-----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, IWjAdQX2QRDaOK4vd3o1AUF9A6yOkbrhza8iR4GQl3XFZ19QnTmCmPgLEK7Hnp4W +V1QTTOasy8OtKE5OCanzw== 0000950133-98-001716.txt : 19980507 0000950133-98-001716.hdr.sgml : 19980507 ACCESSION NUMBER: 0000950133-98-001716 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980506 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED CAPITAL CORP CENTRAL INDEX KEY: 0000003906 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 521081052 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-51899 FILM NUMBER: 98611130 BUSINESS ADDRESS: STREET 1: 1666 K ST NW STE 901 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 2023311112 MAIL ADDRESS: STREET 1: 1666 K STREET NW STREET 2: 1666 K STREET NW CITY: WASHINGTON STATE: DC ZIP: 20006 FORMER COMPANY: FORMER CONFORMED NAME: ALLIED CAPITAL LENDING CORP DATE OF NAME CHANGE: 19931116 FORMER COMPANY: FORMER CONFORMED NAME: ALLIED LENDING CORP DATE OF NAME CHANGE: 19920703 N-2 1 ALLIED CAPITAL CORPORATION FORM N-2 1 As filed with the Securities and Exchange Commission on May 5, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ALLIED CAPITAL CORPORATION (Exact Name of Registrant as Specified in Charter) 1666 K STREET, N.W., NINTH FLOOR WASHINGTON, D.C. 20006 (202) 331-1112 (Address and Telephone Number, including Area Code, of Principal Executive Offices) WILLIAM L. WALTON, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ALLIED CAPITAL CORPORATION 1666 K STREET, N.W., NINTH FLOOR WASHINGTON, D.C. 20006 (Name and Address of Agent for Service) Copies of information to: STEVEN B. BOEHM WINTHROP B. CONRAD, JR. SUTHERLAND, ASBILL & BRENNAN LLP DAVIS POLK & WARDWELL 1275 PENNSYLVANIA AVENUE, N.W. 450 LEXINGTON AVENUE WASHINGTON, D.C. 20004-2415 NEW YORK, NY 10017
Approximate Date of Proposed Public Offering: As soon as possible after the Registration Statement becomes effective. 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. [ ] CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM OFFERING PRICE AGGREGATE TITLE OF SECURITIES AMOUNT BEING PER OFFERING AMOUNT OF BEING REGISTERED REGISTERED(1) UNIT(2) PRICE REGISTRATION FEE Common Stock, $0.0001 par value per share 6,612,500 $25.8125 $170,685,156 $50,352.12
(1) Includes an aggregate of 862,500 additional shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) on the basis of the average of the high and low sales prices of the Common Stock on May 4, 1998 as reported 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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 2 ALLIED CAPITAL CORPORATION CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY PARTS A AND B OF FORM N-2 REGISTRATION STATEMENT
ITEM CAPTION OR LOCATION IN PROSPECTUS OR STATEMENT OF NUMBER REGISTRATION STATEMENT ITEM AND HEADING ADDITIONAL INFORMATION - ------ --------------------------------------- ------------------------------------------------- PART A: INFORMATION REQUIRED IN A PROSPECTUS 1. Outside Front Cover...................... Outside front cover page 2. Inside Front and Outside Back Cover Page................................... Inside front cover page 3. Fee Table and Synopsis................... Prospectus Summary; Fees and Expenses; Additional Information 4. Financial Highlights..................... Prospectus Summary; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Plan of Distribution..................... Outside front cover; Underwriters 6. Selling Shareholders..................... Not Applicable 7. Use of Proceeds.......................... Use of Proceeds 8. General Description of Registrant........ Outside front cover; Prospectus Summary; The Company; Business; Risk Factors; Price Range of Common Stock and Distributions; Portfolio Companies; Senior Securities; Financial Statements 9. Management............................... Management; Safekeeping, Transfer and Dividend Paying Agent and Registrar 10. Capital Stock, Long-Term Debt, and Other Securities............................. Description of Capital Stock; Price Range of Common Stock and Distributions; Dividend Reinvestment Plan; Taxation; Certain Government Regulations 11. Defaults and Arrears on Senior Securities............................. Not Applicable 12. Legal Proceedings........................ Business -- Legal Proceedings 13. Table of Contents of the Statement of Additional Information................. Table of Contents of the Statement of Additional Information PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION 14. Cover Page............................... Outside front cover page of Statement of Additional Information 15. Table of Contents........................ Outside front cover page of Statement of Additional Information 16. General Information and History.......... General Information and History 17. Investment Objective and Policies........ Investment Objectives and Policies 18. Management............................... Management 19. Control Persons and Principal Shareholders........................... Control Persons and Principal Holders of Securities 20. Investment Advisory and Other Services... Investment Advisory Services; Safekeeping, Transfer and Dividend Paying Agent and Registrar; Accounting Services 21. Brokerage Allocation and Other Practices.............................. Brokerage Allocation and Other Practices 22. Tax Status............................... Tax Status 23. Financial Statements..................... Financial Statements in Prospectus PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this registration statement. 3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. PROSPECTUS (Subject to Completion) Issued , 1998 5,750,000 Shares ALLIED CAPITAL CORPORATION COMMON STOCK ------------------------ OF THE 5,750,000 SHARES OF COMMON STOCK OF ALLIED CAPITAL CORPORATION ("ACC" OR THE "COMPANY") BEING OFFERED HEREBY, 4,600,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES BY THE U.S. UNDERWRITERS AND 1,150,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." THE COMPANY'S COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ALLC." ON MAY , 1998, THE LAST REPORTED SALE PRICE FOR THE COMMON STOCK WAS $ . ------------------------ THE COMPANY, A MARYLAND CORPORATION, IS AN INTERNALLY MANAGED CLOSED-END MANAGEMENT INVESTMENT COMPANY THAT HAS ELECTED TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY ("BDC") UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THE COMPANY'S INVESTMENT OBJECTIVE IS TO ACHIEVE CURRENT INCOME AND CAPITAL GAINS. THE COMPANY SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN PRIVATE SMALL TO MEDIUM-SIZED GROWING BUSINESSES IN A VARIETY OF INDUSTRIES AND IN DIVERSE GEOGRAPHIC LOCATIONS, PRIMARILY IN THE UNITED STATES. SEE "BUSINESS." NO ASSURANCES CAN BE GIVEN THAT THE COMPANY WILL CONTINUE TO ACHIEVE ITS OBJECTIVE. THIS PROSPECTUS SETS FORTH THE INFORMATION ABOUT THE COMPANY THAT A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING AND SHOULD BE RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE COMPANY, INCLUDING SUCH INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED THE SAME DATE AS THIS PROSPECTUS, HAS BEEN FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") AND IS AVAILABLE UPON WRITTEN OR ORAL REQUEST WITHOUT CHARGE BY THE COMPANY AT 1666 K STREET, N.W., WASHINGTON, D.C. 20006, INVESTOR RELATIONS, OR BY CALLING 1-888-818-5298. THE COMMISSION MAINTAINS A WEB SITE (HTTP://WWW.SEC.GOV) THAT CONTAINS THE SAI, MATERIAL INCORPORATED BY REFERENCE AND OTHER INFORMATION REGARDING THE COMPANY. THE SAI IS INCORPORATED IN ITS ENTIRETY BY REFERENCE TO THE PROSPECTUS AND ITS TABLE OF CONTENTS APPEARS ON PAGE 59 OF THE PROSPECTUS. SEE "ADDITIONAL INFORMATION." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, INCLUDING THE RISK OF LEVERAGE. ------------------------ 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. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) ---------- -------------- ----------- Per Share............................................ $ $ $ Total(3)............................................. $ $ $
- ------------ (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $600,000. (3) The Company has granted to the U.S. Underwriters an option, exercisable within 30 days of the date of this Prospectus, to purchase up to an aggregate of 862,500 additional shares of Common Stock on the same terms as set forth above, solely to cover over-allotments, if any. If the U.S. Underwriters exercise the option in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company would be $ , $ , and $ , respectively. See "Underwriters." ------------------------ The Shares are being offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that the delivery of the Shares will be made on or about , 1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------------ MORGAN STANLEY DEAN WITTER NATIONSBANC MONTGOMERY SECURITIES LLC THE ROBINSON-HUMPHREY COMPANY SCOTT & STRINGFELLOW, INC. May , 1998 4 ALLIED CAPITAL CORPORATION The following map sets forth, at March 31, 1998, (i) the jurisdictions in which the Company's borrowers are located, (ii) the aggregate value of the loans in each jurisdiction and (iii) the location of the Company's offices. [MAP] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITERS." (i) 5 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 7 The Company................................................. 10 Use of Proceeds............................................. 10 Price Range of Common Stock and Distributions............... 11 Capitalization.............................................. 12 Selected Consolidated Financial Data........................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 15 Senior Securities........................................... 26 Business.................................................... 30 Portfolio Companies......................................... 40 Determination of Net Asset Value............................ 44 Management.................................................. 45 Taxation.................................................... 49 Certain Government Regulations.............................. 51 Dividend Reinvestment Plan.................................. 52 Description of Capital Stock................................ 53 Underwriters................................................ 56 Legal Matters............................................... 58 Safekeeping, Transfer and Dividend Paying Agent and Registrar................................................. 59 Independent Public Accountants.............................. 59 Table of Contents of Statement of Additional Information.... 59 Index to Financial Statements............................... 60
------------------------ INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE MATTERS DESCRIBED IN "RISK FACTORS" AND CERTAIN OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS, AND IN ANY EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART, CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. (ii) 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. The Company's current business and investment portfolio resulted from the merger on December 31, 1997 of Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Commercial Corporation, Allied Capital Lending Corporation and Allied Capital Advisers, Inc. Immediately following the merger, the surviving company, Allied Capital Lending Corporation, changed its name to "Allied Capital Corporation." All information in this Prospectus, unless otherwise indicated, has been presented as if the predecessor companies had merged as of the beginning of the earliest period presented. See "The Company." THE COMPANY Allied Capital Corporation (the "Company" or "ACC") is a commercial finance company principally engaged in lending to and investing in private small and medium-sized businesses. The Company has been lending to private growing businesses for 40 years and has financed thousands of borrowers nationwide in a variety of industries. In addition to its core lending business, the Company provides advisory services to private investment funds. The Company's lending operations are conducted in three primary areas: mezzanine finance, commercial real estate finance, and 7(a) lending. The principal loan products of the Company include: subordinated loans with equity features, commercial mortgage loans, and Small Business Administration ("SBA") 7(a) guaranteed loans. The Company is a full-service lender and sources, originates and services all of the loans it finances. The Company sources loans and investments through its numerous relationships with regional and boutique investment banks, mezzanine and venture capital investors, and other intermediaries, including professional services firms. In order to increase its sourcing and origination activities, the Company recently opened offices in Chicago and San Francisco. The Company centralizes its credit approval function and services all of its loans through an experienced staff of professionals at its headquarters in Washington, D.C. In addition, the Company recently established an office in Frankfurt to provide investment advisory services to a private investment fund making loans in Germany. The Company has experienced significant growth in its investment portfolio in the past several years. The fair value of the Company's portfolio grew at an annual compound growth rate of 20.2% to $697.0 million as of December 31, 1997 from $334.2 million as of December 31, 1993, and at December 31, 1997 included 819 borrower relationships in 40 states and the District of Columbia. The Company's portfolio income grew at an annual compound growth rate of 23.7% to $46.1 million from $19.7 million for the years ended December 31, 1997 and 1993, respectively. Additionally, the Company generated a total of $45.5 million in net realized gains during the five-year period ended December 31, 1997. As a lender, the Company targets a market niche between the senior debt financing provided by traditional lenders, such as banks and insurance companies, and the equity capital provided by venture capitalists. The Company believes that many traditional lenders, due to their overhead costs, regulatory structure or size, are hindered from lending effectively to small and medium-sized businesses. Many traditional lenders do not offer a long-term financing option for small to medium-sized businesses. In addition, the Company recognizes that entrepreneurs need an alternative to the high cost and dilutive nature of venture equity capital. The Company is an "enterprise value" lender, which means that it analyzes the potential equity value of a portfolio company when making a credit decision, in addition to the customary collateral and cash flow analyses used by traditional lenders. In its mezzanine finance operations, the Company assesses the underlying value of a borrower's equity capital and structures its loans to include an equity component in order to enhance its total return on investment. In its commercial real estate operations, the Company assesses the borrower's enterprise value to more accurately determine the ability of the borrower to service its debt. The Company believes that its 40 years of experience operating exclusively as an enterprise value lender provides it with a competitive advantage in originating attractive investment opportunities. 1 7 On December 31, 1997, the Company completed the merger of five separate Allied Capital companies, all of which were engaged in small business finance. The objective of the merger was to create a single, large commercial finance company and to establish a solid foundation for future growth. The increased size of the Company's investment portfolio, equity capital base, and market capitalization as a result of the merger has benefited the Company in many respects. The larger portfolio has enabled the Company to increase the size of the loans it originates while maintaining adequate portfolio size diversity. This is expected to increase both the level of annual loan originations as well as enhance the credit quality of the Company's portfolio. The larger equity capital base has strengthened the Company's credit profile, and has enabled the Company to restructure its credit facilities and obtain unsecured debt financing at a lower cost with more favorable financing terms. In addition, the Company believes that its larger market capitalization has increased its access to capital. Greater access to capital at a lower cost has enabled the Company to price its loans to borrowers more competitively. The Company's objective is to continue to be a leader in financing growing businesses. The Company believes that the merger created the structural and financial foundation from which to grow, and management continues to refine its operations. The Company has begun to streamline its operations and fully integrate all of its lending disciplines in order to improve its efficiency and benefit from synergies between the various lending areas. The Company has developed certain key strategies which it believes will enable it to achieve its objective and result in continued growth in assets and profitability. The principal elements of the Company's strategies are: (i) growth in loan originations, (ii) maintenance of asset quality, and (iii) efficient management of the balance sheet in order to maximize returns to shareholders. In addition, the Company plans to further its growth through the acquisition of portfolios and related businesses, and through strategic partnerships with other lenders and intermediaries. The Company is currently reviewing various acquisition opportunities. The Company has an advantageous structure that allows for the "pass-through" of income to its shareholders without the imposition of a corporate level of taxation. See "Taxation." The Company is an internally managed closed-end management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). The investment objective of the Company is to achieve current income and capital gains. The Company seeks to achieve its investment objective by investing in growing businesses in a variety of industries and in diverse geographic locations, primarily in the United States. See "Business." THE OFFERING Common Stock Offered: U.S. Offering............ 4,600,000 Shares International Offering... 1,150,000 Shares ---------- Total............... 5,750,000 Shares(1) ========== Common Stock to be outstanding after the Offering.......... 57,871,610 Shares(2) - --------------- (1) Assumes the over-allotment option granted to the Underwriters will not be exercised. (2) As of May 4, 1998. Excludes 3,415,446 shares of Common Stock issuable upon the exercise of stock options granted under the Company's stock option plan, of which options to purchase 2,805,116 shares are currently outstanding but not exercisable and options to purchase 610,330 shares are currently outstanding and exercisable. 2 8 Nasdaq National Market Symbol........................ ALLC Use of Proceeds............... Origination of loans and investments and temporary repayment of indebtedness. See "Use of Proceeds." Distributions................. The Company currently intends to distribute quarterly to its shareholders substantially all of its net income and net realized capital gains and may annually make an additional distribution of 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 been distributed through the quarterly dividends. See "Price Range of Common Stock and Distributions." Dividend Reinvestment Plan.... The Company has adopted an "opt out" dividend reinvestment plan ("DRIP Plan"). Under the DRIP Plan, distributions to a shareholder owning shares registered in his or her own name will be automatically reinvested in additional shares of Common Stock unless a shareholder elects to "opt out" of the DRIP Plan. See "Dividend Reinvestment Plan." Principal Risk Factors........ Investment in shares of Common Stock involves certain risks relating to the structure and investment objective of the Company that should be considered by the prospective purchasers of Common Stock. As a BDC, the Company's consolidated portfolio includes securities primarily issued by privately held companies. These investments may involve a high degree of business and financial risk, and such investments are generally illiquid. A large number of entities and individuals compete for the same kind of investment opportunities as does the Company. The Company borrows funds to make investments in and loans to small and medium-sized businesses. As a result, the Company is exposed to the risks of leverage, which may be considered a speculative investment technique. In addition, the loss of pass-through tax treatment under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") could have a materially adverse effect on the total return, if any, obtainable from an investment in the Company. See "Risk Factors" for a discussion of such risks, including the effect of leverage. Certain Anti-Takeover Provisions.................... The Company's Charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for the Company and thereby inhibit a change in control of the Company in circumstances that could give the holders of Common Stock the opportunity to realize a premium over the then prevailing market price for the Common Stock. See "Description of Capital Stock -- Certain Anti-Takeover Provisions." 3 9 FEES AND EXPENSES The purpose of the following tables is to assist an investor in understanding the various costs and expenses that an investor in the Company will bear directly or indirectly. SHAREHOLDER TRANSACTION EXPENSES Sales load (as a percentage of offering price)(1)...... 5.0% Dividend reinvestment plan fees(2)..................... None ANNUAL EXPENSES (AS A PERCENTAGE OF CONSOLIDATED NET ASSETS ATTRIBUTABLE TO COMMON SHARES)(3) Operating expenses(4).................................. 3.8% Interest payments on borrowed funds(5)................. 3.6% ------- Total annual expenses(6).......................... 7.4% =======
- --------------- (1) The underwriting discounts and commissions with respect to the Common Stock sold by the Company in this Offering, which are one-time fees paid by the Company to the Underwriters in connection with this Offering, are the only sales load paid in connection with this Offering. (2) The expenses of the Company's DRIP Plan are included in "Operating expenses." The Company has no cash purchase plan. The participants in the DRIP Plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases, if any. See "Dividend Reinvestment Plan." (3) "Consolidated net assets attributable to common shares" equals net assets, as adjusted (i.e., total assets less total liabilities) at March 31, 1998. This assumes a net asset value of $563.2 million, which will be the Company's estimated shareholders' equity upon completion of the Offering. (4) Operating expenses represent all operating expenses of the Company excluding interest on indebtedness. (5) The "Interest payments on borrowed funds" percentage is based on estimated interest payments for the year ended December 31, 1998 divided by consolidated net assets attributable to common shares. The Company had outstanding borrowings of $202.2 million at March 31, 1998. This percentage for the year ended December 31, 1997 was 6.4%. See "Risk Factors -- Risks of Leverage." (6) "Total annual expenses" as a percentage is based on estimated amounts for the year ended December 31, 1998. "Total annual expenses" as a percentage of consolidated net assets attributable to common shares are higher than the total annual expenses percentage would be for a company that is not leveraged. The Company borrows money to leverage its net assets and increase its total assets. The "Total annual expenses" percentage is required by the Commission to be calculated as a percentage of net assets, rather than the total assets, including assets that have been funded with borrowed monies. If the "Total annual expenses" percentage were calculated instead as a percentage of consolidated total assets, "Total annual expenses" for the Company would be 5.3% of consolidated total assets. EXAMPLE The following example, required by the Commission, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in the Company. These amounts assume no additional leverage and are based upon the payment by an investor of a 5.0% sales load (the underwriting discounts and commissions paid by the Company with respect to the Common Stock sold in this Offering) and the payment by the Company of operating expenses at the levels set forth in the table above.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return............................. $121 $264 $405 $755
Although the example assumes (as required by the Commission) a 5.0% annual return, the Company's performance will vary and may result in a return of greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in the DRIP Plan may receive shares issued by the Company at or above net asset value or purchased by the Plan Agent (as defined below), as administrator of the DRIP Plan, at the market price in effect at the time, which may be higher than, at, or below net asset value. See "Dividend Reinvestment Plan." THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND THE ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. 4 10 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated financial information of the Company set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this Prospectus. Financial information for the years ended December 31, 1997, 1996 and 1995 has been derived from audited financial statements. Financial information for the years ended December 31, 1994 and 1993 has been derived from the audited financial statements of the individual predecessor companies. The selected financial data reflects the operations of the Company with all periods restated as if the predecessor companies had merged as of the beginning of the earliest period presented. Financial information at March 31, 1998 and for the three-month periods ended March 31, 1998 and 1997 is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------- ----------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- ------- ------- OPERATING DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest and related portfolio income: Interest..................................... $19,501 $19,630 $86,882 $77,541 $61,550 $47,065 $33,639 Net premiums from loan dispositions.......... 1,336 701 7,277 4,241 2,796 2,380 2,196 Net gain on securitization of commercial mortgage loans............................. 14,812 -- -- -- -- -- -- Investment advisory fees and other income.... 1,248 1,068 3,246 3,155 4,471 2,710 1,833 ------- ------- ------- ------- ------- ------- ------- Total interest and related portfolio income................................. 36,897 21,399 97,405 84,937 68,817 52,155 37,668 ------- ------- ------- ------- ------- ------- ------- Expenses: Interest on indebtedness..................... 4,598 5,788 26,952 20,298 12,355 7,486 7,053 Salaries and employee benefits............... 2,850 2,057 10,258 8,774 8,031 6,929 5,510 General and administrative................... 2,757 1,586 8,970 8,289 6,888 7,170 5,441 Merger....................................... -- -- 5,159 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses................. 10,205 9,431 51,339 37,361 27,274 21,585 18,004 Formula and cut-off awards(1)................ 1,772 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Portfolio income before realized and unrealized gains........................... 24,920 11,968 46,066 47,576 41,543 30,570 19,664 ------- ------- ------- ------- ------- ------- ------- Net realized and unrealized gains Net realized gains........................... 6,421 3,677 10,704 19,155 12,000 6,236 (2,569) Net unrealized gains (losses)................ 724 (2,159) 7,209 (7,412) 9,266 (2,244) 2,039 ------- ------- ------- ------- ------- ------- ------- Total net realized and unrealized gains.................................. 7,145 1,518 17,913 11,743 21,266 3,992 (530) ------- ------- ------- ------- ------- ------- ------- Income before minority interests and income taxes.......................................... 32,065 13,486 63,979 59,319 62,809 34,562 19,134 Minority interests............................... -- 306 1,231 2,427 546 -- -- Income tax expense............................... -- 534 1,444 1,945 1,784 672 171 ------- ------- ------- ------- ------- ------- ------- Net increase in net assets resulting from operations..................................... $32,065 $12,646 $61,304 $54,947 $60,479 $33,890 $18,963 ======= ======= ======= ======= ======= ======= ======= Per Share: Basic earnings per common share.................. $ .62 $ .27 $ 1.24 $ 1.19 $ 1.38 $ .80 $ .46 Diluted earnings per common share................ .61 .27 1.24 1.17 1.37 .79 .46 Basic earnings per common share excluding merger expenses....................................... .62 .27 1.35 1.19 1.38 .80 .46 Total tax distributions per common share(2)...... $ .35 $ .30 $ 1.71 $ 1.23 $ 1.09 $ .94 $ .74 Weighted average common shares outstanding(3).... 51,814 46,938 49,218 46,172 43,697 42,463 40,466
5 11
AT AT DECEMBER 31, MARCH 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 1993 BALANCE SHEET DATA: ---------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Portfolio at value........................... $564,455 $697,021 $607,368 $528,483 $443,316 $334,193 Portfolio at cost............................ 562,006 690,720 613,276 526,979 451,078 339,711 Total assets................................. 652,710 807,775 713,360 605,434 501,817 435,268 Total debt outstanding....................... 202,243 347,663 274,997 200,339 130,236 69,800 Preferred stock issued to SBA................ 7,000 7,000 7,000 7,000 7,000 7,000 Shareholders' equity......................... 423,248 420,060 402,134 367,192 344,043 342,904 Shareholders' equity per common share...................................... $ 8.23 $ 8.07 $ 8.34 $ 8.26 $ 8.02 $ 8.11 Common shares outstanding at period end(3)... 51,451 52,047 48,238 44,479 42,890 42,306
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 OTHER DATA: -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Loan originations................... $107,506 $ 72,099 $364,942 $283,295 $216,175 $215,843 $147,735 Loan repayments..................... 30,773 25,104 233,005 179,292 111,731 54,097 117,305 Loan sales(4)....................... 9,706 6,425 53,912 27,715 29,726 30,160 18,796 Total assets serviced at period end............................... 909,266 822,009 856,581 773,263 682,489 585,756 441,097 Realized losses..................... -- 829 5,100 11,262 4,679 2,908 3,719 Realized gains...................... $ 6,421 $ 4,505 $ 15,804 $ 30,417 $ 16,679 $ 9,144 $ 1,150 Return on equity(5)................. -- -- 15% 14% 17% 10% 6%
- --------------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." (2) Distributions are based on taxable income, which differs from income for financial reporting purposes. In 1997, Allied Capital Corporation (old) distributed $0.34 per share representing the 844,914 shares of Allied Capital Lending Corporation distributed in conjunction with the Merger, as defined below. The distribution resulted in a partial return of capital. Also in conjunction with the Merger, the Company distributed $0.17 per share representing the undistributed earnings of the predecessor companies at December 31, 1997. See "The Company." (3) Excludes 663,000 shares held in the Company's deferred compensation trust at or for the period ended March 31, 1998. See "Management -- Compensation Plans." (4) Excludes loans sold through securitization in January 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." (5) Return on equity is computed using the net increase in net assets resulting from operations for the year divided by the average of beginning and ending shareholders' equity for the year. Return on equity has not been computed on a quarterly basis because quarterly results may fluctuate significantly and may not be indicative of annual results. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement on Form N-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Common Stock of the Company offered by this Prospectus. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits and schedules thereto and the SAI, contained in the Registration Statement. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Registration Statement and the exhibits and schedules thereto filed with the Commission, as well as such reports, proxy statements and other information, may be inspected, without charge, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that contains reports, proxy statements and other information regarding registrants, including the Company, that file such information electronically with the Commission. The address of the Commission's web site is http://www.sec.gov. Copies of such material may also be obtained from the public reference facility of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the Nasdaq National Market, and such reports, proxy statements and other information can also be inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. 6 12 RISK FACTORS The purchase of the Shares offered by this Prospectus involves a number of significant risks 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. In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following information before making an investment in the Common Stock. RISKS OF DEFAULT ACC invests in and lends to small businesses. Loans to small businesses involve a high risk of default and generally are not rated by any nationally recognized statistical rating organization. Small businesses usually 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. These businesses typically depend for their success on the management talents and efforts of one person or a small group of persons whose death, disability or resignation would adversely affect the business. Because these businesses frequently have highly leveraged capital structures, reduced cash flows resulting from adverse competitive developments, a shift in customer preferences or an economic downturn can severely affect the return on, or the recovery of, the Company's investments in such businesses. The Company recently has begun originating larger loans, and as a result, any individual event of default may have a more significant impact on the Company or its operations. LOSS OF PASS-THROUGH TAX TREATMENT The Company qualifies as a regulated investment company ("RIC") under Subchapter M of the Code and, provided it meets certain requirements under the Code, qualifies for pass-through tax treatment. The Company would cease to qualify for pass-through tax treatment if it is unable to comply with the diversification or distribution requirements contained in Subchapter M of the Code, or if it ceases to qualify as a BDC under the 1940 Act. The Company also could be subject to a 4% excise tax (and, in certain cases, corporate level income tax) if it fails to make certain distributions. The lack of Subchapter M tax treatment could have a material adverse effect on the total return, if any, obtainable from an investment in the Company. See "Taxation." COMPETITION Many entities and individuals compete for investments similar to those made by the Company, some of whom have greater resources than ACC. Increased competition would make it more difficult for the Company to purchase or originate loans at attractive prices. As a result of this competition, ACC may from time to time be precluded from making otherwise attractive investments on terms considered to be prudent in light of the risks assumed. LONG-TERM CHARACTER OF INVESTMENTS It is generally expected that mezzanine loans will yield a current return from the time they are made, but also will produce a realized gain, if any, from an accompanying equity feature after approximately three to eight years. There can be no assurance that either a current return or capital gains will actually be achieved. ILLIQUIDITY OF INVESTMENTS The Company acquires securities directly from issuers in private transactions, and the major portion of such investments ordinarily is subject to restrictions on resale or is otherwise illiquid. In particular, there is usually no established trading market in which such securities could be sold. In addition, securities generally cannot be sold to the public without registration under the Securities Act, which involves delay, uncertainty and expense. 7 13 GOVERNMENT REGULATIONS The Company is subject to regulation by the Commission and the SBA. In addition, the Company's business may be significantly impacted by changes in the laws or regulations that govern BDCs, RICs, real estate investment trusts ("REITs"), small business investment companies ("SBICs"), specialized small business investment companies ("SSBICs") and small business lending companies ("SBLCs"). Laws and regulations may be changed from time to time and the interpretations of the relevant law and regulations also are subject to change. Any change in the laws or regulations that govern the Company could have a material impact on the Company or its operations. See "Certain Government Regulations." INTEREST RATE RISK The Company's income is materially dependent upon the "spread" between the rate at which it borrows funds and the rate at which it loans these funds. The Company anticipates using a combination of long-term and short-term borrowings to finance its lending activities and engaging in interest rate risk management techniques. At March 31, 1998, the Company's net interest spread was 4.8% (480 basis points), which represents the weighted average yield of the combined portfolio less the weighted average cost of funds. There can be no assurance that the Company will maintain this net interest spread or that a significant change in market interest rates will not have a material adverse effect on the Company's profitability. LIMITED INFORMATION 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 its officers and directors to obtain the information necessary for the Company's decision to invest in them. FLUCTUATIONS IN QUARTERLY RESULTS The Company could experience fluctuations in quarterly operating results due to a number of factors including, among others, the completion of a securitization transaction in a particular calendar quarter, the interest rates on the securities issued in connection with its securitization transactions, variations in the volume of loans originated by the Company, variations in and the timing of the recognition of realized and unrealized gains, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any one quarter should not be relied upon as being indicative of performance in future quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS OF LEVERAGE ACC borrows funds from, and issues senior debt securities to, banks and other lenders. Lenders of these senior securities have fixed dollar claims on the Company's consolidated assets which are superior to the claims of the Company's shareholders. Leverage magnifies the potential for gain and loss on amounts invested and, therefore, increases the risks associated with an investment in the Company's securities. If the value of the Company's consolidated assets increases, then such leveraging techniques would cause the net asset value attributable to the Company's Common Stock to increase more sharply than it would have had the techniques not been utilized. Conversely, a decrease in the value of the Company's consolidated assets would cause net asset value to decline more sharply than it otherwise would if the amounts had not been borrowed. Similarly, any increase in the Company's consolidated income in excess of consolidated interest payable on the borrowed funds would cause its net income to increase more than it would without the leverage, while any decrease in its consolidated income would cause net income to decline more sharply than it would have had the funds not been borrowed. Such a decline could negatively affect the Company's ability to make Common Stock dividend payments, and, if asset coverage for a class of senior security representing indebtedness declines to less than 200%, the Company may be required to sell a portion of its investments when it is disadvantageous to do so. Leverage is generally considered a speculative investment technique. As of March 31, 1998, the 8 14 Company's debt as a percentage of total liabilities and shareholders' equity was 31.0%. The ability of the Company to achieve its investment objective may depend in part on its continued ability to maintain a leveraged capital structure by borrowing from banks or other lenders on favorable terms, and there can be no assurance that such leverage can be maintained. See "Certain Government Regulations." At March 31, 1998, the Company had $202.2 million of outstanding indebtedness, bearing a weighted average annual interest rate of 7.6%. In order for the Company to cover annual interest payments on its indebtedness, it must achieve annual returns of at least 2.7% on its portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources -- Indebtedness." Illustration. The purpose of the following table is to illustrate the effect of leverage on returns to a shareholder on an investment in the Common Stock assuming various annual returns, net of expenses. The calculations set forth in the table are hypothetical and actual returns may be greater or less than those appearing below.
ASSUMED RETURN ON THE COMPANY'S PORTFOLIO (NET OF EXPENSES) -------------------------------------------------------------------------- -20% -10% -5% 0% 5% 10% 20% -------- -------- -------- -------- -------- -------- -------- Corresponding return to shareholder(1).............. -34.5% -19.1% -11.4% -3.7% 4.0% 11.7% 27.2%
- --------------- (1) The calculation assumes (i) $652.7 million in total assets, (ii) an average cost of funds of 7.6%, (iii) $202.2 million in debt outstanding and (iv) $423.2 million of shareholders' equity. CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for the Company and thereby inhibit a change in control of the Company in circumstances that could give the holders of Common Stock the opportunity to realize a premium over the then prevailing market price for the Common Stock. See "Description of Capital Stock -- Certain Anti-Takeover Provisions." 9 15 THE COMPANY Allied Capital Corporation is a commercial finance company principally engaged in lending to and investing in private small and medium-sized businesses. The Company, a Maryland corporation, is an internally managed closed-end management investment company that has elected to be regulated as a business development company (as defined above, a "BDC") under the 1940 Act. The Company has three wholly owned subsidiaries that have also elected to be regulated as BDCs. Allied Investment Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial") are licensed by the Small Business Administration ("SBA") as an SBIC and an SSBIC, respectively. Allied Capital SBLC Corporation ("Allied SBLC") is licensed by the SBA as a small business lending company and is a participant in the SBA Section 7(a) Guaranteed Loan Program. In addition, the Company has also established a real estate investment trust subsidiary, Allied Capital REIT, Inc. See "Certain Government Regulations." The Company resulted from the merger on December 31, 1997 of Allied Capital Corporation ("Allied I"), Allied Capital Corporation II ("Allied II"), Allied Capital Commercial Corporation ("Allied Commercial") and Allied Capital Advisers, Inc. ("Advisers") with and into Allied Capital Lending Corporation ("Allied Lending") in a tax free stock-for-stock exchange (the "Merger"). Immediately following the Merger, Allied Lending changed its name to "Allied Capital Corporation." The five parties to the Merger are sometimes referred to herein, either singularly or collectively, as the "Predecessor Company" or "Predecessor Companies." The Company's executive offices are located at 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006 and its telephone number is (202) 331-1112. In addition to its executive offices, the Company maintains offices in Chicago, San Francisco and Frankfurt, Germany. USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $140 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company anticipates that net proceeds from the Offering will be used, in accordance with the Company's investment objective, to make new investments in small to medium-sized, private growth companies. See "Business -- Underwriting Guidelines and Procedures." The Company may temporarily repay amounts outstanding under its short-term lines of credit that bear interest at rates of approximately 7.1% per annum as of the date hereof. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." The Company anticipates that substantially all of the net proceeds from the Offering will be utilized in the manner described above within six months, and in any event within two years. Pending such utilization, the Company intends to invest the net proceeds from this Offering in time deposits, income-producing securities with maturities of three months or less that are issued or guaranteed by the federal government or an agency thereof and high quality debt securities maturing in one year or less from the time of investment. The Company is in the process of issuing $180 million of unsecured long-term notes to institutional investors in a private placement. The Company is issuing the long-term notes in order to match the maturities of its long-term portfolio assets, and plans to use the proceeds from the issuance of the long-term notes to repay short-term lines of credit. The issuance is expected to close during the second quarter of 1998, although there is no assurance that the Company will be able to complete the issuance of the notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." 10 16 PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS The Common Stock is traded on the Nasdaq National Market under the symbol "ALLC." The following table sets forth the high and low closing sales prices for the Company in 1998 and for Allied Lending, the predecessor company to ACC, in 1997 and 1996, the common stock of which was quoted on the Nasdaq National Market under the symbol "ALCL." The stock quotations are interdealer quotations and do not include markups, markdowns or commissions. On May , 1998, the last reported closing sale price of the Common Stock was $ per share.
CLOSING SALE PRICE ------------------ HIGH LOW ------- ------- ALLIED CAPITAL CORPORATION YEAR ENDING DECEMBER 31, 1998 First Quarter.......................................... $27.688 $21.000 Second Quarter (through May )........... ALLIED CAPITAL LENDING CORPORATION YEAR ENDED DECEMBER 31, 1997 First Quarter.......................................... 17.000 14.875 Second Quarter......................................... 16.625 13.875 Third Quarter.......................................... 16.750 14.500 Fourth Quarter......................................... 22.750 15.750 YEAR ENDED DECEMBER 31, 1996 First Quarter.......................................... 15.000 12.750 Second Quarter......................................... 15.000 12.703 Third Quarter.......................................... 15.375 13.125 Fourth Quarter......................................... 15.875 14.000
The common stock of Allied Lending historically traded at prices in excess of the net asset value and the Common Stock of the Company continues to trade in excess of net asset value. There can be no assurance, however, that such premium to net asset value will be maintained. The net asset value and the percentage of the market price to net asset value for Allied Lending has not been presented because the net asset value of the Company has been restated as if the Predecessor Companies, including Allied Lending, had merged as of the beginning of the earliest period presented. See "Selected Consolidated Financial Data -- Quarterly Data." Each Predecessor Company has distributed, and the Company currently intends to distribute, substantially all of its net income and net realized capital gains to shareholders quarterly, generally on the last business of day of March, June, September and December of each year. The Company may also distribute as an additional dividend 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. See "Selected Consolidated Financial Data -- Quarterly Data." There can be no assurance that the Company will achieve investment results or maintain a tax status that will permit any particular level of cash distributions or annual increases in cash distributions. See "Taxation." Certain of the Company's credit facilities limit the Company's ability to declare dividends if the Company defaults under certain provisions of the Company's credit agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." Pursuant to the Company's DRIP Plan, a shareholder whose shares are registered in his or her own name is automatically enrolled in the Company's DRIP Plan and will have all dividends reinvested in additional shares of Common Stock. A shareholder may elect to "opt out" of the DRIP Plan at any time. See "Dividend Reinvestment Plan." 11 17 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1998 (i) on a historical basis and (ii) as adjusted to give effect to (a) the sale of the Common Stock hereby and (b) the issuance of $180 million of unsecured long-term notes expected to be issued during the second quarter of 1998 and the application of the proceeds of (a) and (b) as described in "Use of Proceeds." The information below should be read in conjunction with the Consolidated Financial Statements and the Notes thereto which are included elsewhere herein.
AT MARCH 31, 1998 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Senior unsecured notes(1)................................... $ 28,700 $ 8,700 Debentures and notes payable(1)............................. 70,543 53,300 Revolving lines of credit(1)................................ 103,000 -- Unsecured long-term notes payable(1)........................ -- 180,000 -------- -------- Total debt............................................. 202,243 242,000 Preferred stock issued to SBA............................... 7,000 7,000 Shareholders' equity: Common stock and additional paid-in capital(2)......... 452,728 592,728 Common stock held in deferred compensation trust....... (15,330) (15,330) Notes receivable from sale of common stock............. (26,556) (26,556) Net unrealized appreciation on portfolio............... 2,025 2,025 Undistributed earnings................................. 10,381 10,381 -------- -------- Total shareholders' equity............................. 423,248 563,248 -------- -------- Total capitalization........................................ $632,491 $812,248 ======== ========
- --------------- (1) To record the effect of a $180 million issuance of unsecured long-term notes payable, and the resulting repayment of certain debentures and notes payable and revolving lines of credit. In addition, $20 million of existing senior unsecured notes will be restructured as part of the $180 million issuance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." (2) To record the effect of $140 million of net proceeds received from the issuance of Common Stock in connection with the Offering. See "Use of Proceeds." 12 18 SELECTED CONSOLIDATED FINANCIAL DATA The consolidated financial information of the Company set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto presented elsewhere in this Prospectus. Financial information for the years ended December 31, 1997, 1996 and 1995 has been derived from audited financial statements. The financial information reflects the operations of the Company with all periods restated as if the Predecessor Companies had merged as of the beginning of the earliest period presented. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- --------------------------- 1998 1997 1997 1996 1995 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Interest and related portfolio income: Interest................................................ $19,501 $19,630 $86,882 $77,541 $61,550 Net premiums from loan dispositions..................... 1,336 701 7,277 4,241 2,796 Net gain on securitization of commercial mortgage loans................................................ 14,812 -- -- -- -- Investment advisory fees and other income .............. 1,248 1,068 3,246 3,155 4,471 ------- ------- ------- ------- ------- Total interest and related portfolio income........ 36,897 21,399 97,405 84,937 68,817 ------- ------- ------- ------- ------- Expenses: Interest on indebtedness................................ 4,598 5,788 26,952 20,298 12,355 Salaries and employee benefits.......................... 2,850 2,057 10,258 8,774 8,031 General and administrative.............................. 2,757 1,586 8,970 8,289 6,888 Merger.................................................. -- -- 5,159 -- -- ------- ------- ------- ------- ------- Total operating expenses........................... 10,205 9,431 51,339 37,361 27,274 Formula and cut-off awards(1)........................... 1,772 -- -- -- -- ------- ------- ------- ------- ------- Portfolio income before realized and unrealized gains... 24,920 11,968 46,066 47,576 41,543 ------- ------- ------- ------- ------- Net realized and unrealized gains Net realized gains...................................... 6,421 3,677 10,704 19,155 12,000 Net unrealized gains (losses)........................... 724 (2,159) 7,209 (7,412) 9,266 ------- ------- ------- ------- ------- Total net realized and unrealized gains............ 7,145 1,518 17,913 11,743 21,266 ------- ------- ------- ------- ------- Income before minority interests and income taxes........... 32,065 13,486 63,979 59,319 62,809 Minority interests.......................................... -- 306 1,231 2,427 546 Income tax expense.......................................... -- 534 1,444 1,945 1,784 ------- ------- ------- ------- ------- Net increase in net assets resulting from operations........ $32,065 $12,646 $61,304 $54,947 $60,479 ======= ======= ======= ======= ======= Per Share: Basic earnings per common share............................. $ .62 $ .27 $ 1.24 $ 1.19 $ 1.38 Diluted earnings per common share........................... $ .61 $ .27 $ 1.24 $ 1.17 $ 1.37 Weighted average common shares outstanding(2)............... 51,814 46,938 49,218 46,172 43,697
AT AT DECEMBER 31, MARCH 31, ------------------------------ 1998 1997 1996 1995 --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Portfolio at value.......................................... $564,455 $697,021 $607,368 $528,483 Portfolio at cost........................................... 562,006 690,720 613,276 526,979 Total assets................................................ 652,710 807,775 713,360 605,434 Total debt outstanding...................................... 202,243 347,663 274,997 200,339 Preferred stock issued to SBA............................... 7,000 7,000 7,000 7,000 Shareholders' equity........................................ 423,248 420,060 402,134 367,192 Shareholders' equity per common share....................... $ 8.23 $ 8.07 $ 8.34 $ 8.26 Common shares outstanding at period end(2).................. 51,451 52,047 48,238 44,479
13 19
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------ ------------------------------ 1998 1997 1997 1996 1995 -------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OTHER DATA: Loan originations........................................... $107,506 $72,099 $364,942 $283,295 $216,175 Loan repayments............................................. 30,773 25,104 233,005 179,292 111,731 Loan sales(3)............................................... 9,706 6,425 53,912 27,715 29,726 Total assets serviced at period end......................... 909,266 822,009 856,581 773,263 682,489 Realized losses............................................. -- 829 5,100 11,262 4,679 Realized gains.............................................. $ 6,421 $ 4,505 $ 15,804 $ 30,417 $ 16,679 Return on equity(4)......................................... -- -- 15% 14% 17%
- --------------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." (2) Excludes 663,000 shares held in the Company's deferred compensation trust at or for the period ended March 31, 1998. See "Management -- Compensation Plans." (3) Excludes loans sold through securitization in January 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." (4) Return on equity is computed using the net increase in net assets resulting from operations for the year divided by the average of beginning and ending shareholders' equity for the year. Return on equity has not been computed on a quarterly basis because quarterly results may fluctuate significantly and may not be indicative of annual results.
