. Compensation. The salaries of all officers of the Corporation (if any) shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 4. The Chairman of the Board. The Chairman of the Board (if the Board of Directors so deems advisable and selects one) shall be an officer of the Corporation and, subject to the direction of the Board of Directors, shall perform such executive, supervisory and management functions and duties as may be assigned to him from time to time by the Board. He shall, if present, preside at all meetings of the stockholders and of the Board of Directors. In the absence of the President, the Chairman of the Board shall have general supervision, direction and control over the business and affairs of the Corporation. The Chairman of the Board shall execute in the corporate name all appropriate deeds, mortgages, bonds, contracts or other instruments requiring a seal, under the Seal of the Corporation, except in cases where such execution shall be expressly delegated to another by the Board of Directors. The Chairman of the Board shall be a member of the Executive Committee and an ex-officio member of each standing committee. 9 13 Section 5. The Vice Chairman. The Vice Chairman, if any (or in the event there be more than one, the Vice Chairmen in the order designated, or, in the absence of any designation, in the order of their election), shall, in the absence of the Chairman or in the event of his disability, perform the duties and exercise the powers of the Chairman and shall generally assist the Chairman and perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. Section 6. The President. (a) The President shall be selected from among the directors and shall be the chief executive officer of the Corporation and, subject to the direction of the Board of Directors, shall have general charge of the business, affairs and property of the Corporation and general supervision over its other officers and agents. In general, he shall perform all duties incident to the office of President and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and of the Board of Directors. The President shall be a member of the Executive Committee and an ex-officio member of each standing committee. (b) Unless otherwise prescribed by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to attend, act and vote at any meeting of security holders of other corporations in which the Corporation may hold securities. At such meeting the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation might have possessed and exercised if it had been present. The President shall execute in the corporate name all appropriate deeds, mortgages, bonds, contracts or other instruments requiring a seal of the Corporation, except in cases in which the signing or execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The Board of Directors may from time to time confer like powers and authority upon any other person or persons. Section 7. The Vice Presidents. The Vice President, if any (or in the event there be more than one, the Vice Presidents in the order designated, or, in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his disability, perform the duties and exercise the powers of the President and shall generally assist the President and perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. Section 8. The Secretary. The Secretary shall attend all meetings of the Board of Directors and meetings of the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the Executive Committee or other committees, if required. He shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, and shall perform such other duties as may from time to time be prescribed by the Board of Directors, Chairman of the Board or the President, under whose supervision he shall act. He shall have custody of the seal of the Corporation, and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his signature. 10 14 Section 9. The Assistant Secretary. The Assistant Secretary, if any (or, in the event there be more than one, the Assistant Secretaries in the order designated, or, in the absence of any designation, in the order of their election), shall, in the absence of the Secretary or in the event of his disability, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. Section 10. The Treasurer. The Treasurer shall have the custody of the corporate funds and other valuable effects, including securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may from time to time be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, the President and the Board of Directors, at regular meetings of the Board of Directors, or whenever the Board of Directors may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Section 11. The Assistant Treasurer. The Assistant Treasurer, if any (or in the event there shall be more than one, the Assistant Treasurers in the order designated, or, in the absence of any designation, in the order of their election), shall, in the absence of the Treasurer or in the event of his disability, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND ADVISORS Section 1. Generally. Reference is made to Section 2-418 (and any other relevant provisions) of the Corporations and Associations Article of the Annotated Code of Maryland (1985), as amended. Particular reference is made to the class of persons (hereinafter called "Indemnities") who may be indemnified by a Maryland corporation pursuant to the provisions of such Section 2-418, namely, any entity (including the Corporation's investment adviser) or person (or the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall (and is hereby obligated to) indemnify the Indemnities, and each of them, in each and every situation where the Corporation is obligated to make such indemnification pursuant to the aforesaid statutory provisions. The Corporation shall indemnify the Indemnities, and each of them, in each and every situation where, under the aforesaid statutory provisions, the Corporation is not obligated, but is nevertheless permitted or empowered, to make such indemnification, if the Board of Directors determine that such Indemnitee acted in good faith and in a manner such Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, in the case of any criminal action or proceeding, that such Indemnitee had no reasonable cause to believe that such Indemnitee's conduct was unlawful. 11 15 Section 2. Limitation for Disabling Conduct. Not withstanding any of the foregoing, the Corporation may not limit any liability, or indemnify any director or officer of the Corporation against any liability, to the Corporation or its security holders to which such director or officer might otherwise be subject by reason of "disabling conduct", as hereinafter defined. (a) In the case of a director or officer of the Corporation, such determination shall include a determination that the liability for which such indemnification is sought did not arise by reason of such person's disabling conduct. Such determination may be based on: (i) a final decision on the merits by a court or other body before whom the action, suit or proceeding was brought that the person to be indemnified was not liable by reason of disabling conduct, or (ii) in the absence of such a decision, a reasonable determination, based on a review of the facts, that the person to be indemnified was not liable by reason of such person's disabling conduct by (A) the vote of a majority of a quorum of directors who are disinterested, non-party directors, or 12 16 (B) an independent legal counsel in a written opinion. In making such determination, such disinterested, non-party directors or independent legal counsel, as the case may be, may deem the dismissal for insufficiency of evidence of any disabling conduct of either a court action or an administrative proceeding against a person to be indemnified to provide reasonable assurance that such person was not liable by reason of disabling conduct. (b) For the purpose of this Section: (i) "disabling conduct" of a director or officer shall mean such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office or any other conduct prohibited under Section 17(h) of the Investment Company Act of 1940 or any other applicable securities laws; (ii) "disinterested, non-party director" shall mean a director of the Corporation who is neither an "interested person" of the Corporation as defined in Section 2(a)(19) of the Investment Company Act of 1940 nor a party to the action, suit or proceeding in connection with which indemnification is sought; (iii) "independent legal counsel" shall mean a member of the Bar of the State of Maryland who is not, and not at least two (2) years prior to his engagement to render the opinion in question has not been, employed or retained by the Corporation, by any investment adviser to the principal underwriter for the Corporation, or by any person affiliated with any of the foregoing; and (iv) "the Corporation" shall include, in addition to the resulting Corporation, any constituent Corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents. (c) The Corporation may purchase insurance to cover the payment of costs incurred in performing the Corporation's obligations under Section 1 hereof, but it is understood that no insurance may be obtained for the purpose of indemnifying any disabling conduct, as defined in Section 2(b) hereof. (d) The Corporation may advance legal fees and other expenses pursuant to the indemnification rights set forth in Section 1 hereof so long as, in addition to the other requirements therefor, the Corporation either: (i) obtains security for the advance from the Indemnitee; (ii) obtains insurance against losses arising by reason of lawful advances; or (iii) it shall be determined, pursuant to the means set forth in Section 2 (a)(ii) hereof, that there is reason to believe that the Indemnitee ultimately will be found entitled to indemnification. Section 3. Advisory Committee Members. The Corporation shall indemnify any person appointed to any Advisory Committee pursuant to Article IV, Section 11 hereof (or the heirs, executors, or administrators of such person) who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a member of the Advisory Committee of this Corporation, if the Board of Directors determines that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interest of the Corporation, and in the case of any criminal action or proceeding, that such person had no reasonable cause to believe that such person's conduct was unlawful. 13 17 ARTICLE VIII STOCK CERTIFICATES Section 1. Form; Signatures; Statements. (a) Every holder of stock in the Corporation shall be entitled to have a certificate, signed by the Chairman of the Board or the President or a Vice President and countersigned by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, exhibiting the number and class (and series, if any) of shares owned by him or it, and bearing the seal of the Corporation. Such signatures and seal may be facsimile. In case any officer who has signed, or whose facsimile signature was placed on, a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Corporation with the same effect as if he were such officer at the date of its issue. (b) Every certificate representing stock issued by the Corporation, if it is authorized to issue stock of more than one class, shall set forth upon the face or back of the certificate, a full statement or summary of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued and, if the Corporation is authorized to issue any preferred or special class of stock in series, the variations in relative rights and preferences between the shares of each such series so far as the same have been fixed and determined and the authority of the Board of Directors to fix and determine the relative rights and preferences of subsequent series. In lieu of such full statement or summary, there may be set forth upon the face or back of each certificate a statement that the Corporation will furnish to the stockholder, upon request and without charge, a full statement of such information. (c) Every certificate representing shares which are restricted or limited as to transferability by the Corporation shall either (i) set forth on the face or back of the certificate a full statement of such restrictions or limitations or (ii) state that the Corporation will furnish such a statement upon request and without charge to any holder of such shares. Section 2. Registration of Transfer. Upon surrender to the Corporation or any transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or its transfer agent to issue a new certificate to the person entitled thereto, to cancel the old certificate and to record the transaction upon its books. Section 3. Registered Stockholders. (a) Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person who is registered on its books as the owner of shares of its capital stock to receive dividends or other distributions, to vote as such owner, and to hold liable for calls and assessments a person who is registered on its books as the owner of shares of its capital stock. The Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person except that the Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of its capital stock registered in the name of such stockholder are held for the account of a specified person other than such stockholder. (b) If a stockholder desires that notices and/or dividends shall be sent to a name or address other than the name or address appearing on the stock ledger maintained by the Corporation (or by the transfer agent or registrar, if any), such stockholder shall have the duty to notify the Corporation (or the transfer agent or registrar, if any), in writing, of such desire. Such written notice shall specify the alternate name or address to be used. 14 18 Section 4. Record Date. In order that the Corporation may determine the stockholders of record who are entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or the allotment of any rights, or to make a determination of the stockholders of record for any other proper purpose, the Board of Directors may, in advance, fix a date as the record date for any such determination. Such date shall not be more than 60 nor less than 10 days before the date of any such meeting, nor more than 60 days prior to the date of any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting taken pursuant to Section 8 of Article III; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation which is claimed to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum, or other security in such form, as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate claimed to have been lost, stolen or destroyed. ARTICLE IX GENERAL PROVISIONS Section 1. Dividends. Except as otherwise provided by law or the Articles of Incorporation, dividends upon the outstanding capital stock of the Corporation may be declared by the Board of Directors at any annual, regular or special meeting, and may be paid in cash, in property or in shares of the Corporation's capital stock. Section 2. Reserves. The Board of Directors shall have full power, subject to the provisions of law and the Articles of Incorporation, to determine whether any, and, if so, what part, of the funds legally available for the payment of dividends shall be declared as dividends and paid to the stockholders of the Corporation. The Board of Directors, in its sole discretion, may fix a sum which may be set aside or reserved over and above the paid-in capital of the Corporation for working capital or as a reserve for any proper purpose, and may, from time to time, increase, diminish or vary such fund or funds. 15 19 Section 3. Fiscal Year. The fiscal year of the Corporation shall be as determined from time to time by the Board of Directors. Section 4. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Maryland". ARTICLE X AMENDMENTS The Board of Directors shall have the power to make, alter, amend and repeal these Bylaws, and to adopt new bylaws, by an affirmative vote of a majority of the entire Board of Directors, provided that notice of the proposal to make, alter, amend or repeal these Bylaws, or to adopt new bylaws, was included in the notice of the meeting of the Board of Directors at which such action takes place. 16 20 CERTIFICATE We, G. CABELL WILLIAMS, III and THOMAS R. SALLEY, III, President and Secretary, respectively, of ALLIED CAPITAL CORPORATION (the "Corporation"), a Maryland corporation, DO HEREBY CERTIFY that the foregoing is a true and correct copy of the Corporation's Bylaws as amended and in effect the date hereof. IN WITNESS WHEREOF, we have hereunto set our hands and affixed the corporate seal of the Corporation this 8th day of November, 1995. /s/ G. CABELL WILLIAMS, III -------------------------- G. Cabell Williams, III President /s/ THOMAS R. SALLEY, III ----------------------- Thomas R. Salley, III Secretary [Corporate Seal] 17 EX-99.D.2 3 FORM OF SUBSCRIPTION FORM 1 Exhibit d.2 THIS OFFER EXPIRES AT 5:00 PM EASTERN STANDARD TIME ON FEBRUARY 27, 1996* ALLIED CAPITAL CORPORATION RIGHTS OFFERING Subscription Form Dear Stockholder: As a stockholder of Allied Capital Corporation on January 22, 1996, the Record Date for the Company's rights offering, you have been issued subscription rights equal to the number of shares of common stock held by you on the Record Date. Pursuant to the Primary Subscription, you are entitled to exercise your Subscription Rights to purchase one (1) additional share of Allied Capital Corporation for every seven (7) Subscription Rights held at an Estimated Price of $12.90 per share and according to the terms and conditions set forth in the Company's Prospectus dated January 25, 1996. The terms and conditions of the rights offering (the "Offer") set forth in the Prospectus are incorporated herein by reference. Capitalized terms not defined herein have the meanings attributed to them in the Prospectus. In accordance with the Over-Subscription Privilege, as a Record Date stockholder, you are also entitled to subscribe for additional Shares if, after all Primary Subscriptions have been fulfilled, Shares are available and you have fully exercised all Subscription Rights issued to you. If there are insufficient Shares remaining to satisfy all requests pursuant to the Over-Subscription Privilege, the available shares will be allocated in proportion to the number of Subscription Rights originally issued to you. The Company may also, at its sole discretion, elect to increase the number of Shares available in the Offer by up to 15% in order to satisfy requests for additional Shares pursuant to the Over-Subscription Privilege. SAMPLE CALCULATION OF PRIMARY SUBSCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------------- Estimated Subscription Price is Number of shares of Number of Subscription Rights divided by $12.90 per Share. In this example, if Allied Capital Number of 7 = number of Shares available to you the full Primary Subscription was Corporation owned on Subscription Rights under Primary Subscription exercised, the total Estimated Subscription the Record Date: issued: (any fractions must be dropped): Price would be: - ----------------------------------------------------------------------------------------------------------------------------------- 1,000 1,000 142 $1,831.80 - -----------------------------------------------------------------------------------------------------------------------------------
HOW TO EXERCISE SUBSCRIPTION RIGHTS In order to Exercise your Subscription Rights, you must either (a) complete and sign this Subscription Form and return it together with payment of the Estimated Subscription Price for the shares, or (b) present a properly completed Notice of Guaranteed Delivery, in either case to the Subscription Agent, American Stock Transfer & Trust Company, before 5:00 pm, Eastern Standard Time, on February 27, 1996 * (the "Expiration Date"). By Mail or Express Mail By Hand or Overnight Courier ---------------------------- American Stock Transfer & Trust Company Corporate Reorganization Dept. 40 Wall Street, 46th Floor New York, NY 10005 FULL PAYMENT OF THE ESTIMATED SUBSCRIPTION PRICE PER SHARE FOR ALL SHARES SUBSCRIBED FOR PURSUANT TO BOTH THE PRIMARY SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE MUST ACCOMPANY THIS SUBSCRIPTION FORM AND MUST BE MADE PAYABLE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES AND MADE PAYABLE TO ALLIED CAPITAL CORPORATION. ALTERNATIVELY, IF A NOTICE OF GUARANTEED DELIVERY IS USED, A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION FORM MUST BE RECEIVED BY THE SUBSCRIPTION AGENT NO LATER THAN THE CLOSE OF BUSINESS ON THE THIRD (3RD) BUSINESS DAY FOLLOWING THE EXPIRATION DATE AND FULL PAYMENT, AS DESCRIBED IN THE NOTICE OF GUARANTEED DELIVERY, IS RECEIVED NO LATER THAN THE TENTH (10TH) BUSINESS DAY FOLLOWING THE CONFIRMATION DATE. PLEASE SEE "PAYMENT FOR SHARES" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION. Delivery of shares subscribed to pursuant to the Primary Subscription and Over-Subscription Privilege will be made within thirty (30) days following the Expiration Date of the Offer. See "Delivery of Shares" in the Prospectus for additional information. THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. * UNLESS EXTENDED. 2 In order to exercise your Subscription Rights, you must complete Part 1 and Part 2 below. Complete Part 3 only if applicable. PART 1: If you choose to subscribe for Shares, plesae complete the following: / / I wish to subscribe for the following number of shares pursuant to the Primary Subscription: _________________________ X $12.90 (*) per Share = $____________ Number of shares
/ / I wish to exercise my Over-Subscription Privilege (**): _________________________ X $12.90 (*) per Share = $____________ Number of additional shares AMOUNT ENCLOSED $____________
(*) This is an estimated price only. The Subscription Price will be determined on February 27, 1996, the Pricing Date (which is the same date as the Expiration Date), and could be higher or lower depending on changes in the share price of the common stock as quoted on the Nasdaq National Market. (**) You can only over-subscribe if you have fully exercised your Primary Subscription. There is no limit as to the number of Shares you may subscribe for pursuant to the Over-Subscription Priviledge. If there are insufficient Shares available to satisfy all requests, the Shares will be allocated in proportion to the number of Subscription Rights originally issued to you. - ------------------------------------------------------------------------------- PART 2: I acknowledge that I have received the Prospectus for this Offer and I hereby irrevocably subscribe for the number of Shares indicated above on the terms and conditions set out in the Prospectus. I understand and agree that I will be obligated to pay an additional amount to the Company if the Subscription Price as determined on the Pricing Date is in excess of the Estimated Subscription Price per share. I hereby agree that if I fail to pay in full for the shares for which I have subscribed, the Company may exercise any of the remedies provided for in the Prospectus. Signature of stockholder(s): ----------------------------------------- Printed Name: Telephone number:( ) -------------------------- ---- ------ Please note that all stock certificates and refund checks, if any, will be delivered to the address of record, which is the address to which the materials for this offering were delivered. If you wish to change the address of record, please provide separate written instructions, sign the instructions, and deliver them to the Subscription Agent. - ------------------------------------------------------------------------------- PART 3: The following broker-dealer is hereby designated as having been instrumental in the exercise of the rights hereby exercised: FIRM: ----------------------------------------------------------------- REPRESENTATIVE NAME: -------------------------------------------------- REPRESENTATIVE NUMBER: ------------------------------------------------ EX-99.F.1 4 FORM OF DEBENTURE 1 EXHIBIT F.1 OMB Approval No.: 3245-0081 Expiration Date: 02-28-96 Page 1 of 3 SBIC License No. ________________________ Loan No. ________________________ DEBENTURE ***************** $_______________________ Date of Issuance ________________________ Allied Investment Corporation (the "Company") - ----------------------------------------------------------- (Name of Licensee) ______________________________________________________________________________ (Street) (City) (State) (Zip) For value received, the Company hereby promises to pay to the order of Chemical Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust Agreement dated as of February 1, 1995, as same may be amended from time to time, by and among the Trustee, the U.S. Small Business Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof the principal sum of _______________________________________ ($____________) (the "Original Principal Amount") on _____________ (the "Maturity Date") at such location as SBA, as guarantor of this debenture, may direct and to pay interest semiannually on _____________ 1st and _______________ 1st (the "Payment Dates") of each year, as herein provided, at the rate of _____% per annum on the basis of a year of 365 days, for the actual number of days (including the first day but excluding the last day) elapsed (the "Stated Interest Rate"), on said principal sum from the date of the issuance hereof until payment of such principal sum has been made or duly provided for. The Company shall deposit all payments with respect to this debenture not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date is not a business day, all as directed by SBA. This debenture is issued by the Company and guaranteed by SBA, pursuant and subject to Section 303 of the Small Business Investment Act of 1958, as amended (the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the regulations promulgated under the Act, as amended from time to time, provided, however, that 13 C.F.R. Sections 107.210(h) and 107.261 as in effect on the date of this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 2 Page 2 of 3 The Company may elect to prepay this debenture, as a whole and not in part, on any Payment Date, in the manner and at the price as next described. The prepayment price (the "Prepayment Price") shall be an amount equal to the outstanding principal balance of this debenture, plus interest accrued and unpaid thereon to the Payment Date selected for prepayment, plus a prepayment premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated as a declining percentage (the "Applicable Percentage") multiplied by the Original Principal Amount of this debenture in accordance with the following table:
Consecutive Payment Dates Applicable Percentage 1st or 2nd 5% 3rd or 4th 4% 5th or 6th 3% 7th or 8th 2% 9th or (10th--If Not also Maturity Date) 1%