1998 1997 1996 ------- ------------------------------------- ------------------------------------- QTR 1 QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4 ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTERLY DATA: Total interest and related portfolio income................ $36,897 $21,399 $24,911 $25,111 $25,984 $19,412 $20,866 $20,753 $23,906 Portfolio income before realized and unrealized gains...... 24,920 11,968 14,095 12,093 7,910 11,284 11,665 11,592 13,035 Net increase in net assets resulting from operations............ 32,065 12,646 18,296 17,146 13,216 18,935 11,090 16,855 8,067 Basic earnings per common share.......... .62 .27 .37 .35 .25 .42 .24 .35 .18 Diluted earnings per common share.......... .61 .27 .37 .35 .25 .42 .23 .34 .18 Net asset value per share(1).............. 8.23 8.39 8.50 8.42 8.07 8.37 8.46 8.58 8.34 Dividends declared per share................. .35 .30 .30 .31 .80(2) .25 .26 .27 .45(3)
- --------------- (1) Net asset value per share is determined as of the last day in the relevant quarter. The information presented reflects the operations of the Company with all periods restated as if the Predecessor Companies had merged as of the beginning of the earliest period presented. The net asset values shown are based on outstanding shares at the end of each period. (2) During the fourth quarter of 1997, the Company declared a quarterly dividend of $0.61 which included $0.34 per share representing the distribution of shares of Allied Lending previously held in Allied I's portfolio. The Company also declared an annual extra distribution of $0.02 per share, and a special distribution of previously undistributed earnings of $0.17 per share in conjunction with the Merger. (3) During the fourth quarter of 1996, the Company declared a regular quarterly dividend of $0.29 per share and an annual extra distribution of $0.16 per share. 14 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Selected Consolidated Financial Data, the Company's Consolidated Financial Statements and the Notes thereto, and the other financial data included elsewhere in this Prospectus. The Merger was treated as a tax-free reorganization under Section 368 (a)(1)(A) of the Code. For federal income tax purposes, the Predecessor Companies carried forward the historical cost basis of their assets and liabilities to the surviving entity (Allied Capital Corporation). For financial reporting purposes, the Predecessor Companies also carried forward the historical cost basis of their respective assets and liabilities at the time the Merger was effected. For financial reporting purposes, Allied I's ownership of Allied Lending has been eliminated for all periods presented. The financial information reflects the operations of the Company with all periods restated as if the Predecessor Companies had merged as of the beginning of the earliest period presented. OVERVIEW The Company's primary business is investing in and lending to private small and medium-sized businesses in three areas: mezzanine finance, commercial real estate finance, and 7(a) lending. In addition, the Company earns advisory fees from the management of private investment funds. The Company's earnings depend primarily on the level of interest and related portfolio income and net realized and unrealized gain income earned on these three investment types after deducting interest paid on borrowed capital and operating expenses. Interest income results from the stated interest rate paid on a loan, the amortization of loan origination points and the amortization of any market discount arising from purchased loans. The level of interest income is directly related to the balance of the investment portfolio multiplied by the effective yield on the portfolio. The Company's ability to generate interest income is dependent on economic, regulatory and competitive factors that influence interest rates, loan originations, and the Company's ability to secure financing for its investment activities. The Company's financial results on a quarterly basis may fluctuate significantly due to the timing of gain recognition and the timing of securitization transactions, among other factors. As a result, quarterly financial information may not be indicative of annual results. See "Risk Factors -- Fluctuations in Quarterly Results." The Company's portfolio is managed in three parts: mezzanine loans, debt securities and equity interests; commercial mortgage loans; and 7(a) loans. The total portfolio at value was $564.5 million, $697.0 million, $607.4 million and $528.5 million at March 31, 1998, and December 31, 1997, 1996 and 1995, respectively. During the quarter ended March 31, 1998 the Company completed an asset securitization of approximately $295 million in commercial mortgage loans, and as a result, the portfolio decreased by 19% from December 31, 1997 to March 31, 1998. See "-- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." The portfolio increased approximately 15% for each of the years ended December 31, 1997 and 1996. A summary of the composition of the Company's total assets, including its loan portfolios at March 31, 1998 and December 31, 1997, 1996 and 1995 is shown in the following table:
AT DECEMBER 31, AT MARCH 31, ------------------ ASSET COMPOSITION 1998 1997 1996 1995 ----------------- ------------ ---- ---- ---- Commercial mortgage loans(1)................................ 44% 56% 52% 46% Mezzanine investments....................................... 35 25 27 34 7(a) loans.................................................. 7 5 6 7 Cash and other assets....................................... 14 14 15 13 --- --- --- --- 100% 100% 100% 100% === === === ===
- --------------- (1) Includes residual interests in a securitized pool of mortgage loans and real estate investments. 15 21 Mezzanine loans, debt securities and equity interests were $225.0 million, $207.7 million, $191.2 million and $205.2 million at March 31, 1998, and December 31, 1997, 1996 and 1995, respectively. The effective yield on the mezzanine portfolio was 13.2%, 12.6% and 13.2% at March 31, 1998, and December 31, 1997 and 1996, respectively. Mezzanine loan originations were $37.8 million for the quarter ended March 31, 1998 and $66.7 million and $66.2 million for the years ended December 31, 1997 and 1996, respectively. Mezzanine loan repayments were $13.8 million for the quarter ended March 31, 1998. During the two years ended December 31, 1997, mezzanine loan repayments and sales of equity interests were approximately equal to originations, which kept the level of the portfolio relatively constant. Prior to the Merger, mezzanine loan originations were made through Allied I and Allied II, which originated small ($2 million - $10 million) mezzanine loans in order to maintain appropriate portfolio diversity for regulated investment company purposes. Pursuant to the terms of a Commission exemptive order, Allied I and Allied II loan originations were made pursuant to a co-investment formula, based on relative total assets, which required identical terms for each loan originated. As a result, Allied I and Allied II were unable to originate larger loans or price loans based on their own capital structures. These inefficiencies limited the ability of Allied I and Allied II to compete effectively in the marketplace. Subsequent to the Merger, the Company's larger overall portfolio size enables it to compete for larger mezzanine loans while maintaining adequate diversity within the portfolio. As a result, the Company is actively pursuing mezzanine loans in sizes ranging from $5 million to $25 million. The Company also is able to price its mezzanine loans using a single capital structure, which should enable the Company to price its loans more competitively. The Company believes that these post-Merger strategies will enable the Company to increase mezzanine loan originations in 1998. Commercial mortgage loans were $201.3 million, $447.2 million, $373.7 million and $277.3 million at March 31, 1998, and December 31, 1997, 1996 and 1995, respectively. The commercial mortgage loan portfolio declined by 55% during the first quarter of 1998 due to the sale through securitization of approximately $295 million in commercial mortgage loans. See "-- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." The Company added to its commercial mortgage loan portfolio during the first quarter of 1998 through the origination of new loans and investments totaling $53.9 million and decreased its portfolio due to repayments of loans totaling $16.3 million. The commercial mortgage loan portfolio increased by 20% and 35% for the years ended December 31, 1997 and 1996. Commercial mortgage loan originations were $249.0 million and $176.3 million for 1997 and 1996, respectively. Commercial mortgage loan originations grew by 41% and 58% in 1997 and 1996, respectively. Commercial mortgage loan repayments were $154.5 million and $87.5 million for 1997 and 1996, respectively. The Company experienced a high rate of commercial mortgage loan repayments in 1997 as many loans that had been purchased in earlier years and originated without substantial prepayment prohibitions were repaid due to a favorable interest rate environment. The Company now generally originates its commercial real estate loans to require prepayment premiums, which generally take the form of a fixed percentage of the loan amount that declines as the loan matures. The weighted average current stated interest rate on the commercial real estate portfolio at March 31, 1998 and at December 31, 1997 and 1996 was 9.9%, and 9.6% and 10.3%, respectively. The weighted yield on the commercial real estate portfolio was 11.9%, 11.4% and 13.4% at March 31, 1998 and December 31, 1997 and 1996, respectively. The effective yield on the commercial mortgage loan portfolio is higher than the stated interest rate due to the amortization of market discount on purchased loans. At March 31, 1998, and December 31, 1997 and 1996, unamortized market and original issue discount was $16.4 million, $28.0 million and $37.1 million, respectively. The Company generally prices its commercial mortgage loans based on a fixed spread over comparable U.S. Treasury rates given the term of the loan. During 1997, interest rates on U.S. Treasury bonds declined significantly, and the spreads charged by commercial real estate lenders in the marketplace narrowed. As a result, the Company's pricing was affected. Because of the Company's defined niche as an enterprise value real estate lender, however, ACC has experienced only a minimal decline in the overall interest rates on loans originated in 1997 and for the first quarter of 1998. Commercial mortgage loans originated during the 16 22 first quarter of 1998 had a weighted average stated interest rate of 9.2%. Commercial mortgage loans originated in 1997 had a weighted average stated interest rate of 9.6% as compared to 10.0% for loans originated in 1996. The Company will continue to aggressively originate commercial mortgage loans but may increasingly sell loans that are originated at interest rates that do not meet the Company's overall portfolio strategy. The 7(a) loan portfolio was $45.9 million, $40.7 million, $42.1 million and $43.3 million at March 31, 1998 and December 31, 1997, 1996 and 1995, respectively. 7(a) loan originations were $15.7 million for the quarter ended March 31, 1998 and $49.2 million and $40.8 million for the years ended December 31, 1997 and 1996, respectively. Sales of the guaranteed portions of 7(a) loan originations were $9.7 million in the first quarter of 1998 and $43.4 million and $25.0 million for the years ended December 31,1997 and 1996, respectively. 7(a) loans are originated with variable interest rates priced at spreads ranging from 1.75% to 2.75% over the prime lending rate. Prior to the Merger, 7(a) loan originations were conducted through Allied Lending, which had a consolidated equity base of approximately $40 million. Because of its relatively small equity base, the Company's cost of debt capital was expensive and required the Company to price its 7(a) loans at a level that was, in many cases, above market. Because of the Company's increased equity base, ACC has reevaluated its pricing strategy and can offer 7(a) loans at lower prices, and believes that this should increase loan origination activity in 1998. Also, effective January 1, 1998, the Company is no longer required to hold the guaranteed portion of its 7(a) loans originated for 90 days before selling, which also lowers its costs associated with this loan origination program. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Net increase in net assets resulting from operations ("NIA") was $32.1 million, or $0.62 per share, and $12.6 million, or $0.27 per share, for the three months ended March 31, 1998 and 1997, respectively. NIA results from total interest and related portfolio income earned, less total expenses incurred, plus net realized and unrealized gains or losses. The NIA for the three months ended March 31, 1998 also includes a gain of $14.8 million, or $0.29 per share, resulting from a commercial mortgage loan securitization transaction that was completed in January 1998. On January 30, 1998, the Company, in conjunction with Business Mortgage Investors, Inc.("BMI"), a private REIT managed by the Company, completed a $310 million asset securitization, whereby bonds totaling $239 million were sold in three classes rated "AAA", "AA" and "A" by Standard & Poor's Ratings Services and Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of 97 commercial mortgage loans totaling $310 million to a special purpose, bankruptcy remote entity which transferred the assets to a trust which issued the bonds. The Company contributed approximately 95%, or $295 million, of the total assets securitized, and received cash proceeds, net of costs, of approximately $223 million. The Company retained a trust certificate for its residual interest (the "residual interest") in the loan pool sold, and will receive interest income from this residual interest as well as receive the net spread of the interest earned on the loans sold less the interest paid on the bonds over the life of the bonds (the "residual securitization spread"). The mortgage loan pool had an approximate weighted average stated interest rate of 9.6%. The three bond classes sold have an aggregate weighted average interest rate of approximately 6.38%. The Company accounted for the securitization in accordance with Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." As a result, the Company recorded a gain of approximately $14.8 million net of the costs of the securitization and the cost of settlement of interest rate swaps. The gain arises from the difference between the carrying amount of the loans and the fair market value of the assets received -- cash, residual securitization spread, residual interest and a servicing asset. The value of the residual securitization spread, $17.0 million, was determined based on the future expected cash flows, assuming a constant prepayment rate for the mortgage loan pool of 10%, discounted at 16%. The value of the residual interest was determined to be 17 23 $66.5 million and was based on the future expected cash flows less projected losses of approximately $3.0 million. The projected losses were based upon the attributes of the portfolio sold and the underlying collateral values. The weighted average loan to collateral value of the 97 loans sold was 68.3%. The expected future cash flow from the residual interest was discounted at 9.6%. The servicing asset was valued at $0.2 million, assuming a net servicing fee of 0.04%, and was discounted at a rate of 10%. The Company will continue to earn interest income from the residual interest, and will receive the actual net spread from the portion of the loans sold represented by the bonds issued. As the net spread is received, a portion will be allocated to interest income with the remainder applied to reduce the carrying amount of the residual securitization spread. The residual interest and the residual securitization spread will be valued each quarter using updated prepayment, interest rate and loss estimates. The Company believes that it will continue to use asset securitization as a means to enhance its returns on assets as well as increase its liquidity. The Company expects to complete an asset securitization transaction no more frequently than annually. Interest income totaled $19.5 million and $19.6 million for the three months ended March 31, 1998 and 1997, respectively. Interest income appears relatively constant on a quarter to quarter comparison because of the assets sold through securitization. The Company's average portfolio was approximately $631 million and approximately $628 million during the quarters ended March 31, 1998 and 1997, respectively. The weighted average yield on the total loan portfolio at March 31, 1998 and 1997 remained relatively constant at approximately 12.4%. On a proforma basis, had the Company retained the 97 loans that were securitized, interest income would have been approximately $3.0 million higher during the quarter ended March 31, 1998, for a quarterly increase of approximately 15%. The Company originated loans totaling $107.5 million in the first quarter of 1998 as compared to $72.1 million during the first quarter of 1997, and received repayments on its loan portfolio totaling $30.8 million and $25.1 million for the quarters ended March 31, 1998 and 1997, respectively. Net premiums from loan dispositions were $1.3 million and $0.7 million for the three months ended March 31, 1998 and 1997, respectively. Net premiums from loan dispositions include premiums on the sale of the guaranteed portion of the Company's 7(a) loans into the secondary market of $0.8 million and $0.4 million for the quarters ended March 31, 1998 and 1997, respectively. The premiums result from the Company's sale of 7(a) loans totaling $9.5 million and $4.9 million for the quarters ended March 31, 1998 and 1997, respectively. Also included in net premiums from loan dispositions were premiums, resulting from the early repayment of loans, totaling $0.5 million and $0.3 million for the three months ended March 31, 1998 and 1997, respectively. Investment advisory fees and other income were $1.2 million and $1.1 million for the three months ended March 31, 1998 and 1997, respectively. Investment advisory fees totaled $0.5 million and $0.3 million for the quarters ended March 31, 1998 and 1997, respectively. Three of the Company's private managed funds are no longer making new investments and are actively distributing fund assets to their investors. In January 1998, however, the Company entered into a new agreement with Kreditanstalt fur Wiederaufbau (KfW), the state-owned public development bank of Germany, to manage a fund of approximately DM 160 million (approximately $87 million at March 31, 1998). Advisory fees increased as new fees from the German fund offset the decline in fees from liquidating funds. Total operating expenses were $10.2 million and $9.4 million for the three months ended March 31, 1998 and 1997, respectively, an increase of 8.5%. Operating expenses include interest on indebtedness, salaries and employee benefits, and other general and administrative expenses. Interest expense on indebtedness totaled $4.6 million and $5.8 million for the three months ended March 31, 1998 and 1997, respectively. The decrease in interest expense is the result of the Company repaying amounts outstanding under its short-term credit facilities with the proceeds received from the securitization. Average outstanding indebtedness for the quarters ended March 31, 1998 and 1997 was $246 million and $298 million, respectively. The weighted average interest rate for the Company's combined indebtedness at March 31, 1998 was 7.6%, as compared to 7.4 % at March 31, 1997. 18 24 Salaries and employee benefits totaled $2.9 million and $2.1 million for the three months ended March 31, 1998 and 1997, respectively. At March 31, 1998 and 1997, total employees were 90 and 70, respectively. The increase in salaries and benefits reflects the increase in total employees, combined with wage increases, and the experience level of employees hired. The Company was an active recruiter in 1997 for experienced investment and operational personnel and the Company continues to actively recruit and hire new professionals to support anticipated portfolio growth. General and administrative expenses include the lease for the Company's headquarters in Washington, DC, leases established in 1997 for the Company's new offices in Chicago and San Francisco, travel costs, stock record expenses, legal and accounting fees, directors' fees and various other expenses. General and administrative expenses totaled $2.8 million and $1.6 million, respectively, for the three months ended March 31, 1998 and 1997. The approximate $1.2 million increase was partially due to certain post-Merger integration expenses incurred in the first quarter of 1998, totaling $0.2 million. These expenses included primarily the costs of legal and accounting advice as well as the use of certain outside consultants. The remaining increase in general and administrative expenses results from continued growth of the Company, combined with differences that result from the timing of expenses recognized in 1997. The first quarter of 1997 incurred a relatively low level of expense when compared to an expected average quarterly expense based upon total 1997 actual expenses. 1997 general and administrative expenses in total were $9.0 million, which would imply an average estimated 1997 quarterly expense of $2.2 million. During the first quarter of 1998, the Company began to expense a portion of the formula and cut-off awards that were established in connection with the Merger. Prior to the Merger, each of the Predecessor Companies had a stock option plan (the "Old Plans"). In preparation for the Merger, the Compensation Committees of the Predecessor Companies determined that the Old Plans should be terminated upon the Merger, so that the new merged Company would be able to develop a new incentive compensation plan for all officers and directors with a single equity security. The existence of the Old Plans had resulted in certain inequities in option grants among the various officers of the Predecessor Companies simply because of the differences in the underlying equity securities. To balance stock option awards among the employees, and to account for the deviations caused by the existence of five plans supported by five different publicly traded stocks, Advisers developed two special awards to be granted in lieu of options under the Old Plans that would be foregone upon the cancellation of the Old Plans. Cut-Off Award. The first award established a cut-off dollar amount as of the date of the announcement of the Merger (August 14, 1997) that would be computed for all outstanding, but unvested options that would be canceled as of the date of the Merger. The cut-off award was designed to cap the appreciated value in unvested options at the Merger announcement date in order to set the foundation to balance option awards upon the Merger. The cut-off award was designed to be equal to the difference between the market prices of the shares of stock underlying the canceled option under the Old Plans at August 14, 1997, less the exercise prices of the options. The cut-off award was computed to be $2.9 million in the aggregate and will be payable for each canceled option as the canceled options would have vested. The cut-off award will only be payable if the award recipient is employed by the Company on a future vesting date. The cut-off award that will vest in 1998 will total $0.8 million, and approximately one quarter of this amount, or $0.2 million, has been expensed in the first quarter of 1998. Formula Award. The formula award was designed to compensate officers from the point when their unvested options would cease to appreciate in value pursuant to the mechanics of the cut-off award (i.e., August 14, 1997) up until the time in which they would be able to receive option awards in the Company after the Merger became effective. In the aggregate, the formula award equaled six percent of the difference between the combined aggregate market capitalizations of the Predecessor Companies as of the close of the market on December 30, 1997, and the combined aggregate market capitalizations of the Predecessor Companies on August 14, 1997. The formula award was designed as a long-term incentive compensation program that would replace canceled stock options and would balance share ownership among key officers for past and prospective service. 19 25 The terms of the formula award require that the award be contributed to the Company's deferred compensation plan, and be used to purchase shares of the Company in the open market. The formula award will vest over a three-year period, on the anniversary date of the Merger, beginning on December 31, 1998. In the aggregate, the market capitalizations of the Predecessor Companies increased by approximately $319 million from August 14, 1997 to December 30, 1997, and the total formula award was computed to be approximately $19 million. Assuming all officers who received a formula award remain with the Company over the vesting period, the Company will expense the formula award during 1998, 1999 and 2000 in an annual amount of approximately $6.4 million. The Company recorded approximately one-fourth of the annual formula award expense of $1.6 million during the first quarter of 1998. The total expense recorded as a result of the cut-off and formula awards during the first quarter of 1998 was $1.8 million or $0.03 per share. Net realized gains were $6.4 million and $3.7 million for the three months ended March 31, 1998 and 1997, respectively. The net gains resulted from the sale of equity securities associated with certain mezzanine loans and the realization of unamortized discount resulting from the payoff of mezzanine and commercial mortgage loans, offset by losses on investments. Realized gains totaled $6.4 million and $4.5 million for the quarters ended March 31, 1998 and 1997, respectively. There were no realized losses during the quarter ended March 31, 1998, and realized losses totaled $0.8 million for the quarter ended March 31, 1997. Net realized gains during the first quarter of 1998 were largely due to the sale of securities of two portfolio companies, Labor Ready, Inc. and Broadcast Holdings, Inc. Gains resulting from investments in these two companies totaled $6.1 million. The Company recorded net unrealized gains of $0.7 million for the three months ended March 31, 1998 representing an increase in the board of directors' valuation of the Company's assets over their aggregate cost as compared to the prior period and the effect of valuation of interest rate swap agreements. At March 31, 1998, net unrealized appreciation in the portfolio totaled $2.0 million, and was composed of unrealized appreciation of $25.1 million resulting from appreciated equity interests in portfolio companies, and unrealized depreciation of $23.1 million resulting from under-performing loans in the portfolio. At March 31, 1998, $13.7 million of loans at value in the portfolio were greater than 120 days delinquent, and $18.7 million of loans at value were not accruing interest. The Company incurred income tax expense of $0.5 million for three months ended March 31, 1997, which resulted from the operations of Advisers, prior to the Merger. It is the Company's current intention to distribute all of its taxable income, and therefore no provision for income taxes has been made for the quarter ended March 31, 1998. The weighted average shares outstanding used to compute basic earnings per share for the quarter ended March 31, 1998 were 51.8 million as compared to 46.9 million for the quarter ended March 31, 1997. The increase in weighted average shares is primarily due to the exercise of stock options and new shares issued in conjunction with the exchange of shares pursuant to the Merger. Total shares outstanding at March 31, 1998 were 51.5 million. The weighted average shares and the total shares outstanding are reduced by the approximately 663,000 shares held in the Company's deferred compensation plan resulting from the formula award. In January 1998, the Company granted 3.4 million new stock options to certain of the Company's officers. The shares under option have been included in the calculation of weighted average shares used to compute diluted earnings per share. See "Management -- Compensation Plans -- Stock Option Plan." COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NIA was $61.3 million, or $1.24 per share, $54.9 million, or $1.19 per share, and $60.5 million, or $1.38 per share, for the years ended December 31, 1997, 1996, and 1995, respectively. NIA results from total interest and related portfolio income earned, less total expenses incurred in the operations of the Company, plus net realized and unrealized gains or losses. For 1997, NIA was significantly impacted by certain one-time, non-recurring expenses related to the Merger, which totaled approximately $5.2 million. Without these one- 20 26 time Merger expenses, NIA would have been $66.5 million, or $1.35 per share, for 1997, a 13% increase over 1996 earnings per share. Total interest and related portfolio income was $97.4 million, $84.9 million and $68.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. Total interest and related portfolio income is primarily a function of the level of interest income earned and the balance of portfolio assets. In addition, total interest and related portfolio income includes premiums from loan sales, prepayment premiums, and advisory fee and other income. Interest income totaled $86.9 million, $77.5 million, and $61.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income increased 12% and 26% for 1997 and 1996, respectively. The increase in interest income earned results primarily from increases in the amount of loans outstanding during the periods presented. The Company's loan portfolio increased by 13% to $655.8 million at December 31, 1997 from $580.9 million at December 31, 1996, and the loan portfolio increased by 17% in 1996 from $495.3 million at December 31, 1995. The Company's total loan originations of $364.9 million for 1997 represented a 29% increase over loan originations of $283.3 million for 1996, and a 31% increase of loan originations of $216.2 million for 1995. In addition, the weighted average yield on the total loan portfolio at December 31, 1997 was 11.7%, as compared to 13.1% at December 31, 1996. The Company also earns interest on cash and government securities which totaled $81.5 million, $71.8 million and $49.0 million at December 31, 1997, 1996 and 1995, respectively. The Company for the past three years has earned approximately 4% to 5% on its temporary cash and government securities. Net premiums from loan dispositions were $7.3 million, $4.2 million and $2.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. Included in net premiums from loan dispositions are premiums from loan sales and premiums received on the early repayment of loans. Premiums from loan sales were $3.2 million, $2.6 million and $2.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. This premium income results primarily from the cash gain on the sale of the guaranteed portion of the Company's 7(a) loans into the secondary market, less the costs associated with originating the loans sold. Typically, the Company receives cash premiums on loan sales net of origination costs ranging from 4% to 6% of the face amount of each loan sold. Prepayment premiums were $4.0 million, $1.7 million and $0.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. Commercial mortgage loan repayments of $154.5 million in 1997 were primarily responsible for the large level of prepayment premiums experienced in 1997. The expected maturity of mezzanine or commercial real estate loans ranges from five to ten years. While it is the Company's intention to retain its borrowers for the full expected life of the loan, it is not unusual for ACC's borrowers to refinance or pay off their debts to the Company ahead of schedule. Because the Company seeks to finance primarily seasoned, performing companies, such companies at times can secure lower cost financing as their balance sheets strengthen, or as more favorable interest rates become available. Investment advisory fees and other income was $3.2 million, $3.2 million and $3.2 million, for the years ended December 31, 1997, 1996 and 1995, respectively. This income includes rental income from the Company's fully leased commercial office building located in northern Virginia and income from foreclosure properties. Investment advisory fees are received from the private funds managed by ACC. Three of the Company's private managed funds are in liquidation, and are actively distributing fund assets to their investors. In January 1998, the Company entered into an investment advisory agreement with Kreditanstalt fur Wiederaufbau (KfW), the state-owned public development bank of Germany, to manage a fund of approximately DM 160 million (approximately $87 million at March 31, 1998). For its services related to sourcing, structuring, investing, monitoring and disposing of its investments in small, German businesses, ACC will receive a 3% per annum fee on total committed capital, payable quarterly. Total expenses were $51.3 million ($46.1 million without Merger expenses), $37.4 million and $27.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. Operating expenses include interest on indebtedness, salaries and employee benefits, legal and accounting expenses, and other general and administrative expenses. 21 27 The Company's single largest expense is interest on indebtedness, which totaled $26.9 million, $20.3 million, and $12.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in interest expense was 33% and 64% for 1997 and 1996, respectively, and is attributable to increased borrowings by the Company and its subsidiaries under various credit facilities to fund new loan originations. The Company's total borrowings were $347.7 million at December 31, 1997, $275.0 million at December 31, 1996 and $200.3 million at December 31, 1995. Total borrowings increased by 26% and 37% in 1997 and 1996, respectively. The Company's weighted average interest cost on outstanding borrowings at December 31, 1997, 1996 and 1995 was 7.3%, 7.6% and 7.6%, respectively. Salaries and employee benefits totaled $10.3 million, $8.8 million, and $8.0 million for the years ended December 31, 1997, 1996, and 1995, respectively. Total employees were 80, 66, and 74 at December 31, 1997, 1996 and 1995, respectively. The increase in salaries and benefits reflects the increase in total employees, combined with wage increases, and the experience level of employees hired. The Company was an active recruiter in 1997 for experienced investment and operational personnel and the Company will continue to actively recruit and hire new professionals in 1998 to support anticipated portfolio growth. General and administrative expenses include the lease for the Company's headquarters in Washington, DC, leases established in 1997 for the Company's new offices in Chicago and San Francisco, travel costs, stock record expenses, directors' fees, legal and accounting fees and various other expenses. General and administrative expenses totaled $9.0 million, $8.3 million and $6.9 million, respectively, for the years ended December 31, 1997, 1996 and 1995. Legal and accounting expenses totaled $2.3 million, $1.6 million and $1.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. Legal and accounting expenses include the cost of corporate legal matters, portfolio workout expenses, and routine accounting and auditing fees. The legal and accounting expenses for 1997 include a one-time charge of $0.2 million related to the settlement of a litigation matter associated with one portfolio company. Legal and accounting expenses increased in 1997 because of this one-time charge and various restructuring matters. Other than the increases in legal and accounting fees, the Company did not experience any significant increases in general and administrative expenses. The Company intends to move its Washington, D.C. office to larger office space in mid-1998. The Company is increasing the size of its Washington, D.C. office by approximately 10,000 square feet in order to accommodate its recent and future anticipated increases in headcount. Annual rent expense is expected to increase by approximately $0.6 million, annually. Merger expenses totaled $5.2 million, and consisted primarily of investment banking fees of $3.1 million, legal fees of $1.0 million and costs associated with the solicitation of proxies of approximately $0.6 million. Total expenses excluding interest on indebtedness and Merger expenses represented approximately 2.5%, 2.6% and 2.7% of the Company's average assets for the years ended December 31, 1997, 1996 and 1995, respectively. Net realized gains were $10.7 million, $19.2 million and $12.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. These gains resulted from the sale of equity securities associated with certain mezzanine loans and the realization of unamortized discount resulting from the payoff of mezzanine and commercial mortgage loans, offset by losses on investments. Realized gains totaled $15.8 million, $30.4 million and $16.7 million, and realized losses totaled $5.1 million, $11.3 million and $4.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. Realized losses of $11.3 million in 1996 resulted primarily from the liquidation of two portfolio securities. The Company made loans to these borrowers in the late 1980's and early 1990's, and the borrowers encountered significant difficulties during the recession of the early 1990's. Losses from loans to these borrowers included in 1996 losses totalled $6.6 million. Realized gains for 1997 resulted from the liquidation of securities from 83 portfolio relationships, and ranged in size from less than $100 to $2.6 million, with an average size of $188,000. The Company recorded net unrealized gains of $7.2 million for the year ended December 31, 1997, representing an increase in the board of directors' valuation of the Company's assets over their aggregate cost as compared to the prior period. Included as a component of the $7.2 million was a $5.0 million write-down of 22 28 interest rate swap agreements. For the year ended December 31, 1996, the Company recorded net unrealized losses of $7.4 million, as the Company sold an unusual volume of equity securities that had previously been recorded at appreciated values. When a sale is consummated, a realized gain is recorded and a corresponding unrealized loss is also recorded to reflect that the appreciated asset has been sold. For the year ended December 31, 1995, net unrealized gains were $9.3 million. The Company incurred income tax expense of $1.4 million, $1.9 million and $1.8 million, respectively, for the years ended December 31, 1997, 1996 and 1995 resulting from the operations of Advisers. In conjunction with the Merger, Advisers' operations as an investment adviser to certain private funds were assumed by the Company. The Company will be required to pay a tax on any assets previously owned by Advisers that are subsequently sold. During 1997, 1996 and 1995, Allied I, Allied II, Allied Commercial and Allied Lending declared dividends to their shareholders representing all of each company's ordinary taxable income, taxable net capital gains, and in the case of Allied I in 1997, a partial return of capital resulting from the distribution of Allied I's ownership of Allied Lending's shares. Tax distributions differ from NIA due to timing differences in the recognition of income and expenses, returns of capital and unrealized appreciation which is not included in taxable income. Total tax distributions declared were $85.7 million, $57.4 million and $47.9 million for 1997, 1996 and 1995, respectively. Tax distributions per share were $1.71, $1.23 and $1.09 for the three years ended December 31, 1997, 1996 and 1995, respectively. These per share distributions have been exchange adjusted for the Merger and include the exchange-adjusted shares of Advisers for which no tax distributions had historically been declared or paid. Included in 1997 tax distributions was $18 million, or $0.34 per share, representing a non-cash dividend of the shares of Allied Lending held in Allied I's portfolio. Allied I declared and paid a dividend equal to 0.107448 shares of Allied Lending for each share of Allied I held on the record date for such dividend. These shares had a market value of $21.25 per share on December 30, 1997, the distribution date. Also included in 1997 tax distributions was a special, one-time dividend equal to $8.8 million or $0.17 per share representing all of the retained earnings and profits of the Predecessor Companies at December 31, 1997. The special dividend was declared in conjunction with the Merger in order for the Company to maintain its RIC status. Certain of the Company's credit facilities limit the Company's ability to declare dividends if the Company has defaulted under certain provisions of the credit agreement. The weighted average common shares outstanding were 49.2 million, 46.2 million and 43.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increases in the weighted average shares reflect the exercise of employee stock options to purchase shares of the Company, the issuance of shares pursuant to a dividend reinvestment plan, the issuance of new shares pursuant to two separate rights offerings, and the exchange of shares pursuant to the Merger. Allied I's ownership of Allied Lending during the periods presented has been eliminated in the consolidation. NIA, as a percentage of average shareholders' equity was 15%, 14% and 17% for 1997, 1996 and 1995, respectively. NIA, excluding Merger expenses, as a percentage of average shareholders' equity for 1997 was 16%. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES CASH AND U.S. GOVERNMENT SECURITIES At March 31, 1998, the Company had $56.1 million in cash and government securities. ACC invests otherwise uninvested cash in U.S. government or agency-issued or guaranteed securities that are backed by the full faith and credit of the United States, or in high quality, short term repurchase agreements fully collateralized by such securities. Prior to the Merger, certain of the Predecessor Companies had excess cash resources while other of the Predecessor Companies were borrowers on credit facilities. Subsequent to the Merger, the Company has used 23 29 excess cash for new investments and in its operations; however, the Company continues to maintain excess cash in its SBIC and SSBIC subsidiaries. This cash may not be withdrawn from the subsidiaries because it supports the long-term borrowings of those subsidiaries, and such borrowings carry substantial prepayment penalties. The cash has not been invested due to a lack of quality investment opportunities, primarily for the SSBIC subsidiary. The Company has been working with the SBA to restructure its SBIC and SSBIC licensees so that the excess cash may be effectively used, and the Company recently received permission to begin financing SBIC eligible investments in its SSBIC subsidiary. See "Certain Government Regulations -- SBA Regulations." The Company is continuing its restructuring efforts and plans to merge its SBIC and SSBIC subsidiaries into a single SBIC. There can be no assurance that this restructuring will be achieved. INDEBTEDNESS The Company had outstanding indebtedness at March 31, 1998 as follows:
ANNUAL PORTFOLIO RETURN TO COVER AMOUNT ANNUAL INTEREST CLASS OUTSTANDING INTEREST RATE(1) PAYMENTS(2) ----- -------------- ---------------- ---------------- (IN THOUSANDS) Debentures and notes payable: Master repurchase agreement................... $ 8,243 7.01% 0.09% Master loan and security agreement............ 9,000 6.84 0.09 Senior unsecured notes........................ 28,700 8.57 0.37 SBA debentures................................ 53,300 8.36 0.68 -------- ---- ---- Total debentures and notes payable....... $ 99,243 8.17% 1.24% ======== ==== ==== Revolving line of credit........................... $103,000 7.11% 1.12% ======== ==== ====
- --------------- (1) The annual interest rate includes the cost of commitment fees and other facility fees. (2) The annual portfolio return to cover interest payments ("Annual Return") is calculated as total estimated 1998 annual interest or dividend payments per class of financing, divided by total assets at March 31, 1998. The total Annual Return needed to cover all classes of financing at March 31, 1998 combined is 2.36%. Master Repurchase Agreement. The Company and BMI are co-borrowers under a master repurchase agreement whereby the two entities can borrow up to $250 million of which $100 million is committed, through repurchase agreements using commercial mortgage loans as collateral. The Company pledges commercial mortgage loans as collateral for the facility such that the amount borrowed is approximately equal to 75% to 80% of the value of the collateral pledged. The terms of the master repurchase agreement require interest-only payments with all principal due at maturity. The master repurchase agreement bears interest at one-month London Inter Bank Offered Rate ("LIBOR") plus 1.13% and requires an annual commitment fee of 0.25% of the amount committed. The master repurchase agreement matures on January 31, 1999. Master Loan and Security Agreement. The Company, again in conjunction with BMI, has a facility to borrow up to $250 million, of which $100 million is committed, using its commercial mortgage loans as collateral. The agreement generally requires interest-only payments with all principal due at maturity. The agreement bears interest at one-month LIBOR plus 1.0% and requires an annual commitment fee of 0.15% of the amount committed. The facility matures on August 21, 1998. Senior Unsecured Notes. The Company has a $20 million unsecured senior note payable to an insurance company. The note is scheduled to mature over a five-year period commencing in 1998 with annual principal payments of $4 million. The note has a stated interest rate of 9.15% and is subject to prepayment penalty if paid prior to maturity. In conjunction with the proposed issuance of the unsecured long-term notes described below, the Company anticipates that these senior notes will be restructured during the second quarter of 1998. The Company also has senior notes payable to the Overseas Private Investment Corporation totaling $8.7 million at March 31, 1998. 24 30 SBA Debentures. The Company, through Allied Investment and Allied Financial, has debentures totaling $53.3 million payable to the SBA, at interest rates ranging from 6.87% to 9.80% with scheduled maturity dates as follows: 1998 -- $5.7 million; 1999 -- $0; 2000 -- $17.3 million; 2001 -- $9.4 million; 2002 -- $0; and $21.0 million thereafter. The debentures require semi-annual interest-only payments with all principal due upon maturity. During 1997, Congress increased the maximum leverage available to an SBIC to $101.0 million, and the Company intends to continue to borrow under the SBIC program as the situation warrants. Revolving Line of Credit. The Company has a $200 million unsecured revolving line of credit. The facility bears interest at LIBOR plus 1.25% and requires a commitment fee equal to 0.2% of the committed unused amount. The facility also has a facility fee equal to 0.15% of the initial commitment. The 18-month line of credit requires monthly payments of interest, and all principal is due upon maturity. The amount that may be borrowed is based upon a borrowing base formula generally equal to 50% of the Company's portfolio investments not securing other credit facilities. The Company is in the process of restructuring this facility in conjunction with the proposed issuance of the unsecured long-term notes discussed below. Unsecured Long-term Notes. The Company is in the process of negotiating $180 million in unsecured long-term notes with private institutional lenders, primarily insurance companies. The proposed terms of the notes include five and seven year maturities, priced at approximately 7.15%. The notes require payment of interest semiannually, and all principal is due upon maturity. The Company plans to issue the notes during the second quarter of 1998; however, there is no assurance that the Company will be able to complete the issuance of the notes. FUTURE DEBT OR EQUITY OFFERINGS The Company plans to secure additional debt and equity capital such as the proceeds from this Offering for continued investment in growing businesses. Because the Company is a RIC, it distributes substantially all of its income and requires external capital for growth. Because the Company is a BDC, it is limited in the amount of debt capital it may use to fund its growth, since it is generally required to maintain a ratio of 200% of total assets to total borrowings. See "Certain Government Regulations." The Company anticipates that if the Offering is completed, the proceeds generated, together with other sources of capital, will be sufficient to fund the anticipated growth in the Company's operations through 1999. The Company's cash flow from operations was $11.1 million for the quarter ended March 31, 1998 and $58.9 million, $45.2 million and $47.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company plans to maintain a strategy of financing its operations, dividend requirements and future investments with cash from operations, long-term debt, asset securitizations or through use of its equity capital. The Company will utilize its short-term credit facilities only as a means to bridge to long-term financing. The Company hedges variable and short-term interest rate exposure through interest rate swaps, treasury locks and other techniques. The Company believes that it has access to capital sufficient to fund its ongoing investment and operating activities, and from which to pay dividends. FINANCIAL OBJECTIVES The merged Company has set forth certain financial objectives that it intends to use in allocating its resources and in selecting new investment opportunities. Management's goal is to increase NIA annually by 15% to 20% and to result in a ratio of NIA to average shareholders' equity of 18%. Management believes that the Company will be able to achieve these goals over the next three to five years. Factors that may impede the achievement of these objectives include those described under "Risk Factors" and also include other factors such as changes in the economy, competitive and market conditions, and future business decisions. YEAR 2000 The Company has reviewed its exposure to the risks associated with the Year 2000 issue, and has determined that there is no material risk of business interruption as a result of errors or inefficiencies in the Company's internal computer systems. The Company exclusively uses purchased software and has been 25 31 informed by its vendors that the software will be Year 2000 compatible; however, there is no assurance that such software will indeed address all Year 2000 compatibility issues. The Company is currently assessing the risk that its portfolio companies may have regarding this issue. For all new loans originated, the Company includes in its credit review a Year 2000 compatibility assessment, and will monitor particular portfolio companies as needed. NEW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively, were issued in June 1997. SFAS 130 requires that certain financial activity typically disclosed in shareholders' equity be reported in the financial statements as an adjustment to net income in determining comprehensive income. SFAS 131 requires the reporting of selected segmented information in quarterly and annual reports. SFAS No. 130 did not materially impact the Company's financial statements, and the Company does not anticipate any material financial impact from the implementation of SFAS 131. SENIOR SECURITIES Certain information about the various classes of senior securities issued by the Company is set forth in the following tables. The "--" indicates information which the Commission expressly does not require to be disclosed for certain types of senior securities.