No Prepayment Premium is required to repay this debenture on its Maturity Date. No Prepayment Premium is required when the prepayment occurs on a Payment Date that is on or after the 11th consecutive Payment Date of this debenture, if this debenture has a 20 consecutive Payment Date term. The amount of the Prepayment Price shall be sent to SBA or such agent as SBA shall direct, by wire payment in immediately available funds, not less than three business days prior to the regular payment date. Until the Company is notified otherwise in writing by SBA, any Prepayment Price shall be paid to the account maintained by the Trustee, entitled the SBA Prepayment Subaccount and shall include an identification of the Company by name and SBA-assigned license number, the loan number appearing on the face hereof, and such other information as SBA or its agent may specify. This debenture shall be deemed issued in the District of Columbia as of the day, month, and year first stated above. The terms and conditions of this debenture shall be construed in accordance with, and its validity and enforcement governed by, federal law. The warranties, representations, or certifications made to SBA on the SBA Form 1022 or the Company's application letter for an SBA commitment related to this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 3 Page 3 of 3 Should any provision of this debenture or any of the documents incorporated by reference herein be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this debenture shall be construed as if said provisions were not contained herein. All notices to Company which are required or may be given under this debenture shall be sufficient in all respects if sent to the above-noted address of the Company. For the purposes of this debenture, the Company may change this address only upon written approval of SBA. COMPANY ORGANIZED AS CORPORATION IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL Allied Investment Corporation ------------------------------------------- (Name of Licensee) By: --------------------------------------- --------------------------------------- (Typed Name and Title) ATTEST: - ------------------------------- Secretary or Assistant Secretary (Strike one) SBA Form 444C (Revised 4-95) EX-99.F.4 5 EXCERPT FROM ARTICLES OF INCORPORATION 1 Excerpt from: EXHIBIT F.4 ARTICLES OF AMENDMENT AND RESTATEMENT TO THE ARTICLES OF INCORPORATION OF ALLIED CAPITAL FINANCIAL CORPORATION (a Maryland corporation) FOURTH: A. The total number of shares of stock which the Corporation has authority to issue is twenty million (20,000,000) shares, comprised of (i) two hundred thousand (200,000) shares of Preferred Stock, with a par value of One Hundred Dollars ($100) per share, and (ii) nineteen million eight hundred thousand (19,800,000) shares of Common Stock, with a par value of One-tenth of One Mil ($0.0001) per share. The aggregate par value of all such shares is Twenty Million One Thousand Nine Hundred Eighty Dollars ($20,001,980). B. As to the Common Stock, there shall be no preferences, qualifications, limitations, restrictions or special or relative rights. C. As to the Preferred Stock, the preferences, qualifications, limitations, restrictions and special or relative rights are as follows: 1. Voting Rights. The holders of Preferred Stock shall have no voting rights except as to those matters regarding which they are entitled to vote by law. 2. Payment of Dividends. To the extent the Corporation issues shares of its Preferred Stock to the Small Business Administration, the Small Business Administration shall be paid from retained earnings an annual four percent (4%) dividend on the par value of its holdings of the Corporation's Preferred Stock, but three percent (3 %) on Preferred Stock issued prior to November 20, 1989. Such dividends shall be payable before any amount shall be set aside for or paid to any other class of stock, and shall be preferred and cumulative, so that in the event the Small Business Administration has received less than four percent (4%) in any fiscal year (three percent (3%) as to Preferred Stock issued prior to November 20, 1989), such dividends shall be without interest thereon. 2 Before any declaration of dividends or any distribution (other than to the Small Business Administration), all dividends accumulated and unpaid on Preferred Stock issued to the Small Business Administration shall be paid. 3. Redemption of rights. The Corporation shall be entitled, at its option, to redeem in whole or in part Preferred Stock purchased by the Small Business Administration, on any dividend date (after giving the Small Business Administration at least thirty (30) days' written notice) by paying the Small Business Administration the par value of such securities, but not less than Fifty Thousand Dollars ($50,000.00) par value in any one transaction, and any dividends accumulated and unpaid to the date of such redemption. If not otherwise redeemed, the Corporation shall, within fifteen (15) years of issuance thereof, redeem all of its Preferred Stock issued to the Small Business Administration; the price for such redemption shall be the par value of the subject securities plus any accrued but unpaid dividends. 4. Redemption, liquidation or distribution of assets. Before any redemption of securities not purchased by the Small Business Administration, or liquidation in whole or in part, or any distribution of assets to other stockholders, the Small Business Administration shall be paid any amounts due pursuant to paragraph 2 of this Article FOURTH, together with the par value of its Preferred Stock; provided, however, that such par value need not be paid to the Small Business Administration before the distribution of ordinary dividends from retained earnings. EX-99.F.5 6 FORM OF DEBENTURE 1 EXHIBIT F.5 OMB Approval No.: 3245-0081 Expiration Date: 02-28-96 Page 1 of 3 SBIC License No. ________________________ Loan No. ________________________ DEBENTURE ***************** $_______________________ Date of Issuance ________________________ Allied Capital Financial Corporation (the "Company") - ---------------------------------------------------------- (Name of Licensee) ______________________________________________________________________________ (Street) (City) (State) (Zip) For value received, the Company hereby promises to pay to the order of Chemical Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust Agreement dated as of February 1, 1995, as same may be amended from time to time, by and among the Trustee, the U.S. Small Business Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof the principal sum of _______________________________________ ($____________) (the "Original Principal Amount") on _____________ (the "Maturity Date") at such location as SBA, as guarantor of this debenture, may direct and to pay interest semiannually on _____________ 1st and _______________ 1st (the "Payment Dates") of each year, as herein provided, at the rate of _____% per annum on the basis of a year of 365 days, for the actual number of days (including the first day but excluding the last day) elapsed (the "Stated Interest Rate"), on said principal sum from the date of the issuance hereof until payment of such principal sum has been made or duly provided for. The Company shall deposit all payments with respect to this debenture not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date is not a business day, all as directed by SBA. This debenture is issued by the Company and guaranteed by SBA, pursuant and subject to Section 303 of the Small Business Investment Act of 1958, as amended (the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the regulations promulgated under the Act, as amended from time to time, provided, however, that 13 C.F.R. Sections 107.210(h) and 107.261 as in effect on the date of this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 2 Page 2 of 3 The Company may elect to prepay this debenture, as a whole and not in part, on any Payment Date, in the manner and at the price as next described. The prepayment price (the "Prepayment Price") shall be an amount equal to the outstanding principal balance of this debenture, plus interest accrued and unpaid thereon to the Payment Date selected for prepayment, plus a prepayment premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated as a declining percentage (the "Applicable Percentage") multiplied by the Original Principal Amount of this debenture in accordance with the following table:
Consecutive Payment Dates Applicable Percentage 1st or 2nd 5% 3rd or 4th 4% 5th or 6th 3% 7th or 8th 2% 9th or (10th--If Not also Maturity Date) 1%
No Prepayment Premium is required to repay this debenture on its Maturity Date. No Prepayment Premium is required when the prepayment occurs on a Payment Date that is on or after the 11th consecutive Payment Date of this debenture, if this debenture has a 20 consecutive Payment Date term. The amount of the Prepayment Price shall be sent to SBA or such agent as SBA shall direct, by wire payment in immediately available funds, not less than three business days prior to the regular payment date. Until the Company is notified otherwise in writing by SBA, any Prepayment Price shall be paid to the account maintained by the Trustee, entitled the SBA Prepayment Subaccount and shall include an identification of the Company by name and SBA-assigned license number, the loan number appearing on the face hereof, and such other information as SBA or its agent may specify. This debenture shall be deemed issued in the District of Columbia as of the day, month, and year first stated above. The terms and conditions of this debenture shall be construed in accordance with, and its validity and enforcement governed by, federal law. The warranties, representations, or certifications made to SBA on the SBA Form 1022 or the Company's application letter for an SBA commitment related to this debenture are incorporated herein as if fully set forth. SBA Form 444C (Revised 4-95) 3 Page 3 of 3 Should any provision of this debenture or any of the documents incorporated by reference herein be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this debenture shall be construed as if said provisions were not contained herein. All notices to Company which are required or may be given under this debenture shall be sufficient in all respects if sent to the above-noted address of the Company. For the purposes of this debenture, the Company may change this address only upon written approval of SBA. COMPANY ORGANIZED AS CORPORATION IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL Allied Capital Financial Corporation ------------------------------------------- (Name of Licensee) By: --------------------------------------- --------------------------------------- (Typed Name and Title) ATTEST: - ------------------------------- Secretary or Assistant Secretary (Strike one) SBA Form 444C (Revised 4-95) EX-99.F.7 7 LOAN AGREEMENT 1 ============================================================================== EXHIBIT F.7 LOAN AGREEMENT between ALLIED CAPITAL CORPORATION and OVERSEAS PRIVATE INVESTMENT CORPORATION dated as of April 10, 1995 ============================================================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS 1 Section 1.01 Definitions 1 Section 1.02 Interpretation 7 ARTICLE II. AMOUNT AND TERMS OF THE LOAN 8 Section 2.01 Amount and Disbursement 8 Section 2.02 Cancellation of the Commitment 8 Section 2.03 Interest 8 Section 2.04 Contingent Fee 9 Section 2.05 Repayment of the Loan 10 Section 2.06 Voluntary Prepayment 10 Section 2.07 Miscellaneous 10 ARTICLE III. REPRESENTATIONS AND WARRANTIES 12 Section 3.01 Existence and Power of the Company 12 Section 3.02 Authority of the Company 12 Section 3.03 Financial Condition 13 Section 3.04 Capitalization of the Company 13 Section 3.05 Subsidiaries and Shareholders 13 Section 3.06 Liens 14 Section 3.07 Taxes and Reports 14 Section 3.08 Defaults 14 Section 3.09 Litigation 14 Section 3.10 Compliance with Law 15 Section 3.11 Disclosure 15 ARTICLE IV. CONDITIONS PRECEDENT TO FIRST DISBURSEMENT 15 Section 4.01 Corporate Authorization 15 Section 4.02 Legal Opinions 16 Section 4.03 Insurance 16 ARTICLE V. CONDITIONS PRECEDENT TO EACH DISBURSEMENT 16 Section 5.01 Representations and Defaults 16 Section 5.02 Change in Circumstances 16 Section 5.03 Certification 17 Section 5.04 Financial Information 17 Section 5.05 Payment of Reimbursement of Expenses 17 Section 5.06 Notes 17 ARTICLE VI. AFFIRMATIVE COVENANTS 17 Section 6.01 Project Implementation 17 Section 6.02 Use of Proceeds 18 Section 6.03 Segregated Account 18 Section 6.04 Working Capital 19 Section 6.05 OPIC Insurance 19 Section 6.06 Company Operations 19 Section 6.07 Maintenance of Rights and Compliance with Laws 19 Section 6.08 Insurance 20 Section 6.09 Accounting and Financial Management 20
3 Section 6.10 Financial Statements and Other Information 20 Section 6.11 Access to Records; Inspection; Meetings 22 Section 6.12 Notice of Default and Other Matters 22 Section 6.13 Financial Covenants 22 Section 6.14 Environmental Compliance 23 Section 6.15 Co-investment 23 ARTICLE VII. NEGATIVE COVENANTS 23 Section 7.01 Liens 23 Section 7.02 No Alteration of Charter Documents 24 Section 7.03 Dividends and Share Redemptions 24 Section 7.04 Sale of Assets; Mergers 24 Section 7.05 Ordinary Conduct of Business 24 Section 7.06 Worker Rights 25 ARTICLE VIII. DEFAULTS AND REMEDIES 25 Section 8.01 Events of Default 25 Section 8.02 Remedies upon Event of Default 27 Section 8.03 Jurisdiction and Consent to Suit 27 ARTICLE IX. MISCELLANEOUS 28 Section 9.01 Notices 29 Section 9.02 Governing Law 29 Section 9.03 Succession 29 Section 9.04 Survival of Agreements 29 Section 9.05 Integration; Amendments 29 Section 9.06 Severability 29 Section 9.07 No Waiver 29 Section 9.08 Waiver of Jury Trial 30 Section 9.09 Indemnity 30 Section 9.10 Further Assurances 30 Section 9.11 Counterparts 31 SCHEDULES - --------- 3.03 Change in Financial Condition 3.05 Subsidiaries 3.09 Litigation Outstanding 3.11 Disclosure Documents 6.08 Insurance
EXHIBITS A Form of Disbursement Request B Form of Promissory Note C Form of Corporate Authorization Certificate (Section 4.01) D Form of Disbursement Certificate (Section 5.03) E Form of Legal Opinion of Counsel to the Company F OPIC Guidelines for Screening Downstream Investments, including Exhibit A thereto G List of countries in which Investments may be made ii 4 LOAN AGREEMENT AGREEMENT, dated as of April 10, 1995, between ALLIED CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Maryland (the "Company"), and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America ("OPIC") W I T N E S S E T H : WHEREAS, the Company wishes to establish a fund that will provide financing for international projects involving qualifying U.S. small businesses (the "Fund"); and WHEREAS, to obtain the financing for the Fund, the Company has requested that OPIC make a loan to the Company in an amount of up to twenty million United States dollars (US$20,000,000) pursuant to Section 234(c) of the Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows: ARTICLE I. DEFINITIONS SECTION 1.01. DEFINITIONS. Unless otherwise provided, capitalized terms used herein shall have the definitions specified below: "Agreement" means this Loan Agreement between the Company and OPIC. "Authorized Officer" means, with respect to any Person, its President and any other officer designated in writing by such Person as having been authorized to execute and deliver this Agreement, the Notes, any other Financing Document to which it is or will be a party, or any other notice or instrument contemplated hereunder. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized by law to close in the City of New York or Washington, D.C. "Charter Documents" means the Company's Articles of Incorporation and By-laws and any other documents establishing the Company and setting forth the rules pursuant to which it is governed, as amended. 5 "Closing Date" means any Business Day on which a Disbursement is made. "Commitment" means OPIC's obligation to lend an amount not to exceed $20,000,000 less (i) the portion thereof which pursuant to Section 2.02 has been canceled or has been deemed canceled and (ii) any Loan amounts repaid or prepaid. "Commitment Period" means the period commencing on the date hereof and ending on the earlier of (i) the first date on which the amount of the Loan equals the Commitment and (ii) the date occurring three (3) years after the date hereof. "Company" means Allied Capital Corporation, a corporation organized and existing under the laws of the State of Maryland. "Consolidated Shareholders' Equity" as of any date of determination thereof, shall mean the total shareholders' equity of the Company and its Consolidated Subsidiaries as the same would appear on a consolidated balance sheet of the Company and its Consolidated subsidiaries prepared as of such date in accordance with U.S. GAAP, including, in any case, preferred stock not by its terms redeemable by the holder thereof, but excluding preferred stock which by its terms is redeemable by the holder thereof, and excluding any stock, common or preferred, not both issued and outstanding. "Consolidated Subsidiary" shall mean any subsidiary of the Company of which more than fifty percent (50%) of the stock entitled to vote for corporate directors is beneficially owned, directly or indirectly, by the Company. "Current Assets" means assets treated as current assets under U.S. GAAP. "Current Liabilities" means all Indebtedness and liabilities due on demand or to become due within one year and other liabilities treated as current liabilities under U.S. GAAP. "Day Count Fraction" means 360-day years consisting of twelve 30-day months. "Disbursement" means a disbursement of the Loan. "Disbursement Request" means a request for a Disbursement, substantially in the form of Exhibit A. 2 6 "Dollars" or "$" means the lawful currency of the U.S. "Event of Default" has the meaning set forth in Section 8.01. "Fund" has the meaning provided in the first recital hereto. "Financial Statements" means, with respect to any Person, such Person's quarterly or annual balance sheet and statements of income, retained earnings, and sources and application of funds for such fiscal period, together with all notes thereto and with comparable figures for the corresponding period of its previous fiscal year, each prepared in Dollars in accordance with U.S. GAAP. "Financing Documents" means collectively this Agreement, the Notes and any other instrument pursuant to which, or in reliance on which, a Disbursement is made. "Fiscal Year" means, with respect to the Company, the period beginning on January 1 and ending on December 31 of each year. "Guidelines" means the OPIC procedures for screening investments for compliance with OPIC policy criteria, as set forth in "Guidelines for Screening Downstream Investments," dated December 1993, as set forth in Exhibit F, as they may be amended by OPIC from time to time. "Indebtedness" of any Person means, at any date, all or any liabilities, obligations and reserves, contingent or otherwise, which, in accordance with U.S. GAAP, would be reflected as a liability on a balance sheet, including without limitation, (i) any obligation of such Person for borrowed money or arising out of any credit facility, (ii) any obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) any obligation of such Person to pay the deferred purchase price of property or services, (iv) any obligation of such Person under conditional sales or other title retention agreements, (v) the net aggregate rentals under any lease by such Person as lessee that under U.S. GAAP would be capitalized on the books of the lessee or is the substantial equivalent of the financing of the property so leased, (vi) any obligation of such Person to purchase securities or other property which arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any obligation of such Person secured by any Lien upon property, (viii) any Indebtedness of others secured by a Lien on any asset of 3 7 such Person, and (ix) any Indebtedness of others guaranteed, directly or indirectly, by such Person. "Indemnified Persons" has the meaning set forth in Section 9.09. "Interest Charges" means, for any period, all interest and all amortization of debt discount and expense on any particular Indebtedness for which such calculations are being made. "Interest Period" means the period from and including the day following the immediately preceding Payment Date or, if later, the first Closing Date, to and including the next succeeding Payment Date or, if earlier, the Loan Maturity Date. "Interest Rate" has the meaning set forth in Section 2.03. "Investment Income Available for Interest Charges" means total investment income before net long term realized capital gain, less all operating expenses except interest expense, as shown on the most recent quarterly consolidated statements of operations of the Company (plus short term capital gains of the Company and its Consolidated Subsidiaries) and determined in accordance with U.S. GAAP. "Lien" means any lien, pledge, mortgage, security interest, deed of trust, charge, assignment, hypothecation, title retention or other encumbrance on or with respect to, or any preferential arrangement having the practical effect of constituting a security interest with respect to the payment of any obligation with, or from the proceeds of, any asset or revenue of any kind. "Loan" means, on any date, the aggregate of the outstanding unpaid principal amounts of the Notes then outstanding. "Loan Maturity Date" means the date that is ten years from the date of the first Disbursement. "Material Adverse Effect" means a material adverse effect on (i) the Fund, (ii) the business, operations, prospects, financial condition or property of the Company or its Consolidated Subsidiaries, (iii) the ability of the Company to perform in a timely manner its material obligations under any of the Financing Documents, (iv) the validity or enforceability of any material provision of any Financing Document, and (v) the rights and remedies of OPIC under any of the Financing Documents. 4 8 "Net Income" means, with respect to any Person for any fiscal period, the net income of such Person for such period after Taxes but before extraordinary items, determined in accordance with U.S. GAAP. "Note" means any promissory note issued by the Company pursuant to this Agreement substantially in the form of Exhibit B. "OPIC" means Overseas Private Investment Corporation, an agency of the United States of America. "Payment Date" means each March 15 and September 15 after the date hereof until the Loan, all interest accrued thereon and all other amounts due hereunder or under the Note are paid in full, unless such date is not a Business Day, in which case the Payment Date will be the next succeeding Business Day. "Permitted Investments" means (a) securities with maturities of one year or less from the date of acquisition, issued or fully guaranteed or insured by the Government of the U.S. or any agency thereof, (b) certificates of deposit, time deposits, overnight bank deposits and banker acceptances with maturities of one year or less issued by or placed with any commercial bank having capital and surplus in excess of $500,000,000 or having long-term unsecured debt obligations rated at least "BB+" by Standard & Poor's Corporation or "BAA3" by Moody's Investors Service, Inc., and (c) commercial paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc. "Person" means and includes (i) an individual, (ii) a legal entity, including but not limited to, a partnership, a joint venture, a corporation, a trust, and an unincorporated organization, and (iii) a government or any department or agency thereof. "Portfolio" means the aggregate of investments made in Projects using Loan proceeds, and amounts received in respect of Projects and Permitted Investments made with amounts deposited in the Segregated Account. "Project" means an overseas private sector investment, in a country listed on Exhibit G or any other country in which OPIC is authorized to do business, involving Qualifying Small Businesses as equity participants, suppliers of goods, signatories of technical, marketing or management agreements, participants in long-term supply or purchase 5 9 arrangements, or in such other capacity as OPIC shall agree. "Qualifying Financial Institution" means a bank or trust company (i) that is organized as a banking association or corporation under the laws of the U.S. or any state thereof, or of the District of Columbia, (ii) that is subject to supervision or examination by federal, state, or District of Columbia banking authorities, (iii) that has capital and surplus of not less than $250 million, and (iv) the debt securities of which are rated at least "BAA3" by Moody's Investor Service, Inc. or "BB+" by Standard & Poor's Corporation. "Qualifying Small Business" means a business of which at least 25% of the equity is beneficially owned by United States Persons and which (a), in the case of a manufacturing company, has annual sales less than $174 million or, in the case of a service company, has total shareholder capital as of its latest annual financial report of less than $57 million or (b) fits within such other definition of Qualifying Small Business of which OPIC shall notify the Company in writing; provided that in no event shall such other definition specify dollar amounts less than those set forth in this definition. "Segregated Account" has the meaning set forth in Section 6.03. "Senior Debt" of the Company shall mean (a) the Loan and interest accrued and unpaid thereon, (b) Indebtedness pursuant to the Note Agreement, dated as of April 30, 1992, among the Company, Allied Investment Corporation, Allied Financial Services Corporation and Massachusetts Mutual Life Insurance Company, and (c) any other unsecured Indebtedness which ranks pari passu with the Loan. "Taxes" means any taxes, levies, imposts, stamps, duties, fees, assessments, deductions, withholdings and other governmental charges, and all liabilities with respect thereto. "Treasury Rate" means, with respect to any Disbursement, the annual rate of interest determined at the end of the calendar quarter preceding the calendar quarter in which such Disbursement is made, as notified to OPIC by the U.S. Department of Treasury as the rate to be paid by OPIC, at the time of such Disbursement, for borrowings from the U.S. Department of Treasury having a maturity equivalent to that of such Disbursement. 6 10 "U.S." means the United States of America. "U.S. GAAP" means generally accepted accounting principles in the U.S. in effect from time to time, applied on a consistent basis both as to classification of items and amounts. "United States Persons" means (1) U.S. citizens; (2) corporations, partnerships, or other associations including nonprofit associations, created under the laws of the United States, any State or territory thereof, or the District of Columbia and more than fifty percent (50%) beneficially owned by U.S. citizens; and (3) foreign corporations, partnerships, or other associations, the total of the issued and subscribed share capital of which is at least ninety-five (95%) owned by one or more such U.S. citizens, corporations, partnerships, or other associations. SECTION 1.02. INTERPRETATION. In this Agreement, unless otherwise indicated or otherwise required by the context: (a) Reference to and the definition of any document (including this Agreement) shall be deemed a reference to such document as it may be amended, supplemented, revised, or modified from time to time; (b) All references to an "Article", "Section", "Schedule", or "Exhibit" are to an Article or Section hereof or to a Schedule or an Exhibit attached hereto and made a part hereof; (c) The table of contents, article and section headings, and other captions in this Agreement are for the purpose of reference only and do not limit or affect its meaning; (d) Defined terms in the singular shall include the plural and vice versa, and the masculine, feminine or neuter gender shall include all genders; (e) Accounting terms used herein but not defined in Section 1.01 shall have the respective meanings given to them under U.S. GAAP; and (f) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. 7 11 ARTICLE II. AMOUNT AND TERMS OF THE LOAN SECTION 2.01. AMOUNT AND DISBURSEMENT. (a) Commitment. Subject to the terms and conditions hereof, OPIC agrees to make, and the Company agrees to accept, a loan for the establishment and implementation of the Fund in the principal amount of not more than $20,000,000. Disbursements of the Loan shall only be made from the date hereof through the end of the Commitment Period. (b) Disbursement. Subject to the satisfaction of the conditions set forth in Articles IV and V, the Company may request a Disbursement of the Loan by delivering a Disbursement Request to OPIC not less than five (5) Business Days prior to a Closing Date. Each Disbursement shall be evidenced by one or more (as OPIC may specify) Notes aggregating the principal amount of the Disbursement and dated the Closing Date. All Notes shall be issued for a term ending on or before the Loan Maturity Date. The amount of the Loan shall not exceed the amount of the Commitment, and the Company may not request Disbursement of any Loan amounts repaid or prepaid. SECTION 2.02. CANCELLATION OF THE COMMITMENT. The Company may cancel all or any part of the Commitment at any time. Any part of the Commitment not disbursed at the end of the Commitment Period shall be deemed to have been canceled. SECTION 2.03. INTEREST. (a) Interest Rate. On each Payment Date the Company shall pay interest in arrears to the order of OPIC on the daily outstanding principal balance of each Note at a fixed rate per annum for each Disbursement equal to the sum of the Treasury Rate for such Disbursement plus fifty basis points (0.50%) (the "Interest Rate"). (b) Default Interest. If the Company fails to pay in full when due any amount of principal or interest on any Note or any other amount due hereunder, the Company shall pay default interest on such unpaid amount on demand (to the extent permitted by applicable law), from the date of the payment default until the date on which such defaulted amount is paid in full, at a rate equal to (i) for any unpaid principal or interest on any Note, the sum of two percent (2%) per annum plus the Interest Rate specified in such Note and (ii) for any other unpaid amount, ten percent (10%) per annum or, if less, the maximum rate permitted by law. 8 12 SECTION 2.04. CONTINGENT FEE. (a) As additional consideration for the Loan, the Company shall pay to OPIC, within forty-five (45) days after the Loan Maturity Date or any earlier date on which the Loan shall be repaid in full (whether upon acceleration or otherwise), a fee of five percent (5%) of the Excess Return generated by the Portfolio. Excess Return means the internal rate of return ("IRR") generated by the Portfolio in excess of seven percent (7%). The IRR of the Portfolio shall be determined on the basis of the quarterly Inflows (as defined below) to and Outflows (as defined below) from the Company with respect to the Portfolio. (i) "Inflows" means the sum of (A) the aggregate, as of the Loan Maturity Date or any earlier date of repayment of the Loan in full (whether by acceleration or otherwise) or any Determination Date (as defined below), of (I) all dividends, interest and fees paid by or in respect of the Portfolio and Permitted Investments, (II) all proceeds received upon the sale or other disposition of any stock, warrants, notes or other securities of, the Portfolio, and (III) to the extent not included in (I) or (II), the return of capital or loan repayment by the Projects, and (B) the aggregate, as of the Loan Maturity Date or any earlier date of repayment in full of the Loan (whether upon acceleration or otherwise), of (I) all accrued and unpaid dividends, interest and fees payable by or in respect of the Portfolio, to the extent not written off in accordance with U.S. GAAP, (II) all proceeds owing and unpaid in respect of the sale or other disposition of any stock, warrants, notes or other securities of the Portfolio, and (III) the net unrealized fair market value of any stock, warrants, notes or other securities of the Portfolio, as determined by the Company's Board of Directors. If any dispute arises with respect to the determination of fair market value pursuant to clause (III), such dispute shall be resolved by an independent appraiser mutually agreeable to the parties; provided, that if the parties can not agree on such an appraiser, then the decision regarding an independent appraiser shall be submitted to arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. There shall be one arbitrator, appointed in accordance with such Rules, and the decisions of such arbitrator and of the independent appraiser selected by such arbitrator, shall be final, nonappealable, and conclusive upon the parties. The costs of any arbitration shall be shared equally by the parties. (ii) "Outflows" means the aggregate amount of all investments in Projects and all reasonable expenses, fees and costs incurred in connection with such investments and the operation of the Fund 9 13 through the Loan Maturity Date or any earlier date of repayment in full of the Loan, or any Determination Date (as defined below) including, without limitation, the fees of Allied Capital Advisers, Inc. and interest accrued an the Loan. (b) The Company shall pay to OPIC an early distribution fee of one half (1/2) of the contingent fee (as calculated pursuant to subsection (a) above, but excluding all amounts referred to in subsection (a) (i) (B) above as of any Determination Date, as defined below), if, on December 31, 2002 and on the last day of each year thereafter until the Loan Maturity Date, or an any such date thereafter on which the Loan shall be repaid in full (each such date, a "Determination Date"), the IRR of the Portfolio (excluding all amounts referred to in subsection (a) (i) (B) above, calculated as of the relevant Determination Date) is greater than seventeen percent (17%). Such early distribution fee shall be payable within ninety (90) days after any Determination Date. If, however, on any Determination Date occurring after December 31, 2002 the determination of the IRR of the Portfolio indicates that OPIC would not be entitled to any previously paid early distribution fee or portion thereof, then within forty-five (45) days of receipt of the Company's notice of such determination OPIC shall remit to the Company, by credit against the Loan balance or other payment, that amount of such prepaid contingent fee not earned under the foregoing formula. SECTION 2.05. REPAYMENT OF THE LOAN. Except as otherwise provided herein, the Company shall repay the Loan and all interest accrued thereon in full on the Loan Maturity Date. SECTION 2.06. VOLUNTARY PREPAYMENT. On any date the Company may, upon ten (10) Business Days' prior notice to OPIC, prepay any Note in whole or in part, without premium or penalty. SECTION 2.07. MISCELLANEOUS. (a) Payment or Reimbursement of Expenses. The Company shall pay or reimburse OPIC, upon request, Opec reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery, and implementation of this Agreement, the Notes and the other Financing Documents, including, without limitation, (i) the reasonable fees and expenses of outside legal counsel and business consultants (not to exceed $30,000) and (ii) the reasonable costs of communications, the preparation of any documents, and the preparation of bound volumes of the Financing Documents for Opec use. The Company shall also reimburse OPIC upon demand for (iii) all reasonable costs and 10 14 all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses and reasonable travel costs) incurred by OPIC (A) in taking any action required by any applicable law or regulation to preserve in full force and effect any of its rights hereunder or under any of the Financing Documents, or (B) in enforcing its rights under any of such documents, or (C) in connection with the modification, amendment or waiver of any provision of any such document, and (iv) all reasonable costs and expenses (including, without limitation, reasonable travel costs) of attendance by an OPIC representative of any meetings of the Board of Directors of the Company which are held outside the Washington, D.C. metropolitan area and at which business relating to the Fund is discussed. (b) Currency and Place of Payment. All payments required hereunder shall be made in Dollars in immediately available funds without any offset or deduction for Taxes or otherwise to OPIC at the following address: If sent by wire transfer (via a United States domestic bank): U.S. Treasury Department ABA No. 0210-3000-4 TREASNYC/CTR/BNF=AC71000001 OBI=OPIC Loan No. 999-95-267-DI If sent by express mail or courier: Nations Bank Operations Center Corporate Bank Operations 3 SSE 6000 Feldwood Road College Park, GA 30349 Attn: OPIC Lockbox 198177 If sent by standard mail: Overseas Private Investment Corporation P.O. Box 198177 Atlanta, GA 30384 (c) Computation of Interest on Notes and Fees. Except as otherwise provided herein or in any Note, interest (including without limitation default interest) shall accrue on a daily basis in each Interest Period and shall be computed on the basis of the Day Count Fraction for such Interest Period. (d) Application of Payments to OPIC. Payments received by OPIC under this Agreement or with respect to any Note shall be applied to amounts due under this Agreement and under the Notes in such manner as OPIC in its sole discretion may determine to be appropriate, notwithstanding any instruction from the Company. 