TOTAL AMOUNT OUTSTANDING INVOLUNTARY EXCLUSIVE OF ASSET LIQUIDATING AVERAGE TREASURY COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4) -------------- ------------- ----------- ----------- -------------- MASTER REPURCHASE AGREEMENT AND MASTER LOAN AND SECURITY AGREEMENT 1988....................................... $ 0 $ 0 $-- 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....................................... 23,210,000 3,695 -- N/A 1995....................................... 0 0 -- N/A 1996....................................... 85,775,000 2,485 -- N/A 1997....................................... 225,821,000 2,215 -- N/A 1998 (at March 31)......................... 17,243,000 3,127 -- N/A SENIOR NOTE PAYABLE(5) 1988....................................... $ 0 $ 0 $-- N/A 1989....................................... 0 0 -- N/A 1990....................................... 0 0 -- N/A 1991....................................... 0 0 -- N/A 1992....................................... 20,000,000 5,789 -- N/A 1993....................................... 20,000,000 6,013 -- N/A 1994....................................... 20,000,000 3,695 -- N/A 1995....................................... 20,000,000 2,868 -- N/A 1996....................................... 20,000,000 2,485 -- N/A 1997....................................... 20,000,000 2,215 -- N/A 1998 (at March 31)......................... 20,000,000 3,127 -- N/A
26 32
TOTAL AMOUNT OUTSTANDING INVOLUNTARY EXCLUSIVE OF ASSET LIQUIDATING AVERAGE TREASURY COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4) -------------- ------------- ----------- ----------- -------------- OVERSEAS PRIVATE INVESTMENT CORPORATION LOAN 1988....................................... $ 0 $ 0 $-- 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....................................... 0 0 -- N/A 1995....................................... 0 0 -- N/A 1996....................................... 8,700,000 2,485 -- N/A 1997....................................... 8,700,000 2,215 -- N/A 1998 (at March 31)......................... 8,700,000 3,127 -- N/A SBA DEBENTURES(6) 1988....................................... $ 24,350,000 $1,978 $-- N/A 1989....................................... 25,350,000 4,015 -- N/A 1990....................................... 40,450,000 3,397 -- N/A 1991....................................... 49,800,000 3,834 -- N/A 1992....................................... 49,800,000 5,789 -- N/A 1993....................................... 49,800,000 6,013 -- N/A 1994....................................... 54,800,000 3,695 -- N/A 1995....................................... 61,300,000 2,868 -- N/A 1996....................................... 61,300,000 2,485 -- N/A 1997....................................... 54,300,000 2,215 -- N/A 1998 (at March 31)......................... 53,300,000 3,127 -- N/A REVOLVING LINES OF CREDIT 1988....................................... $ 10,000,000 $1,978 $-- 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....................................... 32,226,000 3,695 -- N/A 1995....................................... 20,414,000 2,868 -- N/A 1996....................................... 45,099,000 2,485 -- N/A 1997....................................... 38,842,000 2,215 -- N/A 1998 (at March 31)......................... 103,000,000 3,127 -- N/A
27 33
TOTAL AMOUNT OUTSTANDING INVOLUNTARY EXCLUSIVE OF ASSET LIQUIDATING AVERAGE TREASURY COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4) -------------- ------------- ----------- ----------- -------------- BONDS PAYABLE 1988....................................... $ 0 $ 0 $-- 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....................................... 0 0 -- N/A 1995....................................... 98,625,000 2,868 -- N/A 1996....................................... 54,123,000 2,485 -- N/A 1997....................................... 0 0 -- N/A 1998 (at March 31)......................... 0 0 -- N/A REVERSE REPURCHASE AGREEMENTS(7) 1988....................................... $ 34,321,000 $1,978 $-- N/A 1989....................................... 29,386,000 4,015 -- N/A 1990....................................... 28,361,000 3,397 -- N/A 1991....................................... 2,761,000 3,834 -- N/A 1992....................................... 0 0 -- N/A 1993....................................... 0 0 -- N/A 1994....................................... 0 0 -- N/A 1995....................................... 0 0 -- N/A 1996....................................... 0 0 -- N/A 1997....................................... 0 0 -- N/A 1998 (at March 31)......................... 0 0 -- N/A REDEEMABLE CUMULATIVE PREFERRED STOCK(6) 1988....................................... $ 0 $ 0 $ 0 N/A 1989....................................... 0 0 0 N/A 1990....................................... 1,000,000 308 100 N/A 1991....................................... 1,000,000 338 100 N/A 1992....................................... 1,000,000 526 100 N/A 1993....................................... 1,000,000 546 100 N/A 1994....................................... 1,000,000 351 100 N/A 1995....................................... 1,000,000 277 100 N/A 1996....................................... 1,000,000 242 100 N/A 1997....................................... 1,000,000 217 100 N/A 1998 (at March 31)......................... 1,000,000 302 100 N/A
28 34
TOTAL AMOUNT OUTSTANDING INVOLUNTARY EXCLUSIVE OF ASSET LIQUIDATING AVERAGE TREASURY COVERAGE PREFERENCE MARKET VALUE CLASS AND YEAR SECURITIES(1) PER UNIT(2) PER UNIT(3) PER UNIT(4) -------------- ------------- ----------- ----------- -------------- NON-REDEEMABLE CUMULATIVE PREFERRED STOCK(6) 1988....................................... $ 5,000,000 $ 184 $100 N/A 1989....................................... 6,000,000 362 100 N/A 1990....................................... 6,000,000 308 100 N/A 1991....................................... 6,000,000 338 100 N/A 1992....................................... 6,000,000 526 100 N/A 1993....................................... 6,000,000 546 100 N/A 1994....................................... 6,000,000 351 100 N/A 1995....................................... 6,000,000 277 100 N/A 1996....................................... 6,000,000 242 100 N/A 1997....................................... 6,000,000 217 100 N/A 1998 (at March 31)......................... 6,000,000 302 100 N/A
- --------------- (1) Total amount of each class of senior securities outstanding at the end of the period presented. (2) 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 3). The Asset Coverage Per Unit for preferred stock is expressed in terms of dollar amounts per share. (3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. (4) Not applicable, as senior securities are not registered for public trading. (5) The Company was the obligor on $15 million of the senior notes. The Company's SBIC subsidiaries were the obligors on the remaining $5 million, which is not subject to the asset coverage requirements of the 1940 Act. (6) Issued by the Company's SBIC subsidiaries to the SBA. These categories of senior securities are not subject to the asset coverage requirements of the 1940 Act. (7) U.S. government agency guaranteed loans sold under agreements to repurchase. The Company was advised by the Staff of the Commission that these reverse repurchase agreements were not considered a class of senior security representing indebtedness and thus were not subject to the asset coverage requirements of the 1940 Act. 29 35 BUSINESS Allied Capital Corporation is a commercial finance company principally engaged in lending to and investing in private small and medium-sized businesses. The Company has been lending to private growing businesses for 40 years and has financed thousands of borrowers nationwide. In addition to its core lending business, the Company provides advisory services to private investment funds. The Company's lending operations are conducted in three primary areas: mezzanine finance, commercial real estate finance, and 7(a) lending. The principal loan products of the Company include: subordinated loans with equity features, commercial mortgage loans and SBA 7(a) guaranteed loans. The investment objective of the Company is to achieve current income and capital gains. The Company seeks to achieve its investment objective by investing in growing businesses in a variety of industries and in diverse geographic locations primarily in the United States. The Company is a full-service lender and sources, originates and services all of the loans it finances. The Company sources loans and investments through its numerous relationships with regional and boutique investment banks, mezzanine and venture capital investors, and other intermediaries, including professional services firms. In order to increase its sourcing and origination activities, the Company recently opened offices in Chicago and San Francisco. The Company centralizes its credit approval function and services all of its loans through an experienced staff of professionals at its headquarters in Washington, D.C. In addition, the Company recently established an office in Frankfurt to provide investment advisory services to a private investment fund making loans in Germany. The Company has experienced significant growth in its investment portfolio in the past several years. The fair value of the Company's portfolio grew at an annual compound growth rate of 20.2% to $697.0 million as of December 31, 1997 from $334.2 million as of December 31, 1993, and at December 31, 1997 included 819 borrower relationships in 40 states and the District of Columbia. The Company's portfolio income grew at an annual compound growth rate of 23.7% to $46.1 million from $19.7 million for the years ended December 31, 1997 and 1993, respectively. Additionally, the Company generated a total of $45.5 million in net realized gains during the five-year period ended December 31, 1997. As a lender, ACC targets a market niche between the senior debt financing provided by traditional lenders, such as banks and insurance companies, and the equity capital provided by venture capitalists. The Company believes that many traditional lenders, due to their overhead costs, regulatory structure or size are hindered from lending effectively to small and medium-sized businesses. Many traditional lenders do not offer a long-term financing option for small to medium-sized businesses. In addition, the Company recognizes that entrepreneurs need an alternative to the high cost and dilutive nature of venture equity capital. The Company is an "enterprise value" lender, which means that it analyzes the potential equity value of a portfolio company when making a credit decision, in addition to the customary collateral and cash flow analyses used by traditional lenders. In its mezzanine finance operations, the Company assesses the underlying value of a borrower's equity capital and structures its loans to include an equity component in order to enhance its total return on investment. In its commercial real estate operations, the Company assesses the borrower's enterprise value to more accurately determine the ability of the borrower to service its debt. The Company believes that its experience as an enterprise value lender provides the Company with a competitive advantage in originating attractive investment opportunities. BUSINESS STRATEGY The Company's objective is to continue to be a leader in financing growing businesses. The Company has developed an expertise as an enterprise value lender over its 40-year history, and believes that it is well-positioned from a financial and operational standpoint to take advantage of the opportunities in the market it serves. On December 31, 1997, the Company completed the Merger of five separate Allied Capital companies, all of which were engaged in small business finance. The objective of the Merger was to create a single, large commercial finance company and to establish a solid foundation for future growth. The increased size of the Company's portfolio, equity capital base and market capitalization as a result of the Merger has benefited the 30 36 Company in many respects. The larger portfolio has enabled the Company to increase the size of the loans it originates while maintaining adequate portfolio size diversity. This is expected to increase both the level of annual loan originations as well as enhance the credit quality of the Company's portfolio. The larger equity capital base has strengthened the Company's credit profile, and has enabled the Company to restructure its credit facilities and obtain unsecured debt financing at a lower cost with more favorable financing terms. In addition, the Company believes that its larger market capitalization has increased its access to capital. Greater access to capital at a lower cost has enabled the Company to price its loans to borrowers more competitively. The Company believes that the Merger created the structural and financial foundation from which to grow, and management continues to refine its operations. The Company has begun to streamline its operations and fully integrate all of its lending disciplines in order to improve its efficiency and benefit from synergies between the various lending areas. The Company has developed certain key strategies which it believes will enable it to achieve its objective and result in continued growth in assets and profitability. The principal elements of the Company's strategies are: - GROWTH IN LOAN ORIGINATIONS. During the fourth quarter of 1997, the Company began to originate larger loans, particularly in its mezzanine portfolio, in order to increase the growth in its total loan originations. The Company now originates loans of up to $25 million in size. In addition, the Company recently has implemented a new pricing strategy in all of its lending operations reflecting its lower cost of capital as a result of the Merger. The Company expects that more competitive pricing will contribute to an increase in the Company's loan originations and ultimately the Company's profitability. In addition to its strategies related to loan size and pricing, the Company continues to increase the scale of its sales and marketing function in order to increase loan origination activity. The Company originated $107.5 million in new loans in the first quarter of 1998 as compared to $72.1 million in the first quarter of 1997, reflecting in large measure the Company's new loan origination growth strategies. - MAINTENANCE OF ASSET QUALITY. The Company continues to maintain its policy of rigorous credit underwriting and maintenance of asset quality. The Company has a corporate culture that values strong credit analysis and believes that it has a proven and effective credit underwriting process. Over the past ten years, the Company has experienced a low level of losses and strives to maintain this record by employing stringent underwriting criteria and guidelines, requiring extensive due diligence, and approving credit decisions by committee, with no individual credit authority. All prospective investments are approved by the Company's investment committee, at its headquarters in Washington, D.C. The investment committee is comprised of nine senior investment professionals, who have an average of 17 years of experience. - EFFICIENT MANAGEMENT OF THE BALANCE SHEET TO MAXIMIZE RETURNS TO SHAREHOLDERS. The Company actively manages its capital structure in an effort to minimize its cost of capital and maximize returns for its shareholders. The Company conservatively leverages its equity capital with debt financing to enhance shareholder returns. The Company strives to match fund its long-term assets with long-term financing, and manages fixed/variable interest rate exposure where appropriate. The Company's large volume of loan originations provides it with access to alternative funding sources. Alternative funding sources such as securitization allow the Company to enhance the returns the Company earns on its investments, as well as increase liquidity. In addition, the Company plans to further its growth through the acquisition of portfolios and related businesses, and through strategic partnerships with other lenders and intermediaries. The Company is currently reviewing various acquisition opportunities. MEZZANINE FINANCE The Company provides financing to small and medium-sized businesses to fund growth, leveraged buyouts, acquisitions and recapitalizations. The Company's mezzanine investments are generally structured as debt securities that carry a relatively high fixed rate of interest, and are often combined with warrants to purchase a portion of the borrower's equity in order to earn investment appreciation. The Company's objective 31 37 for its mezzanine portfolio is to generate a return on assets ranging from 15% to 20% from both interest income earned and gains on sale of equity interests. At March 31, 1998, the Company's mezzanine portfolio had $185.3 million in mezzanine loans and $39.7 million in equity interests totaling $225.0 million, which represented 40% of the Company's total investment portfolio. The majority of the Company's mezzanine investments are in private growth businesses or small public companies with revenues ranging from $20 million to $200 million. As part of the Company's criteria for selecting a business in which to make an investment, the Company generally requires that the business demonstrate a history of growth, positive cash flow, and profitability. Additionally, the Company emphasizes the quality of the borrower's management and seeks experienced entrepreneurs with a proven management track record and relevant industry experience. See "-- Underwriting Guidelines and Procedures." Mezzanine investments have historically ranged in size between $2 million and $10 million. While the Company plans to continue originating investments of this size, it has begun to originate larger-sized transactions of up to $25 million. As an enterprise value lender, the Company assesses the underlying value of a borrower's equity capital and structures its loans to include an equity component to enhance its total return. The Company's primary competition in mezzanine finance is from private equity and mezzanine investment partnerships. The Company believes that it has certain structural and operational advantages when compared to many of its competitors. The Company's scale of operations, equity capital base, and successful track record as a mezzanine lender should enable the Company to borrow long-term capital to leverage its equity and reduce its overall cost of capital. The Company uses its lower cost of capital to price its loans competitively. In addition, the perpetual nature of the Company's corporate structure enables the Company to be a better long-term partner for its borrowers than traditional mezzanine partnerships, which typically have a limited life. Mezzanine investments generally carry a fixed interest rate and a maturity of five to seven years with interest-only payments in the early years and payments of both principal and interest in the later years. The weighted average current yield on the mezzanine loan portfolio at March 31, 1998 was approximately 13.2%. Historically, the Company has structured its loans to generate approximately one-half of its return on investment from current interest income and approximately one-half from the sale of an equity "kicker." The Company has recently modified its mezzanine lending strategy and is structuring more loans where the majority of its investment is expected to result from stated interest income and less of its return is expected to result from gains on sale of equity. At March 31, 1998 the Company held equity investments in 58 companies with a total value of $39.7 million. During the quarter ended March 31, 1998 and the years ended December 31, 1997 and 1996, respectively, the Company converted a portion of its equity investments into realized gains of $6.4 million, $10.7 million, and $19.2 million, respectively. Equity investments held by the Company, which include warrants, options, and common and preferred stock, generally do not produce a current return, but are held for potential investment appreciation and ultimate gain on sale. The majority of the Company's mezzanine loans include warrants to purchase common stock of the borrower. Generally, the warrants are exercisable after a three to five year period, and the exercise price for the purchase of common stock is a nominal amount. The warrants are generally structured to include registration rights allowing the Company to sell the securities in the event of a public offering by the borrower, and in many cases carry a put option that requires the borrower to repurchase the warrants after a specified period of time at a formula price or at the fair market value of the shares issuable. The Company holds a portion of its mezzanine investment portfolio in two wholly owned subsidiaries, Allied Investment and Allied Financial. Allied Investment and Allied Financial are licensed and regulated by the SBA to operate as SBICs and are required to lend to certain small businesses as stipulated by the SBA. See "Certain Government Regulations." The Company manages its mezzanine portfolio in an effort to ensure that it is not concentrated in any particular geographical area or region, and is diverse in terms of the specific industries represented. The 32 38 following table shows the Company's mezzanine portfolio by industry and geographic region at March 31, 1998: MEZZANINE PORTFOLIO - --------------------------------------------------------------------------------
PERCENT OF INDUSTRY TOTAL - ------------------------------ ---------- Industrial/Manufacturing...... 47% Broadcasting/Communications... 17 Services...................... 17 Retail/Wholesale.............. 13 Other......................... 6 --- 100% ===
PERCENT OF GEOGRAPHIC REGION TOTAL - ------------------------------ ---------- Mid-Atlantic.................. 31% Southeast..................... 28 Midwest....................... 18 West.......................... 11 Northeast..................... 7 International................. 5 --- 100% ===
COMMERCIAL REAL ESTATE FINANCE The Company originates and purchases commercial loans to small businesses secured by liens or mortgages on real estate ("commercial mortgage loans"), with a primary focus on loans ranging in size from $1 million to $20 million. In addition to commercial mortgage loans, the Company also provides long-term real estate financing products, such as subordinated real estate loans and sale-leaseback financing. The Company seeks to maximize its return on investment by choosing either to hold loans in its commercial real estate investment portfolio or to sell or securitize certain loans. The commercial real estate portfolio totaled approximately $201.3 million at March 31, 1998, or 36% of the Company's total investment portfolio. In addition, at March 31, 1998 the Company had $87.9 million in interests in a securitization pool of commercial real estate mortgages. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." The Company believes that it competes successfully in the commercial real estate finance market due to the creativity and flexibility of its loan terms. When evaluating a potential commercial real estate investment, the Company considers the enterprise value of the borrower in addition to the value of the underlying collateral. The Company believes that it is able to structure and finance more complicated credits due to its enterprise value approach and the sophistication of its investment professionals. The Company competes with banks, real estate conduits, equity and mortgage REITs and other lenders for the commercial mortgage loans it originates. The Company believes that it has earned a reputation in the commercial real estate finance market as a specialist in credits that require more difficult structuring or underwriting techniques, and that it competes successfully in this niche. The Company considers a variety of information during its credit underwriting process including: the borrower's financial statements, third party appraisals of the related mortgage asset, rent rolls and lease information and other third-party reports, as appropriate, to assess risks related to engineering, environmental, seismic, or structural issues. The Company derives income from the stated interest due on its commercial mortgage loans and from the amortization of discounts on its portfolio of purchased commercial mortgage loans. ACC generally prices its commercial mortgage loans at interest rates ranging from 200 to 500 basis points over comparable term U.S. Treasury rates. At March 31, 1998, approximately 61.4% of the Company's portfolio of commercial mortgage loans carried a fixed rate of interest and approximately 38.6% had adjustable rates of interest tied to various indices. At March 31, 1998, the effective yield on ACC's portfolio of commercial mortgage loans was approximately 11.9%, which reflects the stated interest and amortization of discounts on loans over the expected life of the loan. Commercial mortgage loans originated by ACC generally have a maturity of five to ten years. Occasionally, these loans may require payments of interest only or level payments of principal and interest calculated to amortize principal on a 10- to 30-year basis with a balloon payment at maturity. At 33 39 March 31, 1998, the average loan to value ratio for the commercial mortgage loan portfolio, including the securitized pool, was 70%. The Company experienced a high rate of commercial mortgage loan repayments in 1997 as many loans that had been purchased in earlier years did not have substantial prepayment prohibitions, and as a result were repaid due to a favorable interest rate environment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company now generally originates its commercial real estate loans to require prepayment premiums, which generally take the form of a fixed percentage of the loan amount that declines as the loan matures. In late 1995, the Company commenced securitizing portions of its commercial real estate portfolio. Through asset securitization, the Company effectively sells senior tranches of its mortgage loans to investors while retaining a subordinated interest in the loans sold. Securitization effectively increases the Company's returns on the assets it retains and provides additional liquidity. The Company has completed two asset securitization transactions to date, the most recent of which occurred on January 30, 1998. The Company continues to service all loans securitized, and at March 31, 1998 was servicing $286.8 million of securitized loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." The Company's commercial mortgage loan portfolio is diversified geographically and is secured by various properties, including hotels, motels and resorts, office buildings, retail establishments, industrial/manufacturing facilities and other property types. The following tables show the composition of the Company's commercial mortgage loan portfolio (including the Company's interest in the securitized loan pool) by property type and geographic region at March 31, 1998. COMMERCIAL MORTGAGE LOAN PORTFOLIO - --------------------------------------------------------------------------------
PERCENT OF PROPERTY TYPE TOTAL - ------------------------------ ---------- Office........................ 41% Hospitality................... 28 Retail........................ 11 Recreation.................... 5 Other......................... 15 --- 100% ===
PERCENT OF GEOGRAPHIC REGION TOTAL - ------------------------------ ---------- Mid-Atlantic.................. 47% West.......................... 19 Southeast..................... 14 Midwest....................... 12 Northeast..................... 8 --- 100% ===
7(a) LENDING The Company participates in the SBA's 7(a) Guaranteed Loan Program through its wholly owned subsidiary, Allied SBLC. Allied SBLC is licensed by the SBA as a small business lending company ("SBLC"). The SBA is no longer issuing SBLC licenses, and the Company is one of only fourteen non-bank SBLCs operating in the United States. Under the 7(a) program, the Company makes senior secured loans to small businesses that are partially guaranteed by the SBA. 7(a) loans are made to small businesses for the purposes of acquiring real estate, purchasing machinery or equipment or to provide working capital. The loans are secured by a mortgage or other lien on the assets of the borrower and in all cases, the owners of the business must personally guarantee the payment of interest on and principal of the loans. The Company focuses its 7(a) loan origination activity on loans secured by real estate assets. The 7(a) portfolio totaled approximately $45.9 million at March 31, 1998, or 8.1% of the Company's total investment portfolio. For the fiscal year ending September 30, 1998, the federal government estimates that 7(a) loan originations will approximate $10.5 billion. This large market is served by banks, non-bank SBLCs, and certain state-sponsored non-bank lenders. The Company believes that it competes successfully in the 7(a) loan market because of its focus in certain regional markets and because of its status as a "Preferred Lender" in the markets in which it competes. As an SBA Preferred Lender, the Company is permitted to 34 40 make 7(a) loans without SBA credit approval, thus simplifying and expediting the process of loan approval and disbursements. In order to source 7(a) loan opportunities, the Company has established relationships with certain third-party intermediaries, or "Regional Associates," in seven markets across the nation. The Company's 7(a) loans typically range in size from $200,000 to $1 million. Pursuant to Section 7(a) of the Small Business Act, the SBA will guarantee 80% of any qualified loan up to $100,000 regardless of maturity, and 75% of any such loan over $100,000 regardless of maturity, to a maximum guarantee of $750,000 for any one borrower. SBA regulations define qualified small businesses generally as businesses with no more than $5 million in annual sales and no more than 500 employees. Maximum loan maturities are stipulated by the SBA as follows: loans to acquire real estate: 25 years; loans to purchase machinery and equipment: 15 years; and loans to provide working capital: seven years. The Company typically prices its 7(a) loans with interest at a variable rate, typically 1.75% to 2.75% per annum above the prime rate, adjusted monthly. The Company's lower cost of capital affords the Company the opportunity to concentrate its 7(a) loan origination activity in a more competitive pricing range, and the Company believes that this pricing strategy will increase both the volume of its loan origination activity as well as the credit quality of its borrowers. The Company routinely sells the guaranteed portion of its 7(a) loans in the well-established secondary market. The Company earns premium income from the cash gain it receives from the sale of the guaranteed portion of the Company's 7(a) loans, less the costs associated with originating the loans sold. Typically, the Company receives cash premiums on loan sales, net of origination costs, ranging from 4% to 6% of the face amount of each loan sold. This premium income enhances the return on the Company's 25% retained investment in the loan, and the Company's retained portion is not subordinate to the guaranteed portion sold. The Company continues to service 100% of its loans sold. The Company receives excess interest on the loans sold. The value of such additional interest is recorded as an excess servicing asset. At March 31, 1998, the Company was servicing 7(a) loans sold totaling $133.4 million. The Company also provides companion or "piggyback" loans in conjunction with traditional 7(a) loans (i.e., the 7(a) Companion Loans). For this type of financing, the Company provides an unguaranteed first mortgage loan for up to 60% of the real estate value and a second mortgage loan through the 7(a) program with a 75% SBA guarantee. The total of the two loans is generally 80% or less of the appraised value of the real estate. From time to time, the Company may partner with local banks by providing second mortgage loans that are partially guaranteed by the SBA in conjunction with the banks' conventional first mortgage loans to qualifying small businesses. The 7(a) Companion Loans are included in the Company's commercial real estate finance portfolio. The Company also participates in the SBA Section 504 Loan Program; these loans also are included in the Company's commercial real estate finance portfolio. 35 41 The Company has in its 7(a) portfolio loans to, among others, hotels and motels, automotive shops and gas stations, restaurants, manufacturers, broadcasting and communications companies, service providers, retail shops, and other small businesses. The following tables shows the Company's 7(a) loan portfolio by industry and geographic region at March 31, 1998: 7(a) LOAN PORTFOLIO - --------------------------------------------------------------------------------
PERCENT OF INDUSTRY TOTAL - ------------------------------ ---------- Hospitality................... 32% Automotive Services........... 23 Restaurant/Food Services...... 8 Industrial/Manufacturing...... 8 Broadcasting/Communications... 6 Services...................... 4 Retail/Wholesale.............. 3 Other......................... 16 --- 100% ===
PERCENT OF GEOGRAPHIC REGION TOTAL - ------------------------------ ---------- Midwest....................... 40% Mid-Atlantic.................. 31 Southeast..................... 14 Northeast..................... 8 West.......................... 7 --- 100% ===
INVESTMENT ADVISORY SERVICES The Company is registered under the Investment Advisers Act of 1940, as amended, and provides investment advisory and related services to private investment funds that are primarily owned by large institutional investors or other accredited investors. These funds primarily focus on investing in small growing entrepreneurial companies through senior or subordinated debt, a combination of debt and equity investments, or commercial mortgage loans collateralized by real estate. As the investment adviser to private funds, the Company is responsible for sourcing, originating, monitoring, servicing and liquidating investments in their portfolios. The Company generally is compensated for its services in the form of asset-based or commitment-based fees, and performance incentive fees. The Company is able to participate as a co-investor in, as well as a manager to, private funds, which the Company believes provides an advantage in competing for future advisory contracts. The Company will selectively consider new investment advisory opportunities. Currently, the Company acts as an investment adviser to four private funds. Three of these funds are in the process of liquidation pursuant to the terms of their formation, and the fourth is a new investment fund targeting investments in Germany. In January 1998, the Company entered into an investment advisory agreement with Kreditanstalt fur Wiederaufbau (KfW), the state-owned public development bank of Germany, to manage a fund with committed capital of DM 160 million (approximately $87 million at March 31, 1998). For its services related to sourcing, structuring, investing, monitoring and disposing of its investments in small, German businesses, the Company will receive a 3% per annum fee on total committed capital, payable quarterly, and will share in the investment returns of the fund. The Company will also co-invest with the fund for an aggregate co-investment commitment of DM 40 million (approximately $22 million at March 31, 1998). OTHER INVESTMENTS At March 31, 1998, the Company had $56.1 million in cash and government securities. The Company temporarily invests cash in U.S. government or agency-issued or guaranteed securities that are backed by the full faith and credit of the United States, or in high quality, short-term repurchase agreements fully collateralized by such securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as the Company's Consolidated Financial Statements. MARKETING The Company believes that its experience and reputation provide a competitive advantage in originating new investment opportunities. The Company has established an extensive network of investment referral 36 42 relationships over its 40-year history. The Company is recognized as a pioneer in the mezzanine finance industry, and has developed a reputation in the commercial real estate finance market for its ability to finance complex transactions. During the past twelve months, the Company has increased the scope of its sales and marketing activity by opening regional offices in Chicago and San Francisco and by staffing a full-time sales and marketing function with seven individuals to identify and pursue mezzanine investments, commercial mortgage loans, and 7(a) loans. The Company maintains relationships with regional and boutique investment banks, mezzanine and venture capital investors, and other intermediaries, including business and mortgage brokers, banks, law firms and accountants for loan referrals. In addition to the Company's principal marketing channels, the Company has developed an additional channel for its 7(a) lending operations through its Regional Associates, who refer to the Company potential loans to small businesses located in designated areas. If and when a loan referred by a Regional Associate is closed, the Regional Associate is compensated by an origination fee calculated using a formula agreed upon by the Company and the Regional Associate. The origination fees currently paid by the Company to Regional Associates range from 0.5% to 5.0% of the principal amount of each loan made that was referred by the respective Regional Associate. The Regional Associates from time to time may assist the Company in monitoring any loans referred by them or otherwise made in their designated areas. At March 31, 1998, the Company had eleven Regional Associates located throughout the United States. UNDERWRITING GUIDELINES AND PROCEDURES In assessing new investment opportunities, the Company maintains a rigorous credit policy which is based upon the underwriting guidelines described below, a thorough due diligence process, and a credit approval policy requiring committee review. All credit approval is obtained through the Company's investment committee, and no one individual has the ability to approve an investment. The Company's underwriting process is performed by an experienced staff of professionals and is centralized at the Company's headquarters in Washington, D.C. The Company believes that these procedures have enabled the Company historically to maintain a high level of asset quality in its portfolio. UNDERWRITING GUIDELINES The Company has developed certain general criteria that serve as important guidelines when assessing the attractiveness of new investment opportunities. The emphasis placed on each criteria is dictated by the type of investment the Company is considering and the terms of that investment. Sound capital structure. The Company scrutinizes the capital structure of its potential borrowers to assure that there is sufficient equity capital to support its loans and to assure that the enterprise value of the borrower is reasonable given the amount of the financing the Company intends to provide. In the case of loans secured by real estate, the Company also seeks to have a sufficient loan to collateral value based upon ACC internal valuations and the appraisals received by ACC-approved appraisal firms. Seasoned management team. The Company focuses on the experience and depth of the borrower's management team. The Company seeks to determine that management has demonstrated the ability to successfully operate its business through changes in economic cycles, and has the requisite experience to execute the borrower's business plan. The Company also looks for management that has sufficient depth of talent. Another important aspect of the Company's evaluation is the level of management ownership and the risk assumed by management relative to the success of the growing business. Solid market position and sufficient operating margins. The Company seeks businesses that have a proven business model, and have historical operating margins sufficient to sustain an adequate level of cash flow. The Company typically does not lend to companies that have experimental products or are in the early stages of their development. The Company looks for borrowers that have defined their market niche and have established their presence in that niche. 37 43 Strong cash flow for debt service. The Company analyzes the historical financial performance of the business with particular emphasis placed on a track record of profitability and positive cash flow. Additionally, the Company reviews whether the business has historically achieved the financial performance targets set by its management. UNDERWRITING PROCEDURES Due Diligence. During the underwriting process, the Company conducts a rigorous due diligence process to evaluate investment opportunities. Due diligence focuses on four primary areas including: business due diligence; management due diligence; financial due diligence; and collateral due diligence. In the business due diligence process, the Company's investment professionals challenge the borrower's business plan, assess the borrower's competitive position, and assess the ability of the borrower to weather economic cycles. The Company also assesses the borrower's preparation for the Year 2000. Management due diligence includes a variety of reference checks including personal and professional references, discussions with vendors, suppliers, customers, and competitors, and references from employees. In the financial due diligence process, the investment professional analyzes historical and projected financial information and stress-tests financial information given certain adverse assumptions. For secured loans, the Company's collateral due diligence includes analysis of third party appraisals, environmental reports, structural and engineering reports, when necessary, and personal inspection of collateral properties. In addition, each investment professional is required to value collateral independently of appraised values. Investment Committee. Upon the completion of due diligence, each transaction is presented to the investment committee, which is comprised of nine of the Company's most senior investment professionals. All of the Company's lending disciplines are represented on the investment committee, and the individuals that comprise the investment committee currently have an average of 17 years of experience. The Company benefits not only from the experience of its investment committee members, but also from the experience of its senior investment professionals who, on average, have over 13 years of professional experience. In certain instances where risk/return characteristics warrant, the Executive Committee of the board of directors will also be required to approve investment transactions. PORTFOLIO MONITORING The Company services all of its loans and believes that its portfolio monitoring and internal servicing procedures are essential to maintaining high asset quality and low loan loss rate. Loan Servicing. The Company maintains a staff responsible for routine loan servicing including payment processing, borrower inquiries, escrow analysis and processing, third-party reporting, financial statement processing and insurance and tax administration. In addition, the Company maintains a staff responsible for special servicing activities including delinquency monitoring and collection, workout administration, and management of foreclosed assets. Portfolio monitoring and valuation. In addition to routine and special servicing activity, the Company monitors the portfolio through a grading system, and investment professionals are required to value their loans and investments on a quarterly basis. The grading system varies slightly for mezzanine and real estate loans, but generally the two systems rank loans on a scale of one to five, with one representing the highest quality assets, and five representing assets that have been determined to be impaired, require special servicing, and may require a valuation adjustment. The grades of two, three and four essentially represent varying degrees of risk associated with the asset and are not representative of any current credit problem. The Company does not employ any such grading system for its 7(a) loan portfolio, and monitors the portfolio through review of delinquency statistics and assessment of collateral value. At March 31, 1998, $14.7 million, or 2.8%, of the Company's total loan portfolio was classified as grade five. The Company values its portfolio on a quarterly basis, and valuations are reviewed and approved by the Company's board of directors. Investment professionals are required to review their individual portfolios and consider the financial performance of their borrowers, loan payment histories, indications of potential equity realization events and current collateral values, and determine whether the value of an asset should be 38 44 increased by unrealized appreciation or decreased through unrealized depreciation. As a general rule, the Company does not value its loans above cost, but loans are subject to depreciation events when the asset is considered impaired. Also, as a general rule, equity securities may be assigned appreciation if there has been some determinable event to indicate that an increase in value is warranted. After the investment professional has made his or her determination, the valuation is reviewed by members of senior management for approval, and then presented to the board of directors for their review and approval. At March 31, 1998 the Company had recorded an aggregate of $23.1 million in unrealized depreciation on its loans and investments, and an aggregate of $25.1 million in unrealized appreciation on its portfolio, for a net unrealized appreciation of $2.0 million, or 0.4% of the Company's total portfolio at value. Delinquencies. The Company monitors loan delinquencies through weekly review of the Company's delinquency reports. Loans that are 30 days delinquent are monitored and contacted for collection by the Company's loan servicing staff. Loans that are 60 days delinquent are generally transferred to investment professionals responsible for special servicing activity for monitoring and collection activity. Loans over 90 days delinquent are reviewed by the Company's accounting department in conjunction with the investment professional responsible for special servicing to determine whether the loan should be placed on a non-accrual status or whether a valuation adjustment is required. Generally, loans over 120 days delinquent are placed on a non-accrual status and the Company actively monitors each individual delinquent borrower to determine the appropriate course of action. At March 31, 1998, the Company's portfolio of delinquent assets greater than 120 days past due totaled $13.7 million at value, or approximately 2.4% of the total investment portfolio. Loans not accruing interest at value totaled $18.7 million or 3.3% of the total investment portfolio at March 31, 1998. The Company has a history of low levels of loan losses and has a demonstrated track record of successfully resolving troubled credit situations with minimal loss. Information concerning losses in the Company's portfolio is set forth below:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- -------------------------------------------------------------------- 1998 1997 1997 1996(1) 1995 1994 1993 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Realized losses...... $ -- $ 829 $ 5,100 $ 11,262 $ 4,679 $ 2,908 $ 3,719 Total assets......... 652,710 759,081 807,775 713,360 605,434 501,817 435,268 Realized losses/ total assets....... -- -- 0.6% 1.6% 0.8% 0.6% 0.9%
- --------------- (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operation" for a discussion of the realized losses experienced in 1996. COMPETITION A large number of entities and individuals compete for the opportunity to make investments similar to those made by the Company. Many of these entities and individuals have greater financial resources than the Company. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive loans and investments on terms considered to be prudent in light of the risks to be assumed. In the market for providing mezzanine financing, ACC competes against a broad array of financial institutions including commercial banks, insurance companies, specialized mezzanine and private equity funds, and investment banks. The commercial real estate financing market is also competitive and includes commercial banks, niche funds and investment banks, real estate conduits, equity and mortgage REITs and other non-bank lenders. Competitors in the SBA 7(a) lending market include commercial banks and other SBLCs. EMPLOYEES At March 31, 1998, the Company and its subsidiaries employed 90 persons. Of that total, 43 were employed as investment personnel and 47 were in the areas of loan servicing, finance, accounting, MIS, human resources and corporate administration. The Company believes that its relations with its employees are excellent. 39 45 LEGAL PROCEEDINGS The Company is party to certain lawsuits in connection with its business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the Company's financial condition or results of operations. PORTFOLIO COMPANIES The following table sets forth certain information at March 31, 1998, regarding each portfolio company in which the Company has an equity investment. The Company makes available significant managerial assistance to its portfolio companies. See "Certain Government Regulations." Other than loans to the portfolio company, the only relationship between each portfolio company and the Company is the Company's investment. For information relating to the amount and general terms of all loans to portfolio companies, see the Company's Consolidated Statement of Investments at March 31, 1998 at pages F-5 to F-10 herein.