11 15 (e) Replacement Notes. The Company shall issue at its cost upon receipt of certification of the loss, theft, destruction or mutilation of any Note (and of indemnity satisfactory to the Company in the case of lost, stolen or destroyed Notes), or upon the surrender of other outstanding Note(s), new Note(s) of like tenor and aggregate principal amount in replacement thereof, in such denominations as the holder thereof may request and dated (and bearing interest from) the date to which interest has been paid on the Note(s) so surrendered or certified as lost, stolen or destroyed. ARTICLE III. REPRESENTATIONS AND WARRANTIES The Company represents, covenants, and warrants to OPIC that: SECTION 3.01. EXISTENCE AND POWER OF THE COMPANY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland. The Company is duly authorized to do business in each jurisdiction in which its business makes such authorization required (or for which the failure to be so authorized or qualified would have a Material Adverse Effect), has the requisite power to own and operate its properties, to carry on its business and to establish and implement the Fund, to borrow money and create a charge on its properties and to execute, deliver and perform this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party. Section 3.02. Authority of the Company. The Company's execution, delivery and performance of this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party: (i) have been duly authorized by all necessary corporate action; (ii) will not violate any applicable regulation or ruling of any governmental authority; (iii) will not breach, or result in the imposition of any Lien upon any of its assets (except as permitted by Section 7.01) under, any of the Charter Documents or any agreement or other requirement by which it or any of its properties may be bound or affected; and (iv) all third party consents required therefor have been obtained and are in full force and effect. The execution and delivery by the Company of this Agreement, the Notes and each of the other Financing Documents to which it is or will be a party will cause each such respective instrument to constitute a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally or general principles of equity (regardless of whether 12 16 such enforcement is considered in a proceeding in equity or at law). The Company's obligations hereunder rank, and under the Notes will rank, not less than pari passu with all of the Company's other Indebtedness. For purposes of this Section 3.02 only, the term Indebtedness means any amount payable pursuant to any agreement or instrument involving or evidencing money borrowed or received, the advance of credit, a conditional sale or a transfer with recourse or with an obligation to repurchase, or pursuant to a lease with substantially the same economic effect as any such agreement or instrument, to which the Company is a party as debtor, borrower or guaranty. SECTION 3.03. FINANCIAL CONDITION. The Company's Financial Statements dated December 31, 1994, which have been furnished to OPIC, are complete and correct and fairly present its financial condition and the results of its operations for the period then ended. It has no contingent obligation, liability for Taxes, material or long-term commitment, or outstanding Indebtedness of any kind except as disclosed in such Financial Statements. Except as set forth in Schedule 3.03, there has been no change in the Company's financial condition or prospects from that set forth in such Financial Statements that could have a Material Adverse Effect, and, other than payment of the extra 1994 dividend paid in 1995 and the declaration of the first quarter 1995 regular dividend, since the date thereof, no dividend or other distribution has been declared or paid to its shareholders. SECTION 3.04. CAPITALIZATION OF THE COMPANY. The authorized capital of the Company consists of 10,000,000 shares of common stock, par value $1.00 per share, of which approximately 6,152,703 shares are issued and outstanding. All such capital stock of the Company has been duly authorized and validly issued, and is fully paid and nonassessable. Except as to shares issued and issuable under the Company's Incentive Stock Option Plan, there are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Company. SECTION 3.05. SUBSIDIARIES AND SHAREHOLDINGS. The Company does not own or otherwise control any voting stock of, or have any ownership interest in, any other Person, except as to Allied Investment Corporation and Allied Capital 13 17 Financial Corporation, both Maryland corporations, and Allied Development Corporation, a District of Columbia corporation, and as stated in Schedule 3.05. SECTION 3.06. LIENS. Neither the Company nor its Consolidated Subsidiaries have outstanding, nor are any of them contractually bound to create, any Lien on or with respect to, any of its properties, rights or revenues, except as permitted in Section 7.01. SECTION 3.07. TAXES AND REPORTS. All tax returns and reports of the Company and its Consolidated Subsidiaries required by law to be filed by any government having jurisdiction or any subdivision thereof, or that, if not filed, could have a Material Adverse Effect, have been duly filed for periods ending prior to the date of this Agreement, and all Taxes due or reasonably anticipated to become due in respect of the Company and its Consolidated Subsidiaries, or any assets, income, or franchises of the Company and its Consolidated Subsidiaries, that if not paid could have a Material Adverse Effect, have been duly paid or have been adequately provided for on the books of the Company or its Consolidated Subsidiaries. SECTION 3.08. DEFAULTS. No Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, has occurred and is continuing. Neither the Company nor any other party is in breach of any provision of any contract to which the Company or any Consolidated Subsidiary is a party, which breach could have a Material Adverse Effect. SECTION 3.09. LITIGATION. Except as set forth in Schedule 3.09, no action, suit, other legal proceeding, arbitral proceeding or investigation is pending by or before any domestic or foreign court or governmental authority or in any arbitral or other forum or is threatened, against the Company or any of its Consolidated Subsidiaries or any of their properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Financing Document, or (ii) has, or if adversely determined could have, a Material Adverse Effect. 14 18 SECTION 3.10. COMPLIANCE WITH LAW. Each of the Company and its Consolidated Subsidiaries is conducting its business in compliance in all material respects with all applicable laws, regulations and authorizations of all relevant governmental authorities, non-compliance with which could have a Material Adverse Effect, and in compliance with the Charter Documents. The Company has duly obtained all material consents, licenses, approvals and authorizations and has effected all declarations, filings and registrations necessary for the due execution, delivery, performance, validity or enforceability of this Agreement and each other Financing Document to which it is a party. SECTION 3.11. DISCLOSURE All documents, reports or other written information pertaining to the Fund (including without limitation the Financing Documents) that have been furnished to OPIC, as listed, on Schedule 3.11 hereto, are true and correct and do not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. There is no fact known to the Company, that has not been disclosed to OPIC in writing, the existence of which could have a Material Adverse Effect. ARTICLE IV. CONDITIONS PRECEDENT TO THE FIRST DISBURSEMENT Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the first Disbursement of the Loan is subject to the prior fulfillment, to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued fulfillment on the date of the first Disbursement: SECTION 4.01. CORPORATE AUTHORIZATION. OPIC shall have received a certificate of an Authorized Officer of the Company, dated the Closing Date, satisfactory to OPIC in form and substance, and substantially in the form of Exhibit C: (a) attaching a copy of each of the Charter Documents, as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; (b) attaching a copy of the resolutions of the Board of Directors of the Company, and of all documents evidencing any other necessary corporate action (each such resolution and document satisfactory to OPIC in form and substance), authorizing it to execute, deliver and perform this Agreement, the Notes, and 15 19 each of the other Financing Documents to which it is or will be a party and to engage in the transactions herein contemplated, and certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; and (c) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of the Company this Agreement, the Notes, each of the other Financing Documents to which it is or will be a party and all other notices or instruments contemplated hereunder. SECTION 4.02. LEGAL OPINION. OPIC shall have received a written opinion, dated the Closing Date, satisfactory to OPIC in form and substance, and substantially in the form of Exhibit E, of Thomas R. Salley, the Company's legal counsel, or in such other form and of such other counsel as shall be satisfactory to OPIC. SECTION 4.03. INSURANCE. OPIC shall have received a certificate from an Authorized Officer of the Company that the insurance required by Section 6.08 is in full force and effect without default. ARTICLE V. CONDITIONS PRECEDENT TO EACH DISBURSEMENT Unless OPIC otherwise agrees in writing and save as otherwise provided herein, OPIC's obligation to make each Disbursement (including the first Disbursement) is subject to the prior fulfillment to OPIC's satisfaction in its sole discretion, of the following conditions precedent and to their continued fulfillment on the date of any such Disbursement: SECTION 5.01. REPRESENTATIONS AND DEFAULTS. The representations and warranties set forth in Article III shall be true and correct in all material respects on the date of such Disbursement as if made on such date, and on such date no Event of Default, and no event or condition that with the passage of time or the giving of notice, or both, would constitute an Event of Default, shall have occurred and be continuing. SECTION 5.02. CHANGE IN CIRCUMSTANCES. At the time of each Disbursement, no circumstance shall exist, and no change of law or regulation of any governmental authority shall have occurred, that in OPIC's reasonable judgment could have a Material Adverse Effect. 16 20 SECTION 5.03. CERTIFICATION. The Company shall have furnished OPIC with a certificate of an Authorized Officer of the Company, dated the date of such Disbursement, satisfactory to OPIC in form and substance, and substantially in the form of Exhibit D (i) certifying the satisfaction of the conditions set forth in Sections 5.01 and 5.02 and (ii) setting forth the purposes to which the present Disbursement will be applied and certifying that the proceeds of this Disbursement are presently needed for such purposes. SECTION 5.04. FINANCIAL INFORMATION. Not less that five (5) Business Days before the Closing Date for any disbursement, OPIC shall have received all Financial Statements, reports, and other information that the Company, pursuant to Section 6.10, would otherwise be required to furnish to OPIC on or before such Closing Date. SECTION 5.05. PAYMENT OR REIMBURSEMENT OF EXPENSES. All fees and other amounts due to OPIC with respect to the making of the Loan, and all other amounts payable or reimbursable by the Company in connection with the making of the Loan, shall have been paid, including, but not limited to, any amounts payable pursuant to Section 2.07(a), including the fees and expenses of OPIC legal counsel. SECTION 5.06. NOTES. For each Closing Date, OPIC shall have received a duly executed Note dated such Closing Date in the aggregate principal amount of the Loan to be disbursed on such Closing Date. ARTICLE VI. AFFIRMATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Company covenants and agrees as follows: SECTION 6.01. PROJECT IMPLEMENTATION. (a) The Company shall establish the Fund promptly and as soon as practicable thereafter (i) identify Projects which the Company believes satisfy OPIC's statutory and policy criteria for investment and (ii) provide information regarding the Projects to OPIC for its review. The Company shall provide to OPIC all 17 21 information relating to each proposed Project as OPIC reasonably may request to enable it to determine whether its criteria are met. (b) Within a reasonable period of time after the submission of all information required by OPIC, OPIC shall notify the Company in writing of its determination with respect to the eligibility of the proposed Project. Whether a proposed Project satisfies OPIC's statutory and policy criteria shall be determined by OPIC in accordance with the Guidelines in its sole discretion. (c) The Company may invest in the Projects approved by OPIC. No replacement of, or additional investments in, Projects may be made without OPIC's prior written approval. (d) All funds received by the Company from or in respect of the Projects during the term of the Loan may, at the discretion of the Company, be reinvested in other qualified Projects, subject to OPIC's review and approval pursuant to Section 6.01(a) and (b) above. (e) The Fund shall invest primarily in the debt, quasi-equity, or equity securities of private sector Persons. (f) The amount invested in any single Project shall not exceed seventy-five percent (75%) of the total capital requirements of such Project; provided, however, that this limitation will not apply to investments for which significant risk mitigation measures have been taken or to which OPIC otherwise has agreed. (f) The Company shall invest no more than twenty-five percent (25%) of the Loan proceeds in any single Project, and no more than forty percent (40%) of the Loan in any single country. SECTION 6.02. USE OF PROCEEDS. All Loan proceeds shall be used for investments in Projects approved by OPIC or to pay the reasonable expenses of the Fund. Such expenses shall include reasonable investment management fees paid to Allied Capital Advisers, Inc. for the management of the Fund. OPIC acknowledges that the fees payable to Allied Capital Advisers, Inc., pursuant to the investment management agreement between Allied Capital Advisers, Inc. and the Company in effect on the date hereof, are reasonable. SECTION 6.03. SEGREGATED ACCOUNT. (a) Loan-proceeds shall not be commingled with other funds of the Company. The Company shall establish and maintain a segregated account (the "Segregated Account") at a Qualifying Financial Institution, into which it shall deposit all Loan proceeds pending disbursement. 18 22 (b) All interest, dividends, and other payments from Projects, including the proceeds of any refinancings or sale of the Projects, shall be deposited in the Segregated Account, pending reinvestment or permitted distribution. (c) All amounts in the Segregated Account shall be invested in Permitted Investments. SECTION 6.04. WORKING CAPITAL. In order to minimize the need for small Disbursements, the Company may deposit Loan proceeds of up to US$2,000,000 in the Segregated Account as working capital; provided that it shall do so only if it intends to use such Loan proceeds for investments in Projects or Fund expenditures within a reasonable time after Disbursement of such Loan proceeds. SECTION 6.05. OPIC INSURANCE. The Company shall consider insuring its investments in Projects against political risk by using OPIC insurance and using other OPIC project financing services, to the extent that doing so is in the best interests of the Company and the Projects. SECTION 6.06. COMPANY OPERATIONS. The Company shall duly and punctually perform its obligations under this Agreement, the Notes, and any other Financing Document to which it is a party. The Company shall conduct its operations on the basis of customary commercial practice and arm's-length arrangements, with due diligence and efficiency and under the supervision of Allied Capital Advisers, Inc., a Maryland corporation. SECTION 6.07. MAINTENANCE OF RIGHTS AND COMPLIANCE WITH LAWS. The Company shall: (i) whenever advisable for the Company to do so, in accordance with customary practice for companies in businesses similar to that of the Company, acquire, maintain and renew all rights, contracts, powers, privileges, leases, lands, sanctions and franchises necessary for the conduct of its business and the performance of its obligations hereunder and under the other Financing Documents; (ii) conduct its business in compliance in all material respects with all applicable laws and directives of governmental authorities having force of law, including applicable environmental standards; and (iii) duly pay before they become overdue all Taxes, assessments and other government charges levied or imposed in any jurisdiction upon its property, earnings or business, that if not paid could have a Material Adverse Effect, except amounts being contested in good faith by appropriate proceedings diligently pursued for which adequate reserves shall have been established. 19 23 SECTION 6.08. INSURANCE. The Company shall maintain or cause to be maintained in effect such public liability and other insurance on its property and business as is in accordance with sound commercial practice for the business in which the Company is engaged and from such insurers as shall be selected by the Company and approved by OPIC (such approval not to be unreasonably withheld). Such insurance shall be in such amount as a company similarly situated in respect of property to the Company would, in the prudent management of its operations, maintain. The Company also shall carry workmen's compensation insurance, disability benefits insurance, and such other forms of insurance which the Company is required by law to provide, covering loss resulting from injury, sickness, disability or death of the employees of the Company except, subject to OPIC's approval, to the extent the Company can become a qualified self-insurer under relevant statutes. Notwithstanding the foregoing, OPIC acknowledges that, so long as the Company maintains no physical property, has no employees and has no other attributes which would make the procurement and maintenance of additional insurance necessary or desirable in the view of prudent management, the insurance which the Company has in place, as set forth in Schedule 6.08 hereto, is sufficient. SECTION 6.09. ACCOUNTING AND FINANCIAL MANAGEMENT. The Company shall, and shall cause each Consolidated Subsidiary to, (a) maintain adequate management information and cost control systems, (b) maintain a system of accounting, (c) prepare its Financial Statements in accordance with U.S. GAAP, (d) engage Matthews, Carter & Boyce, Independent Certified Public Accountants, or other independent accountants satisfactory to OPIC, (e) notify OPIC of any change in such accountants and the reason therefor, and (f) upon OPIC's reasonable request to the Company, shall instruct such accountants to communicate directly with OPIC regarding the Company's accounts and operations. SECTION 6.10. FINANCIAL STATEMENTS AND OTHER INFORMATION. At its cost the Company shall furnish to OPIC each of the following documents: (a) Within 45 days after the end of each fiscal quarter of each Fiscal Year, (i) the consolidated and consolidating Financial Statements of the Company and its Consolidated Subsidiaries, certified by the chief financial officer of the Company as being complete and correct, together with such officer's certificate that his or her review has not disclosed the existence of an Event of Default, or an event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, or, if any such event or condition then exists, specifying the nature and period of existence thereof and what 20 24 action the Company has taken or proposes to take with respect thereto and (ii) a report certified by an Authorized Officer of the Company setting forth in reasonable detail the status of the investments made with the proceeds of the Loan; (b) Within 90 days after the end of each Fiscal Year, the consolidated and consolidating audited Financial Statements of the Company and its Consolidated Subsidiaries, together with a certificate by the independent accountants reporting thereon describing briefly the scope of their examination (which shall include a review of the relevant terms of this Agreement) and certifying whether their examination has disclosed the existence of an Event of Default, or an event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default, and if so, specifying the nature and period of existence thereof; (c) Within 90 days after the end of each Fiscal Year, a report of the Company's Board of Directors setting forth their valuation of the investments made by the Fund; (d) Within 45 days after the end of each second and fourth fiscal quarter, a narrative description of material events affecting the Company and/or the Fund and their investments during the semi-annual period ending on the last day of such second and fourth fiscal quarters; (f) Promptly (i) upon receipt thereof a copy of each other special or interim audit report submitted to the Company by its independent accountants and any management letter received from such accountants, (ii) upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Company to stockholders generally and of each regular or periodic report, and any registration statement or prospectus filed by the Company with any securities exchange or the U.S. Securities and Exchange Commission or any successor agency, and copies of any orders in any proceedings to which the Company or any subsidiary is a party, issued by any governmental agency having jurisdiction over the Company or any of its subsidiaries, and (iii) if OPIC so requests, after the filing thereof, copies of all reports that the Company or any of its Consolidated Subsidiaries shall file with the Small Business Administration ("SBA"), or with any successor agency, and any audit results or audit reports prepared in connection with any audit of the Company or any of its Consolidated Subsidiaries by, or at the request of, the SBA or any successor agency, together with all reports generated by the SBA and pertaining to the Company or any Consolidated Subsidiary; and (g) Such other information and data with respect to its operations (including supporting information as to compliance with this Agreement) as OPIC may reasonably request from time to time. 21 25 SECTION 6.11. ACCESS TO RECORDS; INSPECTION; MEETINGS. The Company shall, upon request of OPIC, give, or cause to be given, to any representatives of OPIC access during normal business hours to, and permit them to examine, copy and make extracts from, any and all records and documents in the possession or subject to the control of the Company relating to its operations and financial affairs, and to inspect any of its facilities or properties. If OPIC so requests, the Company shall give OPIC not less than 15 days' notice of, and shall permit a representative of OPIC to attend, the portions of each meeting of its shareholders and of its directors relating to the Fund. Subject to all applicable law, OPIC shall treat the information contained in such records and documents and received in such meetings, or otherwise received from the Company, as confidential information not to be disclosed to other parties. SECTION 6.12. NOTICE OF DEFAULT AND OTHER MATTERS. The Company shall immediately notify OPIC of (i) the occurrence of each Event of Default and of each event or condition known to any of its officers who have, or should have, knowledge of the terms of this Agreement, that with the passage of time or the giving of notice, or both, could constitute an Event of Default, (ii) any actions, suits, other legal proceedings or arbitral proceedings against the Company or any Consolidated Subsidiary that involve claims aggregating more than the equivalent of $500,000, and (iii) the occurrence of any other condition or event (including government action) that could have a Material Adverse Effect on the Company's ability to repay the Loan. SECTION 6.13. FINANCIAL COVENANTS. (a) Capital Maintenance. The Company at all times shall maintain Consolidated Shareholders' Equity of not less than $35,000,000. (b) Interest Charges Coverage Ratio. The Company shall maintain a ratio of Investment Income Available for Interest Charges to Interest Charges of at least 1.1 to 1, as determined on the last day of each month for the twelve month period immediately preceding such day. (c) Limitations on Debt. The Company shall have on the last day of each quarterly fiscal period in each Fiscal Year (i) a ratio of Total Indebtedness to Consolidated Shareholders' Equity not exceeding 3 to 1 and (ii) a ratio of Senior Debt to Consolidated Shareholder Equity not exceeding 1.5 to 1. 22 26 SECTION 6.14 ENVIRONMENTAL COMPLIANCE. The Company shall comply with, and shall conduct its business, operations, assets, equipment, property, leaseholds, and other facilities in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder. The Company shall exercise its reasonable efforts to cause each Project to comply with guidelines promulgated by the World Bank, or such other environmental guidelines of which OPIC shall inform the Company in writing, and to maintain all required permits, licenses, certificates and approvals, relating to (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. SECTION 6.15 CO-INVESTMENT. The Company may (a) invest in Projects using capital from sources other than the Fund and (b) act as a broker or agent or otherwise to arrange for investments (including senior debt, subordinated debt, equity or quasi-equity investments) in Projects by other investors; provided, however, that any such Company and third party investments shall be made on a basis pari passu with or subordinated to investments made by the Fund. ARTICLE VII. NEGATIVE COVENANTS Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Company covenants and agrees as follows: SECTION 7.01. LIENS. The Company shall not, and shall not permit any Consolidated Subsidiary to, create, assume or otherwise permit to exist any Lien on any of its properties or assets, whether now owned or hereafter acquired, or in any proceeds or income therefrom, except for: (a) Liens for Taxes or other statutory Liens that are being contested or litigated in good faith; (b) any mechanic's, workmen's or other like Liens arising by mandatory provision of law securing obligations incurred in the ordinary course of business that are not yet overdue or which are being contested or litigated in good faith. 