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES PERCENTAGE OF OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY CLASS HELD(1) -------------------- ------------------ ------------------- ------------- Acme Paging, L.P. .............. Paging Services Partnership Interests 1.8% 1336 Basswood, Suite F Schaumburg, IL 60173 AGPAL Broadcasting, Inc. ....... Radio Stations Warrants to Purchase 5.0% 1000 S.W. 6th Street Common Stock Pendleton, OR 97801 American Barbecue & Grill, Restaurant Chain 17.3% Inc. ......................... Warrants to Purchase 7300 W. 110th Street, Suite 570 Common Stock Overland Park, KS 66210 ARS, Inc. ...................... Automotive Parts Warrants to Purchase 3.0% 2775 Broadway Manufacturing Common Stock Buffalo, NY 14227 ASW Holding Corporation......... Steel Wool Manufacturer Warrants to Purchase 5.0% 2825 W. 31st Street Common Stock Chicago, IL 60623 Au Bon Pain Co., Inc. .......... Restaurant Chain Warrants to Purchase 1.7% 19 Fid Kennedy Avenue Common Stock Boston, MA 02210 Brazos Sportswear, Inc. ........ Sportswear Manufacturer Common Stock 8.1% 3860 Virginia Avenue & Distribution Cincinnati, OH 45227 Calendar Broadcasting, Inc. .... Radio Stations Warrants to Purchase 15.0% One Independence Plaza Common Stock Middletown, NJ 07701 Candlewood Hotel Company........ Extended Stay Series A Convertible 5.0% 9342 East Central Facilities Preferred Stock Wichita, KS 67206 Celebrities, Inc. .............. Radio Stations Warrants to Purchase 25.0% 408-412 W. Oakland Park Common Stock Boulevard Ft. Lauderdale, FL 33311-1712 CeraTech Holdings Corporation... Ceramic Plate Warrants to Purchase 33.7% 10435 Seymour Avenue Manufacturer Common Stock Franklin Park, IL 60131
40 46
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES PERCENTAGE OF OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY CLASS HELD(1) -------------------- ------------------ ------------------- ------------- Cherry Tree Toys, Inc. ......... Direct Marketer of Common Stock 19.8% 7601 France Avenue South, Woodcrafts #225....................... Edina, MN 55435 Convenience Corporation of America....................... Convenience Store Chain Series A Preferred Stock 8.0% 711 N. 108th Court Omaha, NE 68154 Warrants to Purchase 4.5% Common Stock Cooper Natural Resources, Sodium Sulfate Producer 17.5% Inc. ......................... Warrants to Purchase P.O. Box 1477 Common Stock Seagraves, TX 79360 Cosmetic Group USA, LLC......... Cosmetic Manufacturer Options to Purchase 10.0% 11312 Penrose Street Shares Sun Valley, CA 91352 Csabai Canning Factory Rt. ..... Food Processing Hungarian Quotas 9.2% 5600 Bekescasba Bekis: vt 52-54 Hungary DEH Printed Circuits, Inc. ..... Circuit Board Warrants to Purchase 12.5% 840 Church Road Manufacturer Common Stock Elgin, IL 60123 DeVlieg-Bullard, Inc. .......... Tool Manufacturer Warrants to Purchase 1.7% One Gorham Island Common Stock Westport, CT 06680 Directory Investment Telephone Directories 50.0% Corporation................... Common Stock 1666 K Street, NW 9th floor Washington, DC 20006 Directory Lending Corporation... Telephone Directories Common Stock 50.0% 1666 K Street, NW 9th floor Preferred Stock 50.0% Washington, DC 20006 DMI Furniture, Inc. ............ Furniture Manufacturer Convertible Preferred 101 Bullitt Lane Stock Stock 10.8% Louisville, KY 40222 EDM Consulting, LLC............. Environmental Equity Interest 25.0% 14 Macopin Avenue Consulting Montclair, NJ 07043 El Dorado Communications, Radio Stations 4.7% Inc. ......................... Warrants to Purchase 2130 Sawatelle Boulevard Common Stock Suite 307 Los Angeles, CA 90025 Esquire Communications Ltd. .... Court Reporting Warrants to Purchase 11.1% 216 E. 45th Street, 8th floor Services Common Stock New York, NY 10017 Fairchild Industrial Products Company....................... Industrial Controls Warrants to Purchase 21.5% 3920 Westpoint Boulevard Manufacturer Common Stock Winston-Salem, NC 27013
41 47
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES PERCENTAGE OF OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY CLASS HELD(1) -------------------- ------------------ ------------------- ------------- Gibson Guitar Corp. ............ Guitar Manufacturer Warrants to Purchase 3.0% 1818 Elm Hill Pike Common Stock Nashville, TN 37210 Ginsey Industries, Inc. ........ Toilet Seat Convertible Debentures 7.0% 281 Benigno Boulevard Manufacturer Warrants to Purchase 16.0% Bellmawr, NJ 08031 Common Stock Golden Eagle/Satellite Archery, LLC.................. Sporting Equipment Convertible Debentures 40.0% 1733 Gunn Highway Manufacturer Odessa, FL 33556 Grant Broadcasting System II.... Television Stations Warrants to Purchase 40.0% 919 Middle River Drive, Common Stock Suite 409 Warrants to Purchase 40.0% Ft. Lauderdale, FL 33304 Common Stock in Affiliate Company Grant Television, Inc. ......... Television Stations Warrants to Purchase 20.0% Common Stock Herr-Voss Industries, Inc. ..... Machinery Manufacturer Common Stock 8.5% Arch Street Extension Carnegie, PA 15106 IndeNet Corporation............. Broadcasting Software Warrants to Purchase 2.1% 5475 Tech Enter Drive, Suite Common Stock 300 Colorado Springs, CO 80919 JRI Industries, Inc. ........... Machinery Manufacturer Warrants to Purchase 7.5% 2958 East Division Common Stock Springfield, MO 65803 Julius Koch USA, Inc. .......... Cord Manufacturer Warrants to Purchase 45.0% 387 Church Street Common Stock New Bedford, MA 02745 Kirker Enterprises, Inc. ....... Nail Enamel Warrants to Purchase 22.5% One East 11th Street Manufacturer Common Stock Paterson, NJ 07524 Equity Interest in 22.5% Affiliate Company Kirkland's, Inc. ............... Home Furnishing Warrants to Purchase 3.2% P.O. Box 7222 Retailer Common Stock Jackson, TN 38308-7222 Liberty-Pittsburgh Systems, Inc. ......................... Business Forms Printing Common Stock 20.0% 265 Executive Drive Plainview, NY 11803 Love Funding Corporation........ Mortgage Services Series D Preferred Stock 60.0% 1220 19th Street, NW, Suite 801 Washington, DC 20036 MidSouth Data Systems, Inc. .... Value-Added Reseller, Warrants to Purchase 8.0% 25 Westridge Market Place Computer Systems Common Stock Chandler, NC 28715
42 48
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES PERCENTAGE OF OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY CLASS HELD(1) -------------------- ------------------ ------------------- ------------- Midview Associates, L.P. ....... Residential Land Options to purchase 35.0% 2 Eaton Street, Suite 1101 Development partnership interests Hampton, VA 23669 Mill-It Striping, Inc. ......... Highway Paint Striping Common Stock 8.0% 1005 Sunshine Lane Altamonte Springs, FL 32714 MLX/SinterMet Corp. ............ Friction Materials Common Stock 0.2% 5305 Oakbrook Parkway Manufacturer Norcross, GA 30093 Monitoring Solutions, Inc. ..... Air Emissions Common Stock 25.0% 4303 South High School Road Monitoring Warrants to Purchase 40.0% Indianapolis, IN 46241 Common Stock Nobel Education Dynamics, Inc. ......................... Educational Services Series D Convertible 100.0% 1400 N. Providence Road, Preferred Stock Suite 3055 Warrants to Purchase 5.1% Media, PA 19063 Common Stock Nursefinders, Inc. ............. Home Healthcare Warrants to Purchase 2.4% 1200 Copeland Road, Suite 200 Providers Common Stock Arlington, TX 76011 Old Mill Holdings, Inc.......... Custom Embroidered Warrants to Purchase 30.0% 410 Severn Avenue, Suite 311 Apparel Manufacturer Common Stock Annapolis, MD 21403 Peerless Group, Inc. ........... Commercial Banking Common Stock 7.7% 1212 Arapaho Road Software Development Warrants to Purchase 3.6% Richardson, TX 75081 Common Stock PIATL Holdings Inc. ............ Asbestos Testing Labs Preferred Stock 35.5% 16000 Horizon Way, Suite 100 Common Stock 28.0% Mt. Laurel, NJ 08054 Pico Products, Inc. ............ Satellite/Television Common Stock 5.9% 12500 Foothill Boulevard Component Warrants to Purchase 28.1% Lakeview Terr., CA 91342 Manufacturer Common Stock Quality Software Product Holdings, PLC................. Accounting Software Common Stock 0.7% Talipot House 5th Avenue Developer Gateshead Tyne & Wear, NE110XA UNITED KINGDOM Radio One of Atlanta, Inc. ..... Radio Stations Common Stock 14.3% 5900 Princess Garden Parkway Lanham, MD 20706 R-Tex Decoratives Company, Inc. ......................... Decorative Ribbon Warrants to Purchase 40.0% 5691 Rising Sun Avenue Manufacturer Common Stock Philadelphia, PA 19120 Spa Lending Corporation......... Health Spas Series A Preferred Stock 100.0% 1666 K Street, 9th floor Series B Preferred Stock 68.4% Washington, DC 20006 Series C Preferred Stock 46.3% Common Stock 62.1%
43 49
NAME AND ADDRESS NATURE OF ITS TITLE OF SECURITIES PERCENTAGE OF OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY CLASS HELD(1) -------------------- ------------------ ------------------- ------------- Total Foam, Inc. ............... Packaging Systems Common Stock 49.0% P.O. Box 688 Ridgefield, CT 06877 Waterview Limited Partnership... Multi-tenant Office Option to Purchase 36.0% 1250 Connecticut Avenue, Building Partnership Interests 5th floor Washington, DC 20036 West Virginia Radio Corporation of Clarksburg, Inc. ............. Radio Stations Warrants to Purchase 20.0% 1251 Earlk L Core Road Common Stock Morgantown, WV 26505 Williams Brothers Lumber Company....................... Builders' Supplies Warrants to Purchase 49.0% 3165 Pleasant Hill Road Common Stock Duluth, GA 30136 Z-Spanish Radio Network, Inc. ......................... Radio Stations Warrants to Purchase 4.1% 1436 Auburn Boulevard Common Stock Sacramento, CA 95814
- --------------- (1) Percentages shown for warrants and options held by the Company represent the percentage of class of security to be owned, on a fully diluted basis, upon exercise of the warrants or options. DETERMINATION OF NET ASSET VALUE The net asset value per share of Common Stock is determined quarterly, as soon as practicable after and as of the quarter end, and is equal to the value of total assets minus liabilities divided by the total number of shares outstanding on the date as of which the determination is made. In calculating the value of the Company's total assets, securities that are traded in the over-the-counter market or on a stock exchange are valued at the current market price. Securities in public companies that carry certain restrictions on sale are typically valued by the board of directors at a discount from the market value of the security. Other publicly traded securities may also be valued at a discount due to the investment size or market liquidity concerns. All other investments are valued at fair value as determined in good faith by the board of directors. In making such determination, the board of directors will value loans and non-convertible debt securities for which there exists no public trading market at cost plus amortized original issue discount, if any, unless adverse factors lead to a determination of a lesser value, at which time unrealized depreciation would be recognized. Convertible debt securities and warrants are valued to reflect the value of the underlying equity security less the conversion or exercise price. In valuing equity securities for which there exists no public trading market, investment cost is presumed to represent fair value except where the board of directors may determine fair value on the basis of other factors including financings by unaffiliated investors, recent offers to purchase the portfolio company's securities, or other pertinent factors. A substantial portion of the Company's assets will consist of securities carried at fair values determined by its board of directors. Determination of fair value involves subjective judgments not susceptible to substantiation by auditing procedures. Accordingly, under current standards, the accountants' opinion on the Company's financial statements in its annual report refers to the uncertainty with respect to the possible effect on the financial statements of such valuation. 44 50 MANAGEMENT The business of the Company is managed under the supervision of its board of directors. The responsibilities of each director includes, among other things, the oversight of the loan approval process, the quarterly valuation of ACC's assets, and oversight of ACC's financing arrangements. The board of directors maintains an Executive Committee, Audit Committee, Compensation Committee, and Nominating Committee, and may establish additional committees in the future. Certain of the Company's directors also serve as directors of the Company's subsidiaries. The Company's investment decisions are made by an investment committee comprised of investment professionals representing the most senior investment professionals currently employed by the Company. No one person is primarily responsible for making recommendations to the investment committee. The Company is internally managed and employs investment professionals to manage its portfolio and the portfolios of companies for which the Company serves as investment adviser. These investment professionals have extensive experience in managing investments in private growing businesses in a variety of industries and in diverse geographic locations, and are familiar with the Company's approach of lending and investing. Because investment management services are provided internally by employees of ACC, rather than through a contract with an outside adviser, ACC pays no investment advisory fees, but pays the operating costs associated with employing investment management professionals. STRUCTURE OF BOARD OF DIRECTORS At the March 3, 1998 meeting of the board of directors, the directors voted to amend the Company's bylaws to set the maximum number of directors at fifteen and to decrease the size of the board from twenty-two to twelve directors effective at the Annual Meeting of Shareholders held on May 14, 1998 (the "Meeting"). In connection with the Merger, the bylaws of the Company were amended to provide that, effective at the Meeting, directors of the Company were classified into three approximately equal classes, with each class being elected initially for one, two or three-year terms, with the terms of office of only one of the three classes expiring each year. At the Meeting, Class I Directors were elected for one-year terms, Class II Directors were elected for two-year terms and Class III Directors were elected for full three-year terms. Thereafter, Class I Directors will be elected for full three-year terms commencing with the 1999 annual meeting of shareholders and Class II Directors will be elected for full three-year terms commencing with the 2000 annual meeting of shareholders. Directors serve until their successors are elected and qualified. DIRECTORS The following table sets forth certain information regarding the board of directors.
NAME AGE POSITION DIRECTOR SINCE(1) TERM - ---- --- -------- ----------------- ---- William L. Walton..................... 48 Chairman, Chief Executive Officer and President 1986 2001 George C. Williams, Jr................ 71 Chairman Emeritus 1964 2001 Brooks H. Browne...................... 48 Director 1990 2001 John D. Firestone..................... 54 Director 1993 1999 Anthony T. Garcia..................... 41 Director 1991 1999 Lawrence I. Hebert.................... 51 Director 1989 1999 John I. Leahy......................... 67 Director 1994 2000 Robert E. Long........................ 66 Director 1972 2001 Warren K. Montouri.................... 68 Director 1986 2000 Laura W. Van Roijen................... 45 Director 1992 1999 Guy T. Steuart II..................... 66 Director 1984 2000 T. Murray Toomey, Esq................. 74 Director 1959 2000
- --------------- (1) Includes service as a director of any of the Predecessor Companies. 45 51 EXECUTIVE OFFICERS The following table sets forth certain information regarding executive officers of the Company.
NAME AGE POSITION ---- --- -------- William L. Walton........................... 48 Chairman, Chief Executive Officer and President Joan M. Sweeney............................. 38 Managing Director G. Cabell Williams, III .................... 43 Managing Director John M. Scheurer............................ 45 Managing Director Jon A. DeLuca............................... 35 Principal and Chief Financial Officer
BIOGRAPHICAL INFORMATION DIRECTORS William L. Walton has been the Chairman, Chief Executive Officer and President of the Company since 1997. Mr. Walton was President of Allied II from 1996 to 1997. Mr. Walton is the Chairman of BMI. Mr. Walton was Chief Executive Officer of Success Lab, Inc. (children's educational services) from 1993 to 1996, and Chief Executive Officer of Language Odyssey (educational publishing and services) from 1992 to 1996. Mr. Walton was Managing Director of Butler Capital Corporation from 1987 to 1991. Mr. Walton is an interested person of the Company, as defined in the 1940 Act, due to his position as an officer of the Company. George C. Williams, Jr. is Chairman Emeritus of the Company. Mr. Williams was an officer of the Predecessor Companies from the later of 1959 or the inception of the relevant entity and President or Chairman and Chief Executive Officer of the Predecessor Companies from the later of 1964 or each entities' inception until 1991. Mr. Williams is a director of BMI. Mr. Williams is an interested person of the Company, as defined in the 1940 Act, due to his position as an officer of the Company. Brooks H. Browne has been the President of Environmental Enterprises Assistance Fund since 1993. Mr. Browne was the President, Executive Vice President or Senior Vice President of Advisers from 1984 to 1993. Mr. Browne is a director of SEAF, International Fund for Renewable Energy and Energy Efficiency, Corporation Financiera Ambiental (Panama), Empresas Ambientales de Centro America (Costa Rica) and Yayasan Bina Usaha Lingkungan (Indonesia) (environmental nonprofit or investment funds). John D. Firestone has been a Partner of Secor Group (venture capital) since 1978. Mr. Firestone is a director of BMI and Security Storage Company of Washington, D.C., and is a senior advisor to Gilbert Capital, Inc. Mr. Firestone was the Chairman of Secor Investments, Inc. from 1980 to 1993, and a director of Palmer National Bank from 1988 to 1994. Anthony T. Garcia has been General Manager of Breen Capital Group (investor in tax liens) since 1997. Mr. Garcia was a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996. Lawrence I. Hebert has been a director and the President of Perpetual Corporation (a holding and management company) since 1981. Mr. Hebert has been Vice Chairman (since 1983) and President (since 1984) of Allbritton Communications Company, and the President of Westfield News Advertiser, Inc. since 1988. Mr. Hebert was Vice Chairman (from 1990 to 1993) of Riggs National Corporation and has been a director of Riggs National Corporation (since 1988). Mr. Hebert was a Vice President of University Bancshares, Inc. from 1975 to 1997. He has also been a director of Riggs Bank Europe, Ltd., formerly Riggs AP Bank, Ltd. since 1986, and Riggs Investment Management Corporation (RIMCO) since 1990, and a trustee of the Allbritton Foundation. John I. Leahy has been the President of Management and Marketing Associates (a management consulting firm) since 1986. Mr. Leahy is also the President and Group Executive Officer, Western Hemisphere of Black & Decker Corporation. Mr. Leahy is a director of Kar Kraft Systems, Inc., Cavanaugh Capital, Inc., Acorn Products, Inc., The Wills Group, Thulman-Eastern Company and Gallagher Fluid Seals, Inc. 46 52 Robert E. Long is the Managing Director of Goodwyn & Long Investment Management, Inc. Mr. Long has been the President and Chief Executive Officer of Business News Network, Inc. since 1995, was the Chairman and Chief Executive Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995, and a director and the President of Potomac Asset Management, Inc. from 1983 to 1991. Mr. Long is a director of Ambase Inc., AHL Shipping Company, Inc., CSC Scientific, Inc., and Global Travel, Inc. Warren K. Montouri has been a Partner of Montouri & Roberson (real estate investment firm) since 1980. Mr. Montouri was a director of C&S/Sovran Bank from 1970 to 1990, a director of Sovran Financial Corporation from 1989 to 1990, a director of NationsBank, N.A. from 1990 to 1996, a trustee of Suburban Hospital from 1991 to 1994, and a trustee of The Audubon Naturalist Society from 1979 to 1985. He has been a director of Franklin National Bank since 1996. Laura W. van Roijen has been a private real estate investor since 1992. Ms. van Roijen was the Chairman of CWV & Associates (RTC qualified contracting firm) from 1991 to 1994, a director and the Treasurer of Black Possum Inc. (retail concern) from 1994 to 1996, the President of Volta Place, Inc. (real estate advisory firm) from 1991 to 1994, and Vice President (from 1986 to 1991) and Market Director (from 1989 to 1991) of Citicorp Real Estate, Inc. Guy T. Steuart II has been a director and President of Steuart Investment Company (manages, operates, and leases real and personal property and holds stock in operating subsidiaries engaged in various businesses) since 1960. Mr. Steuart is Trustee Emeritus of Washington and Lee University. T. Murray Toomey, Esq. has been an attorney at law since 1949. Mr. Toomey is a director of The National Capital Bank of Washington, Federal Center Plaza Corporation, and The Donohoe Companies, Inc., and a trustee of The Catholic University of America. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS Joan M. Sweeney has been employed by the Company since 1993. Ms. Sweeney is also a Managing Director of BMI. Ms. Sweeney was a Senior Manager at Ernst & Young from 1990 to 1993. G. Cabell Williams, III has been employed by the Company since 1981. Mr. Williams is also a Managing Director of BMI. John M. Scheurer has been employed by the Company since 1991. Mr. Scheurer is also President of BMI. Jon A. DeLuca has been employed by the Company since 1994. Mr. DeLuca is Principal and Chief Financial Officer of BMI. Mr. DeLuca was a Manager at Coopers & Lybrand from 1986 to 1994. COMPENSATION PLANS STOCK OPTION PLAN The Company (with the approval of its shareholders and independent directors) established the Stock Option Plan (the "New Plan"), which is intended to encourage stock ownership in the Company by officers, thus giving them a proprietary interest in the Company's performance. The New Plan was approved by shareholders at the Special Meeting of Shareholders of Allied Lending held on November 26, 1997. The principal objective of the Company's Compensation Committee in awarding stock options to the Chief Executive Officer and other eligible officers of the Company is to align each officer's interests with the success of the Company and the financial interests of its shareholders by linking a portion of such executive's compensation with the performance of the Company's stock and the value delivered to shareholders. Stock options are granted under the New Plan at a price not less than the prevailing market value and will have value only if the Company's stock price increases. The committee determines the amount and features of the stock options, if any, to be awarded to the Company's officers. Historically, when granting stock options, the committee evaluated a number of criteria, including the recipient's current stock holdings, years of service, position with the Company, and other factors; the committee has not applied a formula assigning specific weights to any of these factors when making its determination. In January 1998, officers were granted a total of 47 53 3,415,446 options to purchase shares of Common Stock under the New Plan, which generally vest over a five-year period. See "Control Persons and Principal Holders of Securities" in the SAI for currently exercisable options granted to certain executive officers. The New Plan is designed to satisfy the conditions of Section 422 of the Code so that options granted thereunder may qualify as "incentive stock options." To qualify as "incentive stock options," options may not become exercisable for the first time in any year to the extent that the number of incentive options first exercisable in that year multiplied by the exercise price exceeds $100,000. CUT-OFF AWARD AND FORMULA AWARD Prior to the Merger, each of the five Predecessor Companies had a stock option plan (each, an "Old Plan" and collectively, the "Old Plans"). Options under the Old Plans had been granted to various employees of Advisers, who were also officers of the Predecessor Companies. In preparation for the Merger, the Compensation Committee of Advisers, in conjunction with the Compensation Committees of the other Predecessor Companies, determined that the five Old Plans should be terminated upon the Merger, so that the new merged Company would be able to develop a new plan that would incent all officers and directors with a single equity security. The existence of the Old Plans had resulted in certain inequities in option grants among the various officers of the Predecessor Companies simply because of the differences in the underlying equity securities. To balance stock option awards among Advisers' employees, and to account for the deviations caused by the existence of five plans supported by five different publicly traded stocks, Advisers developed two special awards to be granted in lieu of options under the Old Plans that would be forgone upon completion of the Merger and the cancellation of the Old Plans. Cut-Off Award. The first award established a cut-off dollar amount as of the date of the announcement of the Merger (August 14, 1997) that would be computed for all outstanding, but unvested options that would be canceled as of the date of the Merger (the "Cut-Off Award"). The Cut-Off Award was designed to cap the appreciated value in unvested options at the Merger announcement date in order to set the foundation to balance option awards upon the Merger. The Cut-Off Award, in the aggregate, was computed to be $2.9 million, and is equal to the difference between the market price of the shares of stock underlying the canceled options under the Old Plans at August 14, 1997, less the exercise prices of the options. The Cut-Off Award will be payable for each canceled option as the canceled options would have vested and will vest automatically in the event of a change of control. The Cut-Off Award will only be payable if the award recipient is employed by the Company on the future vesting date. A table indicating the Cut-Off Award for certain officers, and the related vesting schedule, is contained in the SAI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." Formula Award. The second award (the "Formula Award") was designed to compensate officers from the point when their unvested options would cease to appreciate in value pursuant to the Cut-Off Award (i.e., August 14, 1997) up until the time in which they would be able to receive option awards in the Company after the Merger became effective. In the aggregate, the Formula Award equaled six percent (6%) of the difference between the combined aggregate market capitalizations of the Predecessor Companies as of the close of the market on December 30, 1997, and the combined aggregate market capitalizations of the Predecessor Companies on August 14, 1997. In total, the combined aggregate market capitalization of the Predecessor Companies increased by $319 million from August 14, 1997 to December 30, 1997, and the aggregate Formula Award was approximately $19 million. Advisers' Compensation Committee designed the Formula Award as a long-term incentive compensation program to be a replacement for canceled stock options and to balance share ownership among key officers for past and prospective service. The terms of the Formula Award require that the award be contributed to the Company's deferred compensation plan, and used to purchase shares of the Company in the open market. See "-- Deferred Compensation Plan." The Formula Award vests and accrues equally over a three-year period, on the anniversary of the Merger date (December 31, 1997), and vests automatically in the event of a change of control of the Company. If an 48 54 officer terminates employment with the Company prior to the vesting of any part of the Formula Award, that amount will be forfeited to the Company. Assuming all officers meet the vesting requirement, the Company will accrue the Formula Award over the three-year period in equal amounts of approximately $6.4 million. A table indicating the Formula Award for certain officers, and the related vesting schedule, is contained in the SAI. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Comparison of Three Months Ended March 31, 1998 and 1997." EMPLOYEE STOCK OWNERSHIP PLAN In connection with the Merger, the Company adopted an amended and restated Employee Stock Ownership Plan, or ESOP. All eligible employees (i.e., employees with one (1) year of service who are at least 21 years of age) of the Company are eligible participants in the ESOP. Pursuant to this qualified plan, during 1997 the Company contributed 5% of each eligible participant's total cash compensation for the year (up to a $30,000 limit per person) to a plan account on the participant's behalf, which fully vests over a two-year period. The ESOP has used substantially all of these cash contributions to purchase shares of the Company, thus aligning every employee's interest with those of the Company and its shareholders. At December 31, 1997 the ESOP held 0.8% of the outstanding shares of the Company, and all of these shares had been allocated to participants' plan accounts. DEFERRED COMPENSATION PLAN Pursuant to the Merger, the Company succeeded to the deferred compensation plan of Advisers (the "Deferred Compensation Plan"), and subsequently adopted such plan as amended and restated. The Deferred Compensation Plan is intended to be a funded plan for the purpose of providing deferred compensation to the Company's employees and consultants. Any employee or consultant of the Company is eligible to participate in the plan at such time and for such period as designated by the board of directors. The Deferred Compensation Plan is administered through a trust, and the Company funds this plan through cash and open market purchases of the Company's Common Stock. See "-- Cut-Off Award and Formula Award -- Formula Award," above. TAXATION The following discussion is a general summary of the material federal income tax considerations applicable to the Company and to an investment in the Common Stock and does not purport to be a complete description of the income tax considerations applicable to such an investment. The discussion is based upon the Code, Treasury Regulations thereunder, and administrative and judicial interpretations thereof, each as of the date hereof, all of which are subject to change. Prospective shareholders should consult their own tax advisors with respect to tax considerations which pertain to their purchase of Common Stock. This summary assumes that the investors in the Company hold shares as capital assets. This summary does not discuss all aspects of federal income taxation relevant to holders of the Common Stock in light of particular circumstances, or to certain types of holders subject to special treatment under federal income tax laws, including foreign taxpayers, dealers in securities and financial institutions. This summary does not discuss any aspects of foreign, state or local tax laws. TAXATION AS A RIC The Company intends to be treated for tax purposes as a "regulated investment company" or "RIC" within the meaning of Section 851 of the Code. If the Company qualifies as a RIC and distributes to its shareholders in a timely manner at least 90% of its "investment company taxable income," as defined in the Code, each year, it will not be subject to federal income tax on the portion of its taxable income and gains it distributes to shareholders. In addition, if a RIC distributes in a timely manner (or treats as "deemed distributed") 98% of its capital gain net income for each one year period ending on December 31 (pursuant to Section 4982(e)(4)(A) of the Code), and distributes 98% of its ordinary income for each calendar year, it will not be subject to the 4% nondeductible federal excise tax on certain undistributed income of RICs. The 49 55 Company generally will endeavor to distribute to shareholders all of its investment company taxable income and its net capital gain, if any, for each taxable year so that such Company will not incur income and excise taxes on its earnings. In order to qualify as a RIC for federal income tax purposes, the Company must, among other things: (i) continue to qualify as a BDC under the 1940 Act; (ii) 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 other securities or other income derived with respect to its business of investing in such stock or securities; and (iii) diversify its holdings so that at the end of each quarter of the taxable year (a) at least 50% of the value of the Company's assets consists of cash, cash items, government securities, securities of other RICs, 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 (b) no more than 25% of the value of the Company's assets are invested in securities of one issuer (other than U.S. Government Securities or securities of other RICs), or of two or more issuers that are controlled by the Company and are engaged in the same or similar or related trades or businesses. The failure of one or more of the Company's subsidiaries to continue to qualify as RICs could adversely affect the Company's ability to satisfy foregoing diversification requirements. If the Company fails to satisfy the 90% Distribution Requirement or otherwise fails to qualify as a RIC 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 distribution to its shareholders. In addition, in that case, all of the Company's distributions to its shareholders will be characterized as ordinary income (to the extent of the Company's current and accumulated earnings and profits). In contrast, as is explained below, if the Company qualifies as a RIC, a portion of its distributions may be characterized as long-term capital gain in the hands of shareholders. TAXATION OF SHAREHOLDERS Distributions of the Company are generally taxable to shareholders as ordinary income or capital gains. Shareholders 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 to a particular shareholder may be subject to the alternative minimum tax under the provisions of the Code. Shareholders not subject to tax on income will not be required to pay tax on amounts distributed to them by the Company. Distributions of the ordinary income and net short-term capital gain of the Company generally are taxable to shareholders as ordinary income. Distributions of net capital gain, if any, designated by the Company as capital gain dividends generally will be taxable to shareholders as long-term capital gain, regardless of the length of time a shareholder has held the shares. All distributions are taxable, whether invested in additional shares or received in cash. Dividends declared by the Company and payable to shareholders of record in October, November or December of a given year that are paid during the following January will be treated as having been received by shareholders on December 31 of the year of declaration. The Company's ordinary income dividends to its corporate shareholders may, if certain conditions are met, qualify for the dividends received deduction to the extent that the Company has received qualifying dividend income during the taxable year. Capital gain dividends distributed by the Company are not eligible for the dividends received deduction. In general, any gain or loss realized upon a taxable disposition of shares of the Company, or upon receipt of a liquidating distribution will be treated as capital gain or loss. If gain is realized, it will be subject to taxation at various tax rates depending on the length of time the taxpayer has held such shares and other factors. The gain or loss will be short-term capital gain or loss if the shares have been held for one year or less. If a shareholder has received any capital gain dividends with respect to such shares, any loss realized upon a taxable disposition of shares treated under the Code as having been held for six months or less, to the extent of such capital gain dividends, will be treated as a long-term capital loss. All or a portion of any loss realized upon a taxable disposition of shares of the Company may be disallowed if other shares of the Company are purchased (under a DRIP Plan or otherwise) within 30 days before or after the disposition. 50 56 The Company is required to withhold and remit to the Internal Revenue Service (the "IRS") 31% of the dividends paid to any shareholder who (i) fails to furnish the Company with a certified taxpayer identification number; (ii) has underreported dividend or interest income to the IRS; or (iii) fails to certify to the Company that he, she or it is not subject to backup withholding. CERTAIN GOVERNMENT REGULATIONS The Company operates in a highly regulated environment. The following discussion generally summarizes certain regulations. BUSINESS DEVELOPMENT COMPANY ("BDC") As a BDC, ACC 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 ACC's total investment assets (the "70% test"). The principal categories of Qualifying Assets relevant to the business of ACC are the following: (1) Securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company. An eligible portfolio company is defined to include any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than an SBIC wholly owned by the BDC (ACC's investments in and advances to Allied Investment, Allied Financial, Allied SBLC and certain other subsidiaries generally would be Qualifying Assets), and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit; (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; and (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. To include certain securities described in (1) and (2) above as Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance. Making available significant managerial assistance means, among other things, (i) any arrangement whereby the BDC, through its directors, officers, or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company, or (ii) in the case of an SBIC, making loans to a portfolio company. 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. ACC would provide managerial assistance on a continuing basis to any portfolio company that requests it, whether or not difficulties are perceived. ACC 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 ACC shares. Since ACC made its BDC election, it has not made any substantial change in the nature of its business. As a BDC, ACC is entitled to issue senior securities in the form of stock or senior securities representing indebtedness, as long as each class of senior security has an asset coverage of at least 200% immediately after each such issuance. This limitation is not applicable to borrowings by ACC's SBIC, SSBIC or SBLC subsidiaries. See "Risk Factors -- Risks of Leverage." REGULATED INVESTMENT COMPANY ("RIC") The Company and its subsidiaries are treated as a RIC within the meaning of Section 851 of the Code, and provided the Company meets certain requirements under the Code, the Company qualifies for pass-through tax treatment. See "Taxation" for a discussion of the requirements the Company must meet to maintain RIC status under the Code. 51 57 SBA REGULATIONS SBIC and SSBIC Regulations. Allied Investment, a wholly owned subsidiary of the Company, is licensed by the SBA as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended (the "1958 Act"), and has elected to be regulated as a BDC. In addition, Allied Financial, a wholly owned subsidiary of the Company, is licensed by the SBA as an SSBIC under 301(d) of the 1958 Act, and has also elected to be regulated as a BDC. The Company has determined that, given certain regulatory requirements of the SSBIC program, it is no longer economical to operate Allied Financial as an SSBIC, and the Company has received permission from the SBA to permit Allied Financial to make SBIC eligible investments in addition to SSBIC eligible investments. The Company is also working with the SBA to merge Allied Investment and Allied Financial into a single SBIC. SBICs are authorized to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a net worth not exceeding $18 million and have average annual fully-taxed profits not exceeding $6 million for the most recent two fiscal years. In addition, an SBIC must devote 20% of its investment activity to "smaller" concerns as defined by the SBA. A smaller concern is one that has a net worth not exceeding $6 million and has average annual fully-taxed profits not exceeding $2 million for the most recent two fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses, and provide them with consulting and advisory services. Allied Investment provides long-term loans to qualifying small businesses; equity investments and consulting and advisory services are typically provided only in connection with such loans. Allied Investment and Allied Financial have the opportunity to sell to the SBA preferred stock and subordinated debentures with a maturity of up to ten years, up to an aggregate principal amount of $101 million (the "$101 million limit"). The $101 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. As a group, Allied Investment and Allied Financial have received $53.3 million of subordinated debentures and $7.0 million of preferred stock investments from the SBA at March 31, 1998; as a result, the combined ability to apply for additional financing from the SBA will be limited. Interest rates on the SBA debentures currently outstanding range from 6.9% to 9.8%. Both Allied Investment and Allied Financial are subject to periodic examinations by the SBA staff for determining compliance with SBA regulations. SBLC Regulations. Allied SBLC is licensed to operate as an SBLC and is subject to regulation and periodic examinations by the SBA staff for purposes of determining compliance with SBA regulations, including its participation in the Preferred Lender Program. See "Business -- 7(a) Lending." DIVIDEND REINVESTMENT PLAN The Company has adopted an "opt out" dividend reinvestment plan ("DRIP Plan"). Under the DRIP Plan, distributions to a shareholder owning shares registered in his or her own name will be automatically reinvested in additional shares of Common Stock by the Company's transfer agent, acting as reinvestment plan agent (the "Plan Agent"). Shareholders may change enrollment status in the DRIP Plan at any time by contacting either the Plan Agent or the Company. A shareholder's ability to participate in a DRIP Plan may be limited according to how the shareholder's shares are registered. Beneficial owners holding shares in street name may be precluded from participating by the nominee. Shareholders who wish to participate in a DRIP Plan may need to register their shares in their own name. Shareholders will be informed of their right to elect to receive cash in the Company's annual and quarterly reports to shareholders. Shareholders whose shares are held in the name of a nominee should contact the nominee for details. All distributions to investors who do not participate (or whose nominee elects not to participate) in the DRIP Plan will be paid by check mailed 52 58 directly, or through the nominee, to the record holder by or under the discretion of the Plan Agent. The Plan Agent is American Stock Transfer and Trust Company ("AST"), 40 Wall Street, New York, New York 10005. The telephone number for AST is 800-937-5449. Under the DRIP Plan, the Company may issue new shares unless the market price of the outstanding shares is less than 110% of the last reported net asset value. Alternatively, the Plan Agent may, as agent for the participants, buy shares in the market. Newly issued shares for the DRIP Plan will be valued at the average of the reported closing bid prices of the outstanding shares on the last five trading days prior to the payment date of the distribution, but not less than 95% of the opening bid price on such date. The price in the case of shares bought in the market will be the average actual cost of such shares, including any brokerage commissions. There are no other charges payable in connection with the DRIP Plan. Any distributions reinvested under the plan will nevertheless remain taxable to the shareholders. DESCRIPTION OF CAPITAL STOCK COMMON STOCK The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.0001. At May 4, 1998, there were 52,121,610 shares of Common Stock outstanding and 6,250,000 shares of Common Stock reserved for issuance under the New Plan. The following are the authorized classes of securities of the Company as of March 31, 1998:
(4) (3) AMOUNT AMOUNT HELD OUTSTANDING (2) BY COMPANY EXCLUSIVE OF (1) AMOUNT OR FOR ITS AMOUNTS SHOWN TITLE OF CLASS AUTHORIZED ACCOUNT UNDER (3) -------------- ----------- ----------- ------------- Allied Capital Corporation........ Common Stock 100,000,000 662,948* 51,450,602
- ------------------ * Represents shares of the Company held in a trust for the Deferred Compensation Plan. See "Management -- Compensation Plans." All shares of Common Stock have equal rights as to earnings, assets, dividends, and voting privileges and all outstanding shares of Common Stock are fully paid and non-assessable. The shares of Common Stock have no preemptive, conversion, or redemption rights and are freely transferable. In the event of liquidation, each share of Common Stock is entitled to its proportion of the Company's assets after debts and expenses. Each share is entitled to one vote and does not have cumulative voting rights, which means that holders of a majority of the shares, if they so choose, could elect all of the directors, and holders of less than a majority of the shares would, in that case, be unable to elect any director. All shares offered hereby will be, when issued and paid for, fully paid and non-assessable. The board of directors may classify and reclassify any unissued shares of capital stock of the Company by setting or changing in one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms or conditions or redemption or other rights of such shares of capital stock. LIMITATION ON LIABILITY OF DIRECTORS The Company has adopted provisions in its Charter and bylaws limiting the liability of directors and officers of the Company for monetary damages. The effect of these provisions in the Charter and bylaws is to eliminate the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director or officers for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior) except in certain limited situations. These provisions do not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a 53 59 director's or officer's duty of care. These provisions will not alter the liability of directors or officers under federal securities laws. CERTAIN ANTI-TAKEOVER PROVISIONS The Charter and bylaws of the Company and certain statutory and regulatory requirements contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the board of directors. The Company believes that the benefits of these provisions outweigh the potential disadvantages of discouraging such proposals because, among other things, negotiation of such proposals might result in an improvement of their terms. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Charter and the bylaws. CLASSIFIED BOARD OF DIRECTORS The Charter provides for the board of directors to be divided into three classes of directors serving staggered three-year terms, with each class to consist as nearly as possible of one-third of the directors then elected to the board. A classified board may render more difficult a change in control of the Company or removal of incumbent management. The Company believes, however, that the longer time required to elect a majority of a classified board of directors will help to ensure continuity and stability of the Company's management and policies. ISSUANCE OF PREFERRED STOCK The board of directors of ACC, without shareholder approval, has the authority to reclassify Common Stock as preferred stock and to issue ACC preferred stock. Such stock could be issued with voting, conversion or other rights designed to have an anti-takeover effect. MARYLAND CORPORATE LAW The Company is subject to the Maryland Business Combination Statute and the Control Share Acquisition Statute, as defined below. The partial summary of the foregoing statutes contained in this Prospectus is not intended to be complete and reference is made to the full text of such states for their entire terms. Business Combination Statute. Certain provisions of the Maryland Law establish special requirements with respect to "business combinations" between Maryland corporations and "interested shareholders" unless exemptions are applicable (the "Business Combination Statute"). Among other things, the Business Combination Statute prohibits for a period of five years a merger or other specified transactions between a company and an interested shareholder and requires a super majority vote for such transactions after the end of such five-year period. "Interested shareholders" are all persons owning beneficially, directly or indirectly, 10% or more of the outstanding voting stock of a Maryland corporation. "Business combinations" include certain mergers or similar transactions subject to a statutory vote and additional transactions involving transfer of assets or securities in specified amounts to interested shareholders or their affiliates. Unless an exemption is available, a "business combination" may not be consummated between a Maryland corporation and an interested shareholder or its affiliates for a period of five years after the date on which the shareholder first became an interested shareholder and thereafter may not be consummated unless recommended by the board of directors of the Maryland corporation and approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast by all holders of outstanding shares of voting stock other than the interested shareholder or its affiliates or associates, unless, among other things, the corporation's shareholders receive a minimum price (as defined in the Business Combination Statute) for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares. A business combination with an interested 54 60 shareholder which is approved by the board of directors of a Maryland corporation at any time before an interested shareholder first becomes an interested shareholder is not subject to the five-year moratorium or special voting requirements. An amendment to a Maryland corporation charter electing not to be subject to the foregoing requirements must be approved by the affirmative vote of at least 80% of the votes entitled to be cast by all holders of outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast by holders of outstanding shares of voting stock who are not interested shareholders. Any such amendment is not effective until 18 months after the vote of shareholders and does not apply to any business combination of a corporation with a shareholder who became an interested shareholder on or prior to the date of such vote. Control Share Acquisition Statute. The Maryland Law imposes limitations on the voting rights of shares acquired in a "control share acquisition." The control share statute defines a "control share acquisition" to mean the acquisition, directly or indirectly, of "control shares" subject to certain exceptions. "Control shares" of a Maryland corporation are defined to be voting shares of stock which, if aggregated with all other shares of stock previously acquired by the acquiror, would entitle the acquiror to exercise voting power in electing directors with one of the following ranges of voting power: (i) one-fifth or more but not less than one-third, (ii) one-third or more but less than a majority or (iii) a majority of all voting power. Control shares do not include shares which the acquiring person is entitled to vote as a result of having previously obtained shareholder approval. Control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast by shareholders in the election of directors, excluding shares of stock as to which the acquiring person, officers of the corporation and directors of the corporation who are employees of the corporation are entitled to exercise or direct the exercise of the voting power of the shares in the election of the directors. The control share statute also requires Maryland corporations to hold a special meeting at the request of an actual or proposed control share acquiror generally within 50 days after a request is made with the submission of an "acquiring person statement," but only if the acquiring person (i) gives a written undertaking and, if required by the directors of the issuing corporation, posts a bond for the cost of the meeting and (ii) submits definitive financing agreements for the acquisition of the control shares to the extent that financing is not provided by the acquiring person. In addition, unless the issuing corporation's charter or bylaws provide otherwise, the control share statute provides that the issuing corporation, within certain time limitations, shall have the right to redeem control shares (except those for which voting rights have previously been approved) for "fair value" as determined pursuant to the control share statue in the event (a) there is a shareholder vote and the grant of voting rights is not approved, or (b) an "acquiring person statement" is not delivered to the target within 10 days following a control share acquisition. Moreover, unless the issuing corporation's charter or bylaws provide otherwise, the control share statute provides that if, before a control share acquisition occurs, voting rights are accorded to control shares which result in the acquiring person having majority voting power, then all shareholders other than the acquiring person have appraisal rights as provided under the Maryland Law. An acquisition of shares may be exempted from the control share statute provided that a charter or bylaw provision is adopted for such purpose prior to the control share acquisition by any person with respect to the Company. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange to which the corporation is a party. REGULATORY RESTRICTIONS Allied Investment, Allied Financial and Allied SBLC are SBIC, SSBIC and SBLC subsidiaries, respectively, of the Company. The SBA prohibits, without prior SBA approval, a "change of control" or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC or SSBIC. A "change of control" is any event which would result in a transfer of the power, direct or indirect, to direct the management and policies of an SBIC, SSBIC or SBLC, whether through ownership, contractual arrangements or otherwise. 55 61 UNDERWRITERS Under the terms and subject to the conditions of the Underwriting Agreement dated the date of this Prospectus (the "Underwriting Agreement"), the Company has agreed to sell an aggregate of 5,750,000 shares of Common Stock and the U.S. Underwriters named below, for whom Morgan Stanley & Co. Incorporated, NationsBanc Montgomery Securities LLC, The Robinson-Humphrey Company, LLC and Scott & Stringfellow, Inc. are serving as U.S. Representatives, have severally agreed to purchase, and the International Underwriters named below, for whom Morgan Stanley & Co. International Limited, NationsBanc Montgomery Securities LLC, The Robinson-Humphrey Company, LLC and Scott & Stringfellow, Inc. are serving as International Representatives, have severally agreed to purchase, the respective number of shares of Common Stock set forth opposite their names below:
NUMBER OF NAME SHARES ---- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated......................... NationsBanc Montgomery Securities LLC..................... The Robinson-Humphrey Company, LLC........................ Scott & Stringfellow, Inc. ............................... --------- Subtotal: ............................................. 4,600,000 --------- International Underwriters: Morgan Stanley & Co. International Limited................ NationsBanc Montgomery Securities LLC..................... The Robinson-Humphrey Company, LLC........................ Scott & Stringfellow, Inc. ............................... --------- Subtotal: ............................................. 1,150,000 --------- Total: ................................................ 5,750,000 =========
The U.S. Underwriters and the International Underwriters are collectively referred to as the "Underwriters." The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below), if any such shares are taken. Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any U.S. Shares (as defined below) being sold by it for the account of anyone other than a United States Person (as defined below) and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside the United States or to anyone other than a United States Person. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any International Shares (as defined below) being sold by it for the account of any United States Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any International Shares or distribute any prospectus relating to the International Shares within the United States or to any United States Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter shall apply only to shares purchased by it in its capacity as a U.S. Underwriter, (ii) made by it in its capacity as an International Underwriter shall apply only to shares purchased by it in its capacity as an International Underwriter, and (iii) do not restrict its ability to distribute any prospectus relating to the shares of Common Stock to any person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. Underwriters and International Underwriters. As used herein, "United States Person" means any national or resident of the United States or any corporation, 56 62 pension, profit-sharing, or other trust or other entity organized under the laws of the United States or of any political subdivision thereof (other than a branch located outside the United States of any United States Person) and includes any United States branch of a person who is otherwise not a United States Person. All shares of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters under the Underwriting Agreement are referred to herein as the "U.S. Shares" and the "International Shares," respectively. Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price of any shares so sold shall be the Price to Public set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, each International Underwriter has represented and agreed that (a) it has not offered or sold, and, during the period of six months from the closing date of the Offering, will not offer or sell any shares of Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has complied and will comply with all applicable provisions of the Financial Services Act of 1986 and the Regulations with respect to anything done by it in relation to the shares of Common Stock offered hereby in, from, or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the shares of Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act of 1986, (Investment Advertisement) (Exemptions) Order 1996, or is a person to whom such document may otherwise lawfully be issued or passed on. The Underwriters propose to offer part of the shares of Common Stock directly to the public at the Price to Public set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ a share below the public offering price. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. Pursuant to the Underwriting Agreement, the Company has granted the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 862,500 additional shares of Common Stock at the Price to Public on the cover page hereof, less Underwriting Discounts and Commissions. The U.S. Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the Offering. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to each U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the U.S. Underwriters hereby. The Company and all of its executive officers and directors have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are now owned by such shareholder or acquired after the date of the Prospectus) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (i) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, for a period of 90 days after the date of this Prospectus, other than the sale to the Underwriters of any shares of Common Stock pursuant to the Underwriting Agreement. 57 63 The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Underwriters and dealers may engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Commission. In general, a passive market maker may not bid for, or purchase, the Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of the average daily trading volume in the Common Stock during a specified two-month period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq National Market. Passive market making may stabilize or maintain the market price of the Common Stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. The Underwriters have provided customary financial and advisory services to the Company and the Predecessor Companies. Morgan Stanley & Co. Incorporated was retained by each of the Predecessor Companies as financial advisor for the Merger. In addition, Morgan Stanley & Co. Incorporated has provided the Company with short-term financing. Scott & Stringfellow, Inc. acted as independent financial advisor to the board of directors of Allied Commercial in connection with the Merger. NationsBank of Texas, N.A. ("NationsBank"), an affiliate of NationsBanc Montgomery Securities LLC, provides financing to the Company as one of several lenders under an unsecured revolving line of credit. NationsBank's aggregate commitment thereunder is $50 million. Each of Morgan Stanley & Co. Incorporated and NationsBanc Montgomery Securities LLC will indirectly receive proceeds from the Offering through the application of the net proceeds to the repayment of amounts outstanding under the Company's short-term lines of credit. The Offering will be conducted in compliance with the requirements of Rule 2720 of the National Association of Securities Dealers, Inc. (the "NASD") regarding a NASD member firm's participation in an offering where more than ten (10) percent of the net proceeds will be paid to NASD members participating in the distribution. The principal business address of each of the U.S. Representatives is as follows: Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York 10036; NationsBanc Montgomery Securities LLC, 600 Montgomery Street, San Francisco, California 94111; The Robinson-Humphrey Company, LLC, 3333 Peachtree Road, N.E., Atlanta, GA 30326, and Scott & Stringfellow, Inc., 909 East Main Street, Richmond, VA 23219. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Sutherland, Asbill & Brennan LLP, Washington, D.C. Certain legal matters related to the Offering will be passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York. 58 64 SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR The Company's and its subsidiaries' investments are held in safekeeping by Riggs Bank, N.A. at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove Village, Illinois 60007, serves as trustee with respect to assets of the Company held for securitization purposes. American Stock Transfer and 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. INDEPENDENT PUBLIC ACCOUNTANTS The financial statements included in this Prospectus and elsewhere in the Registration Statement to the extent and for the periods indicated in their report have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION General Information and History............................. B-2 Investment Objective and Policies........................... B-2 Management.................................................. B-2 Compensation of Executive Officers and Directors....... B-2 Compensation of Directors.............................. B-4 Stock Option Awards.................................... B-4 Cut-off Award and Formula Award........................ B-5 Committees of the Board of Directors................... B-6 Control Persons and Principal Holders of Securities......... B-6 Investment Advisory Services................................ B-8 Safekeeping, Transfer and Dividend Paying Agent and Registrar................................................. B-8 Accounting Services......................................... B-8 Brokerage Allocation and Other Practices.................... B-8 Tax Status.................................................. B-9
59 65 ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheet -- March 31, 1998 (unaudited) and December 31, 1997 and 1996................................ F-1 Consolidated Statement of Operations -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996, and 1995................... F-2 Consolidated Statement of Changes in Net Assets -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996, and 1995......... F-3 Consolidated Statement of Cash Flows -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996, and 1995................... F-4 Consolidated Statement of Investments -- March 31, 1998 (unaudited) and December 31, 1997......................... F-5 Notes to Consolidated Financial Statements.................. F-15 Report of Independent Public Accountants.................... F-33
60 66 CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31, ----------- ------------------- 1998 1997 1996 ----------- -------- -------- (IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED) ASSETS Portfolio at value: Commercial mortgage loans (cost: 1998-$201,238; 1997-$447,016; 1996-$373,378)....................... $201,349 $447,244 $373,695 Mezzanine loans and debt securities (cost: 1998-$202,951; 1997-$181,184; 1996-$178,664)........ 185,316 167,842 165,086 Small Business Administration 7(a) loans (cost: 1998-$46,249; 1997-$41,103; 1996-$42,351)........... 45,867 40,709 42,131 Interest in securitization pool of commercial mortgage loans (cost: 1998-$87,937; 1997-$0; 1996-$0)........ 87,937 -- -- Equity interests in portfolio companies (cost: 1998-$19,289; 1997-$20,050; 1996-$18,521)........... 39,691 39,906 26,134 Other portfolio assets (cost: 1998-$4,342; 1997-$1,367; 1996-$362)......... 4,295 1,320 322 -------- -------- -------- Total portfolio at value.......................... 564,455 697,021 607,368 -------- -------- -------- Cash and cash equivalents................................... 31,013 70,437 71,841 U.S. government securities.................................. 25,078 11,091 -- Other assets................................................ 32,164 29,226 34,151 -------- -------- -------- Total assets...................................... $652,710 $807,775 $713,360 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debentures and notes payable.......................... $ 99,243 $308,821 $229,898 Revolving lines of credit............................. 103,000 38,842 45,099 Accounts payable and other liabilities................ 20,219 23,984 21,032 Dividends and distributions payable................... -- 9,068 8,197 -------- -------- -------- 222,462 380,715 304,226 -------- -------- -------- Commitments and contingencies Preferred stock issued to Small Business Administration..... 7,000 7,000 7,000 Shareholders' equity: Common stock, $0.0001 par value, 100,000,000 shares authorized; 52,113,550, 52,047,318 and 48,237,621 issued and outstanding at March 31, 1998, December 31, 1997 and 1996, respectively..................... 5 5 5 Additional paid-in capital............................ 452,723 451,044 417,670 Common stock held in deferred compensation trust (662,948 shares at March 31, 1998).................. (15,330) -- -- Notes receivable from sale of common stock............ (26,556) (29,611) (15,491) Net unrealized appreciation (depreciation) on portfolio........................................... 2,025 1,301 (5,908) Undistributed (distributions in excess of) earnings... 10,381 (2,679) 5,858 -------- -------- -------- Total shareholders' equity........................ 423,248 420,060 402,134 -------- -------- -------- Total liabilities and shareholders' equity........ $652,710 $807,775 $713,360 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-1 67 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, -------------------- --------------------------------- 1998 1997 1997 1996 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- -------- --------- --------- --------- (UNAUDITED) Interest and related portfolio income: Interest................................. $19,501 $19,630 $86,882 $77,541 $61,550 Net premiums from loan dispositions...... 1,336 701 7,277 4,241 2,796 Net gain on securitization of commercial mortgage loans......................... 14,812 -- -- -- -- Investment advisory fees and other income................................. 1,248 1,068 3,246 3,155 4,471 ------- ------- ------- ------- ------- Total interest and related portfolio income............................. 36,897 21,399 97,405 84,937 68,817 ------- ------- ------- ------- ------- Expenses: Interest on indebtedness................. 4,598 5,788 26,952 20,298 12,355 Salaries and employee benefits........... 2,850 2,057 10,258 8,774 8,031 General and administrative............... 2,757 1,586 8,970 8,289 6,888 Merger................................... -- -- 5,159 -- -- ------- ------- ------- ------- ------- Total operating expenses............. 10,205 9,431 51,339 37,361 27,274 Formula and cut-off awards............... 1,772 -- -- -- -- ------- ------- ------- ------- ------- Portfolio income before realized and unrealized gains........................................ 24,920 11,968 46,066 47,576 41,543 ------- ------- ------- ------- ------- Net realized and unrealized gains: Net realized gains....................... 6,421 3,677 10,704 19,155 12,000 Net unrealized gains (losses)............ 724 (2,159) 7,209 (7,412) 9,266 ------- ------- ------- ------- ------- Total net realized and unrealized gains.............................. 7,145 1,518 17,913 11,743 21,266 ------- ------- ------- ------- ------- Income before minority interests and income taxes........................................ 32,065 13,486 63,979 59,319 62,809 Minority interests............................. -- 306 1,231 2,427 546 Income tax expense............................. -- 534 1,444 1,945 1,784 ------- ------- ------- ------- ------- Net increase in net assets resulting from operations................................... $32,065 $12,646 $61,304 $54,947 $60,479 ======= ======= ======= ======= ======= Basic earnings per common share................ $ 0.62 $ 0.27 $ 1.24 $ 1.19 $ 1.38 ======= ======= ======= ======= ======= Diluted earnings per common share.............. $ 0.61 $ 0.27 $ 1.24 $ 1.17 $ 1.37 ======= ======= ======= ======= ======= Weighted average common shares outstanding..... 51,814 46,938 49,218 46,172 43,697 ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-2 68 CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, -------------------- --------------------------------- 1998 1997 1997 1996 1995 --------- -------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Operations: Portfolio income before realized and unrealized gains..................... $ 24,920 $ 11,968 $ 46,066 $ 47,576 $ 41,543 Net realized gains..................... 6,421 3,677 10,704 19,155 12,000 Net unrealized gains (losses).......... 724 (2,159) 7,209 (7,412) 9,266 Minority interests and income tax expense.............................. -- (840) (2,675) (4,372) (2,330) -------- -------- -------- -------- -------- Net increase in net assets resulting from operations....... 32,065 12,646 61,304 54,947 60,479 -------- -------- -------- -------- -------- Shareholder distributions: Portfolio income....................... (18,225) (14,346) (38,751) (39,030) (37,296) Excess of portfolio income............. -- -- (605) (2,533) (451) Net capital gains...................... -- -- (15,172) (11,546) (9,799) Excess of net capital gains............ -- -- -- -- (374) Return of capital...................... -- -- (22,302) (4,289) -- Undistributed earnings................. -- -- (8,848) -- -- Preferred stock dividend............... (55) (55) (220) (220) (220) -------- -------- -------- -------- -------- Net decrease in net assets resulting from shareholder distributions................... (18,280) (14,401) (85,898) (57,618) (48,140) -------- -------- -------- -------- -------- Capital share transactions: Sale of common stock................... -- -- -- 22,365 1,156 Net decrease (increase) in notes receivable from sale of common stock................................ 3,055 2,717 (14,120) (8,176) (3,526) Issuance of common stock upon the exercise of stock options............ -- 800 28,426 12,176 5,310 Issuance of common stock in lieu of cash distributions................... 1,678 3,296 26,612 11,986 7,506 Purchase of common stock by deferred compensation trust................... (15,330) -- -- -- -- Other.................................. -- (102) 1,602 (738) 364 -------- -------- -------- -------- -------- Net (decrease) increase in net assets resulting from capital share transactions.............. (10,597) 6,711 42,520 37,613 10,810 -------- -------- -------- -------- -------- Total increase in net assets................ 3,188 4,956 17,926 34,942 23,149 -------- -------- -------- -------- -------- Net assets at beginning of period........... 420,060 402,134 402,134 367,192 344,043 -------- -------- -------- -------- -------- Net assets at end of period................. $423,248 $407,090 $420,060 $402,134 $367,192 ======== ======== ======== ======== ======== Net asset value per common share............ $ 8.23 $ 8.39 $ 8.07 $ 8.34 $ 8.26 ======== ======== ======== ======== ======== Common shares outstanding at end of period.................................... 51,451 48,541 52,047 48,238 44,479 ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 69 CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31, --------------------- --------------------------------- 1998 1997 1997 1996 1995 (IN THOUSANDS) ---------- -------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net increase in net assets resulting from operations..................... $ 32,065 $12,646 $ 61,304 $ 54,947 $ 60,479 Adjustments Net unrealized (gains) losses....... (724) 2,159 (7,209) 7,412 (9,266) Net gain on securitization of commercial mortgage loans......... (14,812) -- -- -- -- Depreciation and amortization....... 173 106 450 393 319 Amortization of loan discounts and fees.............................. (1,349) (2,086) (10,804) (9,027) (6,841) Deferred income taxes............... -- (10) 1,087 (381) (174) Minority interests.................. -- 306 1,231 2,427 546 Changes in other assets and liabilities....................... (4,228) 4,400 12,881 (10,606) 2,245 --------- ------- --------- --------- --------- Net cash provided by operating activities..................... 11,125 17,521 58,940 45,165 47,308 --------- ------- --------- --------- --------- Cash flows from investing activities: Investments in small business concerns............................ (107,506) (72,099) (364,942) (283,295) (216,175) Collections of investment principal.... 30,773 25,104 233,005 179,292 111,731 Proceeds from the sale of loans........ 9,706 6,425 53,912 27,715 29,726 Proceeds from securitization of commercial mortgage loans........... 223,401 -- -- -- -- Net (purchase) redemption of U.S. government securities............... (13,987) -- (10,301) -- 35,061 Collections of notes receivable from sale of common stock................ 3,055 2,919 6,534 2,199 1,038 Other investing activities............. (3,804) (327) (182) 2,635 2,357 --------- ------- --------- --------- --------- Net cash provided by (used in) investing activities........... 141,638 (37,978) (81,974) (71,454) (36,262) --------- ------- --------- --------- --------- Cash flows from financing activities: Sale of common stock................... -- 500 8,615 24,166 1,074 Purchase of common stock by deferred compensation trust.................. (15,330) -- -- -- -- Common dividends and distributions paid................................ (16,547) (19,028) (58,194) (47,089) (36,265) Special undistributed earnings distribution paid................... (8,848) -- -- -- -- Preferred stock dividends.............. (275) (220) (220) (220) (220) Net borrowings under (payments on) debentures and notes payable........ (209,578) 37,183 78,923 (35,202) 85,636 Net borrowings under (payments on) revolving lines of credit........... 64,158 8,614 (6,257) 110,460 (11,812) Net payments on government securities available for sale.................. -- -- -- -- (23,210) Other financing activities............. (5,767) (361) (1,237) (3,029) 364 --------- ------- --------- --------- --------- Net cash provided by (used in) financing activities........... (192,187) 26,688 21,630 49,086 15,567 --------- ------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............................ $ (39,424) $ 6,231 $ (1,404) $ 22,797 $ 26,613 Cash and cash equivalents at beginning of period................................. $ 70,437 $71,841 $ 71,841 $ 49,044 $ 22,431 --------- ------- --------- --------- --------- Cash and cash equivalents at end of period................................. $ 31,013 $78,072 $ 70,437 $ 71,841 $ 49,044 ========= ======= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 70 CONSOLIDATED STATEMENT OF INVESTMENTS
PORTFOLIO COMPANY MARCH 31, 1998 (IN THOUSANDS, EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- (UNAUDITED) MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES Acme Paging, L.P. Debt Securities $ 6,060 $ 6,060 Partnership Interests 1,456 2,600 - ------------------------------------------------------------------------------------------------------- AGPAL Broadcasting, Inc. Debt Securities 928 928 Warrants -- -- - ------------------------------------------------------------------------------------------------------- American Barbecue & Grill, Loans 1,485 1,485 Inc. Debt Securities 2,274 2,274 Warrants 125 125 - ------------------------------------------------------------------------------------------------------- Arnold Moving Co., Inc. Loans 691 691 - ------------------------------------------------------------------------------------------------------- ARS, Inc. Debt Securities 9,730 9,730 Warrants 171 171 - ------------------------------------------------------------------------------------------------------- ASW Holding Corporation Warrants 25 25 - ------------------------------------------------------------------------------------------------------- Au Bon Pain Co., Inc.(1) Debt Securities 7,371 7,371 Warrants 227 340 - ------------------------------------------------------------------------------------------------------- Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 1,458 - ------------------------------------------------------------------------------------------------------- Calendar Broadcasting, Inc. Debt Securities 3,792 3,792 Warrants 150 150 - ------------------------------------------------------------------------------------------------------- Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250 - ------------------------------------------------------------------------------------------------------- Celebrities, Inc. Debt Securities 359 359 Warrants 12 12 - ------------------------------------------------------------------------------------------------------- CeraTech Holdings Corporation Debt Securities 1,987 257 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Cherry Tree Toys, Inc. Debt Securities 1,717 1,717 Common Stock (220 shares) 1 -- - ------------------------------------------------------------------------------------------------------- Chungsan Corporation Loan 76 76 - ------------------------------------------------------------------------------------------------------- Convenience Corporation of Loans 1,226 1,226 America Debt Securities 8,377 2,651 Series A Preferred Stock (27,408 shares) 337 -- Warrants -- -- - ------------------------------------------------------------------------------------------------------- Cooper Natural Resources, Debt Securities 3,443 3,443 Inc. Warrants -- 1,138 - ------------------------------------------------------------------------------------------------------- Cosmetic Group, USA, LLC Debt Securities 2,941 2,941 Options -- -- - ------------------------------------------------------------------------------------------------------- Csabai Canning Factory Rt. Hungarian Quotas 700 700 - ------------------------------------------------------------------------------------------------------- DEH Printed Circuits, Inc. Warrants 250 1,440 - ------------------------------------------------------------------------------------------------------- DeVlieg-Bullard, Inc.(1) Warrants 350 536 - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-5 71
PORTFOLIO COMPANY MARCH 31, 1998 (IN THOUSANDS EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- (UNAUDITED) Directory Investment Common Stock (470 shares) $ -- $ 83 Corporation - ------------------------------------------------------------------------------------------------------- Directory Lending Corporation Series A Common Stock (1,031 shares) -- 862 Series B Common Stock (188 shares) 235 157 Series C Common Stock (292 shares) 656 245 Series A Preferred Stock (214 shares) 307 192 Series B Preferred Stock (175 shares) 931 158 Series C Preferred Stock (58 shares) 58 52 - ------------------------------------------------------------------------------------------------------- DMI Furniture, Inc.(1) Convertible Preferred Stock (199,920 shares) 500 1,068 - ------------------------------------------------------------------------------------------------------- ECM Enterprises Loan 36 4 - ------------------------------------------------------------------------------------------------------- EDM Consulting, LLC Loans 30 30 Debt Securities 1,875 428 Equity Interest -- -- - ------------------------------------------------------------------------------------------------------- El Dorado Communications, Warrants -- 585 Inc. - ------------------------------------------------------------------------------------------------------- Eparfin S.A. Loan 40 40 - ------------------------------------------------------------------------------------------------------- Esquire Communications Warrants 6 1,492 Ltd.(1) - ------------------------------------------------------------------------------------------------------- Everything Yogurt Loan 57 57 - ------------------------------------------------------------------------------------------------------- Ex Terra Funding, LLC Loan 1,966 1,966 - ------------------------------------------------------------------------------------------------------- Fairchild Industrial Products Debt Securities 5,666 5,666 Company Warrants 280 280 - ------------------------------------------------------------------------------------------------------- FHM Distributions, Inc. Loan 200 200 - ------------------------------------------------------------------------------------------------------- Gibson Guitar Corp. Debt Securities 14,602 14,602 Warrants 525 525 - ------------------------------------------------------------------------------------------------------- Ginsey Industries, Inc. Loans 5,000 5,000 Convertible Debentures 500 500 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Golden Eagle/Satellite Loans 1,390 1,390 Archery, LLC Convertible Debentures 2,248 2,242 - ------------------------------------------------------------------------------------------------------- Grant Broadcasting System II Warrants 139 3,600 - ------------------------------------------------------------------------------------------------------- Grant Television, Inc. Debt Securities 8,659 8,659 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Han Hie Loan 516 516 - ------------------------------------------------------------------------------------------------------- H.B.N. Communications, Inc. Loan 255 255 - ------------------------------------------------------------------------------------------------------- Herr-Voss Industries, Inc. Debt Securities 9,490 9,490 Common Stock (132,507 shares) 1,050 1,050 - ------------------------------------------------------------------------------------------------------- Hotelevision, LLC Loan 250 250 - ------------------------------------------------------------------------------------------------------- In the Dough, Inc. Loan 2 -- - ------------------------------------------------------------------------------------------------------- IndeNet Corporation Debt Securities 8,913 8,913 Warrants -- -- - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-6 72
PORTFOLIO COMPANY MARCH 31, 1998 (IN THOUSANDS EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- (UNAUDITED) Jeff & Chris Mufflers, Inc. Loan $ 120 $ 120 - ------------------------------------------------------------------------------------------------------- JRI Industries, Inc. Debt Securities 2,351 2,351 Warrants 74 74 - ------------------------------------------------------------------------------------------------------- Julius Koch USA, Inc. Debt Securities 4,645 4,645 Warrants 323 2,099 - ------------------------------------------------------------------------------------------------------- Kirker Enterprises, Inc. Loans 793 793 Debt Securities 2,807 2,807 Warrants 348 2,350 Equity Interest 64 64 - ------------------------------------------------------------------------------------------------------- Kirkland's, Inc. Debt Securities 6,261 6,261 Warrants 96 96 - ------------------------------------------------------------------------------------------------------- Kjellberg's Incorporated Loan 3,146 3,146 - ------------------------------------------------------------------------------------------------------- Kurlancheek Loan 283 283 - ------------------------------------------------------------------------------------------------------- Liberty-Pittsburgh Systems, Debt Securities 3,378 3,378 Inc. Common Stock (60,000 shares) 100 100 - ------------------------------------------------------------------------------------------------------- Lingcomm, Inc. Loan 235 235 - ------------------------------------------------------------------------------------------------------- Love Funding Corporation Series D Preferred Stock (26,000 shares) 360 214 Warrants 200 -- - ------------------------------------------------------------------------------------------------------- Magic Auto Loan 13 13 - ------------------------------------------------------------------------------------------------------- Meigher Communications Loan 4,903 4,903 - ------------------------------------------------------------------------------------------------------- MidSouth Data Systems, Inc. Debt Securities 7,554 7,554 Warrants 348 348 - ------------------------------------------------------------------------------------------------------- Midview Associates, L.P. Debt Securities 309 309 Options -- -- - ------------------------------------------------------------------------------------------------------- Mihadas Loan 289 289 - ------------------------------------------------------------------------------------------------------- Mill-It Striping, Inc. Common Stock (18 shares) 250 -- - ------------------------------------------------------------------------------------------------------- MLX/SinterMet Corp.(1) Common Stock (5,835 shares) 241 111 - ------------------------------------------------------------------------------------------------------- Monitoring Solutions, Inc. Loans 33 33 Debt Securities 1,822 219 Common Stock (33,333 shares) -- -- Warrants -- -- - ------------------------------------------------------------------------------------------------------- Radio City Mobil Home Park Loan 1,361 1,361 - ------------------------------------------------------------------------------------------------------- Nobel Education Dynamics, Series D Convertible Preferred Stock Inc.(1) (265,957 shares) 2,000 2,016 Warrants -- 18 - ------------------------------------------------------------------------------------------------------- Norman's Yogurt, Inc. Loan 23 23 - ------------------------------------------------------------------------------------------------------- Northeast Broadcasting Group, Debt Securities 432 432 L.P. - ------------------------------------------------------------------------------------------------------- New York Donut Corporation Loan 95 95 - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-7 73
PORTFOLIO COMPANY MARCH 31, 1998 (IN THOUSANDS EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- (UNAUDITED) Nursefinders, Inc. Debt Securities $ 7,482 $ 7,482 Warrants 619 619 - ------------------------------------------------------------------------------------------------------- Old Mill Holdings, Inc. Debt Securities 1,115 888 Warrants 77 -- - ------------------------------------------------------------------------------------------------------- PAL Liberty, Inc. Loan 320 320 - ------------------------------------------------------------------------------------------------------- Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 1,142 Warrants 4 542 - ------------------------------------------------------------------------------------------------------- David Peters Loan 169 55 - ------------------------------------------------------------------------------------------------------- PIATL Holdings, Inc. Loans 107 107 Preferred Stock (276 shares) 160 175 Common Stock (36 shares) -- -- - ------------------------------------------------------------------------------------------------------- Pico Products, Inc.(1) Debt Securities 5,669 5,669 Common Stock (248,000 shares) 71 210 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Quality Software Products Common Stock (94,479 shares) 901 874 Holdings, PLC(1) - ------------------------------------------------------------------------------------------------------- Radio One of Atlanta, Inc. Loans 281 281 Debt Securities 9,959 9,959 Common Stock (1,430 shares) -- 490 - ------------------------------------------------------------------------------------------------------- Randhawa Brothers Loans 217 217 Enterprises, Inc. - ------------------------------------------------------------------------------------------------------- R-Tex Decoratives Company, Debt Securities 1,521 479 Inc. Warrants 58 -- - ------------------------------------------------------------------------------------------------------- R.L. Singletary Loan 108 108 - ------------------------------------------------------------------------------------------------------- SerpCo., Inc. Loan 182 182 - ------------------------------------------------------------------------------------------------------- Spa Lending Corporation Preferred Stock (28,625 shares) 398 322 Common Stock (6,208 shares) 22 -- - ------------------------------------------------------------------------------------------------------- SunStates Refrigerated Loans 1,557 68 Services, Inc. Debt Securities 4,262 1,486 - ------------------------------------------------------------------------------------------------------- Total Foam, Inc. Debt Securities 1,573 129 Common Stock (910 shares) 57 -- - ------------------------------------------------------------------------------------------------------- University Village Mobile Loan 146 146 Homes - ------------------------------------------------------------------------------------------------------- Vickar Industries, Inc. Loan 5,907 5,907 - ------------------------------------------------------------------------------------------------------- Vidon, Inc. Loans 262 262 - ------------------------------------------------------------------------------------------------------- Waterview Limited Partnership Option -- 3,050 - ------------------------------------------------------------------------------------------------------- Weathertech Distributing Loans 205 205 Company, Inc. - ------------------------------------------------------------------------------------------------------- West Virginia Radio Debt Securities 932 932 Corporation of Clarksburg, Inc. Warrants 400 -- - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-8 74
PORTFOLIO COMPANY MARCH 31, 1998 (IN THOUSANDS EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- (UNAUDITED) William R. Dye Loan $ 268 $ 268 - ------------------------------------------------------------------------------------------------------- Williams Brothers Lumber Loans 720 720 Company Debt Securities 204 204 Warrants 24 24 - ------------------------------------------------------------------------------------------------------- WYCB Acquisition Corporation Loan 3,750 3,750 - ------------------------------------------------------------------------------------------------------- Z-Spanish Radio Network, Inc. Loans 1,030 1,030 Warrants 6 2,462 - ------------------------------------------------------------------------------------------------------- Total mezzanine loans and debt securities and equity interests in portfolio companies (92 investments) $222,240 $225,007 - -------------------------------------------------------------------------------------------------------
MARCH 31, 1998 INTEREST NUMBER OF ------------------- (IN THOUSANDS, EXCEPT NUMBER OF INVESTMENTS) RATE RANGES INVESTMENTS COST VALUE - -------------------------------------------- ---------------- ----------- -------- -------- COMMERCIAL MORTGAGE LOANS Up to 6.99% 4 $ 2,049 $ 1,861 7.00%- 8.99% 21 46,777 46,777 9.00%-10.99% 99 84,764 84,854 11.00%-12.99% 60 53,093 53,302 13.00%-14.99% 6 11,068 11,068 15.00% and above 1 3,487 3,487 - -------------------------------------------------------------------------------------------------- Total commercial mortgage loans 191 $201,238 $201,349 - -------------------------------------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 7(A) LOANS Up to 6.99% 10 $ 111 $ 111 7.00%- 8.99% 14 188 109 9.00%-10.99% 32 6,641 6,793 11.00%-12.99% 381 39,217 38,773 13.00%-14.99% 4 92 81 15.00% and above -- -- -- - -------------------------------------------------------------------------------------------------- Total Small Business Administration 7(a) loans 441 $ 46,249 $ 45,867 - -------------------------------------------------------------------------------------------------- Interest in securitization pool of commercial mortgage loans 1 $ 87,937 $ 87,937 - -------------------------------------------------------------------------------------------------- Other portfolio assets 8 $ 4,342 $ 4,295 - -------------------------------------------------------------------------------------------------- Total portfolio at value 733 $562,006 $564,455 - --------------------------------------------------------------------------------------------------
(1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted. The accompanying notes are an integral part of these consolidated financial statements. F-9 75 CONSOLIDATED STATEMENT OF INVESTMENTS
PORTFOLIO COMPANY DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES Acme Paging, L.P. Debt Securities $ 5,993 $ 5,993 Partnership Interests 1,456 2,600 - ------------------------------------------------------------------------------------------------------- AGPAL Broadcasting, Inc. Debt Securities 928 928 Warrants -- -- - ------------------------------------------------------------------------------------------------------- American Barbecue & Grill, Loans 1,499 1,499 Inc. Debt Securities 2,250 2,250 Warrants 125 125 - ------------------------------------------------------------------------------------------------------- Arnold Moving Co., Inc. Loans 713 713 - ------------------------------------------------------------------------------------------------------- ARS, Inc. Debt Securities 9,723 9,723 Warrants 171 171 - ------------------------------------------------------------------------------------------------------- ASW Holding Corporation Warrants 25 25 - ------------------------------------------------------------------------------------------------------- Au Bon Pain Co., Inc.(1) Debt Securities 7,355 7,355 Warrants 227 234 - ------------------------------------------------------------------------------------------------------- Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 1,547 - ------------------------------------------------------------------------------------------------------- Broadcast Holdings, Inc. Debt Securities 2,696 2,696 Warrants -- 1,054 - ------------------------------------------------------------------------------------------------------- Calendar Broadcasting, Inc. Debt Securities 3,780 3,780 Warrants 144 144 - ------------------------------------------------------------------------------------------------------- Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250 - ------------------------------------------------------------------------------------------------------- Celebrities, Inc. Debt Securities 365 365 Warrants 12 12 - ------------------------------------------------------------------------------------------------------- CeraTech Holdings Corporation Debt Securities 1,983 253 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Cherry Tree Toys, Inc. Debt Securities 1,776 1,776 Common Stock (220 shares) 1 -- - ------------------------------------------------------------------------------------------------------- Chungsan Corporation Loan 78 78 - ------------------------------------------------------------------------------------------------------- Convenience Corporation of Loans 1,226 1,226 America Debt Securities 8,370 6,245 Series A Preferred Stock (22,797 shares) 265 -- Warrants -- -- - ------------------------------------------------------------------------------------------------------- Cooper Natural Resources, Debt Securities 3,440 3,440 Inc. Warrants -- -- - ------------------------------------------------------------------------------------------------------- Csabai Canning Factory Rt. Debt Securities 3,140 3,140 Hungarian Quotas (9.2%) 700 700 - ------------------------------------------------------------------------------------------------------- DEH Printed Circuits, Inc. Warrants 250 1,440 - ------------------------------------------------------------------------------------------------------- DeVlieg-Bullard, Inc.(1) Warrants 350 760 - ------------------------------------------------------------------------------------------------------- Directory Investment Common Stock (470 shares) -- 83 Corporation - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-10 76
PORTFOLIO COMPANY DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- Directory Lending Corporation Series A Common Stock (1,031 shares) $ -- $ 862 Series B Common Stock (188 shares) 235 157 Series C Common Stock (292 shares) 656 245 Series A Preferred Stock (214 shares) 307 192 Series B Preferred Stock (175 shares) 931 158 Series C Preferred Stock (58 shares) 58 52 - ------------------------------------------------------------------------------------------------------- DMI Furniture, Inc.(1) Convertible Preferred Stock (199,920 shares) 500 982 - ------------------------------------------------------------------------------------------------------- ECM Enterprises Loan 36 4 - ------------------------------------------------------------------------------------------------------- EDM Consulting, LLC Loans 30 30 Debt Securities 1,875 428 Equity Interest -- -- - ------------------------------------------------------------------------------------------------------- El Dorado Communications, Warrants -- 585 Inc. - ------------------------------------------------------------------------------------------------------- Esquire Communications Warrants 6 1,000 Ltd.(1) - ------------------------------------------------------------------------------------------------------- Everything Yogurt Loan 65 65 - ------------------------------------------------------------------------------------------------------- Ex Terra Funding, LLC Loan 1,960 1,960 - ------------------------------------------------------------------------------------------------------- Fairchild Industrial Products Debt Securities 5,653 5,653 Company Warrants 280 280 - ------------------------------------------------------------------------------------------------------- FHM Distributions, Inc. Loan 200 200 - ------------------------------------------------------------------------------------------------------- Gibson Guitar Corp. Debt Securities 14,475 14,475 Warrants 525 525 - ------------------------------------------------------------------------------------------------------- Golden Eagle/Satellite Loans 550 550 Archery, LLC Convertible Debentures 2,248 2,248 - ------------------------------------------------------------------------------------------------------- Grant Broadcasting System II Warrants 139 3,600 - ------------------------------------------------------------------------------------------------------- Grant Television, Inc. Debt Securities 7,866 7,866 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Han Hie Loan 518 518 - ------------------------------------------------------------------------------------------------------- H.B.N. Communications, Inc. Loan 262 262 - ------------------------------------------------------------------------------------------------------- Herr-Voss Industries, Inc. Debt Securities 9,500 9,500 Common Stock (132,507 shares) 1,050 1,050 - ------------------------------------------------------------------------------------------------------- HFC Acquisition Sub I, Inc. Loans 232 232 - ------------------------------------------------------------------------------------------------------- In the Dough, Inc. Loan 2 -- - ------------------------------------------------------------------------------------------------------- Jeff & Chris Mufflers, Inc. Loan 128 128 - ------------------------------------------------------------------------------------------------------- JRI Industries, Inc. Debt Securities 2,343 2,343 Warrants 74 74 - ------------------------------------------------------------------------------------------------------- Julius Koch USA, Inc. Debt Securities 4,630 4,630 Warrants 323 2,099 - ------------------------------------------------------------------------------------------------------- Kirker Enterprises, Inc. Loans 800 800 Debt Securities 2,784 2,784 Warrants 348 2,350 Equity Interest 40 40 - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-11 77
PORTFOLIO COMPANY DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- Kirkland's, Inc. Debt Securities $ 6,250 $ 6,250 Warrants 96 96 - ------------------------------------------------------------------------------------------------------- Kjellberg's Incorporated Loan 3,146 3,146 - ------------------------------------------------------------------------------------------------------- Kurlancheek Loan 311 311 - ------------------------------------------------------------------------------------------------------- Labor Ready, Inc.(1) Common Stock (247,863 shares) 1,477 4,308 - ------------------------------------------------------------------------------------------------------- Liberty-Pittsburgh Systems, Debt Securities 3,370 3,370 Inc. Common Stock (60,000 shares) 100 100 - ------------------------------------------------------------------------------------------------------- Lingcomm, Inc. Loan 235 235 - ------------------------------------------------------------------------------------------------------- Love Funding Corporation Series D Preferred Stock (26,000 shares) 360 214 Warrants 200 -- - ------------------------------------------------------------------------------------------------------- Magic Auto Loan 17 17 - ------------------------------------------------------------------------------------------------------- MidSouth Data Systems, Inc. Debt Securities 7,550 7,550 Warrants 348 348 - ------------------------------------------------------------------------------------------------------- Midview Associates, L.P. Debt Securities 326 326 Options -- -- - ------------------------------------------------------------------------------------------------------- Mihadas Loan 290 290 - ------------------------------------------------------------------------------------------------------- Mill-It Striping, Inc. Common Stock (18 shares) 250 -- - ------------------------------------------------------------------------------------------------------- MLX/SinterMet Corp.(1) Common Stock (5,835 shares) 241 109 - ------------------------------------------------------------------------------------------------------- Monitoring Solutions, Inc. Loans 33 33 Debt Securities 1,822 219 Common Stock (33,333 shares) -- -- Warrants -- -- - ------------------------------------------------------------------------------------------------------- Radio City Mobil Home Park Loan 1,361 1,361 - ------------------------------------------------------------------------------------------------------- Nobel Education Dynamics, Series D Convertible Preferred Stock (265,957 2,000 2,000 Inc.(1) shares) Warrants -- -- - ------------------------------------------------------------------------------------------------------- Norman's Yogurt, Inc. Loan 30 30 - ------------------------------------------------------------------------------------------------------- Northeast Broadcasting Group, Debt Securities 483 483 L.P. - ------------------------------------------------------------------------------------------------------- New York Donut Corporation Loan 106 106 - ------------------------------------------------------------------------------------------------------- Old Mill Holdings, Inc. Debt Securities 1,115 888 Warrants 77 -- - ------------------------------------------------------------------------------------------------------- OMA, Inc. Loans 1,931 1,931 - ------------------------------------------------------------------------------------------------------- PAL Liberty, Inc. Loan 323 323 - ------------------------------------------------------------------------------------------------------- Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 1,405 Warrants 4 667 - ------------------------------------------------------------------------------------------------------- David Peters Loan 169 55 - ------------------------------------------------------------------------------------------------------- PIATL Holdings, Inc. Loans 107 107 Preferred Stock (276 shares) 160 175 Common Stock (36 shares) -- -- - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-12 78
PORTFOLIO COMPANY DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT NUMBER ------------------- OF SHARES) INVESTMENT(2) COST VALUE - ----------------------------- --------------------------------------------------- -------- -------- Pico Products, Inc.(1) Debt Securities $ 5,669 $ 5,669 Common Stock (248,000 shares) 71 336 Warrants -- -- - ------------------------------------------------------------------------------------------------------- Quality Software Products Common Stock (94,479 shares) 901 344 Holdings, PLC(1) - ------------------------------------------------------------------------------------------------------- Radio One of Atlanta, Inc. Loans 341 341 Debt Securities 9,951 9,951 Common Stock (1,430 shares) -- -- - ------------------------------------------------------------------------------------------------------- Randhawa Brothers Loans 217 217 Enterprises, Inc. - ------------------------------------------------------------------------------------------------------- R-Tex Decoratives Company, Debt Securities 1,513 1,170 Inc. Warrants 58 -- - ------------------------------------------------------------------------------------------------------- R.L. Singletary Loan 112 112 - ------------------------------------------------------------------------------------------------------- Saturn Chemicals, Inc. Loan -- -- - ------------------------------------------------------------------------------------------------------- SerpCo., Inc. Loan 182 182 - ------------------------------------------------------------------------------------------------------- Spa Lending Corporation Preferred Stock (28,625 shares) 398 322 Common Stock (6,208 shares) 22 -- - ------------------------------------------------------------------------------------------------------- SunStates Refrigerated Loans 1,557 68 Services, Inc. Debt Securities 4,262 1,486 - ------------------------------------------------------------------------------------------------------- Total Foam, Inc. Debt Securities 1,582 129 Common Stock (910 shares) 57 -- - ------------------------------------------------------------------------------------------------------- University Village Mobile Loan 157 157 Homes - ------------------------------------------------------------------------------------------------------- Vidon, Inc. Loans 262 262 - ------------------------------------------------------------------------------------------------------- Waterview Limited Partnership Option -- 3,050 - ------------------------------------------------------------------------------------------------------- Weathertech Distributing Loans 291 291 Company, Inc. - ------------------------------------------------------------------------------------------------------- West Virginia Radio Debt Securities 962 962 Corporation of Clarksburg, Inc. Warrants 400 -- - ------------------------------------------------------------------------------------------------------- William R. Dye Loan 270 270 - ------------------------------------------------------------------------------------------------------- Williams Brothers Lumber Loans 720 720 Company Debt Securities 308 308 Warrants 24 24 - ------------------------------------------------------------------------------------------------------- Z-Spanish Radio Network, Inc. Loans 11,636 11,636 Debt Securities 750 750 Warrants 6 6 - ------------------------------------------------------------------------------------------------------- Total mezzanine loans and debt securities and equity interests in portfolio companies (89 investments) $201,234 $207,748 - ------------------------------------------------------------------------------------------------------- (1) Public company. (2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial statements. F-13 79
DECEMBER 31, 1997 INTEREST NUMBER OF ------------------- RATE RANGES INVESTMENTS COST VALUE (IN THOUSANDS, EXCEPT NUMBER OF INVESTMENTS) ---------------- ----------- -------- -------- COMMERCIAL MORTGAGE LOANS Up to 6.99% 6 $ 6,129 $ 6,129 7.00%- 8.99% 49 108,313 108,313 9.00%-10.99% 156 259,203 259,221 11.00%-12.99% 72 61,681 61,891 13.00%-14.99% 7 8,196 8,196 15.00% and above 1 3,494 3,494 - -------------------------------------------------------------------------------------------------- Total commercial mortgage loans 292 $447,016 $447,244 - -------------------------------------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 7(A) LOANS Up to 6.99% 10 $ 111 $ 111 7.00%- 8.99% 16 192 107 9.00%-10.99% 24 2,636 2,673 11.00%-12.99% 378 38,072 37,739 13.00%-14.99% 4 92 79 15.00% and above -- -- -- - -------------------------------------------------------------------------------------------------- Total Small Business Administration 7(a) loans 432 $ 41,103 $ 40,709 - -------------------------------------------------------------------------------------------------- Other portfolio assets 6 $ 1,367 $ 1,320 - -------------------------------------------------------------------------------------------------- Total portfolio at value 819 $690,720 $697,021 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-14 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. MERGER On December 31, 1997, Allied Capital Corporation ("Allied I"), Allied Capital Corporation II ("Allied II"), Allied Capital Commercial Corporation ("Allied Commercial"), and Allied Capital Advisers, Inc. ("Advisers"), merged with and into Allied Capital Lending Corporation ("Allied Lending") (each a "Predecessor Company" and collectively the "Predecessor Companies") pursuant to an Agreement and Plan of Merger, dated as of August 14, 1997, as amended and restated as of September 19, 1997 in a stock-for-stock exchange (the "Merger"). Immediately following the Merger, Allied Lending changed its name to Allied Capital Corporation ("ACC" or the "Company"). The Merger was effected through a conversion of each share of Predecessor Company common stock into the number of shares of Allied Lending common stock determined pursuant to the following exchange ratios: Allied I -- 1.07 shares; Allied II -- 1.40 shares; Allied Commercial -- 1.60 shares; and Advisers -- 0.31 shares. Allied Lending's common stock outstanding prior to the Merger continues to be outstanding, and was not converted or changed in the Merger. On December 31, 1997, subsequent to the exchange of shares, the Company had 52,047,318 shares outstanding. The Merger was treated as a tax-free reorganization under Section 368 (a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For federal income tax purposes, the Predecessor Companies carried forward the historical cost basis of their assets and liabilities to the surviving entity (ACC). For financial reporting purposes, the Predecessor Companies also carried forward the historical cost basis of their respective assets and liabilities at the time the Merger was effected. The consolidated financial statements reflect the operations of ACC with all periods presented restated as if the Predecessor Companies had merged as of the beginning of the earliest period presented. To facilitate the Merger, Allied Lending's charter was amended primarily to effect: (a) an increase in the number of authorized shares of common stock, par value one-tenth of one mil ($0.0001) per share, from 20,000,000 to 100,000,000 shares; and (b) a change in Allied Lending's name to "Allied Capital Corporation." Prior to the Merger, Allied I owned approximately 16 percent of Allied Lending's total shares outstanding. These shares were distributed to the Allied I shareholders in a dividend immediately prior to the Merger at a rate of 0.107448 shares of Allied Lending for each share of Allied I held on the record date. For financial reporting purposes, Allied I's ownership of Allied Lending has been eliminated for all periods presented. NOTE 2. ORGANIZATION Allied Capital Corporation, a Maryland corporation, is a closed-end management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940 ("1940 Act"). Allied Capital Corporation has three wholly owned subsidiaries that have also elected to be regulated as BDCs. Allied Investment Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial") are licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company and a Specialized Small Business Investment Company, respectively. Allied Capital SBLC Corporation ("Allied SBLC") is licensed by the Small Business Administration ("SBA") as a Small Business Lending Company and is a participant in the SBA Section 7(a) Guaranteed Loan Program. In addition, the Company has also established a real estate investment trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT"). Allied REIT owns several single-member limited liability companies established primarily to hold real estate properties. Allied Capital Corporation and its subsidiaries, collectively, are hereinafter referred to as the "Company" or "ACC." F-15 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2. ORGANIZATION, CONTINUED The investment objective of the Company is to achieve current income and capital gains. In order to achieve this objective, the Company invests primarily in private, growing businesses in a variety of industries and in diverse geographic locations (primarily in the United States). NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements for the periods presented have been restated to include the accounts of the Predecessor Companies for all periods presented. Transaction fees and expenses related to the Merger were expensed in the fourth quarter of 1997. The consolidated financial statements include the accounts of the Company or its wholly owned or majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1997, 1996 and 1995 balances to conform with the 1998 financial statement presentation. VALUATION OF PORTFOLIO INVESTMENTS Portfolio investments are carried at fair value, as determined by the board of directors under the Company's valuation policy. The values of loans and debt securities are based on the board of directors' evaluation of the financial condition of the borrowers and/or the underlying collateral. The values assigned are considered to be amounts which could be realized in the normal course of business which, generally, anticipates the Company holding the loan to maturity and realizing the face value of the loan. For debt securities and loans, value normally corresponds to cost unless the borrower's condition or external factors lead to a determination of value at a lower amount. Equity interests in portfolio companies for which there is no public market are valued based on various factors including history of positive cash flow from operations, the market value of comparable publicly traded companies (discounted for illiquidity), and other pertinent factors. The board of directors also considers recent offers to purchase a portfolio company's securities when valuing equity interests. The Company's equity interests in public companies that carry certain restrictions on sale are typically valued at a discount from the public market value of the security at the balance sheet date. Other publicly traded stocks may also be valued at a discount due to the investment size or market liquidity concerns. INTEREST INCOME Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Loan origination fees, original issue discount, and market discount are amortized into interest income using the effective interest method. NET REALIZED AND UNREALIZED GAINS Realized gains or losses are measured by the difference between the net proceeds from the sale and the cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the year, net of recoveries. Unrealized gains or losses reflect the change in the valuation of the portfolio investment during the reporting period. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the record date. F-16 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED FEDERAL AND STATE INCOME TAXES With the exception of Advisers, the Predecessor Companies qualified as regulated investment companies ("RIC") or a real estate investment trust ("REIT"); however, Advisers was a corporation subject to federal and state income taxes. Income tax expense reported on the consolidated statement of operations relates to the operations of Advisers for all periods presented. The Company and its wholly owned subsidiaries intend to comply with the requirements of the Code that are applicable to RICs and REITs. The Company and its wholly owned subsidiaries intend to distribute annually all of their taxable income to shareholders; therefore, the Company has made no provision for deferred taxes. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce interest rate risk. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading purposes. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in banks and all highly liquid investments with original maturities of three months or less. DEFERRED FINANCING COSTS Financing costs are based on actual costs incurred in obtaining financing and are deferred and amortized as part of interest expense over the term of the related debt instrument. PER SHARE INFORMATION Basic earnings per share is calculated using the weighted average number of shares outstanding for the period presented. Diluted earnings per share reflects the potential dilution that could occur if securities to issue common stock were exercised into common stock. Earnings per share are computed after subtracting dividends on Preferred Shares. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. NOTE 4. PORTFOLIO The Company lends and invests in growing businesses through three primary products: mezzanine loans and debt and equity securities, commercial mortgage loans, and 7(a) loans. MEZZANINE FINANCE Mezzanine investments are generally structured as loans that carry a relatively high fixed rate of interest, which may be combined with equity features, such as conversion privileges, warrants or options to purchase a portion of the portfolio company's equity at a nominal price. Such an investment would typically have a F-17 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PORTFOLIO, CONTINUED maturity of five to ten years, with interest-only payments in the early years and payments of both principal and interest in the later years, although loan maturities and principal amortization schedules vary. At March 31, 1998 and December 31, 1997, approximately 98 percent of the Company's mezzanine loan portfolio was composed of fixed interest rate loans. The weighted average yield on the mezzanine portfolio at March 31, 1998 and December 31, 1997 and 1996 equaled 13.2 percent, 12.6 percent and 13.2 percent, respectively. At March 31, 1998 and December 31, 1997 and 1996, mezzanine loans and debt securities with a cost basis of $25,674,000, $13,661,000 and $16,648,000, respectively, were not accruing interest. At March 31, 1998 and December 31, 1997, approximately 31 percent and 29 percent, 28 percent and 27 percent, 18 percent and 17 percent, 11 percent and 13 percent, and 7 percent and 8 percent of the Company's mezzanine portfolio was located in the mid-atlantic, southeast, midwest, west, and northeast regions, respectively. In addition, 5 percent and 6 percent, respectively, of the mezzanine portfolio was located in other countries. Loans to businesses in the industrial/manufacturing, broadcasting/communications, retail/wholesale, and services industries equaled approximately 47 percent and 43 percent, 17 percent and 26 percent, 13 percent and 15 percent, and 17 percent and 12 percent, respectively, or 94 percent and 96 percent as of March 31, 1998 and December 31, 1997, respectively. Equity investments consist primarily of securities issued by privately owned companies and may be subject to restrictions on their resale or otherwise illiquid. Equity securities generally do not produce a current return, but are held for investment appreciation and ultimate gain on sale. COMMERCIAL REAL ESTATE FINANCE The commercial real estate portfolio contains loans that were originated by the Company or were purchased from the Resolution Trust Corporation, the Federal Deposit Insurance Corporation and other third party sellers including life insurance companies and banks. At March 31, 1998 and December 31, 1997, approximately 61 percent and 39 percent, and 73 percent and 27 percent of the Company's commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At March 31, 1998 and December 31, 1997, approximately 47 percent and 38 percent, 12 percent and 18 percent, 19 percent and 18 percent, 14 percent and 14 percent, and 8 percent and 12 percent of the Company's commercial real estate portfolio was located in the mid-atlantic, midwest, west, southeast, and northeast regions, respectively. In addition, commercial mortgage loans secured by hospitality, office, retail, recreation and other properties equaled approximately 28 percent and 33 percent, 41 percent and 31 percent, 11 percent and 14 percent, 5 percent and 3 percent, and 15 percent and 19 percent, respectively, of the Company's portfolio at March 31, 1998 and December 31, 1997, respectively. The weighted average yield on the real estate portfolio as of March 31, 1998 and December 31, 1997 and 1996 equaled 11.9 percent, 11.4 percent and 13.4 percent, respectively. As of March 31, 1998 and December 31, 1997 and 1996, loans with a cost basis of $6,202,000, $11,987,000 and $10,978,000, respectively, were not accruing interest. As of March 31, 1998 and December 31, 1997 and 1996, unamortized discount related to the real estate portfolio was $16,459,000, $27,954,000 and $37,124,000, respectively. Unamortized discounts are considered in determining the fair value and are amortized into income over the life of the loan. SMALL BUSINESS LENDING The Company, through its wholly owned subsidiary, Allied SBLC, participates in the SBA's Section 7(a) Guaranteed Loan Program. Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will guarantee 80 percent of any qualified loan up to $100,000 regardless of maturity, and 75 percent of any such loan over $100,000 regardless F-18 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PORTFOLIO, CONTINUED of maturity, to a maximum guarantee of $750,000 for any one borrower. SBA regulations define qualified small businesses generally as businesses with no more than $5 million in annual sales and no more than 500 employees. The Company charges interest on these loans at a variable rate, typically 1.75 percent to 2.75 percent above the prime rate, as published in The Wall Street Journal or other financial newspaper, adjusted monthly. All loans are payable in equal monthly installments of principal and interest from the date on which the loan was made to its maturity. At March 31, 1998 and December 31, 1997, approximately 94 percent and 92 percent of the Company's portfolio of 7(a) loans were variable interest rate loans. As permitted by SBA regulations, the Company sells to investors, without recourse, the guaranteed portion of its loans while retaining the right to service 100 percent of such loans. As of March 31, 1998 and December 31, 1997 and 1996, 7(a) loans with a cost basis of $3,984,000, $4,346,000 and $3,734,000, respectively, were not accruing interest. At March 31, 1998 and December 31, 1997, approximately 40 percent and 36 percent, 31 percent and 29 percent, 14 percent and 18 percent, 8 percent and 10 percent, and 7 percent and 7 percent of the Company's 7(a) loan portfolio was located in the midwest, mid-atlantic, southeast, northeast, and west regions, respectively. In addition, loans to businesses in the hospitality, automotive services, broadcasting/communications, restaurant/food services, industrial/manufacturing, services, and retail/wholesale industries equaled 32 percent and 25 percent, 23 percent and 21 percent, 6 percent and 10 percent, 8 percent and 9 percent, 8 percent and 7 percent, 4 percent and 6 percent, and 3 percent and 6 percent, respectively, or 84 percent and 84 percent of the Company's portfolio as of March 31, 1998 and December 31, 1997. INTEREST IN SECURITIZATION POOL OF COMMERCIAL MORTGAGE LOANS On January 30, 1998, the Company in conjunction with Business Mortgage Investors, Inc. ("BMI"), a private REIT managed by the Company, completed a $310 million asset securitization, whereby bonds totaling $239 million were sold in three classes rated "AAA", "AA" and "A" by Standard & Poor's Rating Services and Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of 97 commercial mortgage loans totaling $310 million to a special purpose, bankruptcy remote entity which transferred the assets to a trust which issued the bonds. The Company contributed approximately 95%, or $295 million, of the total assets securitized, and received cash proceeds, net of costs of approximately $223 million. The Company retained a trust certificate for its residual interest (the "residual interest") in the loan pool sold, and will receive interest income from this residual interest as well as receive the net spread of the interest earned on the loans sold less the interest paid on the bonds over the life of the bonds (the "residual securitization spread"). The mortgage loan pool had an approximate weighted average stated interest rate of 9.6%. The three bond classes sold have an aggregate weighted average interest rate of approximately 6.38%. The Company accounted for the securitization in accordance with Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." As a result, the Company recorded a gain of approximately $14.8 million net of the costs of the securitization and the cost of settlement of interest rate swaps. The gain arises from the difference between the carrying amount of the loans and the fair market value of the assets received--cash, residual securitization spread, residual interest and a servicing asset. The value of the residual securitization spread, $17.0 million, was determined based on the future expected cash flows, assuming a constant prepayment rate for the mortgage loan pool of 10%, discounted at 16%. The value of the residual interest was determined to be $66.5 million and was based on the future expected cash flows less projected losses of approximately $3.0 million. The projected losses were based upon the attributes of the portfolio sold and the underlying collateral values. The weighted average loan to collateral value of the 97 loans sold was 68.3%. The expected F-19 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. PORTFOLIO, CONTINUED future cash flow from the residual interest was discounted at 9.6%. The servicing asset was valued at $227,000 assuming a net servicing fee of 0.04% and was discounted at a rate of 10%. The Company will continue to earn interest income from the residual interest, and will receive the actual net spread from the portion of the loans sold represented by the bonds issued. As the net spread is received, a portion will be allocated to interest income with the remainder applied to reduce the carrying amount of the residual securitization spread. The residual interest and the residual securitization spread will be valued each quarter using updated prepayment and loss estimates. NOTE 5. DEBT At March 31, 1998 and December 31, 1997 and 1996, the Company had the following available credit facilities:
DECEMBER 31, MARCH 31, ----------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- FACILITY AMOUNT FACILITY AMOUNT FACILITY AMOUNT AMOUNT DRAWN AMOUNT DRAWN AMOUNT DRAWN -------- -------- -------- -------- -------- -------- (UNAUDITED) (IN THOUSANDS) Notes payable and debentures: Master repurchase agreement................ $250,000 $ 8,243 $250,000 $202,705 $150,000 $ 85,775 Master loan and security agreement................ 250,000 9,000 250,000 23,116 -- -- Senior note payable........ 20,000 20,000 20,000 20,000 20,000 20,000 OPIC loan.................. 8,700 8,700 20,000 8,700 20,000 8,700 SBA debentures............. 53,300 53,300 54,300 54,300 61,300 61,300 Bonds payable.............. -- -- -- -- 54,123 54,123 -------- -------- -------- -------- -------- -------- Total notes payable and debentures...... 582,000 99,243 594,300 308,821 305,423 229,898 -------- -------- -------- -------- -------- -------- Revolving lines of credit....... 200,000 103,000 80,000 38,842 110,000 45,099 -------- -------- -------- -------- -------- -------- Total debt............ $782,000 $202,243 $674,300 $347,663 $415,423 $274,997 ======== ======== ======== ======== ======== ========
MASTER REPURCHASE AGREEMENT The Company and BMI can borrow up to $250,000,000, of which $100,000,000 is committed, through repurchase agreements using its commercial mortgage loans as collateral. The Company pledges commercial mortgage loans as collateral for the facility such that the amount borrowed is approximately equal to 75 percent to 80 percent of the value of the collateral pledged. The terms of the master repurchase agreement require interest only payments with all principal due at maturity. The master repurchase agreement bears interest at the one-month London Inter Bank Offered Rate ("LIBOR") plus 1.13 percent, or 6.8 percent, 6.8 percent and 6.7 percent at March 31, 1998 and December 31, 1997 and 1996, respectively. The facility requires an annual commitment fee equal to 0.25% of the committed amount. The average debt outstanding under the master repurchase agreement for the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996 was $70,504,000, $166,362,000 and $51,767,000, respectively. The maximum amount borrowed under this facility was $202,705,000, $209,591,000 and $85,775,000 during the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996, respectively. The weighted average interest rate for this facility during the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996 was 6.8%, 6.6% and 7.3%, respectively. The master repurchase agreement matures on January 31, 1999. F-20 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. DEBT, CONTINUED MASTER LOAN AND SECURITY AGREEMENT During 1997, the Company, again in conjunction with BMI, established a facility to borrow up to $250,000,000, of which $100,000,000 is committed, using its commercial mortgage loans as collateral under the agreement. At March 31, 1998 and December 31, 1997, the Company's recorded investment in these loans pledged as collateral totaled $13,165,000 and $29,193,000, which approximated their market value. The agreement generally requires interest only payments with all principal due at maturity. The agreement bears interest at the one-month LIBOR plus 1.0 percent, or 6.7 percent, at March 31, 1998 and December 31, 1997. The facility requires an annual commitment fee equal to 0.75% of the committed amount. The average debt outstanding under this facility for the three months ended March 31, 1998 and the year ended December 31, 1997 was $7,378,000 and $17,899,000, respectively. The maximum amount borrowed under this facility was $23,116,000 during the three months ended March 31, 1998 and the year ended December 31, 1997. The weighted average interest rate for this facility during the three months ended March 31, 1998 and the year ended December 31, 1997 was 6.6% and 6.7%, respectively. The agreement matures on August 21, 1998. SENIOR NOTE PAYABLE The Company has a $20,000,000 unsecured senior note payable to an insurance company. This note bears interest at a fixed rate of 9.15 percent, payable semi-annually. The note is scheduled to mature over a five-year period commencing in 1998 with annual principal payments of $4,000,000. The senior note payable is subject to a prepayment penalty if paid prior to maturity. OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) LOAN The Company has a loan agreement with OPIC to provide financing for international projects involving qualifying U.S. small businesses. Loans under this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the applicable period of the borrowing. In addition, OPIC is entitled to receive from the Company a contingent fee at maturity of the loan equal to 5 percent of the return generated by the OPIC-related investments in excess of 7 percent. There are no required principal payments until the OPIC loans mature in January 2006. SBA DEBENTURES At March 31, 1998, the Company had debentures totaling $53,300,000 payable to the SBA at interest rates ranging from 6.87 percent to 9.80 percent, with scheduled maturity dates as follows: 1998 -- $5,650,000; 1999 -- $0; 2000 -- $17,300,000; 2001 -- $9,350,000; 2002 -- $0; and $21,000,000 thereafter. At December 31, 1997, the Company had outstanding debentures totaling $54,300,000 at interest rates ranging from 6.87 percent to 9.80 percent. The debentures require semi-annual interest-only payments with all principal due upon maturity. The SBA debentures are subject to prepayment penalties if paid prior to maturity. BONDS PAYABLE The Company issued $98,810,000 of 6.92 percent series 1995-C1 Commercial Mortgage Collateralized Bonds during November 1995. The bonds were rated "AA" by Fitch Investors Service, L.P. The bonds were repaid in full in November 1997. REVOLVING LINES OF CREDIT Subsequent to the Merger, the Company repaid all of its previous unsecured revolving lines of credit and entered into a new $200,000,000 unsecured revolving line of credit. The new facility bears interest at LIBOR plus 1.25 percent or 6.95 percent at March 31, 1998, and requires a commitment fee equal to 0.2 percent of F-21 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. DEBT, CONTINUED the committed amount, and a facility fee equal to 0.15 percent of the initial commitment. The new line expires June 30, 1999. The new line of credit requires monthly payments of interest and all principal is due upon its expiration. The amount borrowed is based upon a borrowing base formula generally equal to 50 percent of the Company's portfolio investments not securing other credit facilities. At December 31, 1997, the Company had several revolving lines of credit totaling $80,000,000 under which the Company had outstanding borrowings totaling $38,842,000. At December 31, 1996, the Company had several revolving lines of credit totaling $110,000,000 under which the Company had outstanding borrowings totaling $45,099,000. The lines of credit charged interest at rates ranging from LIBOR plus 1.35 percent to 2.5 percent. At December 31, 1997 and 1996 the weighted average interest rate on the facilities was 7.7 percent and 7.8 percent, respectively. The lines required various commitment and other fees equal to 0.39 percent of the outstanding borrowings at December 31, 1997. The average debt outstanding on the revolving lines of credit was $64,347,000, $30,033,000 and $28,216,000 for the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996, respectively. The maximum amount borrowed under these facilities was $103,000,000, $45,759,000 and $45,099,000 during the same periods, respectively. The weighted average interest rate for these facilities during the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996 was 7.0 percent, 8.1 percent and 8.2 percent, respectively. NOTE 6. INCOME TAXES For the years ended December 31, 1997, 1996 and 1995, the Company's effective tax rate was 2.3 percent, 3.5 percent and 2.9 percent, respectively. The Company's income subject to federal and state taxes relates to the income generated by the pre-Merger operations of Advisers. The income generated by the other Predecessor Companies is not subject to federal and state income taxes because these companies qualify as RICs or REITs. Therefore, no income tax expense is expected to be incurred in 1998. NOTE 7. PREFERRED STOCK At March 31, 1998 and December 31, 1997 and 1996, Allied Financial had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. Allied Financial has the option to redeem in whole or in part the 3 percent cumulative 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 8. SHAREHOLDERS' EQUITY In 1996, the Company completed two non-transferable subscription rights offerings to common shareholders. The Company issued 1,433,414 shares of common stock pursuant to these offerings raising net proceeds to the Company of $17,147,000, after costs including a 2.5 percent fee paid to eligible broker/dealers. In 1996, the Company also sold 400,000 shares of its common stock through an underwriter in a registered offering for net proceeds of $5,218,000. The Company has a dividend reinvestment plan, whereby the Company may buy shares of its common stock in the open market or issue new shares in order to satisfy dividend reinvestment requests. If the Company issues new shares, the issue price is equal to the average of the closing sales prices reported for the F-22 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. SHAREHOLDERS' EQUITY, CONTINUED Company's common stock for the five days on which trading in the shares takes place immediately prior to the dividend payment date. For the three months ended March 31, 1998 and the years ended December 31, 1997 and 1996, the Company issued 66,232, 550,971 and 913,206 shares, respectively, at an average price of $25.33, $15.67 and $13.13 per share, respectively. F-23 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9. EARNINGS PER COMMON SHARE
PER COMMON INCOME SHARES SHARE AMOUNT -------- ------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) Net increase in net assets resulting from operations... $32,065 Less: Preferred stock dividends........................ (55) ------- Income available to common shareholders................ $32,010 ======= BASIC EARNINGS PER COMMON SHARE........................ 51,814 $0.62 ===== Options outstanding to officers........................ 294 ------ DILUTED EARNINGS PER COMMON SHARE...................... 52,108 $0.61 ====== ===== FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) Net increase in net assets resulting from operations... $12,646 Less: Preferred stock dividends........................ (55) ------- Income available to common shareholders................ $12,591 ======= BASIC EARNINGS PER COMMON SHARE........................ 46,938 $0.27 ===== Options outstanding to officers........................ 575 ------ DILUTED EARNINGS PER COMMON SHARE...................... 47,513 $0.27 ====== ===== 1997 Net increase in net assets resulting from operations... $61,304 Less: Preferred stock dividends........................ (220) ------- Income available to common shareholders................ $61,084 ======= BASIC EARNINGS PER COMMON SHARE........................ 49,218 $1.24 ===== Options outstanding to officers........................ 33 ------ DILUTED EARNINGS PER COMMON SHARE...................... 49,251 $1.24 ====== ===== 1996 Net increase in net assets resulting from operations... $54,947 Less: Preferred stock dividends........................ (220) ------- Income available to common shareholders................ $54,727 ======= BASIC EARNINGS PER COMMON SHARE........................ 46,172 $1.19 ===== Options outstanding to officers........................ 561 ------ DILUTED EARNINGS PER COMMON SHARE...................... 46,733 $1.17 ====== ===== 1995 Net increase in net assets resulting from operations... $60,479 Less: Preferred stock dividends........................ (220) ------- Income available to common shareholders................ $60,259 ======= BASIC EARNINGS PER COMMON SHARE........................ 43,697 $1.38 ===== Options outstanding to officers........................ 313 ------ DILUTED EARNINGS PER COMMON SHARE...................... 44,010 $1.37 ====== =====
Basic earnings per common share was computed by dividing the net increase in net assets resulting from operations, after deducting preferred stock dividends, by the weighted average number of common shares outstanding each period. Diluted earnings per common share was computed by dividing the net increase in net assets resulting from operations, after deducting preferred stock dividends, by the weighted average number of common shares outstanding plus common shares issuable upon assumed exercise of stock options outstanding each period. F-24 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. EMPLOYEE STOCK OWNERSHIP PLAN AND DEFERRED COMPENSATION PLAN The Company has an employee stock ownership plan ("ESOP"). Pursuant to the ESOP, the Company is obligated to contribute 5 percent of each eligible participant's total cash compensation for the year to a plan account on the participant's behalf, which vests over a two-year period. ESOP contributions are used to purchase shares of ACC. At March 31, 1998, the ESOP held 433,047 shares of the Company's common stock, all of which had been allocated to participants' accounts. The plan is funded annually and the total ESOP contribution expense for the years ended December 31, 1997, 1996 and 1995 was $351,000, $1,018,000 and $864,000, respectively, net of forfeitures of $0, $36,000 and $180,000 in 1997, 1996 and 1995, respectively. The Company also has a deferred compensation plan (the "DC Plan"). Eligible participants of the DC Plan may elect to defer some of their compensation and have such compensation credited to a participant account. All amounts credited to a participant's account shall be credited solely for purposes of accounting and computation and shall remain assets of the Company and subject to the claims of the Company's general creditors. Amounts credited to participants under the DC Plan are at all times 100 percent vested and non-forfeitable except for amounts credited to participants' accounts related to the Formula Award (see Note 12). A participant's account shall become distributable upon his or her separation from service, retirement, disability, death, or at a future determined date. All DC Plan accounts will be distributed in the event of a change of control of ACC or in the event of the Company's insolvency. Amounts deferred by participants under the DC Plan are funded to a trust, the trustee of which administers the DC Plan on behalf of the Company. NOTE 11. STOCK OPTION PLAN In conjunction with the Merger, all stock option plans that existed for Allied Lending and the Predecessor Companies before the Merger ("Old Plans") were cancelled on December 31, 1997, and at a special meeting of shareholders on November 26, 1997, the Company's shareholders approved a new stock option plan ("ACC Plan") for the Company to be effected post-Merger. THE ACC PLAN The purpose of the ACC Plan is to provide officers and non-officer directors of ACC with additional incentives. Options may be granted from time to time on up to 6,250,000 shares which represents approximately 12 percent of the outstanding shares as of December 31, 1997. Options will be exercisable at a price equal to the fair market value of the shares on the day the option is granted. Each option will state the period or periods of time within which the option may be exercised by the optionee, which may not exceed ten years from the date the option is granted. All rights to exercise options terminate 60 days after an optionee ceases to be (i) a non-officer director, (ii) both an officer and a director, if such optionee serves in both capacities, or (iii) an officer (if such officer is not also a director) of ACC for any cause other than death or total and permanent disability. If an optionee dies or becomes totally and permanently disabled before expiration of the options without fully exercising it, he or she or the executors or administrators or legatees or distributees of the estate shall, as may be provided at the time of the grant, have the right, within one year after the optionee's death or total and permanent disability, to exercise the options in whole or in part before the expiration of its term. In the event of a change of control of ACC, all outstanding options will become fully vested and exercisable as of the change of control. On January 8, 1998, the Company's compensation committee granted a total of 3,415,446 options to officers of the Company under the ACC Plan. The options awarded to officers were generally non-qualified stock options that vest over a five-year period from the grant date. The stock options granted had an exercise price equal to $21.38 per share. At March 31, 1998, options for 610,330 shares were exercisable into common stock. No options were exercised or canceled during the three months ended March 31, 1998. There were no options granted pursuant to the ACC Plan as of December 31, 1997. F-25 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. STOCK OPTION PLAN, CONTINUED NOTES RECEIVABLE FROM THE SALE OF COMMON STOCK The Company provides loans to officers for the exercise of options. The loans have varying terms not exceeding ten years, bear interest at the applicable federal interest rate in effect at the date of issue and have been recorded as a reduction of shareholders' equity. At March 31, 1998 and December 31, 1997, 1996 and 1995, the Company had outstanding loans to officers of $26,556,000, $29,611,000, $15,491,000, and $7,315,000, respectively. Officers with outstanding loans repaid principal of $3,055,000, $6,534,000, $2,199,000 and $1,038,000 for the three months ended March 31, 1998 and the years ended December 31, 1997, 1996 and 1995, respectively. The Company recognized interest income from these loans of $456,000, $1,031,000, $529,000 and $276,000, respectively, during these same periods. OLD PLAN ACTIVITY During 1997, 1996 and 1995, the Predecessor Companies granted 1,474,000, 866,000, and 1,505,000 options, respectively, under the Old Plans at exercise prices ranging from $9.53 to $22.58 per share. Total shares issued pursuant to the exercise of stock options totaled 2,395,000, 1,051,000, and 576,000 during 1997, 1996 and 1995, respectively. The Company accounts for the ACC Plan as required by the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and no compensation cost has been recognized. Had compensation cost for the plan been determined consistent with SFAS No. 123 "Accounting for Stock Based Compensation," the Company's net increase in net assets resulting from operations and basic earnings per share would have been reduced to the following pro forma amounts:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net increase in net assets resulting from operations: As reported.......................................... $61,304 $54,947 $60,479 Pro forma............................................ $60,656 $53,372 $58,931 Basic earnings per common share: As reported.......................................... $ 1.24 $ 1.19 $ 1.38 Pro forma............................................ $ 1.23 $ 1.16 $ 1.35 Diluted earnings per common share: As reported.......................................... $ 1.24 $ 1.17 $ 1.37 Pro forma............................................ $ 1.23 $ 1.14 $ 1.34
Pro forma expenses are based on the underlying value of the options granted by the Company and the Predecessor Companies. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. NOTE 12. CUT-OFF AWARD AND FORMULA AWARD The Predecessor Companies' existing stock option plans were canceled and the Company established a cut-off dollar amount for all existing, but unvested options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award is computed for each unvested option as of the Merger date. The Cut-off Award is equal to the difference between the market price on August 14, 1997 (the Merger announcement date) of the shares of stock underlying the option less the exercise price of the option. The Cut-off Award is payable for each unvested option upon the future vesting date of that option. The Cut-off Award was designed to cap the appreciated value in unvested options at the Merger announcement date, in order to set the foundation to balance option awards upon the Merger. The Cut-off Award approximates $2.9 million in the aggregate and F-26 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12. CUT-OFF AWARD AND FORMULA AWARD, CONTINUED will be expensed as the Cut-off Award vests. For the three months ended March 31, 1998, $189,000 of the Cut-off Award vested and $256,000 was forfeited. The Formula Award was established to compensate employees from the point when their unvested options would cease to appreciate in value (the Merger announcement date), up until the time at which they would be able to receive option awards in ACC post-Merger. In the aggregate, the Formula Award equaled 6 percent of the difference between an amount equal to the combined aggregated market capitalizations of the Predecessor Companies as of the close of the market on the day before the Merger date (December 30, 1997), less an amount equal to the combined aggregate market capitalizations of the Predecessor Companies as of the close of the market on the Merger announcement date (August 14, 1997). Advisers' compensation committee allocated the Formula Award to individual officers on December 30, 1997. The amount of the Formula Award as computed at December 30, 1997 approximated $19 million. For the three month period ended March 31, 1998, the Company funded the DC Plan with approximately $19 million in cash in connection with the Formula Award. The Trustee of the DC Plan will use those funds to acquire the Company's stock in the open market. As of March 31, 1998, the Trustee had purchased 662,948 shares of the Company's stock with an aggregate cost of $15,330,000. The purchase of these shares has been reflected in shareholders' equity. The Formula Award will vest equally in three installments on December 31, 1998, 1999 and 2000; provided, however, that such Formula Award vests immediately upon a change in control of the Company. The Formula Award will be expensed in each year in which it vests. Formula Award expense for the three months ended March 31, 1998 was $1,583,000. NOTE 13. INVESTMENT ADVISORY SERVICES The Company has investment advisory agreements to manage the assets of certain private companies. The investment advisory agreements are generally annual agreements, and may be terminated at any time on 60 days' notice, without penalty, by the managed companies. NOTE 14. INTEREST RATE SWAPS The Company uses interest rate swap agreements to protect against fluctuation in interest costs on its variable rate short-term credit facilities. Amounts paid or received on the settlement of interest rate swap agreements are recognized as an adjustment to interest expense. In January 1998, the Company settled its interest rate swap agreements in connection with the asset securitization transaction which resulted in a loss of $5,767,000 which has been recorded against the gain on the securitization of commercial mortgage loans in the first quarter of 1998. As of December 31, 1997, the Company had interest swap agreements with an aggregate notional amount of $145,000,000. Pursuant to the swap agreements, the Company paid a weighted average fixed rate equal to 6.8 percent and received payments with a weighted average variable rate equal to the 30-day LIBOR. The swap agreements had a remaining weighted average maturity of approximately four years from December 31, 1997. As of December 31, 1997, the Company recorded an estimated unrealized loss of $5,000,000 related to the swap agreements in connection with the January 1998 asset securitization transaction. The estimated unrealized loss was subsequently reversed upon consummation of the securitization. NOTE 15. DIVIDENDS AND DISTRIBUTIONS The Company's Board of Directors declared and the Company paid a $0.35 per common share dividend, or $18,225,000, for the first quarter of 1998. F-27 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. DIVIDENDS AND DISTRIBUTIONS, CONTINUED For the years ended December 31, 1997, 1996, and 1995, the Company declared the following distributions:
1997 1996 1995 --------------- --------------- --------------- TOTAL TOTAL TOTAL TOTAL PER TOTAL PER TOTAL PER AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE ------- ----- ------- ----- ------- ----- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) First quarter............................ $14,347 $0.30 $11,158 $0.25 $ 8,855 $0.20 Second quarter........................... 14,795 0.30 11,911 0.26 9,344 0.21 Third quarter............................ 15,548 0.31 12,743 0.27 9,818 0.22 Fourth quarter........................... 31,022 0.61 13,678 0.29 10,355 0.24 Annual extra distribution................ 1,118 0.02 7,908 0.16 9,548 0.22 Special undistributed earnings distribution........................... 8,848 0.17 -- -- -- -- ------- ----- ------- ----- ------- ----- Total distributions to common shareholders........................... $85,678 $1.71 $57,398 $1.23 $47,920 $1.09 ======= ===== ======= ===== ======= =====
For income tax purposes, distributions for 1997, 1996, and 1995 were comprised of the following:
1997 1996 1995 --------------- --------------- --------------- TOTAL TOTAL TOTAL TOTAL PER TOTAL PER TOTAL PER AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE ------- ----- ------- ----- ------- ----- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Ordinary income.......................... $39,356 $0.79 $41,563 $0.89 $37,747 $0.86 Long-term capital gains.................. 31,037 0.62 15,835 0.34 10,173 0.23 Return of capital (tax).................. 6,437 0.13 -- -- -- -- ------- ----- ------- ----- ------- ----- Total distributions before special distribution........................... 76,830 1.54 57,398 1.23 47,920 1.09 ------- ----- ------- ----- ------- ----- Special undistributed earnings distribution........................... 8,848 0.17 -- -- -- -- ------- ----- ------- ----- ------- ----- Total distributions to common shareholders........................... $85,678 $1.71 $57,398 $1.23 $47,920 $1.09 ======= ===== ======= ===== ======= =====
The following table summarizes the differences between taxable income and financial reporting income for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------- ------- ------- (IN THOUSANDS) Financial statement net income.............................. $61,304 $54,947 $60,479 Adjustments: Amortization of discount............................... (1,124) (2,779) (1,206) Gains from disposition of portfolio assets............. 17,890 874 (904) Net unrealized (gains) losses.......................... (7,209) 7,412 (9,266) Expenses not deductible for tax: Merger expenses................................... 5,159 -- -- Other............................................. 853 2,306 1,176 Other.................................................. (9,050) (1,372) 930 Income tax expense..................................... 1,444 1,945 1,784 ------- ------- ------- Taxable income.............................................. $69,267 $63,333 $52,993 ======= ======= =======