23 27 SECTION 7.02 NO ALTERATION OF CHARTER DOCUMENTS. The Company shall not terminate, amend or assign any of its obligations under any of the Charter Documents, other than amendments or waivers either to correct manifest error or which are of a formal, minor, or technical nature or which do not change materially its rights or obligations, provided that the Company promptly gives OPIC notice of each such amendment or waiver. SECTION 7.03. DIVIDENDS AND SHARE REDEMPTIONS. The Company shall not declare or pay any dividends on or make any other distributions in respect of any shares of any class of its capital stock (other than dividends payable solely in shares of its capital stock), or purchase, acquire, redeem or retire (directly or indirectly through any subsidiary of the Company) any of such shares until all amounts due or to become due hereunder or under the Notes shall have been paid in full, unless no Event of Default, or event which, with the passage of time or giving of notice or both, would constitute an Event of Default, exists or would be caused by any such dividend, other distribution, share purchase or other such share retirement. SECTION 7.04. SALE OF ASSETS; MERGERS. (a) The Company shall not, and shall not permit any Consolidated Subsidiary to, sell, assign, convey, lease or otherwise dispose of all or a substantial part of its assets or properties, whether now owned or hereafter acquired, except for the replacement of a capital asset with an asset of equal or greater value; provided that the Company and any Consolidated Subsidiary may sell, transfer or otherwise dispose of all or any part of its investments in the ordinary course of business. (b) Notwithstanding the foregoing, the Company shall not transfer or otherwise dispose of the Fund. (c) The Company shall not dissolve, liquidate or otherwise cease to do business, or merge or consolidate with any Person. SECTION 7.05. ORDINARY CONDUCT OF BUSINESS. The Company shall not: (a) nor shall it permit any Consolidated Subsidiary to, engage in any business other than its present business activities, those related to the Fund and other activities similar thereto; (b) materially change the nature or scope of the Fund; 24 28 (c) take any action which, under the Employee Retirement Income Security Act of 1974, as amended, would cause a Material Adverse Effect; or (d) fail to maintain its corporate existence and its right to carry on its operations. SECTION 7.06. WORKER RIGHTS. The Company shall not take any action to prevent its employees from lawfully exercising their right of free association and their right to organize and bargain collectively. The Company further agrees to observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety, and not to use forced labor. The Company shall undertake its reasonable efforts to cause each Project to afford each of the foregoing protections to such Project's own employees. ARTICLE VIII. DEFAULTS AND REMEDIES SECTION 8.01. EVENTS OF DEFAULT. The occurrence and continuation of any of the following events or circumstances shall constitute an "Event of Default" hereunder: (a) The Company fails to pay when due any interest payable pursuant to any Note or any other amount (other than Loan principal) payable pursuant to this Agreement, and such failure continues for more than five Business Days after the date on which such payment was due; (b) The Company fails to pay when due any principal of the Loan payable pursuant to any Note on the Loan Maturity Date or on such earlier date on which such principal shall have become due; (c) The Company or any Consolidated Subsidiary fails to pay when due any principal of or interest on any of its Indebtedness other than the Loan, and such failure continues beyond the grace period, if any, applicable thereto (unless the amount of such unpaid Indebtedness is de minimis and the party to whom such Indebtedness is owed has not declared the Company or such Consolidated Subsidiary to be in default); or a default occurs under any agreement or instrument evidencing, or under which the Company or any Consolidated Subsidiary has outstanding at the time, any such Indebtedness and such default continues beyond the grace period, if any, applicable thereto, if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; 25 29 (d) Any representation or warranty made by or on behalf of the Company in this Agreement, or in any notice or other certificate, document, Financial Statement or other statement delivered pursuant hereto, proves to have been incorrect in any material respect when made; (e) The Company fails to comply with any covenant or provision set forth in Section 6.12 or Article VII; (f) The Company fails to comply with or perform any agreement or covenant contained herein other than those referred to in Sections 8.01(a) through (e) above, and such failure continues for 30 days after the occurrence thereof; (g) This Agreement, the Notes, or any other Financing Document at any time for any reason ceases to be in full force and effect, or is declared to be void or is repudiated by the Company, or the validity or enforceability hereof or thereof is at any time contested by the Company; (h) Allied Capital Advisers, Inc. ceases to manage the Fund; (i) The Company (i) applies for, or consents to the appointment of, a receiver, trustee, custodian, intervenor or liquidator of itself or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, admits in writing that it is unable to pay its debts as they become due or generally fails to pay its debts as they become due, (iii) makes a general assignment for the benefit of creditors, (iv) files a petition or answer seeking reorganization or arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) files an answer admitting the material allegations of, or consents to, or defaults in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding where such action or failure to act will result in a determination of bankruptcy or insolvency against it; (j) Without the Company's written application, approval or consent, a proceeding is instituted in any court of competent jurisdiction or by or before any government or governmental agency of competent jurisdiction, seeking in respect of the Company: adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of Indebtedness, the appointment of a trustee, receiver, liquidator or the like of it or of all or any substantial part of its property or assets, or other like relief in respect of it under any bankruptcy, reorganization or insolvency law; provided, however, that the same shall not constitute an Event of Default if such proceeding is being contested by the Company in good faith, unless the same continues undismissed for a period of 60 days; 26 30 (k) Any final judgment or judgments for the payment of money is or are rendered against the Company or any Consolidated Subsidiary or any of their properties, and such judgment or judgments is or are not satisfied or discharged within 30 days of entry; provided, however, that the same shall not constitute an Event of Default except to the extent that it would have a Material Adverse Effect on the Company's ability to repay the Loan; (l) Any environmental claim shall have been asserted against the Company, and such claim could have a Material Adverse Effect on the Company's ability to repay the Loan; or (m) Any event shall have occurred that, in the reasonable judgment of OPIC, would, or is reasonably likely to, impair the Company's ability to repay the Loan. SECTION 8.02. REMEDIES UPON EVENT OF DEFAULT. (a) Except as otherwise provided in Section 8.02(b), if any Event of Default has occurred and is continuing, OPIC may at any time in its sole discretion, (i) suspend or terminate the Commitment, (ii) declare, by written demand for payment to the Company, any portion or all of the Loan to be due and payable, whereupon such portion of the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and any other Financing Document, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Company hereby expressly waives, and/or (iii) without notice of default or demand, proceed to protect and enforce its rights and remedies by appropriate proceedings, whether for damages or the specific performance of any provision of this Agreement, any Note, or any other Financing Document, or in aid of the exercise of any power granted in this Agreement, any Note, any other Financing Document, or by law, or may proceed to enforce the payment of any Note. (b) Upon the occurrence of an Event of Default referred to in Sections 8.01(i) or (j), (I) the Commitment shall automatically be terminated, and (II) the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and any other Financing Document, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Company hereby expressly waives. SECTION 8.03. JURISDICTION AND CONSENT TO SUIT. Without prejudice to OPIC's right to bring suit in the courts of any domestic or foreign jurisdiction, any proceeding to enforce 27 31 this Agreement, any Note, or any other Financing Document to which the Company is a party (unless otherwise specified) may be brought by OPIC in any court of competent jurisdiction in the District of Columbia of the U.S. or in any other jurisdiction where the Company or any of its property may be found. The Company hereby irrevocably waives any present or future objection to such venue, and irrevocably consents and submits unconditionally to the nonexclusive jurisdiction for itself and in respect of any of its property of any such court. The Company further irrevocably waives any claim that any such court is not a convenient forum for any such proceeding. The Company further agrees that final judgment against it in any such action or proceeding arising out of or relating to this Agreement, any Note, or any other Financing Document shall be conclusive and may be enforced in any other jurisdiction within or outside the U.S. by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its indebtedness. ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES. Each notice, demand, report, or other communication relating to this Agreement shall be in writing, shall be hand-delivered or sent by mail (postage prepaid), telegram or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties: To the Company: Allied Capital Corporation 1666 K Street, N.W., Suite 901 Washington, D.C. 20006 (Attn: G. Cabell Williams, III, President) Facsimile: (202) 659-2053 To OPIC: Overseas Private Investment Corporation 1100 New York Ave, N.W. Washington, D.C. 20527 (Attn: Vice President, Finance with a copy to Treasurer) Facsimile: (202) 408-9866 Either party may, by written notice to the other, change the address to which such communications should be sent to it. 28 32 SECTION 9.02. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS. SECTION 9.03. SUCCESSION. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, provided that the Company shall not, without the prior written consent of OPIC, assign or delegate all or any part of its interest herein or obligations hereunder. SECTION 9.04. SURVIVAL OF AGREEMENTS. Each agreement, representation, warranty and covenant contained or referred to in this Agreement shall survive any investigation at any time made by OPIC and shall survive the Disbursement of the Loan, except for changes permitted hereby, and shall terminate only when all amounts due or to become due under this Agreement and the Notes are paid in full. SECTION 9.05. INTEGRATION; AMENDMENTS. This Agreement embodies the entire understanding of the parties hereto, and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The provisions of this Agreement may be waived, supplemented or amended only by an instrument in writing signed by Authorized Officers of the Company and OPIC. SECTION 9.06. SEVERABILITY. If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction. SECTION 9.07. NO WAIVER. (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise 29 33 impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other or further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing. (b) The rights or remedies provided for herein are cumulative and are not exclusive of any other rights, powers or remedies provided by law. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of any other appropriate right or remedy. SECTION 9.08. WAIVER OF JURY TRIAL. The Company and OPIC each hereby irrevocably waives, to the fullest extent permitted by law, any right to have a jury participate in resolving any dispute arising out of, in connection with, related to, or incidental to the relationship between them established by this Agreement, the Notes, any other Financing Document and any other instrument, document or agreement entered into in connection with this Agreement or the transactions contemplated hereby. SECTION 9.09. INDEMNITY. To the extent permitted by law, the Company hereby indemnifies and holds harmless OPIC and its directors, officers, employees, agents and counsel (the "Indemnified Persons") from and against any and all losses, liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against any Indemnified Person in any way relating to or arising out of this Agreement, the Financing Documents or any of them or any of the transactions contemplated hereby or thereby; provided, however, that the Company shall not be liable to any Indemnified Person for any losses, liabilities, obligations, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that resulted from the gross negligence or willful misconduct of such Indemnified Person. SECTION 9.10. FURTHER ASSURANCES. From time to time, the Company shall execute and deliver to OPIC such additional documents as OPIC may require to carry out the purposes of this Agreement or the Financing Documents or to preserve and protect OPIC's rights as contemplated herein or therein. 30 34 SECTION 9.11. COUNTERPARTS. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer as of the date first above written. ALLIED CAPITAL CORPORATION /s/ G. CABELL WILLIAMS, III ----------------------------- By: G. Cabell Williams, III Its: President OVERSEAS PRIVATE INVESTMENT CORPORATION /s/ CHRISTOPHER FINN --------------------------------- By: Christopher Finn Its: Executive Vice President 31 35 United States of America ) ) ss: District of Columbia ) I, Donna Jo Hayhurst, a notary public in and of District of Columbia, DO HEREBY CERTIFY that G. Cabell Williams, III, an Authorized Officer of Allied Capital Corporation (the "Company"), personally appeared before me in said District of Columbia, personally known to me and known by me to be the person who executed on behalf of the Company the Loan Agreement annexed hereto, who acknowledged the same to be his or her own free act and deed and the free act and deed of the Company, and that he or had the necessary authority to do so. Given under my hand and notarial seal this 10th day of April, 1995. /s/ DONNA JO HAYHURST -------------------------------------- Donna Jo Hayhurst Notary Public, District of Columbia My Commission Expires Jan. 14, 1998 --------------------------------------- 32 36 United States of America ) ) ss: District of Columbia ) I, Donna Jo Hayhurst, a notary public in and of District of Columbia, DO HEREBY CERTIFY that Christopher Finn, an Authorized Officer of Overseas Private Investment Corporation ("OPIC") personally appeared before me in said District of Columbia, personally known to me and known by me to be the person who executed on behalf of OPIC the Loan Agreement annexed hereto, who acknowledged the same to be his or her own free act and deed and the free act and deed of OPIC, and that he or she had the necessary authority to do so. Give n under my hand and notarial seal this 10th day of April, 1995. /s/ DONNA JO HAYHURST -------------------------------------- Donna Jo Hayhurst Notary Public, District of Columbia My Commission Expires Jan. 14, 1998 --------------------------------------- 33 37 SCHEDULE 3.03 CHANGES IN FINANCIAL CONDITION Since the financial statements set forth in the Company's Annual Report as of December 31, 1994, there have been no changes in the Company's financial condition except as have occurred in the ordinary course of the Company's business since such date. 38 SCHEDULE 3.05 SUBSIDIARIES AND SHAREHOLDINGS As a regular part of its business, the Company owns interests in portfolio companies in a wide range of businesses. These ownership interests are predominantly in the form of common stock or warrants exercisable into common stock. These shareholdings are set forth in the Company's 1994 Annual Report. S-2 39 SCHEDULE 3.09 LITIGATION None, except as set forth in the Company's Form 10-K as of December 31, 1994 and the Company's 1994 Annual Report. S-3 40 SCHEDULE 3.11 DISCLOSURE DOCUMENTS 1. 1993 Allied Capital Corporation Annual Report 2. 1994 Allied Capital Corporation Annual Report 3. Allied Capital International "business plan" dated February, 1995, with appendices 4. Allied Capital Corporation Loan Commitments Outstanding Report, as of December 31, 1994 5. Allied Capital Corporation consolidated statement of investment performance statistics for the 34-year period ended December 31, 1993 6. Allied Capital Advisers advisory fee explanation memorandum from Joan Sweeney to Allied Capital Corporation Board of Directors, dated February 6, 1995 7. Sponsor Disclosure Report dated December 7, 1994 8. Conformed copy of Note Agreement with Massachusetts Mutual Life, dated April 30, 1992, as amended S-4 41 SCHEDULE 6.08 INSURANCE None S-5 42 EXHIBIT A FORM OF DISBURSEMENT REQUEST Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, D.C. 20527 Attention: Vice President for Finance, with a copy to the Treasurer Disbursement Request Dear Sir or Madam: Reference is made to the Loan Agreement between Allied Capital Corporation (the "Company") and Overseas Private Investment Corporation ("OPIC") dated as of April 10, 1995 (the "Loan Agreement"). Except as otherwise provided, capitalized terms used herein shall have the meanings set forth in the Loan Agreement. Pursuant to Section 2.01(b) of the Loan Agreement, notice is hereby given that the undersigned requests Disbursement of the Loan as follows: Amount of Disbursement: $[_____] Proposed Closing Date: [Not less than 5 Business Days from the date OPIC receives this Disbursement Request] As of the Closing Date, each of the conditions set forth in [Articles IV and V] [Article V] will be satisfied. Very truly yours, ALLIED CAPITAL CORPORATION By: ------------------------ Its: ----------------------- 43 EXHIBIT B FORM OF PROMISSORY NOTE ALLIED CAPITAL CORPORATION PROMISSORY NOTE No. _____ ________________________ __, 199__ FOR VALUE RECEIVED, ALLIED CAPITAL CORPORATION, a corporation organized and existing under the laws of the State of Maryland (the "Company"), hereby unconditionally promises to pay to the order of OVERSEAS PRIVATE INVESTMENT CORPORATION ("OPIC") the Principal Sum (defined below) in lawful currency of the United States of America and in immediately available funds, at the office of OPIC, 1100 New York Avenue, N.W., Washington, D.C. 20527, at the times and as provided in the Loan Agreement, dated as of April 10, 1995, between the Company and OPIC (as it may be amended from time to time, the "Loan Agreement"). The Company hereby also promises to pay interest on the unpaid principal amount hereof in like funds at said office from the date hereof until paid at the rates and at the times provided in the Loan Agreement. The Company hereby waives all requirements as to diligence, presentment, demand of payment, protest and notice of any kind with respect to this promissory note. As used herein, the following capitalized terms shall have the meanings specified: Principal Sum _______________________ and 00/100 United States Dollars (U.S. $_________________) Maturity Date _______________, 2005 Interest Payment Dates semi-annually on the fifteenth day of March and September of each year and on the Maturity Date Note Rate The rate per annum equal to the sum of the Treasury Rate plus fifty basis points (0.50%) Treasury Rate ___________________ percent (___%) per annum 44 Default Spread two percent (2%) per annum Day Count Fraction 360-day years consisting of twelve 30-day months Business Day Any day except a Saturday, Sunday or other day on which commercial banks in New York City or Washington, D.C. are authorized by law to close All other capitalized terms used herein and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. 1. Principal Payment. The Principal Amount hereof shall be due on the Maturity Date. 2. Interest Payments. The Company shall pay to OPIC interest at the Note Rate in arrears on each Interest Payment Date, commencing with the first such date after the date hereof, on the Principal Amount hereof from time to time outstanding, accruing from and including the date hereof until payment in full. 3. Computation of Interest. Interest shall accrue and be computed on the basis of the Day Count Fraction, for each period (an "Interest Period") from and including the Closing Date or the day following the immediately preceding Interest Payment Date, as the case may be, to and including the next succeeding Interest Payment Date or, if earlier, the Maturity Date. 4. Method and Application of Payment. All payments hereunder shall be made in immediately available funds to OPIC. Whenever any Payment Date under this Note shall fall on any day that is not a Business Day, the payment due on such Payment Date shall be made on the next succeeding Business Day. 5. Additional Provisions. This Note is issued under and is subject to the provisions of the Loan Agreement. No reference herein to the Loan Agreement and no provision of this Note or the Loan Agreement shall alter or impair the obligation of the Company to pay the principal of, interest on, and all other amounts due pursuant to this Note as provided herein. 6. Principal Prepayments. The Principal Amount of this Note (a) may be prepaid at the election of the Company, at any time, in whole or in part without penalty or premium and (b) shall be prepaid (i) in whole at the election of OPIC upon the occurrence of an Event of Default under the Loan Agreement or (ii) in whole or in part upon the occurrence of certain events requiring mandatory prepayment under the Loan Agreement. B-2 45 prepayment under the Loan Agreement. 7. Default Rate. Interest shall accrue on the amount of any principal and interest not paid when due, from the date on which such amount became due and payable (whether at stated maturity, by acceleration, or otherwise), at a rate per annum equal to the sum of the Note Rate plus the Default Spread, and shall be payable on the last day of each month succeeding such due date and on the date when such defaulted amount is paid in full. 8. Amendments and Modifications. The provisions of this Note may be modified or amended only by an instrument in writing signed by duly authorized representatives of the Company and OPIC. 9. Governing Law. This Note shall be construed and enforced in accordance with the law of the State of New York without regard to its conflict of laws provisions. IN WITNESS WHEREOF, the Company acting by its duly authorized representative has caused this Note to be executed and delivered on the date first above written. ALLIED CAPITAL CORPORATION By: ---------------------------- Its: --------------------------- B-3 46 EXHIBIT C FORM OF CORPORATE AUTHORIZATION CERTIFICATE [COMPANY LETTERHEAD] ---------------------------------- OFFICER'S CERTIFICATE PURSUANT TO SECTION 4.01 ---------------------------------- I, ________________, [_______________], corporate Secretary of Allied Capital Corporation, company organized and existing under the laws of the State of Maryland (the "Company"), DO HEREBY CERTIFY that: 1. Attached hereto as Exhibit A is a true and complete copy of the Charter Documents of the Company, as amended to date, which are in full force and effect as of the date hereof. 2. Attached hereto as Exhibit B are true and complete copies of resolutions duly adopted by the Board of Directors of the Company [and of all documents evidencing any other necessary corporate or shareholder action taken by the Company] to authorize the execution, delivery and performance of the Loan Agreement between the Company and Overseas Private Investment Corporation ("OPIC"), dated as of April 10, 1995 (the "Loan Agreement") (capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Loan Agreement) and the Note(s), and such resolutions are in full force and effect without amendment as of the date hereof. 47 3. The following named individuals whose specimen signatures and titles are set forth opposite their names are authorized to execute and deliver on behalf of the Company the Loan Agreement, the Notes, and all other instruments and notices contemplated in the Loan Agreement: ------------------------------ ----------------------------------- --------------------------------------- Name Title Specimen Signature ------------------------------ ----------------------------------- --------------------------------------- Name Title Specimen Signature ------------------------------ ----------------------------------- --------------------------------------- Name Title Specimen Signature
WITNESS my hand this day of , 1995. --- ------ -------------------------------------- [Name] Corporate Secretary I, [_____________], the [President] [Chairperson and Chief Executive Officer] of the Company, DO HEREBY CERTIFY that [Name of Corporate Secretary] is, and at all times since [_______________], 199 [__] has been, duly elected and qualified as Corporate Secretary of the Company, and that the signature of such Corporate Secretary set forth above is true and genuine. WITNESS my hand this [_______] day of _______, 1995. -------------------------------------- [Name] [President] [Chairperson and Chief Executive Officer] C-2 48 EXHIBIT D FORM OF CLOSING CERTIFICATE [COMPANY LETTERHEAD] ----------------------------------- OFFICER'S CERTIFICATE PURSUANT TO SECTION 5.03 ----------------------------------- I, [______________], the [President] [Chairperson and Chief Executive Officer] of Allied Capital Corporation (the "Company"), a company organized and existing under the laws of the State of Maryland, DO HEREBY CERTIFY that: A. I am familiar with the terms of the Loan Agreement between the Company and overseas Private Investment Corporation ("OPIC"), dated as of April 10, 1995 (the "Loan Agreement") (capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Loan Agreement); B. I have read the covenants, representations, warranties and agreements of the Company contained in the Loan Agreement and have been represented by counsel in connection with the preparation, execution and delivery of the Loan Agreement; C. I have made or caused to be made such examination or investigation as is necessary to enable me to express an informed opinion as to the matters set forth below; and pursuant to Section 5.03 of the Loan Agreement DO HEREBY CERTIFY that, except as set forth on the Exceptions Schedule attached hereto: 1. The representations and warranties set forth in Article III of the Loan Agreement are true and correct in all material respects on the date hereof as if made on the date hereof, and no Event of Default, and no event or condition which with lapse of time or the giving of notice, or both, would constitute an Event of Default, exists on the date hereof; 2. As of the date hereof, no circumstance exists, or change of law or regulation of any governmental authority has 49 occurred, that would have a Material Adverse Effect. 3. Attached hereto as Exhibit A is a schedule setting forth the purposes to which the present Disbursement will be applied, for which the proceeds of this Disbursement are presently needed. WITNESS my hand this [_________] day of [______________], 199[__]. ---------------------------------------- [Name] Chairperson and Chief Executive Officer D-2 50 United States of America ) ) ss: District of Columbia ) I, ____________________________________, a notary public in and for the District of Columbia, DO HEREBY CERTIFY that [Name], [Title] of Allied Capital Corporation (the "Company"), personally appeared before me in said District, personally known to me and known by me to be the person who executed on behalf of the Company the Closing Certificate annexed hereto, who acknowledged the same to be [his/her] own free act and deed and the free act and deed of the Company, and that (he/she] had the necessary authority to do so. Given under my hand and [notarial] seal this [_________] day of [________________], 199[__]. - --------------------------------------------------- - --------------------------------------------------- D-3 51 EXHIBIT E FORM OF LEGAL OPINION [On Letterhead] ____________ __, 1995 Overseas Private Investment Corporation 1100 New York Avenue, N.W. Washington, D.C. 20527 Ladies and Gentlemen: I have acted as counsel to Allied Capital Corporation, a corporation organized and existing under the laws of the State of Maryland (the "Company") and in connection with the negotiation, execution and delivery by the Company of the Loan Agreement dated as of April 10, 1995 (the "Loan Agreement") between the Company and Overseas Private Investment Corporation ("OPIC") and the execution and delivery by the Company of certain other instruments related thereto. This opinion is submitted to OPIC pursuant to Section 4.02 of the Loan Agreement. All capitalized terms used herein and not otherwise defined shall have their respective meanings set forth in the Loan Agreement. In connection herewith, I have examined originals or copies certified or otherwise identified to my satisfaction of (i) the Loan Agreement, dated as of April 10, 1995 and (ii) the form of Note. I have also examined originals, or copies certified or otherwise identified to my satisfaction, of the Articles of Incorporation and By-laws of the Company, board resolutions, other corporate and official records, agreements, certificates, approvals and such other documents relating to the Company as I have deemed necessary or appropriate. I have also made such other investigations, and have reviewed such matters of law, as I have considered relevant to the opinions expressed herein. The opinions hereinafter expressed are subject to the following qualifications, whether or not such opinions refer to such qualifications: (a) the enforceability of the Loan Agreement and each of the related documents specified therein may be limited by the effect of applicable federal or state bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws, statutes or rules of general application relating to, or affecting, the enforcement of creditor's rights; 52 (b) the enforceability of the Loan Agreement and each of the related documents specified therein is subject to such principles of equity as a court having jurisdiction may impose by the exercise of judicial discretion, including without limitation, the effect of rules of law governing judicial discretion, including without limitation, the effect of rules of law governing specific performance, injunctive relief and other equity remedies (regardless of whether such enforceability is considered in a proceeding in equity or at law); (c) I have assumed the legal capacity, power and due authorization of any party or parties (other than the Company) executing and delivering any document referred to herein; and (d) I have assumed and relied upon the truth and completeness, as to matters of fact, of the certificates of government officials and of the certificates, representations, warranties, covenants and agreements of the Company given pursuant to or in connection with the Loan Agreement and the documents specified therein. I have not consulted with legal counsel in any other jurisdiction, and I do not, except as expressly set forth herein, opine as to any matter relative to any jurisdiction other than the District of Columbia, applicable Federal laws and the corporations law of the State of Maryland. I am not aware of any material differences between the applicable laws of the District of Columbia and the State of New York, and, in giving the opinions set forth herein, I have, with your permission, assumed that there are no material differences between the applicable laws of the District of Columbia and the State of New York. Subject to the foregoing, I am of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland. 2. The Company's authorized capitalization consists of 10,000,000 shares of common stock, of which approximately 6,152,703 shares are issued and outstanding as of March 30, 1995. All outstanding shares of common stock of the Company have been duly authorized and validly issued and are fully paid and Nonassessable. 3. The Company is duly authorized to do business and is in good standing in each jurisdiction in which its business makes such authorization required (or for which the failure to be so authorized or qualified would have a Material Adverse Effect), has the corporate power and authority to own and operate its properties, to carry on its business and to establish and E-2 53 implement the Fund and to execute, deliver and perform its obligations under the Loan Agreement and the Notes. 4. The Company's execution, delivery and performance of the Loan Agreement, the Notes and each of the other Financing Documents to which it is or will be a party (i) have been duly authorized by all necessary corporate action; (ii) will not violate any applicable regulation or ruling of any competent governmental authority; and (iii) will not breach, or result in the imposition of any encumbrance upon any of its assets (except as permitted by Section 7.01 of the Loan Agreement) under any agreement or other requirement to which it or any of its properties may be bound or affected or any applicable provision of its Articles of Incorporation or By-laws; and all third party consents required therefor have been obtained and are in full force and effect. 5. The Loan Agreement has been duly executed and delivered by the Company, and constitutes, and each Note when executed and delivered in accordance with the Loan Agreement will constitute, the legal, valid and binding obligation of the Company, enforceable in accordance with its respective terms except as its enforceability may be limited by bankruptcy, insolvency, reorganization, similar laws affecting the enforcement of creditors' rights generally or general principles of equity. 6. Except for Liens permitted by Section 7.01 of the Loan agreement, each of the Company and its Consolidated Subsidiaries has good title to its property free and clear off all Liens, and the Company's obligations under the Loan Agreement rank, and its obligations under the Notes will rank, at least pari passu with all its other Indebtedness. For purposes of this paragraph, the term "Indebtedness" means any amount payable pursuant to any agreement or instrument involving or evidencing money borrowed or received, the advance of credit, a conditional sale or a transfer with recourse or with an obligation to repurchase, or pursuant to a lease with substantially the same economic effect as any such agreement or instrument, to which the Company is a party as debtor, borrower or guaranty. 7. No registration, authorization, exemption, consent, approval or order of or with any governmental authority or any governmental subdivision thereof is required: (a) to enable the execution, delivery and performance by the Company of the Loan Agreement or the Notes; or (b) to permit OPIC to exercise any right, privilege or remedy afforded under (i) the Loan Agreement or the Notes or (ii) any applicable law (including acceleration of the maturity of the Loan), and to enforce each of its rights, privileges and remedies E-3 54 in any court or other tribunal of competent jurisdiction in the District of Columbia. 8. All tax returns and reports of the Company and its Consolidated Subsidiaries required by law to be filed in the United States of America and each governmental subdivision thereof have been duly filed, and all taxes, assessments, fees and other governmental charges due in respect of the Company and its Consolidated Subsidiaries or any assets, income or franchise of the Company and its Consolidated Subsidiaries have been duly paid, except for amounts contested in good faith by appropriate proceedings diligently pursued and for which adequate reserves have been established. 9. Neither the Company nor, to my best knowledge after due inquiry, any other party, is in breach of any contractual provision that would have a material adverse effect upon the Company's ability to perform its obligations under the Loan Agreement or the Notes or to carry on its business and to establish and implement the Fund. 10. No actions, suits, proceedings or investigations are pending or are threatened by or before any domestic or foreign court or governmental authority against the Company or any of its properties or rights that, if adversely determined, would be likely to result in any material liability or to have a material adverse effect the ability of the Company to perform its obligations under any of the Financing Documents, except as to matters previously disclosed in writing to OPIC. 11. The Company has the power to submit, and pursuant to the Loan Agreement has legally, validly, effectively and irrevocably submitted, to the jurisdiction of the courts of the United States of America in the District of Columbia in respect of any proceeding to enforce the Loan Agreement or any Note. The opinions expressed herein are given, and relate to acts and circumstances existing, as of the date hereof. I assume no obligation to update or supplement these opinions to reflect any facts or circumstances which may hereafter come to my attention or any changes in laws which hereafter occur. The opinions expressed herein are not intended to be relied upon by any individual or entity other than OPIC. Very truly yours, Thomas R. Salley E-4 55 EXHIBIT F GUIDELINES FOR SCREENING DOWNSTREAM INVESTMENTS (DECEMBER 1993) Presented below are guidelines that provide a mechanism for the application to downstream investments of OPIC's U.S. and environmental effects standards as well as the worker rights and insurance of exports undertakings required by the Jobs Through Exports Act of 1992. THE GUIDELINES ARE DIVIDED INTO TWO PARTS-- THOSE APPLICABLE TO "ONE-TIME INVESTMENT PROJECTS",(3) AND THOSE APPLICABLE TO "REVOLVING LOAN PROJECTS." (4) I. Guidelines for One-time Investment Projects. In general, OPIC SCREENING OF DOWNSTREAM INVESTMENTS (AS DEFINED BELOW) WILL BE BASED ON REVIEW OF THE OPIC EXPEDITED SCREENING QUESTIONNAIRE, A COPY OF WHICH IS ATTACHED AS EXHIBIT A HERETO (THE."QUESTIONNAIRE"). The Questionnaire is to be completed by the appropriate investment, project manager well in advance of the proposed investment date. OPIC may amend the Questionnaire from time to time as circumstances warrant. A. Small-Scale Downstream Investment FOR SMALL-SCALE DOWNSTREAM INVESTMENTS (AS DEFINED BELOW), OPIC WILL MAKE EVERY EFFORT TO TRANSMIT ITS SCREENING DECISION WITHIN 10 WORKING DAYS OF RECEIPT OF A COMPLETED QUESTIONNAIRE, PROVIDED THAT THE INVESTMENTS ARE NOT IN ANY OF THE SECTORS LISTED IN APPENDIX I, II OR III. Since investments in sectors outside those listed in Appendix I, II or III are unlikely to have material adverse impacts, investment project managers can expect an expeditious positive response from OPIC for most such investments. (Investment project managers should be aware that even downstream investments falling within the sectors listed in Appendix I, II or III may well be permitted by OPIC, but only after a full review of the proposed investment in accordance with OPIC's existing procedures for all OPIC-supported projects.) For purposes of these guidelines, A "SMALL-SCALE DOWNSTREAM INVESTMENT" IS ONE THAT, WHEN COMBINED WITH ALL OTHER OUTSTANDING INVESTMENTS MADE BY THE - -------------------- (3) "One-time investment projects" are investment projects the capital of which generally may be deployed only once. (4) "Revolving loan projects" are investment projects, such as trade capital funds, the capital of which may be redeployed continually as downstream investments are liquidated and (that generally make investments only in the form of short term loans. 56 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 SAME INVESTMENT PROJECT IN THE SAME DOWNSTREAM PROJECT COMPANY, DOES NOT EXCEED THE LESSER OF: (i) $2.5 MILLION, OR (ii) 10 PERCENT OF THE INVESTMENT PROJECT'S TOTAL CAPITAL.(5) The dollar amount calculated in accordance with the preceding sentence is referred to as the "Small-Scale Threshold." B. Intermediate-Scale Downstream Investments. OPIC SCREENING OF DOWNSTREAM INVESTMENTS IN EXCESS OF THE SMALL-SCALE THRESHOLD, BUT NOT MORE THAN $5 MILLION (OR 10 PERCENT OF TOTAL PROJECT CAPITAL, WHICHEVER IS LESS), ALSO NORMALLY WILL BE COMPLETED WITHIN 10 WORKING DAYS OF RECEIPT OF A COMPLETED QUESTIONNAIRE, PROVIDED IN ADDITION THAT: 1. THE DOWNSTREAM INVESTMENT IS NOT IN A SECTOR LISTED IN APPENDIX I, II OR III HERETO; AND 2. NOT MORE THAN ONE (1) PERCENT OF THE DOWNSTREAM PROJECT COMPANY'S TOTAL PRODUCTION, REPRESENTING INCIDENTAL SALES, IS TO BE EXPORTED TO THE UNITED STATES; AND 3. THE DOWNSTREAM INVESTMENT PROJECT IS NOT IN THE AGRICULTURE, MANUFACTURING OR TOURISM SECTOR. For projects in these sectors, a favorable environmental assessment prepared by a qualified party approved by OPIC must be submitted before OPIC review can be completed. The investment project manager must also receive appropriate assurances that remedial measures recommended in the assessment, if any, will be taken. (Information regarding the preparation of environmental assessments may be obtained from OPIC.); and 4. THE DOWNSTREAM INVESTMENT REPRESENTS LESS THAN 25 PERCENT OF THE TOTAL EQUITY CAPITAL OF THE DOWNSTREAM PROJECT COMPANY. For investments that represent more than 25 percent of such capital, worker rights undertakings, to be prepared in consultation with OPIC, must be obtained from each - -------------------- (5) For one-time investment projects. such as the Finance Department's investment funds, total capital would be based on the project's total committed capital. For revolving loan projects, such as trade capital funds, total capital would he that outstanding (i.e., the outstanding sum of moneys invested in the investment project) from time to time during the life of the project, with appropriate relaxation of this standard during the start-up and wind-down phase of such investment projects. F-2 57 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 downstream project company before OPIC review can be completed. II. Guidelines for Revolving Loan Projects. Except for projects in the sectors listed in Appendix I, II or III, no OPIC screening will be required where the amount invested, when combined with the outstanding balance(s) of all other investments by an investment project in the same downstream project company, does not exceed the Small-Scale Threshold. III. OPIC Screening. DOWNSTREAM INVESTMENTS THAT DO NOT FALL WITHIN THE FOREGOING CATEGORIES MUST BE SCREENED BY OPIC IN ACCORDANCE WITH ITS CUSTOMARY SCREENING CRITERIA APPLICABLE TO OPIC-SUPPORTED INVESTMENTS. EVERY EFFORT WILL BE MADE TO SCREEN SUCH INVESTMENTS IN A TIMELY MANNER. INVESTMENT PROJECT MANAGERS SHOULD BE AWARE THAT PROPOSED DOWNSTREAM INVESTMENTS IN SECTORS LISTED IN APPENDIX I, II OR III MAY BE APPROVED BY OPIC, BUT ONLY AFTER PRIOR SCREENING. In addition to the expedited screening procedure applicable to Small-Scale and Intermediate-Scale Downstream Investments, as described above, other projects in certain sectors that are unlikely to cause adverse effects are likely to be reviewed more quickly than those in other sectors. Attached hereto as Appendix IV is a list of sectors for which OPIC considers the possibility of adverse effects on the U.S. economy to be remote; Appendix V hereto lists sectors in which downstream investments are unlikely to cause environmental harm. For downstream investments in environmental sectors that normally will be screened by OPIC for environmental effects, investment projects are encouraged, as is the case under current OPIC practice, to submit environmental assessments prepared by responsible parties in order to expedite to the maximum degree possible OPIC's final decision regarding the potential environmental hazards of a downstream investment and the remedial measures required. F-3 58 Obtaining Clearances For OPIC-supported Investment Projects 12/14/93 Directive 94-16 EXHIBIT A: OPIC Expedited Screening Questionnaire-Downstream Investments (OPIC Form 168) is included here by reference. APPENDIX I DOWNSTREAM INVESTMENTS PROHIBITED ON U.S. EFFECTS GROUNDS ABSENT OPIC PRIOR APPROVAL - Copper and copper products - Motor vehicles, parts and supplies - Iron, steel and products thereof - Leather - Footwear - Textiles, apparel and apparel accessories - Electronics - Agricultural products F-4 59 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 APPENDIX II DOWNSTREAM INVESTMENTS PROHIBITED ON ENVIRONMENTAL GROUNDS ABSENT OPIC PRIOR APPROVAL - Logging - Mining - Chemical production - Pulp and paper production - Manufacture, disposal, import or export of products classified as toxic or hazardous by the U.S. Environmental Protection Agency* - Manufacture of ozone depleting chemicals* - Harvesting of rare, endangered or threatened species of plants or animals* - ------------- * Downstream investments in these sectors are highly unlikely to be approved by OPIC. F-5 60 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 APPENDIX III DOWNSTREAM INVESTMENTS PROHIBITED BY OPIC ON POLICY GROUNDS ABSENT OPIC PRIOR APPROVAL - Export processing zones or investments located therein - Projects established as a result or in contemplation of reducing or terminating U.S. operations - military production or sales - Pharmaceuticals and medical equipment - Tobacco - Alcoholic beverages - Gambling - Real estate development, including housing - Communications (publishing and mass media) - Companies in which host governments have majority ownership or effective management control - Companies in which the investment project has majority ownership or effective management control - Companies engaged in monopolistic practices - Projects located in or adjacent to national parks or similar protected areas F-6 61 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 APPENDIX IV DOWNSTREAM INVESTMENT SECTORS UNLIKELY TO CAUSE HARM TO THE U.S. ECONOMY - Financial services - Power production or transmission for host country or regional markets - Telecommunications services to serve predominantly host country or regional markets - Tourism services (e.g., hotels, restaurants, resorts) - Other services provided in host country or regional markets that cannot be supplied from the United States - Mining of minerals or ores not mined in the United States - Oil and gas exploration - Host country sales, service, distribution or transportation -- no production involved - Agricultural products not grown or raised in the United States F-7 62 Obtaining Clearances For OPIC-Supported Investment Projects 12/14/93 Directive 94-16 APPENDIX V DOWNSTREAM INVESTMENT SECTORS UNLIKELY TO CAUSE ENVIRONMENTAL HARM - Financial services - Hotel modernization (without significant physical expansion) - Restaurants - Retail establishments - Office buildings - Warehouses - Cellular telephone networks - Publishing - Garment assembly - Transportation services - Food packaging F-8 63 EXHIBIT A Fund:_______________ Company:_______________ Country:_______________ OPIC-168--December 8, 1993 OPIC Expedited Screening Questionnaire - Downstream Investments - D R A F T A. INVESTMENT SIZE 1. What is the Fund's total capital(1)? ________ 2. Please indicate the size of the downstream investment(2): _______ 3. What percentage of the downstream company's equity will the investment(2) represent? __________ B. U.S., ENVIRONMENTAL, AND POLICY CONSIDERATIONS 1. Please give a brief description of the downstream investment. The description should clearly explain the sector involved in the investment: 2. Does the company involved in the downstream investment export more than one percent of its production to the U.S.? / / No / / Yes 3. Does the downstream investment fall into any of the following sectors or categories? (Please answer for each group.) Group A / / Agricultural Products / / Leather / / Copper and copper products / / Motor vehicles, parts, supplies / / Electronics / / Textiles, apparel, and apparel accessories / / Footwear / / None of the above / / Iron, steel, and products thereof Group B / / Agricultural products not grown or / / Power production and transmission raised in the U.S. (host country/regional markets) / / Financial Services / / Telecommunications services (host / / Host country sales, service, country/regional markets) distribution, transportation (no / / Tourism services (e.g., hotels, production involved) restaurants, resorts) / / Mining of minerals or ores not / / Other local services that cannot mined in the U.S. be supplied from the U.S.:_______ / / Oil and gas exploration (no _________________________________ production involved) / / None of the above
- ------------ (1) Based on the Fund's total committed capital. (2) Including all other investments made by the Fund in the same downstream company. F-9 64 Page 2 Group C / / Chemical Production / / Manufacture, disposal, import, or export / / Harvesting of rare, endangered or of products classified as toxic or threatened species of plants or animals hazardous by the U.S. Environmental / / Logging Protection Agency / / Manufacture of ozone depleting chemicals / / Mining / / Pulp and paper production / / None of the above Group D / / Cellular telephone networks / / Publishing / / Financial Services / / Restaurants / / Food packaging / / Retail establishments / / Garment assembly / / Transportation Services / / Hotel modernization (without significant / / Warehouses physical expansion) / / None of the above / / Office buildings Group E / / Alcoholic Beverages / / Tobacco / / Media Communications / / Companies engaged in monopolistic practices / / Export processing zone or investment / / Companies in which the host government has therein majority ownership or effective management / / Gambling control / / Military production or sales / / Companies in which the Fund has or / / Pharmaceuticals or medical equipment will acquire majority ownership or / / Projects located in or adjacent to effective management control national parks or similar protected areas / / Established as a result or in contemplation / / Real estate development, including housing of reducing or terminating U.S. operations / / None of the above
I hereby affirm that the information provided herein is accurate and complete. Signature: Date: ---------------------------------- ------------------------ F-10 65 EXHIBIT G LIST OF COUNTRIES IN WHICH OPIC-RELATED INVESTMENTS MAY BE MADE Algeria Angola Anguilla Antigua & Barbuda Argentina Armenia Aruba Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belize Benin Bolivia Bosnia & Herzegovena Botswana Brazil Bulgaria Buridna Faso Burundi Cameroon Cape Verde Central African Republic Chad Chile Colombia Congo Cook Islands Costa Rica Cote d'lvoire Croatia Cyprus Czech Republic Djibouti Dominica Dominican Republic Ecuador Egypt El Salvador Equatorial Guinea Eritrea Estonia Ethiopia Fiji French Guiana Gabon Georgia Germany (eastern) Ghana Greece Grenada Guatemala Guinea Guinea-Bissau Guyana Haiti Honduras Hungary India Indonesia Ireland Israel Jamaica Jordan Kazakhstan Kenya Kiribati Kuwait Kyrgyzstan Laos Latvia Lebanon Lesotino Lithuania Madagascar Malawi Malaysia Mali Malta Marshall Islands Mauritius Micronesia, Federated States of Moldova Mongolia Morocco Mozambique Namibia Nepal Netherlands Antilles Nicaragua Niger Northern Ireland Oman Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Qatar Romania Russia Rwanda Saint Kitts & Nevis Saint Lucia Saint Vincent & the Grenadines Sao Tome & Principe Saudi Arabia Senegal Sierra Leone Singapore Slovakia Slovenia Somalia South Africa Sri Lanka Swaziland Taiwan Tajikistan Tanzania Thailand Togo Tonga Trindad & Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates Uruguay Uzbekistan Venezuela Western Samoa West Bank & Gaza Yemen Zaire Zambia Zimbabwe EX-99.F.8 8 UNSECURED LINE OF CREDIT AGREEMENT 1 EXHIBIT F.8 UNSECURED LINE OF CREDIT AGREEMENT THIS UNSECURED LINE OF CREDIT AGREEMENT, dated as of the 18th day of December 1995, and effective as of September 30, 1995, is made by and between ALLIED CAPITAL CORPORATION, a Maryland corporation ("Borrower") and THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., a national banking association (the "Bank"). The Bank has agreed to extend credit to the Borrower and the Borrower have agreed to obtain credit from the Bank on the terms and conditions set forth in this Agreement. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Bank and the Borrower agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings assigned to them below, which meanings shall be equally applicable to the singular and plural forms of the terms defined. "ACFC" means ALLIED CAPITAL FINANCIAL CORPORATION, a Maryland corporation. "AFFILIATE" means with respect to any specified Person, any other Person which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a Person, whether through ownership of common stock, by contract or otherwise. "AGREEMENT" means this Unsecured Line of Credit Agreement, as the same may be amended, modified or supplemented from time to time. "AIC" means ALLIED INVESTMENT CORPORATION, a Maryland corporation. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which commercial banks are authorized or required to close under the laws of the District of Columbia. "CAPITAL LEASE" means all leases which have been or should be capitalized on the books of the lessee in accordance with GAAP. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations and published interpretations thereof. "CONSOLIDATED" means, with reference to any term defined herein, that term as applied to Borrower and its Subsidiaries, consolidated in accordance with GAAP. "DEFAULT" means any event which with the giving of notice, the lapse of time, or both, would constitute an Event of Default. 2 "EVENT OF DEFAULT" means any of the events specified as an "Event of Default" under this Agreement, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "GAAP" means generally accepted accounting principles consistently applied. "INDEBTEDNESS" means (1) indebtedness or liability for borrowed money; (2) obligations evidenced by bonds, debentures, notes, or other similar instruments; (3) obligations for the deferred purchase price of property or services (including trade obligations); (4) obligations as lessee under Capital Leases; (5) current liabilities in respect of unfunded vested benefits under Plans covered by ERISA; (6) obligations under letters of credit; (7) obligations under acceptance facilities; (8) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss; and (9) obligations secured by any Liens, whether or not the obligations have been assumed. "INVESTMENTS" means all debt or equity securities or share, participation, or other interest in any Person, which is, or is of a type, dealt in or traded on financial markets, or which is recognized in any area in which it is issued or dealt in as a medium for investment. "LETTER OF CREDIT" means a letter of credit issued by Bank on behalf of Borrower as described below in Section 2.05. "LIEN" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). "LOAN DOCUMENTS" means this Agreement, the Note, and any other document now or hereafter executed or delivered in connection with the Obligations in evidence thereof or as security therefor, including, without limitation, any life insurance assignment, pledge agreement, security agreement, deed of trust, mortgage, promissory note or subordination agreement "LOANS" means the loans to be made to the Borrower by the Bank pursuant to this Agreement and the Letters of Credit. "MAXIMUM AMOUNT" means (i) with respect to all Loans at any time outstanding, Ten Million Dollars and no/100 ($10,000,000.00), and (ii) with respect to all Letters of Credit at any time outstanding, One Million, Five Hundred Thousand Dollars and no/100 ($1,500,000.00), each as may be reduced from time to time pursuant to Section 2.01(d) of this Agreement. "NET INCOME" means income after deduction of all expenses, taxes and other proper charges, determined in accordance with GAAP and shall exclude all unrealized appreciation or depreciation on Investments. 2 3 "NOTE" means a promissory note in the original principal amount of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of Borrower to pay the principal amount of its borrowings hereunder, together with interest thereon, as the same may be amended, modified or supplemented from time to time. The term "Note" also shall include any promissory note executed and delivered by Borrower in connection with an extension of the Termination Date, an increase in the Maximum Amount or any other amendment to this Agreement. "OBLIGATIONS" means the Loans, the Note, all Indebtedness and obligations of Borrower under this Agreement and the other Loan Documents, as well as all other Indebtedness of Borrower to the Bank, now existing or hereafter arising, of every kind and description, whether or not evidenced by notes or other instruments, and whether such Indebtedness is direct or indirect, fixed or contingent, liquidated or unliquidated, due or to become due, secured or unsecured, joint, several or joint and several, related or unrelated to the Loans, similar or dissimilar to the Indebtedness arising out of this Agreement, of the same or a different class of Indebtedness as the Indebtedness arising out of this Agreement, including, without limitation, any overdrafts in any deposit account maintained by Borrower with the Bank, all obligations of Borrower with respect to Letters of Credit, any Indebtedness of Borrower that is assigned to the Bank and any Indebtedness of such Borrower to any assignee of this Agreement. "PERSON" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "SUBSIDIARY" means a corporation of which shares of stock having ordinary voting power to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both, by any Person. "TANGIBLE NET WORTH" means, with respect to any Person, tangible net worth as computed in accordance with GAAP and reported in the financial statement of such Person delivered to Bank. "TERMINATION DATE" means September 30,1998, and any extension or extensions thereof granted by the Bank in its sole discretion. "TOTAL INTEREST EXPENSE" means, for any period with respect to any Person, the aggregate amount of interest required to be paid during such period on all Indebtedness of such Person outstanding during all or any part of such period, including any payments consisting of fees in connection with such Indebtedness, but excluding any interest the payment of which is deferred or that is to be added to the principal amount of the Indebtedness to which such interest relates, rather than paid at regular intervals. "TOTAL LIABILITIES" means, with respect to any Person, the aggregate amount of all liabilities of such Person (including tax and other proper accruals), computed in accordance with GAAP. SECTION 1.02. ACCOUNTING TERMS. All accounting terms used herein which are not otherwise expressly defined in this Agreement shall have the meanings respectively given to them 3 4 in accordance with GAAP in effect on the date of this Agreement. Except as otherwise provided herein, all financial computations made pursuant to this Agreement shall be made in accordance with GAAP and all balance sheets and other financial statements shall be prepared in accordance with GAAP. Except as otherwise provided herein, whenever reference is made in any provision of this Agreement to a balance sheet or other financial statement or financial computation with respect to Borrower, such terms shall mean a consolidated balance sheet or other financial statement or financial computation, as the case may be. ARTICLE 2 TERMS OF THE LOANS SECTION 2.01. AMOUNT AND BORROWING PROCEDURE. (a) Subject to the terms and conditions of this Agreement, Borrower may, from time to time, until the Termination Date request Loans from the Bank as provided herein in an aggregate principal amount under the Note not to exceed at any one time outstanding the Maximum Amount and the Bank will make such Loans on the terms provided herein and in the Note. Up to the aggregate Maximum Amount, Borrower may borrow, repay without penalty and re-borrow hereunder from the date of this Agreement until the Termination Date. (b) The unpaid principal balance of the Loans shall bear interest as provided in the Note. (c) The obligations of the Borrower to repay the Loans, together with interest thereon, shall be evidenced by the Note. The unpaid principal balance of the Note shall be payable on the Termination Date together with all interest accrued and unpaid. (d) The Borrower may terminate or reduce the credit facility provided for in Section 2.01(a) of this Agreement in whole or in part by giving at least fifteen (15) Business Days' prior written notice of such termination or reduction to the Bank. The termination or reduction of the credit facility provided for in Section 2.01(a) of this Agreement shall not affect the rights of the Bank with respect to any Obligations arising prior or subsequent to such termination or reduction and the provisions of this Agreement shall remain in full force and effect until the Obligations have been fully and completely paid and discharged. (e) The Borrower and the Bank from time to time may agree to extend the Termination Date or increase the amount of credit to be provided under this Agreement, or both. During any such periods of extension, the remaining terms and conditions of this Agreement shall remain in full force and effect, and the Borrower shall execute and deliver any amendments or modifications to the Loan Documents as the Bank may require in connection with any such extension or increase. Nothing in this Section 2.01(e) shall obligate the Bank to grant such extensions or to increase the amount of credit provided under this Agreement. SECTION 2.02. FEES. The Borrower agrees to pay to the Bank, in consideration of its commitment to make the Loans, a commitment fee of one eighth of one percent (0.125%) per annum of the Maximum Amount, payable on the date of this Agreement and on each anniversary thereof until the Termination Date. In addition, the Borrower agrees to pay to the Bank, in consideration of its agreement to make the Loans, a facility fee of one eighth of one percent 4 5 (0.125%) per annum of the average daily amount of the difference between the Maximum Amount and the aggregate unpaid principal amount of the Loans outstanding on each day during the preceding quarter. The fee shall commence to accrue as of the date of this Agreement and shall cease to accrue on the Termination Date and shall be paid quarterly in arrears on last Business Day of March, June, September or December and on the Termination Date, commencing with the first such date after the date of this Agreement. If on the Termination Date Bank has received an amount as a facility fee greater than that accrued under this Section 2.02, then such amount shall be applied to the amount due under the Note or if no amount is then due the Bank shall pay such amount to the Borrower. SECTION 2.03. PAYMENTS AND COMPUTATIONS. All payments due under this Agreement (including any payment or prepayment of principal, interest, fees and other charges) or with respect to the Note or the Loans shall be made in lawful money of the United States of America, in immediately available funds, to the Bank at its office at 808 17th Street, N.W., Washington, D.C. 20006, or at such other place as the Bank may designate, and shall be applied first to accrued fees, next to accrued late charges, next to accrued interest and then to principal. If any payment of principal, interest or fees is not due on a Business Day, then the due date will be extended to the next succeeding full Business Day and interest and fees will be payable with respect to the extension. Upon the occurrence of an Event of Default and during the continuation of such Event of Default, interest shall accrue on the Loans at a per annum rate as provided in the Note for such event. SECTION 2.04. LOAN ADVANCE PROCEDURES. Borrower may at any time or from time to time request a Loan provided that after such amount is loaned the aggregate amount of all Loans shall not exceed the Maximum Amount. Such request shall state the date an which the Loan is to be made which shall be not less than one (1) Business Day after the receipt of such request by Bank. SECTION 2.05. LETTER OF CREDIT FACILITY. Subject to the terms of this Agreement, Bank will issue standby letters of credit letters of credit (each a "Letter of Credit") on behalf of Borrower. At no time, however, shall the total face amount of all Letters of Credit outstanding, less any partial draws paid under the Letters of Credit exceed the Maximum Amount. Upon Bank's request, Borrower promptly shall pay to Bank issuance fees and such other fees, commissions, costs, and any out-of-pocket expenses charged or incurred by Bank with respect to any Letter of Credit. The commitment by Bank to issue Letters of Credit shall, unless earlier terminated in accordance with the terms of this Agreement, automatically terminate on the Termination Date and no Letter of Credit shall expire on a date which is after the Termination Date. Each Letter of Credit shall be in form and substance satisfactory to Bank and in favor of beneficiaries satisfactory to Bank, provided that Bank may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where Bank, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation, or order from issuing such Letter of Credit. Prior to the issuance of each Letter of Credit, and in all events prior to any daily cutoff time Bank may have established for purposes thereof, Borrower shall deliver to Bank a duly executed form of Bank's standard form of letter of credit reimbursement agreement and application for issuance of letter of credit with proper insertions. 