F-28 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16. COMMITMENTS AND CONTINGENCIES The Company is party to certain lawsuits in connection with its business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these proceedings will have a material effect upon the financial condition of the Company. NOTE 17. CONCENTRATIONS OF CREDIT RISK The Company places its cash with financial institutions and, at times, cash held in checking accounts in financial institutions may be in excess of the Federal Deposit Insurance Corporation insured limit. Cash and cash equivalents consisted of the following:
MARCH 31, DECEMBER 31, ----------- ------------------- 1998 1997 1996 ----------- -------- -------- (UNAUDITED) (IN THOUSANDS) Cash and cash equivalents...................... $36,434 $76,791 $75,744 Less escrows held.............................. (5,421) (6,354) (3,903) ------- ------- ------- Total.......................................... $31,013 $70,437 $71,841 ======= ======= =======
NOTE 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid interest and income taxes of $4,014,000 for the three months ended March 31, 1998 and $26,874,000, $21,391,000 and $13,393,000 during 1997, 1996, and 1995, respectively. For the three months ended March 31, 1998 and during 1997, 1996 and 1995, respectively, the Company's non-cash financing activities totaled $1,678,000, $48,207,000, $22,361,000 and $15,756,000 related primarily to common stock issuances resulting from stock option exercises and dividend reinvestment shares issued. Additionally, during 1995, $18,062,000 in long-term debt was consolidated from the minority interest in an asset securitization pool. During 1997, 1996 and 1995, respectively, the Company's non-cash investing activities totaled $12,022,000, $2,004,000 and $23,490,000, relating to mortgage loans consolidated from the minority interests in certain joint ventures. NOTE 19. SELECTED QUARTERLY DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 ------------------------------------- QTR 1 QTR 2 QTR 3 QTR 4 ------- ------- ------- ------- Total interest and related portfolio income............. $21,399 $24,911 $25,111 $25,984 Portfolio income before realized and unrealized gains... $11,968 $14,095 $12,093 $ 7,910 Net increase in net assets resulting from operations.... $12,646 $18,296 $17,146 $13,216 Basic earnings per common share......................... $ 0.27 $ 0.37 $ 0.35 $ 0.25 Diluted earnings per common share....................... $ 0.27 $ 0.37 $ 0.35 $ 0.25
1996 ------------------------------------- QTR 1 QTR 2 QTR 3 QTR 4 ------- ------- ------- ------- Total interest and related portfolio income............. $19,412 $20,866 $20,753 $23,906 Portfolio income before realized and unrealized gains... $11,284 $11,665 $11,592 $13,035 Net increase in net assets resulting from operations.... $18,935 $11,090 $16,855 $ 8,067 Basic earnings per common share......................... $ 0.42 $ 0.24 $ 0.35 $ 0.18 Diluted earnings per common share....................... $ 0.42 $ 0.23 $ 0.34 $ 0.18
F-29 95 CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997 ---------------------------------------------------------------------------------- ALLIED ALLIED ALLIED CONSOLIDATED ACC INVESTMENT FINANCIAL SBLC OTHERS ELIMINATIONS TOTAL -------- ---------- --------- ------- ------ ------------ ------------ (IN THOUSANDS) ASSETS Portfolio at value: Commercial mortgage loans........ $446,342 $ -- $ -- $ -- $ -- $ -- $446,342 Mezzanine loans and debt securities..................... 89,707 64,486 13,649 -- -- -- 167,842 Small Business Administration 7(a) loans..................... -- -- -- 40,709 -- -- 40,709 Equity interests in portfolio companies...................... 16,836 21,814 1,256 -- -- -- 39,906 Investments in subsidiaries...... 67,293 -- -- -- -- (67,293) -- Other portfolio assets........... 8 -- -- 43 2,171 -- 2,222 -------- -------- ------- ------- ------ --------- -------- Total portfolio at value..... 620,186 86,300 14,905 40,752 2,171 (67,293) 697,021 -------- -------- ------- ------- ------ --------- -------- Cash and cash equivalents............. 25,958 26,024 16,397 1,593 465 -- 70,437 U.S. government securities............ -- -- 11,091 -- -- -- 11,091 Intercompany notes and receivables.... 56,167 8 -- 1,386 -- (57,561) -- Other assets.......................... 13,809 2,425 761 8,696 3,535 -- 29,226 -------- -------- ------- ------- ------ --------- -------- Total assets................. $716,120 $114,757 $43,154 $52,427 $6,171 $(124,854) $807,775 ======== ======== ======= ======= ====== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debentures and notes payable..... $249,521 $ 40,183 $19,117 $ -- $ -- $ -- $308,821 Revolving lines of credit........ 20,294 -- -- 18,548 -- -- 38,842 Accounts payable and accrued expenses....................... 12,040 3,961 152 1,828 208 -- 18,189 Dividends and distributions payable........................ 8,848 -- 220 -- -- -- 9,068 Intercompany notes and payables....................... 6,967 26,495 1,598 19,915 2,586 (57,561) -- Other liabilities................ 4,591 816 226 162 -- -- 5,795 -------- -------- ------- ------- ------ --------- -------- 302,261 71,455 21,313 40,453 2,794 (57,561) 380,715 -------- -------- ------- ------- ------ --------- -------- Commitments and contingencies Preferred stock issued to Small Business Administration.......... -- -- 7,000 -- -- -- 7,000 Shareholders' equity: Common stock..................... 5 -- -- -- 1 (1) 5 Additional paid-in capital....... 451,044 22,374 12,134 12,564 1,437 (48,509) 451,044 Notes receivable from sale of common stock................... (29,611) -- -- -- -- -- (29,611) Net unrealized appreciation (depreciation) on portfolio.... 1,301 4,689 299 (394) -- (4,594) 1,301 Undistributed (distributions in excess of) earnings............ (8,880) 16,239 2,408 (196) 1,939 (14,189) (2,679) -------- -------- ------- ------- ------ --------- -------- Total shareholders' equity... 413,859 43,302 14,841 11,974 3,377 (67,293) 420,060 -------- -------- ------- ------- ------ --------- -------- Total liabilities and shareholders' equity....... $716,120 $114,757 $43,154 $52,427 $6,171 $(124,854) $807,775 ======== ======== ======= ======= ====== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-30 96 CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------------------------------------- ALLIED ALLIED ALLIED CONSOLIDATED ACC INVESTMENT FINANCIAL SBLC OTHERS ELIMINATIONS TOTAL ------- ---------- --------- ------ ------ ------------ ------------ (IN THOUSANDS) Interest and related portfolio income: Interest........................ $57,067 $ 9,903 $3,637 $6,352 $9,923 $ -- $86,882 Interest income-intercompany.... 3,843 -- -- -- -- (3,843) -- Dividends from subsidiaries..... 22,960 -- -- -- -- (22,960) -- Net premiums from loan sales.... 170 -- -- 3,071 -- -- 3,241 Prepayment premiums............. 3,689 -- -- -- 347 -- 4,036 Investment advisory fees........ 15,439 -- -- -- -- (14,446) 993 Other income.................... 663 107 -- -- 1,483 -- 2,253 ------- ------- ------ ------ ------ -------- ------- Total interest and related portfolio income........... 103,831 10,010 3,637 9,423 11,753 (41,249) 97,405 ------- ------- ------ ------ ------ -------- ------- Expenses: Interest on indebtedness........ 16,950 3,897 1,781 1,511 2,813 -- 26,952 Interest on indebtedness- intercompany.................. -- 1,555 -- 1,749 539 (3,843) -- Salaries and employee benefits...................... 10,258 -- -- -- -- -- 10,258 Investment advisory fees........ 14,130 -- -- -- 316 (14,446) -- Legal and accounting............ 1,850 200 94 118 -- -- 2,262 General and administrative...... 5,677 157 (45) 113 806 -- 6,708 Merger.......................... 5,159 -- -- -- -- -- 5,159 ------- ------- ------ ------ ----- -------- ------- Total expenses............... 54,024 5,809 1,830 3,491 4,474 (18,289) 51,339 ------- ------- ------ ------ ----- -------- ------- Portfolio income before realized and unrealized gains (losses).......... 49,807 4,201 1,807 5,932 7,279 (22,960) 46,066 ------- ------- ------ ------ ----- -------- ------- Net realized and unrealized gains: Net realized gains (losses)..... 6,777 3,104 (93) (132) 1,048 -- 10,704 Net unrealized gains (losses)... 7,919 7,425 934 (711) -- (8,358) 7,209 ------- ------- ------ ------ ----- -------- ------- Total net realized and unrealized gains (losses)................... 14,696 10,529 841 (843) 1,048 (8,358) 17,913 ------- ------- ------ ------ ----- -------- ------- Income before minority interests and income taxes....................... 64,503 14,730 2,648 5,089 8,327 (31,318) 63,979 ------- ------- ------ ------ ----- -------- ------- Minority interests................... -- -- -- -- 1,231 -- 1,231 Income tax expense................... 1,444 -- -- -- -- -- 1,444 ------- ------- ------ ------ ----- -------- ------- Net increase in net assets resulting from operations.................... $63,059 $14,730 $2,648 $5,089 $7,096 $(31,318) $61,304 ======= ======= ====== ====== ====== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-31 97 CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------------------------------------------------------ ALLIED ALLIED ALLIED CONSOLIDATED ACC INVESTMENT FINANCIAL SBLC OTHERS ELIMINATIONS TOTAL --------- ---------- --------- ------- ------- ------------ ------------ (IN THOUSANDS) Cash flows from operating activities: Net increase in net assets resulting from operations................. $ 63,060 $ 7,306 $ 1,714 $ 5,088 $ 7,096 $(22,960) $ 61,304 Adjustments: Net unrealized (gains) losses................... (7,920) -- -- 711 -- -- (7,209) Depreciation and amortization............. 331 -- -- -- 119 -- 450 Amortization of loan discounts and fees....... (7,362) (314) (666) (505) (1,957) -- (10,804) Deferred income taxes...... 1,087 -- -- -- -- -- 1,087 Minority interests......... -- -- -- -- 1,231 -- 1,231 Amortization of deferred financing costs.......... -- -- -- -- 957 -- 957 Changes in net assets and liabilities.............. 656 3,475 658 (2,835) 5,254 4,716 11,924 --------- ------- ------- ------- ------- -------- -------- Net cash provided by operating activities... 49,852 10,467 1,706 2,459 12,700 (18,244) 58,940 --------- ------- ------- ------- ------- -------- -------- Cash flows from investing activities: Investments in small business concerns................... (284,563) (20,949) (257) (49,231) (9,942) -- (364,942) Collections of investment principal.................. 143,470 26,396 12,544 8,117 42,478 -- 233,005 Proceeds from the sale of loans...................... 10,546 -- -- 43,366 -- -- 53,912 Net (purchase) redemption of U.S. government securities................. -- 254 (10,555) -- -- -- (10,301) Collections (advances) under intercompany notes......... (990) 1,500 -- (10) (500) -- -- Collections of notes receivable from sale of common stock............... 6,534 -- -- -- -- -- 6,534 Other investing activities... (182) -- -- -- -- -- (182) --------- ------- ------- ------- ------- -------- -------- Net cash provided by (used in) investing activities............. (125,185) 7,201 1,732 2,242 32,036 -- (81,974) --------- ------- ------- ------- ------- -------- -------- Cash flows from financing activities: Sale of common stock......... 8,615 -- -- -- -- -- 8,615 Purchase of common stock of subsidiaries............... (15,528) -- -- -- 15,528 -- -- Common dividends and distributions paid......... (58,194) -- -- -- -- -- (58,194) Dividends paid to parent company.................... -- (6,321) (5,067) (5,995) (861) 18,244 -- Preferred stock dividends.... -- -- (220) -- -- -- (220) Net borrowings under (payments on) debentures and notes payable.......... 134,519 (5,000) (2,000) -- (48,596) -- 78,923 Net borrowings under revolving lines of credit..................... (9,144) -- -- 2,887 -- -- (6,257) Net payments on government securities available for sale....................... -- -- -- -- -- -- -- Other financing activities... 10,800 -- -- -- (12,037) -- (1,237) --------- ------- ------- ------- ------- -------- -------- Net cash provided by (used in) financing activities............. 71,068 (11,321) (7,287) (3,108) (45,966) 18,244 21,630 --------- ------- ------- ------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents........... (4,265) 6,347 (3,849) 1,593 (1,230) -- (1,404) --------- ------- ------- ------- ------- -------- -------- Cash and cash equivalents at beginning of year.............. 30,223 19,677 20,247 -- 1,694 -- 71,841 --------- ------- ------- ------- ------- -------- -------- Cash and cash equivalents at end of year........................ $ 25,958 $26,024 $16,398 $ 1,593 $ 464 $ -- $ 70,437 ========= ======= ======= ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-32 98 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Allied Capital Corporation and Subsidiaries: We have audited the consolidated balance sheets of Allied Capital Corporation and subsidiaries as of December 31, 1997 and 1996, including the consolidated statement of investments as of December 31, 1997, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements and supplementary consolidating financial information referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary consolidating financial information referred to below 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. These procedures included the confirmation and physical counts of investments. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations, changes in net assets and cash flows for each of the three years in the period then ended in conformity with generally accepted accounting principles. As discussed in Note 3, the consolidated financial statements include investments valued at $697,021,000 as of December 31, 1997 and $607,368,000 as of December 31, 1996, (86 percent and 85 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 investments and have inspected the underlying documentation, and in the circumstances we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, the board of directors' estimate of values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary consolidating balance sheet and related consolidating statements of operations and cash flows are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Anderson LLP Vienna, Virginia February 20, 1998 F-33 99 SUBJECT TO COMPLETION MAY , 1998. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. ALLIED CAPITAL CORPORATION STATEMENT OF ADDITIONAL INFORMATION MAY , 1998 This Statement of Additional Information ("SAI") is not a prospectus, and should be read in conjunction with the Prospectus dated May , 1998 relating to this offering (the "Prospectus"). A copy of the Prospectus may be obtained by calling Allied Capital Corporation at 1-888-818-5298 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 LOCATION STATEMENT OF RELATED OF ADDITIONAL DISCLOSURE IN INFORMATION THE PROSPECTUS ------------- -------------- General Information and History............................. B-2 1;10;30 Investment Objective and Policies........................... B-2 1;10;30 Management.................................................. B-2 45 Compensation of Executive Officers and Directors....... B-2 47 Compensation of Directors.............................. B-4 47 Stock Option Awards.................................... B-4 47 Cut-Off Award and Formula Award........................ B-5 48 Committees of the Board of Directors................... B-6 N/A Control Persons and Principal Holders of Securities......... B-6 N/A Investment Advisory Services................................ B-8 45 Safekeeping, Transfer and Dividend Paying Agent and Registrar................................................. B-8 59 Accounting Services......................................... B-8 59 Brokerage Allocation and Other Practices.................... B-8 N/A Tax Status.................................................. B-9 49
B-1 100 GENERAL INFORMATION AND HISTORY This SAI contains information with respect to Allied Capital Corporation (the "Company"). The Company changed its name from "Allied Capital Lending Corporation" to "Allied Capital Corporation,"effective upon the Merger, which was consummated on December 31, 1997. The Company changed its name from "Allied Lending Corporation" to "Allied Capital Lending Corporation" in September 1993 in anticipation of its initial public offering in November 1993. The Company is a registered investment adviser. INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Company is to achieve current income and capital gains. The Company seeks to achieve its investment objective by lending to and investing primarily in private, growing businesses in a variety of industries and in diverse geographic locations primarily in the United States. The Company's lending activities are organized in three areas: mezzanine finance, commercial real estate finance and 7(a) lending. ACC's investment portfolio, resulting from the merger of the portfolios and businesses of Allied I, Allied II, Allied Commercial and Allied Lending, consists of small senior loans, small and medium-sized subordinated loans with equity features, and small and medium-sized commercial mortgage loans. At March 31, 1998, ACC's investment portfolio totaled $564.5 million. A discussion of the selected financial data, supplementary financial information and management's discussion and analysis of financial condition and results of operations is included in the Prospectus. In addition to its core lending business, the Company also provides advisory services to private investment funds. MANAGEMENT COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS Under Commission rules applicable to BDCs, the Company is required to set forth certain information regarding the compensation of certain of its executive officers and directors. Prior to the Merger, the Company had no employees and did not pay any cash compensation to any of its officers (other than directors' fees to those of its officers who also were directors). All of the Company's officers and employees were employed by Advisers, which paid all of their cash compensation. The information regarding compensation of the executive officers of the Company contained in this SAI includes the compensation paid by Advisers and the other Predecessor Companies. The following table sets forth compensation paid by the Predecessor Companies in all capacities during the year ended December 31, 1997, to all the directors and the four highest paid executive officers of the Company (collectively, the "Compensated Persons"). B-2 101 COMPENSATION TABLE
AGGREGATE PENSION OR DIRECTORS FEES COMPENSATION FROM RETIREMENT BENEFITS PAID BY ALL OF THE A PREDECESSOR ACCRUED AS PART OF PREDECESSOR NAME AND POSITION COMPANY(1,2) COMPANY EXPENSES COMPANIES(6) ----------------- --------------------------- ------------------- ------------------ William L. Walton, Chairman and Chief Executive Officer..................... $765,737(3) 0 $57,000 John M. Scheurer, Managing Director..... 490,117(3) 0 18,000 Joan M. Sweeney, Managing Director...... 453,757(3) 0 9,000 G. Cabell Williams III, Managing Director.............................. 419,864(3) 0 13,000 Jon W. Barker, Director (5)............. 8,000 0 8,000 Eleanor Deane Bierbower, Director (5)... 9,000 0 9,000 Brooks H. Browne, Director.............. 16,000 0 16,000 Joseph A. Clorety III, Director (5)..... 14,500 0 14,500 Swep T. Davis, Director (5)............. 30,250(4) 0 10,000 John D. Firestone, Director............. 12,000 0 12,000 Robert V. Fleming II, Director (5)...... 12,500 0 12,500 Michael I. Gallie, Director (5)......... 16,500 0 16,500 Anthony T. Garcia, Director............. 28,500 0 28,500 Lawrence I. Hebert, Director............ 16,500 0 16,500 Arthur H. Keeney III, Director (5)...... 7,000 0 7,000 John I. Leahy, Director................. 8,500 0 8,500 Robert E. Long, Director................ 18,000 0 18,000 Robin B. Martin, Director (5)........... 10,500 0 10,500 Warren K. Montouri, Director............ 11,500 0 11,500 John D. Reilly, Director (5)............ 35,000 0 35,000 Guy T. Steuart II, Director............. 18,000 0 18,000 T. Murray Toomey, Director.............. 14,000 0 14,000 Laura W. van Roijen, Director........... 19,000 0 19,000 George C. Williams, Jr. Director, Chairman Emeritus..................... 217,325(3,4) 0 52,000 Smith T. Wood, Director (5)............. 15,500 0 15,500
- --------------- (1) All options issued under the Old Plans that were unexercised as of December 30, 1997 were canceled in connection with the Merger. See "Option Grants During 1997" table below. (2) Includes amounts paid by all the Predecessor Companies, including directors' fees. (3) For Mr. Walton, Mr. Scheurer, Ms. Sweeney and Mr. Williams III, amount includes: (i) salaries for 1997 in the amounts of $277,051, $215,588, $177,864, and $198,919, respectively; (ii) bonuses for 1997 in the amounts of $400,000, $235,000, $250,000, and $190,000, respectively; (iii) directors' fees in the amounts of $57,000, $18,000, $9,000 and $13,000, respectively; and (iv) a cash contribution in the amounts of $13,269, $21,529, $16,893, and $17,946, respectively, to the account of each under the Company's ESOP during 1997. In addition, Mr. Walton received $18,418 in consulting fees prior to his appointment as Chairman in February 1997. There were no perquisites paid by the Company in excess of the lesser of $50,000 or 10% of the Compensated Person's total salary and bonus for the year. No portion of the Formula Award has been included herein for any Compensated Person; the Formula Award, which totaled approximately $19 million in the aggregate, will be paid to all recipients in three equal installments on December 31, 1998, 1999, and 2000, and will be expensed for financial reporting purposes similarly. In addition, no portion of the Cut-Off Award has been included herein; the Cut-Off Award, which totaled $2.9 million in the aggregate, will be paid to individuals on the respective vesting date of any options under the Old Plans which were canceled in connection with the Merger. See "-- Cut-Off Award and Formula Award." No portion of the Formula Award or Cut-Off Award was expensed in 1997; each will be expensed in future years. (4) Consists of directors' fees and consulting fees paid by the relevant Predecessor Company. (5) Director's term expired at the Meeting, and such director was not nominated for re-election. (6) Consists only directors' fees paid by the Predecessor Companies during 1997. Such fees are also included in the column titled "Aggregate Compensation from a Predecessor Company." B-3 102 COMPENSATION OF DIRECTORS During 1997, each director received a fee of $1,000 for each meeting of the board of directors of the Predecessor Company or Companies for which he or she served as a director in 1997 or any separate committee meeting attended, and $500 for each committee meeting attended on the same day as a board of directors meeting. In addition, the directors of Allied Commercial each received an annual retainer of $12,000; the Company does not currently pay any such retainer. In connection with the Merger, each of the Predecessor Companies' stock option plans were canceled, and any unexercised or unvested stock options previously granted to directors were canceled at the end of 1997. Directors are eligible for stock option awards under the Company's current stock option plan, provided that the Commission grants exemptive relief to permit such awards. No grants have been made to directors under the Company's current stock option plan. See "-- Stock Option Awards" and "Management -- Compensation Plans -- Stock Option Plan" in the Prospectus. STOCK OPTION AWARDS Prior to the Merger, each of the Predecessor Companies maintained a stock option plan (the "Old Plans"). In connection with the Merger, the Old Plans were terminated, and the Company adopted a new stock option plan (the "New Plan") effective January 1, 1998. Therefore, the information contained in this SAI regarding stock option awards to directors and executive officers during 1997 represents awards made under all the Old Plans. The following table sets forth the details relating to option grants in 1997 to Compensated Persons of all the Predecessor Companies under the Old Plans, and the potential realizable value of each grant, as prescribed to be calculated by the Commission. As discussed below under "Formula Award and Cut-Off Award," upon the consummation of the Merger, each Old Plan was terminated, and all unexercised or unvested stock options under the Old Plans were canceled. After the consummation of the Merger, the Company adopted the New Plan for directors and officers. See "Management -- Compensation Plans -- Stock Option Plan" in the Prospectus. OPTION GRANTS DURING 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT RATES OF 1997 SECURITIES OF TOTAL EXERCISE STOCK APPRECIATION OPTIONS UNDERLYING OPTIONS PRICE OVER 10-YEAR TERM(2) CANCELED OPTIONS GRANTED PER EXPIRATION ----------------------- UPON NAME GRANTED (1) IN 1997 SHARE DATE 5% 10% MERGER(1) ---- ----------- -------- -------- ---------- -- --- --------- William L. Walton............. 150,000(3) 49.1% $15.33 5/2/07 $1,445,672 $3,663,615 112,500 100,000(4) 28.9% 18.25 5/2/07 1,147,733 2,908,580 75,000 125,000(5) 40.3% 23.13 5/12/07 1,817,899 4,606,912 93,750 200,000(6) 93.8% 4.65 5/2/07 536,005 1,404,368 150,000 100,000(7) 100% 15.13 5/9/07 951,203 2,410,535 75,000 John M. Scheurer.............. 24,996(5) 8.1% $23.75 6/24/07 $ 373,346 $ 946,133 19,996 Joan M. Sweeney............... 15,468(3) 5.1% $15.88 5/21/07 $ 154,428 $ 391,351 9,169 22,111(4) 6.4% 21.00 5/21/07 292,015 740,024 17,350 8,332(5) 2.7% 23.75 6/24/07 124,449 315,378 7,507 G. Cabell Williams III........ 25,680(4) 7.4% $21.00 5/21/07 $ 339,150 $ 859,473 21,496 4,166(5) 1.3% 23.75 6/24/07 62,224 157,689 4,166 George C. Williams, Jr. ...... 30,000(3) 9.8% $15.88 5/21/07 $ 299,511 $ 759,020 22,500 30,000(4) 8.7% 21.00 5/21/07 396,204 1,004,058 22,500 Swep T. Davis................. 13,333(6) 6.2% $ 5.33 3/19/07 $ 44,650 $ 113,153 --
- --------------- (1) All unvested and unexercised options under the Old Plans were canceled in connection with the Merger, including those granted in 1997. (2) Potential realizable value is calculated on 1997 options granted, and is net of the option exercise price but before any tax liabilities that may be incurred. These amounts represent certain assumed rates of appreciation, as mandated by the Commission. Actual gains, if any, or stock option exercises are dependent on the future performance of the shares, overall market conditions, and the continued employment by the Company of the option holder. The potential realizable value will not necessarily be realized. B-4 103 (3) Options granted under Allied I's Old Plan. (4) Options granted under Allied II's Old Plan. (5) Options granted under Allied Commercial's Old Plan. (6) Options granted under Advisers' Old Plan. (7) Options granted under Allied Lending's Old Plan. CUT-OFF AWARD AND FORMULA AWARD As discussed in the Prospectus, prior to the Merger options had been granted under the Old Plans to various employees of Advisers, who were also officers of the Predecessor Companies. In preparation for the Merger, the Compensation Committee of Advisers, in conjunction with the Compensation Committee of the other Predecessor Companies, determined that the five Old Plans should be terminated upon the Merger, so that the new merged Company would be able to develop a new plan that would incent all officers and directors with a single equity security. The existence of the Old Plans had resulted in certain inequities in option grants among the various officers of the Predecessor Companies simply because of the differences in the underlying equity securities. To balance stock option awards among Advisers' employees, and to account for the deviations caused by the existence of five plans by five different publicly traded stocks, Advisers developed two special awards to be granted in lieu of options under the Old Plans that would be foregone upon the Merger and the cancellation of the Old Plans. Cut-Off Award. The first award established a cut-off dollar amount as of the date of the announcement of the Merger (August 14, 1997) that would be computed for all outstanding, but unvested options that would be canceled as of the date of the Merger (the "Cut-Off Award"). The Cut-Off Award was designed to cap the appreciated value in unvested options as of the Merger announcement date in order to set the foundation to balance option awards upon the Merger. The Cut-Off Award, in the aggregate, was computed to be $2.9 million, and is equal to the difference between the market price of the shares of stock underlying the canceled options under the Old Plans at August 14, 1997, less the exercise prices of the options. The Cut-Off Award will be payable for each canceled option as the canceled options would have vested and will vest automatically in the event of a change of control. The Cut-Off Award will only be payable if the award recipient is employed by the Company on the future vesting date. The following table indicates the Cut-Off Award for each Compensated Person, and the related vesting schedule.
CUT-OFF AWARD RECIPIENT 1998 1999 2000 2001 2002 THEREAFTER ----------------------- -------- -------- -------- ------- ------- ---------- William L. Walton......................... $170,157 $170,157 $170,157 $ 0 $ 0 $ 0 John M. Scheurer.......................... 29,248 29,248 29,248 29,248 27,998 142,770 Joan M. Sweeney........................... 38,964 37,678 36,602 2,026 0 0 G. Cabell Williams III.................... 88,257 46,803 39,678 21,152 18,916 0 George C. Williams, Jr.................... 32,685 4,687 52,373 0 0 0
Formula Award. The second award (the "Formula Award") was designed to compensate officers from the point when their unvested options would cease to appreciate in value pursuant to the Cut-Off Award (i.e., August 14, 1997) up until the time in which they would be able to receive option awards in the Company after the Merger became effective. In the aggregate, the Formula Award equaled six percent (6%) of the difference between the combined aggregate market capitalizations of the Predecessor Companies as of the close of the market on December 30, 1997, and the combined aggregate market capitalizations of the Predecessor Companies on August 14, 1997. In total, the combined aggregate market capitalization of the Predecessor Companies increased by $319 million from August 14, 1997 to December 30, 1997, and the aggregate Formula Award was approximately $19 million. Adviser's Compensation Committee designed the Formula Award as a long-term incentive compensation program to be a replacement for canceled stock options and to balance share ownership among key officers for past and prospective service. The terms of the Formula Award require that the award be contributed to the Company's deferred compensation plan, and used to purchase shares of the Company in the open market. B-5 104 The Formula Award vests and accrues equally over a three-year period, on the anniversary of the Merger date (December 31, 1997), and vests automatically in the event of a change of control of the Company. If an officer terminates employment with the Company prior to the vesting of any part of the Formula Award, that amount will be forfeited to the Company. Assuming all officers meet the vesting requirement, the Company will accrue the Formula Award over the three-year period in equal amounts of approximately $6.4 million. The following table indicates the Formula Award for each Compensated Person, and the related vesting schedule.
FORMULA AWARD RECIPIENT 1998 1999 2000 ----------------------- ---- ---- ---- William L. Walton.......................................... $1,472,451 $1,472,451 $1,472,451 John M. Scheurer........................................... 400,228 400,228 400,228 Joan M. Sweeney............................................ 862,761 862,761 862,761 G. Cabell Williams III..................................... 400,664 400,664 400,664 George C. Williams, Jr..................................... 601,068 601,068 601,068
COMMITTEES OF THE BOARD OF DIRECTORS The board of directors of the Company has established an Executive Committee, an Audit Committee, a Nominating Committee and a Compensation Committee. Each of the Predecessor Companies maintained similar committees (as appropriate) prior to the consummation of the Merger. The Executive Committee of the Company has 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 where action by the board of directors is required by statute, an order of the Securities and Exchange Commission (the "Commission") or the Company's Charter or bylaws. Following the Meeting, it is anticipated that the Executive Committee of the Company will consist of Messrs. Walton, Leahy, Long, Montouri, and Williams. The Executive Committee met twice during 1997. The Audit Committee of the Company recommends the selection of independent public accountants for the Company, reviews with such independent public accountants the planning, scope and results of their audit of the Company's financial statements and the fees for services performed, reviews with the independent public accountants the adequacy of internal control systems, reviews the annual financial statements of the Company and receives audit reports and financial statements of the Company. Following the Meeting, it is anticipated that the Audit Committee of the Company will consist of Messrs. Browne, Leahy and Steuart. The Audit Committee met four times during 1997. The Compensation Committee of the Company determines the compensation for the executive officers of the Company and the amount of salary and bonus to be included in the compensation package for each of the Company's officers and employees. In addition, the Compensation Committee approves stock option grants for officers of the Company under the Company's Stock Option Plan. Following the Meeting, it is anticipated that the Compensation Committee of the Company will consist of Messrs. Browne, Long, Firestone and Garcia. The Compensation Committee met three times during 1997, including one joint committee meeting with the Compensation Committees of the Acquired Companies. The Nominating Committee of the Company recommends candidates for election as directors. Following the Meeting, it is anticipated that the Nominating Committee of the Company will consist of Messrs. Walton, Herbert, Toomey and Steuart, and Ms. van Roijen. The Nominating Committee did not meet in 1997 since it was formed late in 1997. The Nominating Committee met on March 3, 1998. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of April 30, 1998, there were no persons that owned 25% or more of the Company's outstanding voting securities, and no person would be deemed to control the Company, as such term is defined in the 1940 Act. The following table sets forth, at April 30, 1998, the beneficial ownership of each current director, the Chief Executive Officer, the Company's executive officers, and the executive officers and directors as a group. B-6 105 At this time the Company is unaware of any shareholder owning 5% or more of the outstanding shares of Common Stock of the Company. Unless otherwise indicated, the Company believes that each beneficial owner set forth in the table has sole voting and investment power.
NAME OF NUMBER OF SHARES PERCENTAGE OF BENEFICIAL OWNER OWNED BENEFICIALLY CLASS (1) - ------------------------------------------------------------ ------------------ ------------- DIRECTORS: William L. Walton........................................... 589,790(2, 3) 1.1% Jon W. Barker(9)............................................ 449 * Eleanor Deane Bierbower(9).................................. 7,329 * Brooks H. Browne............................................ 38,883 * Joseph A. Clorety III(9).................................... 5,707 * Swep T. Davis(9)............................................ 4,133 * John D. Firestone........................................... 16,231 * Robert V. Fleming II(9)..................................... 1,940 * Michael I. Gallie(9)........................................ 7,345 * Anthony T. Garcia........................................... 52,507 * Lawrence I. Hebert.......................................... 16,800 * Arthur H. Keeney III(9)..................................... 177 * John I. Leahy............................................... 16,318 * Robert E. Long.............................................. 12,777 * Robin B. Martin(9).......................................... 500(7) * Warren K. Montouri.......................................... 196,182 * John D. Reilly(9)........................................... 41,006(4) * Guy T. Steuart II........................................... 317,065(5) * T. Murray Toomey, Esq....................................... 33,265(6) * Laura W. van Roijen......................................... 28,302 * George C. Williams, Jr...................................... 342,978 * Smith T. Wood(9)............................................ 14,627 * EXECUTIVE OFFICERS: Jon A. DeLuca............................................... 108,058(2) * John M. Scheurer............................................ 289,903(2) * Joan M. Sweeney............................................. 221,055(2) * G. Cabell Williams III...................................... 680,280(2, 3) 1.3% All directors and executive officers as a group (26 in number)................................................... 2,719,462(8) 5.2%
- --------------- * Less than 1% (1) Based on a total of 52,121,610 shares of the Company's common stock issued and outstanding on April 30, 1998 and shares of the Company's common stock issuable upon the exercise of immediately exercisable stock options held by each individual executive officer. At this time, no options have been granted to non-officer directors. (2) Share ownership includes 109,865, 11,062, 53,212, and 37,234 shares which Mr. Walton, Mr. DeLuca, Mr. Scheurer, Ms. Sweeney, and Mr. Williams III, respectively, have options to purchase that are exercisable within 60 days of April 30, 1998. Share ownership also includes 459, 4,616, 18,432, 7,381, and 59,499 shares, respectively, for Mr. Walton, Mr. DeLuca, Mr. Scheurer, Ms. Sweeney and Mr. Williams III, respectively, allocated to their respective ESOP accounts through December 31, 1997. (3) Includes 293,716 shares held by the ESOP, of which Messrs. Walton and Williams III are co-trustees. Participants in the ESOP may direct the voting of these shares; however, if a participant does not direct the voting, the co-trustees of the ESOP will vote the shares on behalf of the participants. Messrs. Walton and Williams III disclaim beneficial ownership of such shares. As of December 31, 1997, all shares held in the ESOP had been allocated to participants' accounts. (4) Includes 3,200 shares which are held in an irrevocable trust for the benefit of Mr. Reilly's two minor children for which he is not the trustee and for which he disclaims beneficial ownership. (5) Includes 276,576 shares held by a corporation for which Mr. Steuart serves as an executive officer. (6) Shares are held by a trust for the benefit of Mr. Toomey and his wife. B-7 106 (7) Shares are held by a trust for the benefit of Mr. Martin. (8) Includes a total of 304,974 shares underlying stock options exercisable within 60 days of March 27, 1998, which are assumed to be outstanding for the purpose of calculating the group's percentage ownership, and 433,095 shares held by the ESOP. (9) Director's term expired at the Meeting, and such director was not nominated for re-election. INVESTMENT ADVISORY SERVICES The Company is internally managed and therefore has not entered into any advisory agreement with, nor pays advisory fees to, an outside investment adviser. The Company is a registered investment adviser under the Advisers Act and provides advisory services to other entities. The Company currently has 43 investment and other professionals, as well as 47 other employees, that manage the investments of the Company as well as the investments of other managed entities. All investments of the Company must be approved by the Company's investment committee, which is composed of senior investment professionals of the Company. Additionally, the board of directors of the Company reviews and approves or ratifies all loans and other investments made by the Company. See "Management" in the Prospectus. SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR The investments of the Company and its subsidiaries are held in safekeeping by Riggs Bank N.A. ("Riggs") at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove Village, Illinois 60007, serves as the trustee and custodian with respect to assets of the Company held for securitization purposes. 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. ACCOUNTING SERVICES Arthur Andersen LLP ("Andersen") has served as the independent accountant to the Company since December 31, 1997. Prior to the year ended December 31, 1997, Allied Lending's financial statements were audited by Matthews, Carter and Boyce, P.C., or its predecessor ("Matthews"). On December 12, 1997, Matthews resigned, effective upon the consummation of the Merger, and Andersen was engaged and continues as the independent accountants of the Company. The decision to change accountants was recommended by the Company's Audit Committee and was approved by the board of directors of the Company. For the year ended December 31, 1996, and up to the date of resignation of Matthews, there were no disagreements with Matthews on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Matthews, would have caused it to make reference to the subject matter of the disagreement in connection with its report. The independent accountants' report on the 1996 financial statements did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. Each of Andersen and Matthews has advised the Company that neither it nor any present member or associate of the relevant firm has any financial interest, direct or indirect, in the Company or 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 in the normal course of business. B-8 107 TAX STATUS The following discussion is a general summary of the material federal income tax considerations applicable to the Company and to an investment in the Common Stock and does not purport to be a complete description of the income tax considerations applicable to such an investment. The discussion is based upon the Code, Treasury Regulations thereunder, and administrative and judicial interpretations thereof, each as of the date hereof, all of which are subject to change. Prospective shareholders should consult their own tax advisors with respect to tax considerations which pertain to their purchase of Common Stock. This summary assumes that the investors in the Company hold shares as capital assets. This summary does not discuss all aspects of federal income taxation relevant to holders of the Common Stock in light of particular circumstances, or to certain types of holders subject to special treatment under federal income tax laws, including foreign taxpayers, dealers in securities and financial institutions. This summary does not discuss any aspects of foreign, state or local tax laws. The Company has elected for each taxable year to be treated as a "regulated investment company" or "RIC" under Subchapter M of the Code and intends to continue 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% 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. 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 RICs. 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 such Company will not incur income and excise taxes on its earnings. In order to qualify as a RIC for federal income tax purposes, the Company must, among other things: (a) continue to qualify as a BDC under the 1940 Act, (b) 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"); 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 or securities of other RICs) 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 or related trades or businesses. The failure of one or more of the Company's subsidiaries to continue to qualify as RICs could adversely affect the Company's ability to satisfy the foregoing diversification requirements. 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, the Company 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 relevant entity in the same taxable year and to make distributions accordingly. Although it does not presently expect to do so, the Company is authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, the Company is not 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 RIC, including the diversification requirements. If the Company disposes of assets in order to meet B-9 108 distribution requirements, the Company 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 RIC 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 is explained below, if the Company qualifies as a RIC, a portion of its distributions may be characterized as long-term capital gain in the hands of stockholders. Other than distributions properly designated as "capital gain dividends" as is described below, dividends to stockholders of the investment company taxable income of the Company will be taxable as ordinary income to stockholders to the extent of the Company's current or accumulated earnings and profits, whether paid in cash or reinvested in additional shares. 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. Distributions in excess of the Company's earnings and profits will first reduce the adjusted tax basis of the stockholder's shares and, after the adjusted basis is reduced to zero, will constitute capital gains to the stockholder. For a summary of the tax rates applicable to capital gains, including capital gains dividends, see discussion below. 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, or claim or refund for the tax paid thereon by the Company. The amount of the deemed distribution net of such tax will be added to the stockholder's cost basis for his or her shares. Since the Company expects to pay tax on net capital gain at its regular corporate capital gain tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on net capital gain, the amount of tax that individual stockholders will be treated as having paid will exceed the amount of tax that such stockholders 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 or her shares. A stockholder may recognize taxable gain or loss if he or she sells or exchanges his or her 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. This capital gain or loss normally will be treated as a long-term capital gain or loss if the stockholder has held his or her 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. It is unclear how any such long-term capital loss offsets capital gains taxable at different rates. All or a portion of any loss realized upon a taxable disposition of shares of the Company may be disallowed if other shares of the Company are purchased (under a DRIP Plan or otherwise) within 30 days before or after the disposition. B-10 109 In general, net capital gain (the excess of net long-term capital gain over net short-term capital loss) of non-corporate taxpayers is currently subject to a maximum federal income tax rate of 28% (subject to reduction in many situations) while other income may be taxed at rates as high as 39.6%. Capital gains derived from the disposition of assets held for more than 18 months generally are subject to federal income tax at the rate of 20%. 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 IRS that they are subject to backup withholding. Backup withholding is not an additional tax, and any amounts withheld may be credited against a stockholder's U.S. federal income tax liability. Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply to distributions to stockholders that are nonresident aliens or foreign partnerships, trusts, or corporations. Foreign investors should consult their tax advisors with respect to the possible U.S. federal, state, and local tax consequences and foreign tax consequences of an investment in the Company. The Company will send to each of its 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 IRS. Distributions may also be subject to additional state, local, and foreign taxes depending on a stockholder's particular situation. The Company's ordinary income dividends to its corporate shareholders may, if certain conditions are met, qualify for the dividends received deduction to the extent that the Company has received qualifying dividend income during the taxable year; capital gain dividends distributed by the Company are not eligible for the dividends received deduction. 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-11 110 PART C INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS 1. FINANCIAL STATEMENTS. The following financial statements of Allied Capital Corporation (the "Company" or the "Registrant") are included in this registration statement in "Part A: Information Required in a Prospectus":
PAGE ---- Consolidated Balance Sheet -- March 31, 1998 (unaudited) and as of December 31, 1997 and 1996.......................... F-1 Consolidated Statement of Operations -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and 1995.................... F-2 Consolidated Statement of Changes in Net Assets -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and 1995.......... F-3 Consolidated Statement of Cash Flows -- For the Three Months Ended March 31, 1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and 1995.................... F-4 Consolidated Statement of Investments -- March 31, 1998 (unaudited) and December 31, 1997......................... F-5 Notes to Consolidated Financial Statements.................. F-15 Report of Independent Public Accountants.................... F-33
2. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- a.1(1) Articles of Amendment and Restatement of the Articles of Incorporation. a.2(2) Articles of Merger. b.(3) Bylaws. c. Not applicable. d.* Specimen certificate of the Company's Common Stock, par value $0.0001, the rights of holders of which are defined in Exhibits a.1, a.2 and b. e.(3) Dividend Reinvestment Plan. f.1(4) Form of debenture between certain subsidiaries of ACC and the U.S. Small Business Administration. f.2* Amended and Restated Credit Agreement dated as of April 20, 1998 (the "1998 Credit Agreement") between the Company, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation, as Borrowers, each of the financial institutions initially a signatory thereto, as Lenders, and BankBoston, N.A., as disbursing agent, First Union National Bank, as syndication agent and Riggs Bank N.A., as managing agent and NationsBank of Texas, N.A., as Co-Agent. f.3(5) Note Agreement between Allied I and certain subsidiaries and Massachusetts Mutual Life Insurance Company, as amended, dated April 30, 1992. The Company has received confirmation of the assignment of Note Agreement from Allied I to the Company. f.4(6) Loan Agreement between Allied I and Overseas Private Investment Corporation, dated April 10, 1995. Letter dated December 11, 1997 evidencing assignment of Loan Agreement from Allied I to the Company. f.5(3) Amended and Restated Master Repurchase Agreement dated March 22, 1996 among Allied Commercial, BMI and Merrill Lynch Mortgage Capital Inc. Letter evidencing the assignment of this facility to the Company dated November 6, 1997. f.6(3) Master Loan & Security Agreement dated August 21, 1997 among Allied Commercial, BMI and Morgan Stanley Mortgage Capital, Inc. f.7.a* Sale and Servicing Agreement dated, as of January 1, 1998, among Allied Capital CMT, Inc., Allied Capital Commercial Mortgage Trust 1998-1 and Allied Capital Corporation and LaSalle National Bank and ABN AMRO Bank N.V.