5 6 SECTION 2.06. USE OF PROCEEDS. The proceeds of the Loans hereunder shall be used by the Borrower for general corporate purposes and the obtaining of Letters of Credit. The Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or to extend credit to any Person for the purpose of purchasing or carrying any such margin stock, or for any purpose which violates, or is inconsistent with, Regulation X of such Board of Governors. ARTICLE 3 CONDITIONS PRECEDENT SECTION 3.01. CONDITION PRECEDENT TO INITIAL LOAN. The obligation of the Bank to make the initial Loan to Borrower is subject to the condition precedent that the Bank shall have received on or before the day of such Loan (except as otherwise noted below) each of the following, in form and substance satisfactory to the Bank and its counsel: (1) NOTE. The Note duly executed by the Borrower; (2) EVIDENCE OF ALL CORPORATE ACTION BY THE BORROWER. Certified (as of the date of such action) copies of all corporate action taken by the Borrower, including resolutions of its Board of Directors, authorizing or ratifying the execution, delivery, and performance of the Loan Documents to which it is a party and each other document to be delivered pursuant to this Agreement (to be delivered no later than December 15, 1995); (3) INCUMBENCY AND SIGNATURE CERTIFICATE OF THE BORROWER. A certificate (dated as of the date of this Agreement) of the Secretary of each Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign the Loan Documents to which it is a party and the other documents to be delivered by the Borrower under this Agreement; (4) OPINION OF COUNSEL FOR THE BORROWER. A favorable opinion of counsel for the Borrower as to such matters as the Bank may reasonably request; SECTION 3.02. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Bank to make each Loan (including the initial Loan) shall be subject to the further conditions precedent that on the date of such Loan: (1) The following statements shall be true and the Borrower's request for a Loan shall be deemed a statement by such Borrower dated the date of such Loan, that: (a) The representations and warranties contained in Article IV of this Agreement are correct on and as of the date of such Loan as though made on and as of such date; and (b) No Default or Event of Default has occurred and is continuing, or would result from such Loan; and 6 7 (2) The Bank shall have received such other approvals, opinions, or documents as the Bank may reasonably request. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants that: SECTION 4.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Each of AIC and ACFC are wholly-owned Subsidiaries of Borrower. Borrower has no other Subsidiaries; AIC and ACFC have no Subsidiaries. Borrower (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of is incorporation; (b) has the corporate power and authority to own its assets and to transact the business in which it is now engaged or in which it is proposed to be engaged; and (c) is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required except in such instances which would not, in any one case or in the aggregate, materially and adversely affect the financial condition, operations, properties or business of the Borrower. SECTION 4.02. CORPORATE POWER AND AUTHORITY. The execution, delivery and performance by the Borrower of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of, or filing or registration with, any governmental agency or authority or the stockholders of such corporation; (b) contravene such corporation's charter or bylaws; (c) result in a breach of or constitute a default under any agreement or instrument to which such corporation is a party or by which it or its properties may be bound or affected; (d) result in, or require, the creation or imposition of any lien upon or with respect to any of the properties now owned or hereafter acquired by such corporation; or (e) cause such corporation to be in default under any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award applicable to such corporation. SECTION 4.03. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. SECTION 4.04. FINANCIAL STATEMENTS. The most recent financial statements of the Borrower which have been furnished to the Bank in connection with this Agreement are complete and correct and fairly present the financial condition of the Borrower as at the dates of such statements. Since the dates of such statements, there has been no material adverse change in the condition (financial or otherwise), business or operations of the Borrower. SECTION 4.05. LITIGATION. Except as set forth in the Borrower's most recent 10-Q and 10-K filed with the Securities and Exchange Commission, there is no pending or threatened action or proceeding against or affecting the Borrower, before any court, governmental agency or arbitrator, which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Borrower. 7 8 SECTION 4.06. OTHER AGREEMENTS. The Borrower is not a party to any Indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which has a material adverse effect on the business, properties, assets, operations, or conditions, financial or otherwise, of the Borrower, or the ability of the Borrower to carry out its obligations under the Loan Documents to which it is a party. The Borrower is not in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party. SECTION 4.07. NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. The Borrower has satisfied all judgments and is not in default with respect to any judgment, writ injunction, decree, rule, or regulation of any court, arbitrator, or federal, state, municipal, or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. SECTION 4.08. OWNERSHIP AND LIENS. The Borrower has title to, or valid leasehold interests in, all of its properties and assets, real and personal, including the properties and assets and leasehold interests reflected in the financial statements referred to in Section 4.04 (other than any properties or assets disposed of in the ordinary course of business), and none of the properties and assets owned by the Borrower and none of its leasehold interests is subject to any Lien, except such as may be permitted pursuant to Section 6.01 of this Agreement. SECTION 4.09. OPERATION OF BUSINESS. The Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct its respective businesses substantially as now conducted and as presently proposed to be conducted, and is not in violation of any valid rights of others with respect to any of the foregoing. SECTION 4.10. TAXES. The Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid all taxes, assessments, and governmental charges and levies thereon to be due, including interest and penalties. SECTION 4.11. ENVIRONMENT. The Borrower has not received notice of, nor knows of, or suspects facts which might constitute any violations of any federal, state, or local environmental, health, or safety laws, codes or ordinances, and any rules or regulations promulgated thereunder with respect to its businesses, operations, assets, equipment, property, leaseholds, or other facilities. ARTICLE 5 AFFIRMATIVE COVENANTS Borrower covenants and agrees that: SECTION 5.01. MAINTENANCE OF EXISTENCE. The Borrower will preserve and maintain its corporate existence and good standing in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is required, except if the failure to so qualify would have, in any one case or in the aggregate, a 8 9 material and adverse effect on the financial condition, operations, properties or business of the Borrower. SECTION 5.02. MAINTENANCE OF RECORDS. The Borrower will keep adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all financial transactions of the Borrower. The principal records and books of account, shall be kept at the chief executive office of the Borrower's investment adviser at 1666 K Street, N.W., Suite 901, Washington, D.C. 20006. The Borrower will not move such records and books of account or change such chief executive office or the name under which it does business without giving the Bank at least thirty (30) days' prior written notice. SECTION 5.03. MAINTENANCE OF PROPERTIES. The Borrower will maintain, keep, and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. SECTION 5.04. CONDUCT OF BUSINESS. The Borrower will continue to engage in an efficient and economical manner in a business of the same general type as conducted by it on the date of this Agreement. SECTION 5.05. COMPLIANCE WITH LAWS. The Borrower will comply in all respects with all applicable laws, rules, regulations and orders (including, without limitation, the Employee Retirement Income Security Act, as amended from time to time), such compliance to include, without limitation, paying, before the same become delinquent, all duly imposed taxes, assessments and governmental charges imposed upon it or upon its property. SECTION 5.06. MAINTENANCE OF INSURANCE. The Borrower will maintain insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated. SECTION 5.07. REPORTING REQUIREMENTS. The Borrower will furnish to the Bank: (a) Quarterly Financial Statements. As soon as available and, in any event, within forty-five (45) days after the end of each of the quarters of each fiscal year of the Borrower (i) unaudited financial statements consisting of consolidated statements of financial position of the Borrower, as of the end of such quarter and consolidated statements of operations and consolidated statements of changes in assets of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the previous fiscal year and all prepared in accordance with GAAP, and (ii) a certificate detailing a calculation of each of the ratios and amounts referred to in the financial covenants of the Borrower set forth in Sections 7.01 through 7.05 hereof, as may be applicable to such Borrower. Such financial statements and certificate shall be certified to be accurate by the chief financial officer of the Borrower (subject to year-end adjustments); (b) Annual Financial Statements. As soon as available and, in any event, within one hundred twenty (120) days after the end of each fiscal year of the Borrower (i) audited financial statements consisting of consolidated statements of financial position of the Borrower as of the 9 10 end of such fiscal year, consolidated statements of operations, changes in net assets, and cash flows of the Borrower for such fiscal year, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the prior fiscal year and all prepared in accordance with GAAP. The consolidated financial statements shall be accompanied by an opinion thereon acceptable to the Bank of an independent certified public accounting firm selected by the Borrower and acceptable to the Bank; (c) Management Letters. Promptly upon receipt thereof, copies of any reports submitted to the Borrower by independent certified public accountants in connection with audit of the financial statements of the Borrower made by such accountants; (d) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower, which, if determined adversely to the Borrower could have a material adverse effect on the financial condition, properties or operations of the Borrower; (e) Notice of Defaults and Events of Default. As soon as possible and, in any event, within 15 days after the occurrence of each Default and Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by the Borrower with respect thereto; (f) Proxy Statements, etc. Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports which the Borrower sends to its stockholders, and copies of all regular, periodic and special reports, and all material registration statements which the Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; (g) General Information. Such other information respecting the condition or operations, financial or otherwise, of the Borrower or any Subsidiary as the Bank may from time to time reasonably request. SECTION 5.08. ENVIRONMENT. The Borrower will be and remain in compliance with the provisions of all federal, state, and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations issued thereunder. SECTION 5.09. INVESTMENT ADVISER. Allied Capital Advisers, Inc. will remain the investment adviser for the Borrower. SECTION 5.10. CORPORATE RELATIONSHIP. Each of AIC and ACFC will remain wholly-owned subsidiaries of Borrower. SECTION 5.11. REFINANCING OF INDEBTEDNESS. With respect to any Indebtedness which matures prior to the Termination Date, Borrower will refinance with a new maturity no earlier than the Termination Date no less than seventy-five percent (75%) of such Indebtedness; provided, however, that the amount of such required refinancing shall be reduced by the amount, if any, of new equity raised by Borrower after the date hereof. 10 11 ARTICLE 6 NEGATIVE COVENANTS Borrower agrees that, without first obtaining the prior written consent of the Bank: SECTION 6.01. LIENS. The Borrower will not create, incur, assume or permit to exist any Lien upon or with respect to any of its properties or assets, now owned or hereafter acquired, except: (a) Liens in favor of the Bank; (b) Liens which are incidental to the conduct of the business of the Borrower, are not incurred in connection with the obtaining of credit and do not materially impair the value or use of assets of the Borrower; and (c) Liens in existence on the date of this Agreement and disclosed in writing to the Bank. SECTION 6.02. INDEBTEDNESS. The Borrower will not create, incur, assume or permit to exist Indebtedness, except (a) the Obligations; (b) Indebtedness in existence on the date of this Agreement and disclosed in writing to the Bank; (c) Indebtedness of the Borrower subordinated to the Obligations on terms satisfactory to the Bank; (d) Indebtedness of any Subsidiary to the Borrower or another Subsidiary; and (e) ordinary trade accounts payable. SECTION 6.03. MERGERS, ETC. The Borrower will not merge or consolidate with any Person and will not permit any subsidiary to merge with any person except that Borrower may merge with a Subsidiary and any Subsidiary may merge with another Subsidiary. SECTION 6.04. SALE AND LEASEBACK. The Borrower will not sell, transfer or otherwise dispose of any real or personal property to any Person and thereafter, in connection therewith, directly or indirectly, lease back the same or similar property. SECTION 6.05. SALE OF ASSETS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of any of its now owned or hereafter acquired assets except: (a) for assets disposed of in the ordinary course of business and (b) the sale or other disposition of assets no longer used or useful in the conduct of its business. SECTION 6.06. GUARANTIES, ETC. The Borrower will not assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable (including, but not limited to, any liability arising out of any agreement to purchase any obligation, stock, assets, goods or services, or to supply or advance any funds, assets, goods or services, or to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss) for obligations of any Person, or permit any such guaranties or liabilities to exist, except (i) in favor of the Bank, (ii) with respect to Indebtedness in existence on the date hereof and previously disclosed to the Bank in writing, (iii) guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, and (iv) as may be implemented in the ordinary course of Borrower's portfolio activities, provided, however, that any such matter described in this clause (iv): (a) shall be treated as a non-contingent liability for purposes of calculating the financial covenants described below, and (b) if the aggregate amount thereof exceeds $100,000, shall be itemized in a writing provided to the Bank along with the financial statements described above. SECTION 6.07. TRANSACTIONS WITH AFFILIATE. The Borrower will not enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the 11 12 rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be applicable in a comparable arm's-length transaction with a Person not an Affiliate (provided that the investment advisory agreement between Borrower and Allied Capital Advisers, Inc. shall not be deemed to violate this provision). ARTICLE 7 FINANCIAL COVENANTS So long as the Note shall remain unpaid or the Bank shall have any Commitment or outstanding Letter of Credit under this Agreement, the Borrower agrees that: SECTION 7.01. MAXIMUM LEVERAGE RATIO. Each of AIC and ACFC will maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not greater than 3.5 to 1. Borrower will maintain at all times a ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth of not greater than 3.0 to 1. SECTION 7.02. MINIMUM CONSOLIDATED TANGIBLE NET WORTH. Borrower will maintain at all times a Consolidated Tangible Net Worth of not less than Forty Million Dollars ($40,000,000). SECTION 7.03. CONSOLIDATED MINIMUM INTEREST COVERAGE. Borrower will maintain a ratio of (a) Consolidated Net Income plus Consolidated Total Interest Expense to (b) Consolidated Total Interest Expense of not less than 1.5 to 1 as of the end of each calendar quarter for the previous four quarters. SECTION 7.04. CONSOLIDATED MINIMUM PRINCIPAL COVERAGE. Borrower will maintain a ratio of Consolidated collections of the principal or cost-basis portion of its Investments to Consolidated Total Indebtedness of not less than .05 to 1 as of the end of each calendar quarter for the previous four quarters. SECTION 7.05. TOTAL OUTSTANDING LOANS. Borrower will not permit the total principal amount of Loans and Letters of Credit outstanding at any one time to exceed the sum of cash and cash equivalents plus 75% of non-cash tangible assets, minus Total Liabilities (including letters of credit). With respect to the above covenants, no effect shall be given to the contemplated credit facility from the Bank to Borrower consisting of a cash-secured line of credit available only on the last day of each calendar quarter and to be repaid promptly thereafter. ARTICLE 8 EVENTS OF DEFAULT SECTION 8.01. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: 12 13 (a) Failure of Borrower to pay any Obligation to the Bank, including, without limitation, the principal of or interest on the Note or any of the Loans, when the same shall become due and payable, and such failure shall continue for a period of five (5) days; or (b) Failure of Borrower to perform or observe any covenant set forth in this Agreement (except any such failure resulting in the occurrence of another Event of Default described in this section), or to perform or observe any other term, condition, covenant, warranty, agreement or other provision contained in this Agreement within thirty (30) days after receipt of notice from the Bank specifying such failure; or (c) Discovery that any representation or warranty by Borrower in this Agreement or any statement or representation made in any certificate, report or opinion delivered pursuant to this Agreement or in connection with any Loan under this Agreement was materially untrue in any material respect provided, however, the Bank shall take no action based on a default under this paragraph unless such Borrower shall have been provided a reasonable opportunity to render such misrepresentation or untruth immaterial; or (d) If, as a result of default, any other obligation of Borrower for the payment of any debt in excess of $500,000.00 becomes or is declared to be due and payable prior to the expressed maturity thereof, unless and to the extent that the declaration is being contested in good faith in a court of appropriate jurisdiction; or (e) Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, petitions or applies to any tribunal for any receiver or any trustee of Borrower or any substantial part of its property, or commences any proceeding relating to Borrower under any reorganization, arrangement, readjustments of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (f) If, within thirty (30) days after the filing of a bankruptcy petition or the commencement of any proceeding against Borrower seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, the proceeding shall not have been dismissed, or, if, within 30 days after the appointment, without the consent or acquiescence of Borrower, of any trustee, receiver or liquidator of Borrower or of all or any substantial part of the properties of such Borrower, the appointment shall not have been vacated; or (g) Any judgment against Borrower in excess of $500,000.00 or any attachment in excess of $500,000.00 against any property of Borrower that remains unpaid, undischarged, unbonded or undismissed for a period of thirty (30) days, unless and to the extent that the judgment or attachment is appealed in good faith in a court of higher jurisdiction and the appeal remains pending; or (h) The occurrence of an event of default (and the expiration of any applicable cure period) under any other Loan Document. SECTION 8.02. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, the following provisions shall be applicable: 13 14 (a) The Bank may, at its option, terminate its obligation to make Loans under this Agreement and declare all Obligations, whether incurred prior to, contemporaneous with or subsequent to the date of this Agreement, and whether represented in writing or otherwise, immediately due and payable and may exercise all of it rights and remedies against the Borrower. (b) The Bank shall have such set-off rights as are provided by applicable common law or statute. (c) EACH BORROWER EXPRESSLY WAIVES ITS RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. (d) The Bank may itself perform or comply, or otherwise cause performance or compliance, with the obligations of the Borrower contained in this Agreement. The reasonable expenses of the Bank incurred in connection with such performance or compliance shall be payable by the Borrower to the Bank on demand and shall constitute Obligations. (e) The Bank may, at its sole and absolute discretion and in addition to any other remedies available to it under this Agreement or otherwise, require Borrower to pay immediately to Bank, for application against drawings under any outstanding Letters of Credit issued for the account of Borrower, the outstanding principal amount of any such Letters of Credit which have not expired. Such amount shall be held in an interest-bearing account pledged to secure the Obligations. Any portion of the amount remaining in such account which is not applied to satisfy draws under any such Letters of Credit or any other Obligations of Borrower to the Bank shall be repaid to Borrower. ARTICLE 9 MISCELLANEOUS SECTION 9.01. COLLECTION COSTS. The Borrower shall pay all of the reasonable costs and expenses incurred by the Bank in connection with the enforcement of this Agreement and the other Loan Documents, including, without limitation, reasonable attorneys' fees and expenses. SECTION 9.02. MODIFICATION AND WAIVER. Except for the other documents expressly referred to in this Agreement, this Agreement contains the entire agreement between the parties and supersedes all prior agreements between the Bank and the Borrower concerning the unsecured line of credit and the Loans hereunder. No modification or waiver of any provision of the Note or this Agreement and no consent by the Bank to any departure therefrom by the Borrower shall be effective unless such modification or waiver shall be in writing and signed by an officer of the Bank with a title of vice president or any higher office, and the same shall then be effective only for the period and on the conditions and for the specific instances and purposes specified in such writing. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. No failure or delay by the Bank in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies 14 15 of the Bank contained in this Agreement are cumulative and not exclusive of any rights or remedies otherwise provided by law. SECTION 9.03. NOTICES. All notices, requests, demands or other communications provided for in this Agreement shall be in writing and shall be delivered by hand, sent prepaid by Federal Express (or a comparable overnight delivery service) or sent by the United States mail, certified, postage prepaid, return receipt requested, to the Bank, at 808 17th Street, N.W., Washington, D.C. 20006 Attention: Executive Vice President, Commercial Lending, or to the Borrower at c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., Suite 901, Washington, D.C. 20006, Attention: Chief Financial Officer. Any notice, request, demand or other communication delivered or sent in the foregoing manner shall be deemed given or made (as the case may be) upon the earliest of (a) the date it is actually received, (b) on the business day after the day on which it is property delivered to Federal Express (or a comparable overnight delivery service), or (c) on the third business day after the day on which it is deposited in the United States mail. The Borrower or the Bank may change its address by notifying the other party of the new address in any manner permitted by this Section 9.03. SECTION 9.04. CAPTIONS. The captions of the various sections and paragraphs of this Agreement have been inserted only for the purposes of convenience; such captions are not a part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement. SECTION 9.05. SURVIVAL OF AGREEMENTS. All agreements, representations and warranties made herein shall survive the delivery of this Agreement and the making and renewal of the Loans hereunder. SECTION 9.06. FEES AND EXPENSES. Whether or not any Loans are made hereunder, the Borrower shall pay on demand all reasonable out-of-pocket costs and expenses incurred by the Bank in connection with the preparation, negotiation, execution, delivery, filing, recording and administration of any of the documents and instruments executed or delivered in connection herewith, including, without limitation, the reasonable fees and expenses of counsel to the Bank (including, the reasonable fees of salaried counsel employed by the Bank or its affiliates), and local counsel who may be retained by the Bank, with respect to such documents and any amendments thereof or of this Agreement and any amendment hereof and with respect to advising the Bank as to its rights and responsibilities hereunder or thereunder, provided, however, that the Bank shall use reasonable efforts to notify the Borrower prior to incurring any costs or expenses chargeable to Borrower under this section, unless the Bank shall have determined in good faith, but at its sole and unfettered discretion, that a delay or such notice may impair or adversely impact the rights, remedies, claims or other interest of the Bank or the collectibility of the Loans. SECTION 9.07. USE OF DEFINED TERMS. All terms defined in this Agreement shall have the defined meanings when used in certificates, reports or other documents made or delivered pursuant to this Agreement, unless the context shall otherwise require. SECTION 9.08. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and bind the respective parties hereto and their successors and assigns; provided, however, that Borrower may not assign its rights hereunder without the prior written consent of the Bank. 15 16 SECTION 9.09. INTERPRETATION. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the District of Columbia, without reference to conflicts of law principles. IN WITNESS WHEREOF, the Borrower and the Bank have caused this Agreement to be signed by their duly authorized representatives all as of the day and year first above written. ALLIED CAPITAL CORPORATION a Maryland corporation. By: /s/ G. CABELL WILLIAMS, III ------------------------------- Name: G. Cabell Williams, III Title: President THE RIGGS NATIONAL BANK OF WASHINGTON, D.C., a national banking association. By: /s/ WINT PALMER ------------------------------- Name: William W. Palmer, III Title: Vice President 16 EX-99.H 9 FORM OF SOLICITING DEALER AGREEMENT 1 Exhibit h ALLIED CAPITAL CORPORATION RIGHTS OFFERING Soliciting Dealer Agreement THE OFFER WILL EXPIRE AT 5:00 PM, EASTERN STANDARD TIME, ON FEBRUARY 27, 1996, UNLESS EXTENDED. To Securities Brokers and Dealers: Allied Capital Corporation (the "Company") is issuing to its stockholders of record as of the close of business on January 22, 1996 (the "Record Date) subscription rights ("Subscription Rights") to subscribe for an aggregate of 885,448 shares (the "Shares") of common stock, par value $1.00 per share, of the Company upon the terms and subject to the conditions set forth in the Company's Prospectus dated January 25, 1996 (the "Offer"). Each stockholder of record on the Record Date is being issued one Subscription Right for each full share of common stock owned on the Record Date. No fractional Subscription Rights will be issued. The Subscription Rights are non-transferable and will not be quoted for trading on the Nasdaq National Market System ("Nasdaq") or on any other exchange. The Subscription Rights entitle stockholders to acquire at the Subscription Price (as hereinafter defined) one Share for each seven Subscription Rights held in the Primary Subscription. The Subscription Price per Share will be 95% of the average of the last reported sale price of a share of the Company's common stock on Nasdaq on the date of expiration of the Offer (the "Pricing Date") and on the four preceding business days. The Subscription Period commences on January 29, 1996 and ends at 5:00 pm, Eastern Standard Time, on February 27, 1996 (the "Expiration Date"), unless extended by the Company at its sole discretion. Any stockholder who fully exercises all Subscription Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for by others in the Primary Subscription (the "Over-Subscription Privilege"). Shares acquired pursuant to the Over-Subscription Privilege are subject to increase and allotment, as more fully discussed in the Prospectus. The Company will pay Soliciting Fees (as hereinafter defined) to any qualified broker or dealer who solicits the exercise of Subscription Rights in connection with the Offer and who complies with the procedures described below (each such broker or dealer, a "Soliciting Dealer"). Upon timely delivery to American Stock Transfer and Trust Company, the Company's subscription agent for the Offer (the "Subscription Agent") of payment for Shares purchased pursuant to the exercise of Subscription Rights and of properly completed and executed documentation as set forth in this Soliciting Dealer Agreement, a Soliciting Dealer hereunder will be entitled to receive fees equal to 2.5% of the Subscription Price per Share purchased pursuant to exercise of the Subscription Rights by such Soliciting Dealer's customers (the "Soliciting Fees"). A qualified broker or dealer is a broker or dealer that is a member of a registered national securities exchange in the United States or the National Association of Securities Dealers, Inc. ("NASD") or otherwise eligible to participate under the NASD Rules. The Company hereby agrees to pay the Soliciting Fees payable to each such Soliciting Dealer. Solicitation and other activities by Soliciting Dealers may be undertaken only in accordance with the applicable rules and regulations of the Securities and Exchange Commission and the NASD, including but not limited to Sections 8, 24, 25 and 36 of Article III of the NASD Rules of Fair Practice, or any other applicable self-regulatory organization and only in those states and other jurisdictions where those solicitations and other activities may be undertaken in accordance with the laws in those states and other jurisdictions. Compensation will not be paid for solicitations in any state or jurisdiction in which, in the opinion of counsel to the Company, compensation may not be lawfully paid. No Soliciting Dealer will be paid Soliciting Fees with respect to Shares purchased pursuant to an exercise of Subscription Rights for its own account or for the account of any affiliate of the Solicitor Dealer. No Soliciting Dealer or any other person is authorized by the Company to give any information or make any representations in connection with the Offer other than those contained in the Prospectus and other authorized solicitation material furnished by the Company through the Company's Information Agent and Offering Coordinator, Shareholder Communications Corporation. No Soliciting Dealer is authorized to act as agent of the Company in any connection or transaction. In addition, nothing contained in this Soliciting Dealer Agreement will cause the Soliciting Dealer to become a partner with the Company or create any other association between the Soliciting Dealer and the Company, or will render the Company liable for the obligations of any Soliciting Dealer. The Company will be under no liability to make any payment to any Soliciting Dealer except as otherwise set forth herein. 2 In order for a Soliciting Dealer to receive Soliciting Fees: (i) Shareholder Communications Corporation, the Company's Information Agent and Offering Coordinator, must have received from that Soliciting Dealer, no later than 5:00 pm, Eastern Standard Time, on the Expiration Date, a properly completed and duly executed Soliciting Dealer Agreement. The Subscription agent must have received the Beneficial Owner Certification (in the form provided by the Company)(or a facsimile thereof), and (ii) Subscription Rights must be exercised and Shares must be paid for as and when set forth in the Prospectus. All questions as to the form, validity and eligibility (including time of receipt) of the Soliciting Dealer Agreement will be determined by the Company's Information Agent and Offering Coordinator, in its sole discretion, which determination will be final and binding. Unless waived, any irregularities in connection with a Soliciting Dealer Agreement must be cured within such time as the Company may determine. None of the Company, Shareholder Communications Corporation, the Company's Subscription Agent, or any other person will be under any duty to give notification of any defects or irregularities in any Soliciting Dealer Agreement or incur any liability for failure to give that notification. Execution and delivery of this Soliciting Dealer Agreement and the acceptance of Soliciting Fees from the Company by a Soliciting Dealer constitute a representation and warranty by that Soliciting Dealer to the Company that: (i) it has received and reviewed the Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of the Subscription Rights, it has complied with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the applicable rules and regulations thereunder, any applicable securities laws of any state or other jurisdiction where such solicitations may lawfully be made and the applicable rules and regulations of any self-regulatory organization or registered national securities exchange; (iii) in soliciting purchases of Shares pursuant to the exercise of the Subscription Rights, it has not published, circulated or used any soliciting materials other than the Prospectus and any other authorized solicitation material furnished by the Company through Shareholder Communications Corporation;(iv) it has not purported to act as agent of the Company in any connection or transaction relating the Offer; (v) the information contained in this Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vi) it is not affiliated with the Company; (vii) the Soliciting Fees being paid are not being paid with respect to Shares purchased by it or an affiliate pursuant to an exercise of Subscription Rights for its own or the affiliates account; (viii) it will not remit, directly or indirectly, any part of the Soliciting Fees paid by the Company pursuant to the terms of this Soliciting Dealer Agreement to any beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has agreed to the amount of the Soliciting Fees and the terms and conditions set forth in this Soliciting Dealer Agreement with respect to receiving those Soliciting Fees. By returning a Soliciting Dealer Agreement and accepting Soliciting Fees, a Soliciting Dealer agrees to indemnify the Company against losses, claims, damages and liabilities to which the Company may become subject as a result of the breach of that Soliciting Dealer's representations and warranties made in this Soliciting Dealer Agreement and described above. In making the foregoing representations and warranties, Soliciting Dealers are reminded of the possible applicability of Rule 10b-6 under the Exchange Act if they have bought, sold, dealt in or traded in any shares of the common stock of the Company for their own account since the commencement of the Offer. The Company agrees to indemnify and hold harmless each of the Soliciting Dealers and each person, if any, who controls a Soliciting Dealer within the meaning of either Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the Exchange Act (a "controlling person") from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by such Selected Dealer or any such controlling person in connection with defending or investigating any such action or claim) caused by any untrue statement of a material fact contained in the Registration Statement of the Company on Form N-2 under the Securities Act covering the Shares or any amendment thereof or the Prospectus (as amended or supplemented if the Company has furnished any amendments or supplements thereto), or any other soliciting materials furnished by the Company through Shareholder Communications Corporation, or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which such statements were made,not misleading. Soliciting Fees due to an eligible Soliciting Dealer will be paid promptly after the Company's receipt of payment for the Shares issued upon the exercise of Subscription Rights as a result of the Soliciting Dealer's soliciting effort and upon verification by Shareholder Communications Corporation that the documentation has been received in good form. 3 This Soliciting Dealer Agreement may be signed in two or more counterparts, each of which will be an original, with the same effect as if the signatures were upon the same instrument. This Soliciting Dealer Agreement will be governed by the internal laws of the State of Maryland. Please execute this Soliciting Dealer Agreement below, accepting the terms and conditions set forth in this Soliciting Dealer Agreement and confirming that you are a member firm of a registered national securities exchange or of the NASD or a foreign broker or dealer not eligible for membership who has conformed to the Rules of Fair Practice of the NASD in making solicitations of the type being undertake pursuant to the Offer in the United States to the same extent as if you were a member of the NASD, and certifying that you have solicited the purchase of the Shares pursuant to exercise of the Rights, all as described above, in accordance with the terms and conditions set forth in this Soliciting Dealer Agreement. /s/ DAVID GLADSTONE ---------------------------------- Chairman of the Board Allied Capital Corporation ACCEPTED AND CONFIRMED - ----------------------------- --------------------------------- Printed Firm Name Address - ----------------------------- --------------------------------- Authorized Signature City State Zip Code - ----------------------------- --------------------------------- Name Area Code Telephone Number - ----------------------------- Title Dated: ------------------------ ALL SOLICITING DEALER AGREEMENTS SHOULD BE RETURNED TO: SHAREHOLDER COMMUNICATIONS CORPORATION by facsimile (telecopier) at 800-733-1885. Facsimile transmissions may be confirmed by calling 212-805-7113. ALL QUESTIONS CONCERNING SOLICITING DEALER AGREEMENTS SHOULD BE DIRECTED TO: SHAREHOLDER COMMUNICATIONS CORPORATION toll free at 800-221-5724, extension 331 ALL BENEFICIAL OWNERSHIP CERTIFICATIONS SHOULD BE RETURNED TO: American Stock Transfer & Trust by facsimile (telecopier) at (718) 234-5001 Facsimile transmission may be confirmed by calling (718) 921-8238. EX-99.J.1 10 CORPORATE CUSTODY AGREEMENT 1 EXHIBIT J.1 CORPORATE CUSTODY AGREEMENT This agreement is between the UNDERSIGNED as Principal and THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. as Agent. (1) DELIVERY AND OWNERSHIP OF THE PROPERTY. Principal may deliver from time to time property acceptable to Riggs to be held in accordance with this agreement. Principal is the owner of all property held pursuant to this agreement, and Riggs is acting as agent of the Principal for the purposes set forth below. (2) INVESTMENTS. Riggs shall invest, sell, reinvest, and make other disposition of property only upon the instructions of Principal or of any Investment Adviser employed by Principal and shall undertake the collection of any item held as the same matures. Instructions may be oral, in writing or in any other form acceptable to Riggs, and Principal assumes all risks resulting from action taken by Riggs in good faith on such instructions. Riggs shall not be required to comply with any direction to purchase securities unless there is sufficient cash available, or with any direction to sell securities unless such securities are held in the account at the time in deliverable form. Expenses incurred in effecting any of the foregoing transactions shall be charged to the account. (3) INCOME. Riggs shall receive the income on the property held by it and after payment of expenses remit the net income as Principal may instruct. (4) STATEMENTS. Riggs shall furnish periodically to Principal statements of assets and statements of receipts and disbursements and shall furnish annually data for the preceding year to assist Principal in preparing returns for income tax purposes on the property held by Agent. (5) NOMINEE. Riggs may register all or any part of the property in a nominee of Riggs, or may retain it unregistered and in bearer form. (6) PAYMENT OF TAXES. Principal is responsible for the payment of all taxes assessed on or with respect to any property held by Agent and any income received and agrees to hold Riggs harmless. (7) COMPENSATION. The compensation of Riggs shall be in accordance with its established fee schedules in effect from time to time. Riggs shall be entitled to reimbursement for expenses. (8) WITHDRAWAL OF PROPERTY AND TERMINATION OF AGREEMENT. Principal may withdraw any and all property held hereunder upon giving Riggs written notice. The final withdrawal of all property held by Agent shall terminate this agreement. Riggs shall have the right to terminate this agreement at any time upon giving the Principal written notice. Riggs shall deliver the property as soon as practicable upon either a withdrawal or termination, but prior to delivery may require re-registration of any property held in nominee form. 2 (9) AUTHORITY OF PRINCIPAL. Principal certifies that it has corporate authority to enter into this agreement. A certified copy of a resolution authorizing the opening of the account and stating the names of the corporate officers duly authorized to act on behalf of Principal is attached hereto. Riggs is authorized to follow any and all instructions received by it from such person or persons until receipt by it of a certified copy of a new resolution conferring such authority upon another person or persons. (10) LAW GOVERNING. The laws of the District of Columbia shall govern the interpretation of this agreement. (11) GENERAL INFORMATION. The Corporation Tax Identification Number is 53-0245085. This agreement shall bind the respective successors and assigns of the Principal and Agent. Principal and Riggs have executed this agreement in duplicate on June 27, 1989. PRINCIPAL ATTEST: Allied Capital Corporation --------------------------------- /s/ T.R. SALLEY By: /s/ DAVID GLADSTONE - ----------------------- ------------------------------ Asst. Secretary President AGENT: THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. ATTEST: /s/ JUANITA LYON By: /s/ ALBERT BEHAR - ----------------------- ------------------------------ Trust Officer Vice President & Trust Officer EX-99.J.2 11 CORPORATE CUSTODY AGREEMENT 1 EXHIBIT J.2 CORPORATE CUSTODY AGREEMENT This agreement is between the UNDERSIGNED as Principal and THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. as Agent. (1) DELIVERY AND OWNERSHIP OF THE PROPERTY. Principal may deliver from time to time property acceptable to Riggs to be held in accordance with this agreement. Principal is the owner of all property held pursuant to this agreement, and Riggs is acting as agent of the Principal for the purposes set forth below. (2) INVESTMENTS. Riggs shall invest, sell, reinvest, and make other disposition of property only upon the instructions of Principal or of any Investment Adviser employed by Principal and shall undertake the collection of any item held as the same matures. Instructions may be oral, in writing or in any other form acceptable to Riggs, and Principal assumes all risks resulting from action taken by Riggs in good faith on such instructions. Riggs shall not be required to comply with any direction to purchase securities unless there is sufficient cash available, or with any direction to sell securities unless such securities are held in the account at the time in deliverable form. Expenses incurred in effecting any of the foregoing transactions shall be charged to the account. (3) INCOME. Riggs shall receive the income on the property held by it and after payment of expenses remit the net income as Principal may instruct. (4) STATEMENTS. Riggs shall furnish periodically to Principal statements of assets and statements of receipts and disbursements and shall furnish annually data for the preceding year to assist Principal in preparing returns for income tax purposes on the property held by Agent. (5) NOMINEE. Riggs may register all or any part of the property in a nominee of Riggs, or may retain it unregistered and in bearer form. (6) PAYMENT OF TAXES. Principal is responsible for the payment of all taxes assessed on or with respect to any property held by Agent and any income received and agrees to hold Riggs harmless. (7) COMPENSATION. The compensation of Riggs shall be in accordance with its established fee schedules in effect from time to time. Riggs shall be entitled to reimbursement for expenses. (8) WITHDRAWAL OF PROPERTY AND TERMINATION OF AGREEMENT. Principal may withdraw any and all property held hereunder upon giving Riggs written notice. The final withdrawal of all property held by Agent shall terminate this agreement. Riggs shall have the right to terminate this agreement at any time upon giving the Principal written notice. Riggs shall deliver the property as soon as practicable upon either a withdrawal or termination, but prior to delivery may require re-registration of any property held in nominee form. 2 (9) AUTHORITY OF PRINCIPAL. Principal certifies that it has corporate authority to enter into this agreement. A certified copy of a resolution authorizing the opening of the account and stating the names of the corporate officers duly authorized to act on behalf of Principal is attached hereto. Riggs is authorized to follow any and all instructions received by it from such person or persons until receipt by it of a certified copy of a new resolution conferring such authority upon another person or persons. (10) LAW GOVERNING. The laws of the District of Columbia shall govern the interpretation of this agreement. (11) GENERAL INFORMATION. The Corporation Tax Identification Number is 52-1081051. This agreement shall bind the respective successors and assigns of the Principal and Agent. Principal and Riggs have executed this agreement in duplicate on June 27, 1989. PRINCIPAL ATTEST: Allied Investment Corporation --------------------------------- /s/ T.R. SALLEY By: /s/ DAVID GLADSTONE - ----------------------- ------------------------------ Asst. Secretary President AGENT: THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. ATTEST: /s/ JUANITA LYON By: /s/ ALBERT BEHAR - ----------------------- ------------------------------ Trust Officer Vice President & Trust Officer EX-99.J.3 12 CORPORATE CUSTODY AGREEMENT 1 EXHIBIT J.3 CORPORATE CUSTODY AGREEMENT This agreement is between the UNDERSIGNED as Principal and THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. as Agent. (1) DELIVERY AND OWNERSHIP OF THE PROPERTY. Principal may deliver from time to time property acceptable to Riggs to be held in accordance with this agreement. Principal is the owner of all property held pursuant to this agreement, and Riggs is acting as agent of the Principal for the purposes set forth below. (2) INVESTMENTS. Riggs shall invest, sell, reinvest, and make other disposition of property only upon the instructions of Principal or of any Investment Adviser employed by Principal and shall undertake the collection of any item held as the same matures. Instructions may be oral, in writing or in any other form acceptable to Riggs, and Principal assumes all risks resulting from action taken by Riggs in good faith on such instructions. Riggs shall not be required to comply with any direction to purchase securities unless there is sufficient cash available, or with any direction to sell securities unless such securities are held in the account at the time in deliverable form. Expenses incurred in effecting any of the foregoing transactions shall be charged to the account. (3) INCOME. Riggs shall receive the income on the property held by it and after payment of expenses remit the net income as Principal may instruct. (4) STATEMENTS. Riggs shall furnish periodically to Principal statements of assets and statements of receipts and disbursements and shall furnish annually data for the preceding year to assist Principal in preparing returns for income tax purposes on the property held by Agent. (5) NOMINEE. Riggs may register all or any part of the property in a nominee of Riggs, or may retain it unregistered and in bearer form. (6) PAYMENT OF TAXES. Principal is responsible for the payment of all taxes assessed on or with respect to any property held by Agent and any income received and agrees to hold Riggs harmless. (7) COMPENSATION. The compensation of Riggs shall be in accordance with its established fee schedules in effect from time to time. Riggs shall be entitled to reimbursement for expenses. (8) WITHDRAWAL OF PROPERTY AND TERMINATION OF AGREEMENT. Principal may withdraw any and all property held hereunder upon giving Riggs written notice. The final withdrawal of all property held by Agent shall terminate this agreement. Riggs shall have the right to terminate this agreement at any time upon giving the Principal written notice. Riggs shall deliver the property as soon as practicable upon either a withdrawal or termination, but prior to delivery may require re-registration of any property held in nominee form. 2 (9) AUTHORITY OF PRINCIPAL. Principal certifies that it has corporate authority to enter into this agreement. A certified copy of a resolution authorizing the opening of the account and stating the names of the corporate officers duly authorized to act on behalf of Principal is attached hereto. Riggs is authorized to follow any and all instructions received by it from such person or persons until receipt by it of a certified copy of a new resolution conferring such authority upon another person or persons. (10) LAW GOVERNING. The laws of the District of Columbia shall govern the interpretation of this agreement. (11) GENERAL INFORMATION. The Corporation Tax Identification Number is 52-1278855. This agreement shall bind the respective successors and assigns of the Principal and Agent. Principal and Riggs have executed this agreement in duplicate on June 27, 1989. PRINCIPAL ATTEST: Allied Financial Corporation --------------------------------- /s/ T.R. SALLEY By: /s/ DAVID GLADSTONE - ----------------------- ------------------------------ Asst. Secretary President AGENT: THE RIGGS NATIONAL BANK OF WASHINGTON, D.C. ATTEST: /s/ JUANITA LYON By: /s/ ALBERT BEHAR - ----------------------- ------------------------------ Trust Officer Vice President & Trust Officer EX-99.K.3 13 OFFERING COORDINATOR/INFORMATION AGENT AGREEMENT 1 EXHIBIT K.3 SHAREHOLDER -------------------------- COMMUNICATIONS CORPORATION OFFERING COORDINATOR/INFORMATION AGENT AGREEMENT This document will constitute the agreement between ALLIED CAPITAL CORPORATION ("the FUND"), with its principal executive offices at 1666 K Street, N.W.-9th Floor, Washington, DC 20006 and SHAREHOLDER COMMUNICATIONS CORPORATION ("SCC"), with its principal executive offices at 17 State Street, New York, NY 10005, relating to a Rights Offering (the "OFFER") of the Fund. The services to be provided by SCC will be as follows: I. OFFERING COORDINATOR As the "offering coordinator", SCC will provide several services to the FUND in connection with the OFFER, which will include, but may not be limited to: A. Coordinating and maintaining contact with those registered broker/dealers who will directly solicit shareholders, who are their customers, and serve as the intermediary between the issuer and each such broker/dealer. B. Distributing relevant offering material to all syndicate departments, including prospectus and any solicitation agreements. C. Offering input as to the feasibility of the offering's general structure including pricing, market timing, transferability, oversubscription allotments, offering extensions and solicitation payouts. D. Assisting in drafting all documents including letters to shareholders, warning letters, exercise forms, solicitation agreements and any broker related soliciting summaries. E. Providing extensive reporting beginning one week prior to expiration or any extensions thereafter, which will measure shareholder participation and the offering's general progress. This reporting will be based solely on previously established contacts within the reorganization departments of participating broker/dealers. II. INFORMATION AGENT A. INDIVIDUAL HOLDERS OF RECORD AND BENEFICIAL OWNERS 1. Target Group. SCC estimates that it may call between 1000 to 1,600 of the approximately 7,600 outstanding beneficial and record shareholders. The estimate number is subject to adjustment and SCC may actually call more or less shareholders depending on the response to the OFFER or at the FUND's direction. 2 SHAREHOLDER -------------------------- COMMUNICATIONS CORPORATION 2. Telephone Number Lookups. SCC will obtain the needed telephone numbers from various types of telephone directories. 3. Initial Telephone Calls to Provide Information. SCC will begin telephone calls to the target group as soon as practical. Most calls will be made during 10:00 A.M. to 9:00 P.M. on business days and only during 10:00 A.M. to 5:00 P.M. on Saturdays. No calls will be received by any shareholder after 9:00 P.M. on any day, in any time zone, unless specifically requested by the shareholder. SCC will maintain "800" lines for shareholders to call with questions about the OFFER. The "800" lines will be staffed Monday through Friday between 9:00 a.m. and 9:00 p.m. 4. Remails. SCC will coordinate remails of offering materials to the shareholders who advise us that they have discarded or misplaced the originally mailed materials. 5. Reminder/Extension Mailing. SCC will help to coordinate any targeted or broad-based reminder mailing at the request of the FUND. SCC will mail only materials supplied by the FUND or approved by the Fund in advance in writing. B. BANK/BROKER SERVICING SCC will contact all banks, brokers and other nominee shareholders ("intermediaries") holding stock as shown on appropriate portions of the shareholder lists to ascertain quantities of offering materials needed for forwarding to beneficial owners. SCC will deliver offering materials by messenger to New York City based intermediaries and by Federal Express or other means to non-New York City based intermediaries. SCC will also follow-up by telephone with each intermediary to ensure receipt of the offering materials and to confirm timely remailing of materials to the beneficial owners. SCC will maintain frequent contact with intermediaries to monitor shareholder response and to ensure that all liaison procedures are proceeding satisfactorily. In addition, SCC will contact beneficial holders directly, if possible, and do whatever may be appropriate or necessary to provide information regarding the OFFER to this group. SCC will, as frequently as practicable, report to the Fund with response from intermediaries. 3 SHAREHOLDER -------------------------- COMMUNICATIONS CORPORATION III. PROJECT FEES In consideration for acting as Offering Coordinator, SCC will receive a flat project fee of $35,000 which is not tied in any way to the performance of the offering. In consideration for acting as Information Agent, SCC will receive a project fee of $5,000. The fees are payable by Allied Capital Corporation for both services. IV. ESTIMATED EXPENSES (Offering Coordinator) SCC will be reimbursed by the FUND for its reasonable out-of-pocket expenses incurred provided that SCC submits to the FUND an expense report, itemizing such expenses and providing copies of all supporting bills in respect of such expenses. If the actual expenses incurred are less than the portion of the estimated high range expenses paid in advance by the FUND, the FUND will receive from SCC a check payable in the amount of the difference at the time that SCC sends its final invoice for the second half of the project fee. SCC's expenses are estimated as set forth below and the estimates are based largely on data provided to SCC by the FUND. In the course of the OFFER the expenses and expense categories may change due to changes in the OFFER schedule or due to events beyond SCC's control, such as delays in receiving offering material and related items. In the event of significant change or new expenses not originally contemplated, SCC will notify the FUND by phone and/or by letter for approval of such expenses.
Estimated Expenses Low Range High Range ------------------ --------- ---------- Distribution Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500 $ 4,000 Telephone # look up 1,800 to 2,200 @ $.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 1,100 Outgoing telephone 1,000 to 1,600 initial outgoing telephone calls @ $3.25 . . . . . . . . . . . . . . . . . . . . . . . . . 3,250 5,200 Incoming "800" calls 220 to 450 @ $3.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715 1,462 Miscellaneous, data processing, postage, deliveries Federal Express and mailgrams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 1,000 ------ ------- Total Estimated Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,865 $12,762 ====== =======
V. PERFORMANCE SCC will use its best efforts to achieve the goals of the FUND but SCC is not guaranteeing a minimum success rate. SCC's Project Fee as outlined in Section III or Expenses as outlined in Section IV are not contingent on success or failure of the OFFER. 4 SHAREHOLDER -------------------------- COMMUNICATIONS CORPORATION SCC's strategies revolve around a telephone information campaign. The purpose of the telephone information campaign is to raise the overall awareness among shareholders of the OFFER and help shareholders better understand the transaction. This in turn may result in a higher overall response. VI. COMPLIANCE The FUND will be responsible for compliance with any regulations required by the Securities and Exchange Commission, National Association of Securities Dealers or any applicable federal or state agencies. In rendering the services contemplated by this Agreement, SCC agrees not to make any representations, oral or written, to any shareholders or prospective shareholders of the FUND or any broker/dealer that are not contained in the FUND's Prospectus, unless previously authorized to do so in writing by the FUND. Further, in the role of "offering coordinator", SCC will not undertake any broker/dealer activities including but not limited to executing securities transactions, soliciting shareholders in an effort to exercise rights, or offer advice to shareholders regarding their decisions to exercise or reject rights. VII. PAYMENT Payment for one half the project fees ($20,000) and one half the estimated high range expenses ($6,381) for a total of $26,381 will be made at the signing of this contract. The balance, if any, will be paid by the FUND due thirty days after SCC sends its final invoice. VIII. MISCELLANEOUS SCC will hold in confidence and will not use nor disclose to third parties information we receive from the FUND, or information developed by SCC based upon such information we receive, except for information which was public at the time of disclosure or becomes part of the public domain without disclosure by SCC or information which we learn from a third party which does not have an obligation of confidentiality to the FUND. In the event the project is cancelled for an indefinite period of time after the signing of this contract and before the expiration of the OFFER, SCC will be reimbursed by the FUND for any expenses incurred and not less than 50% of the project fees. 5 SHAREHOLDER -------------------------- COMMUNICATIONS CORPORATION The FUND agrees to indemnify, hold harmless, reimburse and defend SCC, and its officers, agents and employees, against all claims or threatened claims, costs, expenses, liabilities, obligations, losses or damages (including reasonable legal fees and expenses) of any nature, incurred by or imposed upon SCC, or any of its officers, agents or employees, which results, arises out of or is based upon services rendered to the FUND in accordance with the provisions of to this AGREEMENT, provided that such services are rendered to the FUND without any negligence, willful misconduct, bad faith or reckless disregard on the part of SCC, or its officers, agents and employees. SCC agrees to indemnify, hold harmless, reimburse and defend Allied Capital Corporation and its officers, agents and employees, against all claims or threatened claims, costs, liabilities, obligations, losses or damages (including reasonable legal fees and expenses) of any nature, incurred by or imposed upon the Fund or any of its officers, agents or employees which results, arises out of or is based upon services rendered to the Fund by SCC, provided that such services are rendered to the Fund with negligence, willful misconduct, bad faith or reckless disregard on the part of SCC or its officers, agents or employees. This agreement will be governed by and construed in accordance with the laws of the State of New York. This AGREEMENT sets forth the entire AGREEMENT between SCC and the FUND with respect to the agreement herein and cannot be modified except in writing by both parties. IN WITNESS WHEREOF, the parties have signed this AGREEMENT this 18th day of January 1996. ALLIED CAPITAL CORPORATION SHAREHOLDER COMMUNICATIONS CORPORATION By /s/ SUZANNE V. SPARROW By /s/ ROBERT S. BRENNAN -------------------------- --------------------------- Suzanne V. Sparrow Robert S. Brennan Vice President Senior Account Executive EX-99.K.4 14 SUBSCRIPTION AGENCY AGREEMENT 1 EXHIBIT K.4 SUBSCRIPTION AGENCY AGREEMENT Between ALLIED CAPITAL CORPORATION AND AMERICAN STOCK TRANSFER & TRUST COMPANY THIS AGREEMENT is made this 19th day of January, 1996, by and between Allied Capital Corporation, a Maryland corporation, (the "Company") and American Stock Transfer & Trust Company, a New York corporation ("AST"). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Purpose of Agreement. This agreement sets forth the rights and obligations of the Company and AST in connection with the provision of subscription agency services for the Company by AST relating to the offering of shares of common stock of the Company through the rights offering to existing stockholders described in a registration statement filed with the Securities and Exchange Commission on November 29, 1995, and as subsequently amended (the "Registration Statement"). SECTION 2. Reliance on Prospectus. (A) It is understood that terms of the prospectus that is a part of the Registration Statement as declared effective by the Securities and Exchange Commission (the "Prospectus") shall govern the activities of AST in connection with the Offering to the extent not covered by or inconsistent with any of the terms of this Agreement. (B) Terms not otherwise defined herein shall have the meaning ascribed to them in the Prospectus. SECTION 3. Appointment of Subscription Agent. The Company hereby appoints AST to serve as the Company's Subscription Agent in connection with the rights offering described in the Registration Statement (the "Offering") in accordance with the terms set forth in this Agreement, and AST hereby accepts such appointment. SECTION 4. Issuing of Securities. (A) The Company will provide to AST a form of subscription (the "Subscription Form"), and AST will deliver such Subscription Form to holders of record of shares of common stock of the Company as of the close of business on January 22, 1996 (the "Record Date") evidencing non- 2 transferable subscription rights to purchase such shares, together with a copy of the Prospectus, no later than four business days following the date upon which the Registration Statement is declared effective and in accordance with the terms of the Prospectus. (B) No physical rights will be issued; the Subscription Form will evidence the number of shares available for purchase by each stockholder of record as of the record date ("Record Date Stockholder") in accordance with the terms of the Prospectus. (C) The Company has authorized the issuance of the common stock underlying the subscription rights with respect to the shares of the Company's common stock to be offered ("Subscription Rights"), and upon the valid exercise of such Subscription Rights, the Company will instruct AST to issue such shares to Record Date Stockholders in accordance with the terms of the Prospectus. SECTION 5. Duties of AST. AST will be responsible for providing certain services required to effect the Offering, including but not necessarily limited to: (A) Mailing the Prospectus, the Subscription Form, and all other necessary documents to all Record Date Stockholders whose shares are held directly and not in nominee name. (B) Accepting Subscription Forms, payment for shares and other documentation pursuant to the Offering from all subscribing stockholders, including both direct and nominee holders. (C) Identifying and researching any problems arising in connection with the Offering and communicating with all subscribing stockholders or any other persons as necessary to cure such problems. (D) Allocating shares as necessary in connection with the Offering and in accordance with the terms of the Prospectus. (E) Refunding payments, as required, to subscribing stockholders, in accordance with the terms of the Prospectus. (F) Taking all reasonable steps necessary to obtain payments due from subscribing stockholders including but not limited to the sending of notices of payment due. 2 3 (G) Sending confirmations of purchase to every subscribing stockholder once the number of shares to be sold to each subscribing stockholder has been determined. (H) Reporting to the Company on a daily basis concerning responses to the Offering and working with the Company's Information Agent and Offering Coordinator, Shareholder Communications Corporation, to assure the accuracy of the daily reports. (I) Collecting all required paperwork from all subscribing stockholders, including follow-up on Notices of Guaranteed Delivery, Subscription Forms, payment for shares, and notices of payment due. (J) Providing an accounting of all offering proceeds (including interest due on the segregated account described below) to the Company following the conclusion of the Offer, allocation of shares, and collection of all payments due. (K) Issuing certificates to stockholders of record representing purchases pursuant to the Offer; allocating shares to the dividend reinvestment plan accounts of those who participated the Offer and who are participants in the Company's dividend reinvestment plan; and allocating to all street name accounts the shares purchased by nominees pursuant to the Offer. SECTION 6. Certain Terms of the Offering. (A) The "Subscription Price" shall be determined according to the formula described in the Prospectus, and will be provided to AST on the Expiration Date. An Estimated Subscription Price will be determined prior to the date on which Prospectuses are delivered to shareholders according to the formula set forth in the Prospectus. Subscribing stockholders will remit payments for shares to be purchased pursuant to the Offering based upon such Estimated Subscription Price. If the Subscription Price is LESS than the Estimated Subscription Price, AST will refund appropriate amounts to all subscribing stockholders who paid other than pursuant to a Notice of Guaranteed Delivery. If the Subscription Price is MORE than the Estimated Subscription Price, then AST will issue notices for payment due to all subscribing stockholders. (B) If an exercising stockholder has not indicated the number of Subscription Rights being exercised, or if the Subscription Price payment forwarded by such stockholder to AST, after notice of payment due is 3 4 sent, is not sufficient to purchase the number of shares subscribed for, AST will apply all payments actually received by it toward the purchase of the greatest number of whole shares which could be acquired by such stockholder upon exercise of the Primary Subscription or Over-Subscription Privilege. To the extent that the Subscription Price payment exceeds the number of shares to be purchased on the Subscription Form, the stockholder will be deemed to have exercised his Over-Subscription Privilege to the extent that additional whole shares may be purchased, and the excess amount will be refunded to the stockholder. (C) Funds received by AST in payment of the Subscription Price for shares subscribed for pursuant to the Offering shall be held in a segregated, interest-bearing account pending allocation and eventual distribution to the Company. All interest and gains earned on such funds shall be paid to the Company. If a Subscription Rights holder exercising the Over-Subscription Privilege is allocated less than all of the shares of common stock which such holder subscribed for pursuant to the Over-Subscription Privilege, AST, within ten business days of the Confirmation Date, shall send via first class mail to such stockholder the amount paid by such holder which was over and above that which was required to be paid for the number of shares that were subscribed for and purchased, without interest or deduction. (D) AST is authorized to accept only Subscription Forms (other than those delivered in accordance with the procedure set forth in the Prospectus for guaranteed deliveries) received prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date. (E) Subscription Rights, once exercised, are irrevocable. However, amounts paid in connection with Subscription Rights that have been exercised may be returned to exercising stockholders if the Company is required to do so pursuant to the terms of any of the undertakings it has made in the Registration Statement. SECTION 7. Delivery of Stock Certificates. Within ten business days following the Confirmation Date, AST will issue certificates or otherwise deliver the total number of shares subscribed for in the Offering according to the terms of the Prospectus. SECTION 8. Fractional Subscription Rights and Shares. 4 5 (A) The Company will not issue fractional Subscription Rights nor shall AST distribute Subscription Forms which evidence fractional Subscription Rights. The number of Subscription Rights issued to each holder will be rounded down to the nearest whole number. (B) The Company shall not issue fractional shares of common stock to exercising Subscription Rights holders upon exercise and acceptance of Subscription Rights. The number of shares of common stock that each Subscription Rights holder shall be entitled to purchase pursuant to the Over Subscription Privilege shall be rounded up or down as required to reach the nearest whole share. SECTION 9. Reports. AST shall coordinate with the Company's Information Agent and Offering Coordinator to provide daily reports by the Company during the Subscription Period regarding the number of Subscription Rights exercised, the number of shares purchased, the level of participation both in the Primary Subscription and the Over-Subscription Privilege. SECTION 10. Future Instructions and Interpretation. (A) All questions as to the timeliness, validity, form and eligibility of any exercise of Subscription Rights will be resolved by the Company, whose determinations shall be final and binding. The Company in its sole discretion may waive any defect or irregularity, permit a defect or irregularity to be corrected within such time as it may determine or reject the purported exercise of any Subscription Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been cured or waived within such time as the Company determines in its sole discretion. Neither the Company nor AST shall be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Rights or incur any liability for failure to give such notification. (B) AST is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from an authorized officer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with instructions of any such officer. SECTION 11. Compensation of AST.The Company agrees to pay AST compensation in the amount of thirty-five thousand dollars ($35,000) for all services rendered by it hereunder and for its 5 6 reasonable out-of-pocket expenses, including but not limited to disbursements for printing, postage and delivery. Such fee and out-of-pocket expenses will be paid following the conclusion of the Offering and upon written invoice. SECTION 12. Indemnification and Other Matters (A) The Company agrees to indemnify AST for, and to hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the part of AST for anything done or omitted by AST in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises, provided that AST shall have provided the Company with notice of any such claim promptly after such claim became known to AST, and provided further that the Company shall have the right to assume the defense of any such claim upon receipt of written notice thereof from AST. If the Company assumes the defense of any such claim, AST shall be entitled to participate in (but not control) the defense of any such claim at its own expense. The Company shall not indemnify AST with respect to any claim or action settled without its consent, which consent shall not be unreasonably withheld. (B) AST agrees to indemnify the Company for, and to hold it harmless against, any loss, liability, or expense incurred without negligence or bad faith on the part of the Company arising from anything done or omitted by the Company in connection with the Company's performance of its obligations and duties under this Agreement, including the costs and expenses of defending against any claim of liability in the premises, provided that the Company shall have provided AST with notice of any such claim promptly after such claim became known to the Company, and provided further that AST shall have the right to assume the defense of any such claim upon receipt of written notice thereof from the Company. If AST assumes the defense of any such claim, the Company shall be entitled to participate in (but not control) the defense of any such claim at its own expense. AST shall not indemnify the Company with respect to any claim or action settled without its consent, which consent shall not be unreasonably withheld. (C) AST shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Subscription Right, 6 7 instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate statement or other paper or document reasonably believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged by the proper person or persons. SECTION 13. Miscellaneous Matters. AST undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Subscription Rights by their acceptance thereof shall be bound: (A) AST may consult with legal counsel (who may be, but is not required to be, legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to AST as to any actions taken or omitted by it in good faith and in accordance with such opinion. (B) Whenever in the performance of its duties under this Agreement AST shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by an officer of the Company and delivered to AST; and such certificate shall be full authorization to AST for any action taken or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (C) AST shall be liable hereunder only for its own negligence or willful misconduct. (D) AST shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Prospectus or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (E) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by AST for the carrying out or performing by AST of the provisions of this Agreement. 7 8 (F) Nothing herein shall preclude AST from acting in any other capacity for the Company. SECTION 14. Governing Law. This Agreement shall be governed by the laws of the State of Maryland. SECTION 15. Captions. The captions included in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect the construction or effect. SECTION 16. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF the undersigned have caused this Subscription Agency Agreement to be executed by their duly authorized representative as of the date first above written. ALLIED CAPITAL CORPORATION By: /s/ SUZANNE V. SPARROW ---------------------------- Name: Suzanne V. Sparrow Title: Vice President AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ HERBERT LEMMER ---------------------------- Name: Herbert Lemmer, Esq. Title: General Counsel 8 EX-99.L 15 OPINION OF SUTHERLAND ASBILL & BRENNAN 1 EXHIBIT L [SUTHERLAND, ASBILL & BRENNAN LETTERHEAD] January 16, 1996 Allied Capital Corporation c/o Allied Capital Advisers, Inc. 1666 K Street, N.W. Suite 901 Washington, D.C. 20006 Ladies and Gentlemen: We have acted as counsel to Allied Capital Corporation, a Maryland corporation (the "Company"), in connection with the registration with the Securities and Exchange Commission of the Company's proposed offering of shares of the Company's common stock (the "Shares") pursuant to a registration statement on Form N-2, as amended (File No. 33-64629) (the "Registration Statement"). The Shares are being offered through the issuance of nontransferable rights to existing holders of the Company's common stock, and any Shares not subscribed for pursuant to such rights may be offered to other persons, in each case as described in the Registration Statement. We have participated in the preparation of the Registration Statement and have examined originals or copies, certified or otherwise identified to our satisfaction by public officials or officers of the Company as authentic copies of originals, of (i) the Company's Articles of Incorporation and its Bylaws, (ii) resolutions of the board of directors of the Company approving the offer and the issuance of the Shares, and (iii) such other documents as in our judgment were necessary to enable us to render the opinions expressed below. In our review and examination of all such documents, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents and records submitted to us as originals, and the conformity with authentic originals of all documents and records submitted to us as copies. To the extent we have deemed appropriate, we have relied upon certificates of public officials and certificates and statements of corporate officers of the Company as to certain factual matters. This opinion is limited to the laws of the State of Maryland, and we express no opinion with respect to the laws of any other jurisdiction. We do not hold ourselves out as experts 2 Allied Capital Corporation January 16, 1996 Page 2 in the laws of the State of Maryland, and we have not consulted with Maryland counsel with respect to this opinion letter. The opinions expressed in this letter are based on our review of the Maryland Corporation Law, with which we are familiar. Based upon and subject to the foregoing and our investigation of such matters of law as we have considered advisable, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Maryland. 2. Upon the consummation of sale of Shares and the payment of the consideration therefor in the manner described above and in the Registration Statement, the Shares will be duly authorized, validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We do not admit by giving this consent that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended. Very truly yours, /s/ SUTHERLAND, ASBILL & BRENNAN EX-99.N 16 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit n Consent of Matthews, Carter and Boyce, independent accountants Allied Capital Corporation Washington, D.C. 20006 We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form N-2, in the form in which it becomes effective, of our report dated February 10, 1995 relating to the consolidated financial statements of Allied Capital Corporation and its wholly owned subsidiaries for the years ended December 31, 1994, 1993 and 1992, which appear in such Prospectus. We also consent to the reference to us under the headings "Financial Highlights" and "Reports and Independent Public Accountants" in such Prospectus. /s/ MATTHEWS, CARTER AND BOYCE McLean, Virginia January 24, 1996 EX-27 17 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED STATEMENT OF FINANCIAL POSITION, CONSOLIDATED STATEMENT OF OPERATIONS, CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 113,980 121,819 0 2,936 20,835 145,590 0 81,300 4,052 85,352 12,186 41,332 6,186 6,174 2,284 0 3,584 0 7,661 59,238 1,079 8,645 618 8,058 2,284 3,584 6,551 12,419 0 2,284 1,539 0 0 0 33 9,251 854 2,024 3,420 0 2,077 4,994 8,058 54,600 7.11 .37 1.63 .37 .25 0 8.61 .15 74,800 12.09
-----END PRIVACY-ENHANCED MESSAGE-----