C-1 111
EXHIBIT NUMBER DESCRIPTION - ------- ----------- f.7.b* Indenture dated as of January 1, 1998, between the Allied Capital Commercial Mortgage Trust 1998-1 and LaSalle National Bank. f.7.c* Amended and Restated Trust Agreement, dated January 1, 1998 between Allied Capital CMT, LaSalle National Bank Inc. and Wilmington Trust Company. f.7.d* Guaranty dated as of January 1, 1998 by Allied Capital Corporation. g. Not applicable. h.1+ Form of Underwriting Agreement. h.2+ Form of Agreement among International Underwriters. h.3+ Form of Agreement between U.S. and International Underwriters. h.4+ Form of International Dealer Agreement. i.1(3) Employee Stock Ownership Plan, as amended on December 31, 1997. i.2(3) Deferred Compensation Plan, as amended January 1, 1998. i.3(9) Stock Option Plan. i.4 Description of Formula Award and Cut-Off Award Arrangements. A discussion of the Formula and Cut-off Awards is set forth on page 48 of the Registration Statement. j.1* Form of Custody Agreement with Riggs Bank N.A. with respect to safekeeping. j.2* Form of Custody Agreement with LaSalle National Bank. k.1(7) Investment Management Agreement among Advisers, Mitchell Hutchins Institutional Investors Inc. and BMI, dated January 4, 1993 (the "MH Management Agreement"). Assignment of the MH Agreement from Mitchell Hutchins Institutional Investors Inc. to Siguler Guff & Company LLC on August 8, 1995. Waiver dated December 31, 1997 evidencing assignment of MH Management Agreement from Advisers to the Company. k.2(7) Agreement between the Company and Mitchell Hutchins Institutional Investors Inc., dated January 4, 1993 ("MH Agreement") Assignment of MH Agreement from Mitchell Hutchins Institutional Investors, Inc. to Siguler Guff & Company LLC on August 8, 1995. Assignment of MH Management Agreement from Advisers to the Company on December 31, 1997. Consent to assign MH Agreement to the Company. k.3(8) Lease Agreement between 1620 K Street Associates Limited Partnership and Advisers dated February 17, 1993 (the "1620 K Street Lease Agreement"). Assignment of Lease and Landlord's consent to Assignment dated January 5, 1998 evidencing assignment of the 1620 K Street Lease Agreement from Advisers to the Company. k.4(3) Form of Regional Associate Agreement. l.* Opinion of counsel and consent to its use. m. Not applicable. n.1* Consent of Arthur Andersen LLP, independent public accountants. n.2* Consent of Sutherland, Asbill & Brennan LLP (included in Exhibit l). o. Not applicable. p. Not applicable. q. Not applicable. r.* Financial Data Schedule.
- --------------- * Filed herewith. + To be filed by amendment. (1) Incorporated by reference to Exhibit 3(i) with Allied Lending's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-22832). (2) Incorporated by reference from Appendix B to the Company's registration statement on Form N-14 filed on the Company's behalf with the Commission on September 26, 1997 (File No. 333-36459). (3) Incorporated by reference to the exhibit of the same name filed with the Company's report on Form 10-K for the year ended December 31, 1997 (File No. 0-22832). (4) Incorporated by reference to Exhibit 4.2 filed with Allied I's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 811-00907).
C-2 112 (5) Incorporated by reference to Exhibit (4)(D)(i) filed with Allied I'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 Allied I's Form 8-K filed on December 9, 1993 (File No. 811-00907). (6) Incorporated by reference to Exhibit 10.2 of Allied I's Pre-Effective Amendment No. 2 filed with the registration statement on Form N-2 on January 24, 1996 (File No. 33-64629). Assignment to the Company is incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-22832). (7) Agreement incorporated by reference to the exhibit of the same name to Advisers' Report on Form 10-K for the year ended December 31, 1992. Assignment to the Company is incorporated by reference to the exhibit of the same name filed with Advisers' Report on Form 10-K for the year ended December 31, 1995. (File No. 0-18826). Waiver and consent to assign to the Company for each agreement is incorporated by reference to the exhibit of the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-22832). (8) Incorporated by reference to an exhibit of the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-22832). Incorporated by reference to the exhibit of the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-22832). (9) Incorporated by reference to Exhibit 4 of the Allied Capital Corporation Stock Option Plan registration statement on Form S-8, filed on behalf of such Plan on February 3, 1998 (File No. 333-45525).
ITEM 25. MARKETING ARRANGEMENTS The information contained under the heading "Underwriters" on pages 56-58 of the Prospectus is incorporated herein by reference. In connection with this Offering, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Common stock of a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Commission registration fee*................................ $ 50,352 NASD filing fee*............................................ $ 15,342 Nasdaq National Market Additional Listing Fee*.............. $ 17,500 Accounting fees and expenses................................ $ 75,000 Legal fees and expenses..................................... $200,000 Printing and engraving...................................... $150,000 Miscellaneous fees and expenses............................. $ 91,806 -------- Total.................................................. $600,000 ========
- --------------- * Estimated for filing purposes. All of the expenses set forth above shall be borne by the Company. ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL Direct Subsidiaries The following list sets forth each of the Company's subsidiaries, the state or country under whose laws the subsidiary is organized, and the percentage of voting securities or membership interests owned by the Company in such subsidiary: Allied Investment Corporation (Maryland).................... 100% Allied Capital Financial Corporation (Maryland)............. 100% Allied Capital SBLC Corporation (Maryland).................. 100% Allied Capital REIT, Inc. ("Allied REIT") (Maryland)........ 100% Allied Capital Beteiligungsberatung GmbH (Germany).......... 100%
Each of the Company's subsidiaries are consolidated with the Company for financial reporting purposes. C-3 113 Indirect Subsidiaries The Company indirectly controls the entities set forth below through Allied REIT. Allied REIT owns either all of the membership interests (in the case of a limited liability company, "LLC") or all of the outstanding voting stock (in the case of a corporation) of each entity. The following list sets forth each of Allied REIT's subsidiaries, the state under whose laws the subsidiary is organized, and the percentage of voting securities or membership interests owned by the Allied REIT in such subsidiary: Allied Capital Holdings LLC (Delaware)...................... 100% Allied Capital Property LLC (Delaware)...................... 100% Allied Capital Equity LLC (Delaware)........................ 100% 9586 I-25 East Frontage Road, Longmont, CO 80504 LLC (Delaware)................................................ 100% 8930 Stanford Boulevard LLC (Delaware)...................... 100% Allied Capital CMT, Inc. (Delaware)......................... 100%
Allied REIT also indirectly owns Allied Capital Commercial Mortgage Trust 1998, a Delaware LLC that is wholly owned by Allied Capital CMT, Inc. ("CMT"). Each subsidiary of Allied REIT and CMT is not required to maintain financial and other reports required under the Securities Act because each does not have a class of securities registered under the Securities Act. Other Entities Deemed to be Controlled by the Company* The Company provides investment advisory services to the certain entities and therefore may be deemed to control such entities and their respective subsidiaries. The following list sets forth each such entity and its respective subsidiaries and the state under whose laws the entity or subsidiary is organized: Allied Capital Germany Fund LLC (Delaware) Business Mortgage Investors, Inc. (Maryland) Wholly Owned Subsidiaries of Business Mortgage Investors, Inc.: BMI Holdings, Inc. (Maryland) BMI Acceptance Corporation (Maryland) BMI Funding, Inc. (Delaware) Indirect subsidiary of Business Mortgage Investors, Inc. BMI Funding LLC (Delaware), of which BMI Funding, Inc. owns all membership interests - --------------- * By so including these entities herein, the Registrant does not concede that it controls such entities. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following table sets forth the number of record holders of the Company's Common Stock at March 31, 1998.
NUMBER OF TITLE OF CLASS RECORD HOLDERS -------------- -------------- Common Stock, $0.0001 par value............................. 4,500
ITEM 29. INDEMNIFICATION The Annotated Code of Maryland, Corporations and Associations (the "Maryland Law"), 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, 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. C-4 114 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 or she 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 (with such power to indemnify officers and directors limited to the scope provided for in Section 2-418 as currently in force). The Company's Bylaws, however, provide that the Company may not indemnify any director or officer against liability to the Company or its security holders to which he or she might otherwise be subject by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her 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 Company, 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 $5,000,000, subject to a $250,000 retention and the other terms thereof. The Agreement and Plan of Merger (the "Merger Agreement") by and among Advisers, Allied I, Allied II, Allied Lending and Allied Commercial provides that, from and after consummation of the Merger the Company shall indemnify any person who at the date of the Merger Agreement, or had been at any time prior to such date or who becomes prior to the effective time of the Merger, an officer or director of Allied I, Allied II, Allied Commercial or Advisers, or any of their respective subsidiaries, from any and all liabilities resulting from their acts and omissions prior to the effective time of the Merger to the full extent permitted by Maryland Law and the 1940 Act, including but not limited to acts and omissions arising out of or pertaining to the Merger, and shall maintain in effect for at least 72 months directors' and officers' liability insurance policies with respect to matters occurring prior to the effective time of the Merger. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Not applicable. C-5 115 ITEM 31. LOCATION OF ACCOUNTS AND RECORDS The Company maintains at its principal office physical possession of each account, book or other document required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder. ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS The Registrant hereby undertakes: (a) to suspend the offering of shares until the Prospectus is amended if subsequent to the effective date of this Registration Statement, its net asset value declines more than ten percent from its net asset value as of the effective date of this Registration Statement; (b) that, for the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (c) that, for the purpose of determining any liability under the Securities Act of 1933, each post effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. (d) 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. Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions of its Charter and Bylaws permitting indemnification, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant 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 Securities Act and will be governed by the final adjudication of such issue. C-6 116 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, in the District of Columbia, on the 4th day of May, 1998. ALLIED CAPITAL CORPORATION By: /s/ William L. Walton ---------------------------------------- William L. Walton Chief Executive Officer and President KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below hereby constitutes and appoints William L. Walton and Joan M. Sweeney and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ William L. Walton Chairman of the Board, Chief Executive May 4, 1998 - --------------------------------------------- Officer, and President William L. Walton /s/ Jon W. Barker Director May 4, 1998 - --------------------------------------------- Jon W. Barker /s/ Eleanor Deane Bierbower Director May 4, 1998 - --------------------------------------------- Eleanor Deane Bierbower /s/ Brooks H. Browne Director May 4, 1998 - --------------------------------------------- Brooks H. Browne /s/ Joseph A. Clorety III Director May 4, 1998 - --------------------------------------------- Joseph A. Clorety III /s/ Swep T. Davis Director May 4, 1998 - --------------------------------------------- Swep T. Davis /s/ John D. Firestone Director May 4, 1998 - --------------------------------------------- John D. Firestone /s/ Robert V. Fleming II Director May 4, 1998 - --------------------------------------------- Robert V. Fleming II /s/ Michael I. Gallie Director May 4, 1998 - --------------------------------------------- Michael I. Gallie
117
SIGNATURE TITLE DATE --------- ----- ---- /s/ Anthony T. Garcia Director May 4, 1998 - --------------------------------------------- Anthony T. Garcia /s/ Lawrence I. Hebert Director May 4, 1998 - --------------------------------------------- Lawrence I. Hebert /s/ Arthur H. Keeney III Director May 4, 1998 - --------------------------------------------- Arthur H. Keeney III /s/ John I. Leahy Director May 4, 1998 - --------------------------------------------- John I. Leahy /s/ Robert E. Long Director May 4, 1998 - --------------------------------------------- Robert E. Long /s/ Robin B. Martin Director May 4, 1998 - --------------------------------------------- Robin B. Martin /s/ Warren K. Montouri Director May 4, 1998 - --------------------------------------------- Warren K. Montouri /s/ John D. Reilly Director May 4, 1998 - --------------------------------------------- John D. Reilly /s/ Guy T. Steuart II Director May 4, 1998 - --------------------------------------------- Guy T. Steuart II /s/ T. Murray Toomey Director May 4, 1998 - --------------------------------------------- T. Murray Toomey /s/ Laura W. van Roijen Director May 4, 1998 - --------------------------------------------- Laura W. van Roijen /s/ George C. Williams Director May 4, 1998 - --------------------------------------------- George C. Williams /s/ Smith T. Wood Director May 4, 1998 - --------------------------------------------- Smith T. Wood /s/ Jon A. DeLuca Principal and Chief Financial Officer May 4, 1998 - --------------------------------------------- (Principal Financial and Accounting Jon A. DeLuca Officer)
118 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ---------- ----------- 99.2d. Specimen certificate of the Company's common stock, par value $0.0001, the rights of holders of which are defined in Exhibits a.1, a.2 and b. 99.2f.2 Amended and Restated Credit Agreement dated as of April 20, 1998 (the "1998 Credit Agreement") between the Company, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation, as Borrowers, each of the financial institutions initially a signatory thereto, as Lenders, and BankBoston, N.A., as disbursing agent, First Union National Bank, as syndication agent and Riggs Bank N.A., as managing agent. 99.2f.7.a Sale and Servicing Agreement dated, as of January 1, 1998, among Allied Capital CMT, Inc., Allied Capital Commercial Mortgage Trust 1998-1 and Allied Capital Corporation and LaSalle National Bank and ABN AMRO Bank N.V. 99.2f.7.b Indenture dated as of January 1, 1998, between the Allied Capital Commercial Mortgage Trust 1998-1 and LaSalle National Bank. 99.2f.7.c Amended and Restated Trust Agreement, dated January 1, 1998 between Allied Capital CMT, Inc., LaSalle National Bank, and Wilmington Trust Company. 99.2f.7.d Guaranty dated as of January 1, 1998 by Allied Capital Corporation. 99.2j.1 Form of Custody Agreement with Riggs Bank N.A.with respect to safekeeping 99.2j.2 Form of Custody Agreement with LaSalle National Bank. 99.2l. Opinion of counsel and consent to its use. 99.2n.1 Consent of Arthur Andersen LLP, independent public accountants. 27 Financial Data Schedule.
EX-99.2D 2 SPECIMAN CERTIFICATE OF THE COMPANY'S COMMON STOCK 1 NUMBER EXHIBIT D SB COMMON [ALLIED CAPITAL LOGO] CUSIP 01903Q 10 8 INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.0001 EACH OF THE COMMON STOCK OF ALLIED CAPITAL CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. CERTIFICATE OF STOCK SPECIMEN Dated: /s/ Tricia Benz Daniels /s/ William L. Walton [SEAL] Secretary Chairman of the Board & Chief Executive Officer Countersigned And Registered: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NEW YORK) TRANSFER AGENT AND REGISTRAR BY Authorized Signature 2 The following abbreviations, when used in the inscription on the face on this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM--as tenants in common UNIF GIFT MIN ACT--.........Custodian............ TEN ENT--as tenants by the entireties (Cust) (Minor) JT TEN--as joint tenants with right of survivorship under Uniform Gifts to Minors Act................ and not as tenants in common (State)
Additional abbreviations may also be used though not in the above list. For value received, ______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------- - -------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- shares - ------------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ------------------------------------------------------------------------ to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ------------------------- NOTICE: -------------------------------------------------------------------- THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. The Board of Directors of the Corporation may classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms or conditions of redemption or other rights of such shares of stock. In that event, the Corporation will furnish to any stockholder, on request and without charge, a full statement of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue and, in the case of any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. EX-99.2F.2 3 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT F.2 ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT Dated as of April 20, 1998 by and among ALLIED CAPITAL CORPORATION, ALLIED CAPITAL REIT, INC. and ALLIED CAPITAL SBLC CORPORATION as Borrowers, THE FINANCIAL INSTITUTIONS PARTY HERETO AND THEIR ASSIGNEES UNDER SECTION 12.5(a), as Lenders, RIGGS BANK N.A., as Managing Agent, BANKBOSTON, N.A., as Disbursing Agent, FIRST UNION NATIONAL BANK, as Syndication Agent, and NATIONSBANK OF TEXAS, N.A., as Co-Agent ================================================================================ 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2. GENERAL; REFERENCES TO TIMES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 ARTICLE 2 CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 2.1. LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 SECTION 2.2. RATES AND PAYMENT OF INTEREST ON LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 2.3. NUMBER OF INTEREST PERIODS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 2.4. REPAYMENT OF LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 2.5. PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 2.6. CONTINUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 SECTION 2.7. CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 2.8. NOTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SECTION 2.9. VOLUNTARY REDUCTIONS OF THE COMMITMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 ARTICLE 3 PAYMENTS, FEES AND OTHER GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 3.1. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 3.2. PRO RATA TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 3.3. SHARING OF PAYMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 SECTION 3.4. SEVERAL OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 SECTION 3.5. MINIMUM AMOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 SECTION 3.6. FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 SECTION 3.7. COMPUTATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 SECTION 3.8. USURY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 3.9. AGREEMENT REGARDING INTEREST AND CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 3.10. STATEMENTS OF ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 3.11. DEFAULTING LENDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 SECTION 3.12. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 ARTICLE 4 YIELD PROTECTION, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 SECTION 4.1. ADDITIONAL COSTS; CAPITAL ADEQUACY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 SECTION 4.2. SUSPENSION OF LIBOR LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 SECTION 4.3. ILLEGALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 SECTION 4.4. COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 4.5. TREATMENT OF AFFECTED LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 4.6. CHANGE OF LENDING OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 4.7. ASSUMPTIONS CONCERNING FUNDING OF LIBOR LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 ARTICLE 5 CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 5.1. INITIAL CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 5.2. CONDITIONS PRECEDENT TO ALL LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 ARTICLE 6 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 6.1. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 SECTION 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 ARTICLE 7 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 7.1. PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 7.2. COMPLIANCE WITH APPLICABLE LAW AND MATERIAL CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 SECTION 7.3. MAINTENANCE OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 SECTION 7.4. CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
-i- 3 SECTION 7.5. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 SECTION 7.6. PAYMENT OF TAXES AND CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 SECTION 7.7. VISITS AND INSPECTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 SECTION 7.8. USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 SECTION 7.9. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 SECTION 7.10. BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 SECTION 7.11. STATUS OF RIC AND BDC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 SECTION 7.12. ERISA EXEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 7.13. FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 7.14. BORROWING SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 7.15. YEAR 2000 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 ARTICLE 8 INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 8.1. QUARTERLY FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 SECTION 8.2. YEAR-END STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 SECTION 8.3. COMPLIANCE CERTIFICATE; BORROWING BASE CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 SECTION 8.4. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 ARTICLE 9 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 SECTION 9.1. FINANCIAL COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 SECTION 9.2. INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 SECTION 9.3. CONTINGENT OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 SECTION 9.4. INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 SECTION 9.5. LIENS; AGREEMENTS REGARDING LIENS; OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 SECTION 9.6. DISTRIBUTIONS TO SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 SECTION 9.7. MERGER, CONSOLIDATION AND SALES OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 SECTION 9.8. FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 SECTION 9.9. MODIFICATIONS TO MATERIAL CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 SECTION 9.10. TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 ARTICLE 10 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 SECTION 10.2. REMEDIES UPON EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 SECTION 10.3. REMEDIES UPON CERTAIN DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 SECTION 10.4. ALLOCATION OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 SECTION 10.5. PERFORMANCE BY AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 SECTION 10.6. RIGHTS CUMULATIVE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 ARTICLE 11 THE AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 SECTION 11.1. AUTHORIZATION AND ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 SECTION 11.2. AGENT'S RELIANCE, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 SECTION 11.3. DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 SECTION 11.4. AGENT AS LENDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 SECTION 11.5. APPROVALS OF LENDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 SECTION 11.6. LENDER CREDIT DECISION, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 SECTION 11.7. INDEMNIFICATION OF AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60 SECTION 11.8. SUCCESSOR AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 SECTION 11.9. SYNDICATION AGENT AND CO-AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 ARTICLE 12 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 SECTION 12.1. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 SECTION 12.2. EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 SECTION 12.3. SETOFF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 SECTION 12.4. JURISDICTION; CONSENT TO SERVICE OF PROCESS; WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . .64
-ii- 4 SECTION 12.5. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 SECTION 12.6. REMOVAL OF LENDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 SECTION 12.7. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 SECTION 12.8. NONLIABILITY OF AGENT AND LENDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 SECTION 12.9. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 SECTION 12.10. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 SECTION 12.11. TERMINATION; SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 SECTION 12.12. SEVERABILITY OF PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 SECTION 12.13. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 SECTION 12.14. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 SECTION 12.15. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 SECTION 12.16. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 SECTION 12.17. CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
SCHEDULE 6.1(b) Ownership Structure SCHEDULE 6.1(g) Indebtedness and Liens SCHEDULE 6.1(h) Material Contracts SCHEDULE 9.3 Contingent Obligations EXHIBIT A Form of Assignment and Acceptance Agreement EXHIBIT B Form of Guaranty EXHIBIT C Form of Notice of Borrowing EXHIBIT D Form of Notice of Continuation EXHIBIT E Form of Notice of Conversion EXHIBIT F Form of Note EXHIBIT G Form of Opinion of Counsel EXHIBIT H Form of Compliance Certificate EXHIBIT I-1 Form of Borrowing Base Certificate of Company EXHIBIT I-2 Form of Borrowing Base Certificate of SBLC -iii- 5 THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 20, 1998, by and among ALLIED CAPITAL CORPORATION, a corporation organized under the laws of the State of Maryland (the "Company"), ALLIED CAPITAL REIT, INC., a Maryland corporation ("REIT"), ALLIED CAPITAL SBLC CORPORATION, a Maryland corporation ("SBLC," and together with the Company and REIT, collectively, the "Borrowers" and individually, a "Borrower"), each of the financial institutions initially a signatory hereto together with their assignees pursuant to Section 12.5(d) (the "Lenders"), BANKBOSTON, N.A., a national banking association, as Disbursing Agent (the "Disbursing Agent"), FIRST UNION NATIONAL BANK, a national banking association, as Syndication Agent (the "Syndication Agent"), NATIONSBANK OF TEXAS, N.A., a national banking association, as Co-Agent (the "Co-Agent") and RIGGS BANK N.A., a national banking association, as Managing Agent (the "Managing Agent"). RECITALS Pursuant to the Credit Agreement dated as of January 8, 1998, among the Company, SBLC, the Lenders parties thereto (the "Existing Lenders"), the Disbursing Agent, the Syndication Agent and the Managing Agent (the "Existing Credit Agreement"), the Existing Lenders agreed to make available to the Company a $150,000,000 revolving credit facility (which includes a $30,000,000 sub-facility for SBLC). The parties hereto wish to amend and restate the Existing Credit Agreement to, among other things, add REIT as a Borrower, add an additional Lender and increase the amount of credit available. The Lenders desire to make available to the Company and REIT a $200,000,000 revolving credit facility (which includes a $40,000,000 sub-facility for SBLC) on the terms and conditions contained herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto agree that, effective as of the date hereof, the Existing Credit Agreement shall be and hereby is amended to read in its entirety as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. DEFINITIONS. In addition to terms defined elsewhere herein, the following terms shall have the following meanings for the purposes of this Agreement: "ADDITIONAL COSTS" has the meaning given that term in Section 4.1. "ADJUSTED EBIT" means, for any period with respect to the Company and its Subsidiaries on a consolidated basis, income after deduction of all expenses and other proper charges other than taxes and Interest Expense, including realized gains and losses, but excluding gain income related to asset securitization transactions, unrealized gains and losses on 6 Investments and the amortization of market discount income related to Investments acquired at less than face value, all as determined in accordance with GAAP. "ADJUSTED EURODOLLAR RATE" means, with respect to each Interest Period for any LIBOR Loan, the rate obtained by dividing (a) LIBOR for such Interest Period by (b) a percentage equal to one minus the stated maximum rate (stated as a decimal) of all reserves, if any, required to be maintained against "Eurocurrency liabilities" as specified in Regulation D of the Board of Governors of the Federal Reserve System (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by an office of any Lender outside of the United States of America to residents of the United States of America). "AFFILIATE" means any Person (other than an Agent or any Lender): (a) directly or indirectly controlling, controlled by, or under common control with, the Company; (b) directly or indirectly owning or holding five percent (5.0%) or more of any equity interest in the Company; or (c) five percent (5.0%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by the Company. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling," "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise, other than by investment advisory contracts entered into in the ordinary course of business of the Company or a Subsidiary of the Company. "AGENTS" means the Disbursing Agent, the Syndication Agent, the Co-Agent and the Managing Agent, individually and collectively. "AGREEMENT DATE" means the date as of which this Agreement is dated. "APPLICABLE LAW" means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and all orders and decrees of all courts, tribunals and arbitrators. "ASSIGNEE" has the meaning given that term in Section l2.5(d). "ASSIGNMENT AND ACCEPTANCE AGREEMENT" means an Assignment and Acceptance Agreement among a Lender, an Assignee and each Agent, substantially in the form of Exhibit A or such other form as may be agreed to by such Lender, such Assignee and each Agent. "BANKBOSTON RATE" means the rate of interest per annum announced publicly by the Disbursing Agent as its base rate from time to time. The BankBoston Rate is not necessarily the best or the lowest rate of interest offered by the Disbursing Agent or any Lender. "BASE RATE" means the per annum rate of interest equal to the greater of (a) the BankBoston Rate or (b) the Federal Funds Rate plus one-half of one percent (0.5%). Any change in the Base Rate resulting from a change in the BankBoston Rate or the Federal Funds Rate shall become effective as of 12:01 a.m. on the Business Day on which each such change occurs. The -2- 7 Base Rate is a reference rate used by the Disbursing Agent in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged by the Disbursing Agent or any Lender on any extension of credit to any debtor. "BASE RATE LOAN" means a Loan bearing interest at a rate based on the Base Rate. "BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BORROWER" has the meaning set forth in the introductory paragraph hereof and shall include each Borrower's successors and assigns. "BORROWING BASE" means, at any time, with respect to the Company or SBLC and without duplication, (a) 100% of cash and Cash Equivalents owned by such Borrower, free and clear of all Liens, plus (b) in the case of the Borrowing Base of SBLC, 75% of Guaranteed 7(a) Loans owned by SBLC that are Eligible Assets, plus (c) 50% of any other Eligible Assets owned by such Borrower (or in the case of the Borrowing Base of the Company, the Subordinated CMBS Tranches may be owned by the QRS and the Sale Leaseback Assets may be owned by a Real Estate Sub), provided that: (1) not more than 50% of the Borrowing Base of the Company shall be derived from Commercial Mortgage Loans (excluding those made pursuant to Section 504 of the SBA Act) owned by the Company; (2) not more than 50% of the Borrowing Base of the Company shall be derived from Mezzanine Loans owned by the Company; (3) not more than 20% of the Borrowing Base of the Company shall be derived from Subordinated CMBS Tranches owned by the QRS; (4) not more than 15% of the Borrowing Base of the Company shall be derived from Equity Investments owned by the Company, (5) not more than 25% of the Borrowing Base of the Company shall be derived from Loans made pursuant to Sections 7(a) and 504 of the SBA Act, and (6) not more than 25% of the Borrowing Base of the Company shall be derived from Sale Leaseback Assets and no Sale Leaseback Asset may be included in the Borrowing Base for more than six months, minus (c) all Unsecured Indebtedness and Contingent Obligations of such Borrower. For the purpose of determining the Borrowing Base, the value of Eligible Assets shall be determined in accordance with the market valuation method pursuant to GAAP, provided that (i) in no event shall a debt security be valued at more than the outstanding principal balance thereof, and (ii) the market valuation method used by the Company and the corresponding values of Eligible Assets must be acceptable to the Managing Agent in its reasonable discretion. For purposes of this definition, Eligible Assets owned by REIT shall be deemed to be owned by the Company, and therefore included in the Borrowing Base to the same extent as Eligible Assets that are in fact owned by the Company. "BORROWING BASE ASSETS" means, at any time, Eligible Assets included in the Borrowing Base with respect to which Loans are outstanding. "BORROWING BASE CERTIFICATE" has the meaning given such term in Section 8.3. "BUSINESS DAY" means (a) any day other than a Saturday, Sunday or other day on which banks in New York City, New York, are authorized or required to close and (b) with reference to -3- 8 a LIBOR Loan, any such day that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITALIZED LEASE OBLIGATION" means Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with such principles. "CASH EQUIVALENTS" means: (a) securities issued, guaranteed or insured by the United States of America or any of its agencies with maturities of not more than one year from the date acquired; (b) certificates of deposit with maturities of not more than one year from the date acquired issued by a United States federal or state chartered commercial bank of recognized standing, which has capital and unimpaired surplus in excess of $500,000,000.00 and which bank or its holding company has a short-term commercial paper rating of at least A-1 or the equivalent by Standard & Poor's Rating Group, a division of McGraw-Hill, Inc. ("S&P") or at least P-1 or the equivalent by Moody's Investors Services, Inc. ("Moody's"); (c) reverse repurchase agreements with terms of not more than seven days from the date acquired, for securities of the type described in clause (a) above and entered into only with commercial banks having the qualifications described in clause (b) above; (d) commercial paper issued by any Person incorporated under the laws of the United States of America or any State thereof and rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, in each case with maturities of not more than one year from the date acquired; and (e) investments in money market funds registered under the Investment Company Act of 1940, which have net assets of at least $500,000,000.00 and at least 85% of whose assets consist of securities and other obligations of the type described in clauses (a) through (d) above. "CMBS" means any security that entitles the holder thereof to receive all or a specified portion of, or to receive payments based upon payments received on, the proceeds of Commercial Mortgage Loans, either fixed or revolving. "COMMERCIAL MORTGAGE LOAN" means a loan secured by a Lien on improved real estate used for commercial purposes and occupied by the applicable Obligor. "COMMITMENT" means, as to each Lender, such Lender's obligation to make Loans pursuant to Section 2.1 in an amount up to, but not exceeding, the amount set forth for such Lender on its signature page hereto as such Lender's "Initial Commitment Amount" or as set forth in the applicable Assignment and Acceptance Agreement, as the same may be reduced from time to time pursuant to Section 2.9 or as appropriate to reflect any assignments to or by such Lender effected in accordance with Section 12.5. "COMMITMENT PERCENTAGE" means, as to each Lender, the ratio, expressed as a percentage, of (a) the amount of such Lender's Commitment to (b) the sum of the aggregate amount of the Commitments of all Lenders hereunder; provided, however, that if at the time of determination the Commitments have terminated or been reduced to zero, the "Commitment Percentage" of each Lender shall be the Commitment Percentage of such Lender in effect immediately prior to such termination or reduction. -4- 9 "COMPLIANCE CERTIFICATE" has the meaning given such term in Section 8.3. "CONTINGENT OBLIGATION" as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person: (a) with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; (b) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings; (c) under Interest Rate Agreements; or (d) under any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect that Person against fluctuations in currency values. Contingent Obligations shall include (i) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), comaking, discounting with recourse or sale with recourse by such Person of the obligation of another, (ii) the obligation to make take or pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement, and (iii) any liability of such Person for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefor, to provide funds for the payment or discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed. The amount of any Contingent Obligation outstanding under clauses (c) or (d) shall be the net amount determined in good faith by the Managing Agent using any convention or method used by the Managing Agent in quantifying its own exposure under such agreements or arrangements. "CONTINUE," "CONTINUATION" AND "CONTINUED" each refers to the continuation of a LIBOR Loan from one Interest Period to another Interest Period pursuant to Section 2.6. "CONVERT," "CONVERSION" AND "CONVERTED" each refers to the conversion of a Loan of one Type into a Loan of another Type pursuant to Section 2.7. "CREDIT EVENT" MEANS any of the following: (a) the making (or deemed making) of any Loan and (b) the Conversion of a Loan. "CREDIT RATING" means, at any time as to any Person, the lowest rating assigned by a Rating Agency to each series of rated senior unsecured long term indebtedness of such Person. "DEFAULT" means any of the events specified in Section 10.1, whether or not there has been satisfied any requirement for the giving of notice, the lapse of time or both. "DEFAULTING LENDER" has the meaning set forth in Section 3.l1. "DISBURSING AGENT" means BankBoston, N.A., in its capacity as contractual representative of the Lenders under the terms of this Agreement, and any of its successors. -5- 10 "DOLLARS" or "$" means the lawful currency of the United States of America. "EFFECTIVE DATE" means the later of: (a) the Agreement Date; and (b) the date on which all of the conditions precedent set forth in Section 5.1. shall have been fulfilled. "ELIGIBLE ASSETS" means any of the following Investments that satisfy all of the Eligibility Requirements: (a) cash and Cash Equivalents, (b) Commercial Mortgage Loans; (c) Subordinated CMBS Tranches; (d) Mezzanine Loans; (e) Commercial Mortgage Loans made pursuant to Section 504 of the SBA Act; (f) loans made pursuant to Section 7(a) of the SBA Act, (g) Equity Investments, and (h) Sale Leaseback Assets. "ELIGIBLE ASSIGNEE" means any Person who is: (i) currently a Lender; (ii) a commercial bank, trust company, insurance company, investment bank or pension fund organized under the laws of the United States of America, or any state thereof, and having total assets in excess of $5,000,000,000; (iii) a savings and loan association or savings bank organized under the laws of the United States of America, or any state thereof, and having a tangible net worth of at least $500,000,000; or (iv) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development ("OECD"), or a political subdivision of any such country, and having total assets in excess of $10,000,000,000, provided that such bank is acting through a branch or agency located in the United States of America. If such Person is not currently a Lender, such Person's senior unsecured long term indebtedness must be rated BBB or higher by S&P, Baa2 or higher by Moody's, or the equivalent or higher of either such rating by another Rating Agency acceptable to the Managing Agent. Notwithstanding the foregoing, if an Event of Default shall have occurred and be continuing under Section 10.1.(a) or (b), the "Eligible Assignee" shall mean any Person that is not an individual. "ELIGIBILITY REQUIREMENTS" means, for any Eligible Asset, that at all times the following statements are accurate and complete: (a) No Obligor on the Eligible Asset is an Affiliate of a Borrower; (b) The Eligible Asset is owned by a Borrower or, in the case of Subordinated CMBS Tranches, by the QRS, or, in the case of Sale Leaseback Assets, by a Real Estate Sub; (c) The Eligible Asset is a legal, valid and binding obligation of each Obligor thereon, enforceable in accordance with its terms; (d) No payment on the Eligible Asset is more than 45 days past due, nor has such Eligible Asset been restructured during the most recently ended 12-month period in connection with the inability of the Obligor to perform its obligations as they existed prior to such restructuring; (e) The Eligible Asset is free and clear of all Liens, other than Liens described in clause (a) of the definition of Permitted Liens; -6- 11 (f) The Eligible Asset complies with all Applicable Laws; (g) Each Obligor on the Eligible Asset is a United States citizen or corporation, partnership, limited liability company or other entity organized and existing under the laws of one of the states of the United States.; (h) The Eligible Asset is not owned by SBIC or SSBIC; (i) The Eligible Asset is not secured by real or personal property located outside of the United States; and (j) The Eligible Asset does not arise out of a real estate equity participation. "ENVIRONMENTAL LAWS" means any Applicable Law relating to environmental protection or the manufacture, storage, disposal or clean-up of Hazardous Materials including, without limitation, the following: Clean Air Act, 42 U.S.C. 7401 et seq.; Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq.; Solid Waste Disposal Act, 42 U.S.C. 6901 et seq.; Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.; National Environmental Policy Act, 42 U.S.C. 4321 et seq.; regulations of the Environmental Protection Agency and any applicable rule of common law and any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. "EQUITY INVESTMENT" means an Investment by the Company in an Equity Issuance of a Person that is an operating business that sells goods or services. "EQUITY ISSUANCE" means any issuance or sale by a Person of its capital stock or other similar equity security, or any warrants, options or similar rights to acquire, or securities convertible into or exchangeable for, such capital stock or other similar equity security. "ERISA" means the Employee Retirement Income Security Act of 1974, as in effect from time to time. "ERISA GROUP" means the Company, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EVENT OF DEFAULT" means any of the events specified in Section 10.1, provided that any requirement for notice or lapse of time or any other condition has been satisfied. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward to the nearest l/l00th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions for the next preceding Business Day, and (b) -7- 12 if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Disbursing Agent by federal funds dealers selected by the Disbursing Agent on such day on such transaction as determined by the Disbursing Agent. "FEES" means the fees and commissions provided for or referred to in Section 3.6 and any other fees payable by the Company hereunder or under any other Loan Document. "FOREIGN LENDER" means any Lender organized under the laws of a jurisdiction other than the United States of America. "GAAP" means accounting principles as promulgated from time to time in statements, opinions and pronouncements by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board and in such statements, opinions and pronouncements of such other entities with respect to financial accounting of for-profit entities as shall be accepted by a substantial segment of the accounting profession in the United States. "GOVERNMENTAL APPROVALS" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all Governmental Authorities. "GOVERNMENTAL AUTHORITY" means any national, state or local government (whether domestic or foreign), any political subdivision thereof or any other governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body, agency, bureau or entity (including, without limitation, the Federal Deposit Insurance Corporation, the Comptroller of the Currency or the Federal Reserve Board, any central bank or any comparable authority) or any arbitrator with authority to bind a party at law. "GUARANTEED 7(A) LOAN" means a loan made by SBLC pursuant to Section 7(a) of the SBA Act and the payment of which is guaranteed by the SBA to the maximum amount permitted by Section 7(a) of the SBA Act, provided that such loan shall lose its status as a Guaranteed 7(a) Loan when all or any portion of the amount thereof guaranteed by the SBA is sold by SBLC. "GUARANTOR" means any Subsidiary that is required to execute and deliver a Guaranty. "GUARANTY" means a Guaranty executed by any Subsidiary and substantially in the form of Exhibit B. "HAZARDOUS MATERIALS" means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable Environmental Laws as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances" or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, "TLCP" toxicity, or "EP toxicity"; (b) oil, petroleum or petroleum derived substances, natural gas, natural gas liquids or synthetic gas and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; -8- 13 (d) asbestos in any form; or (e) electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million. "INDEBTEDNESS" means, with respect to a Person, at the time of computation thereof, all of the following (without duplication): (a) obligations of such Person in respect of money borrowed; (b) obligations of such Person (other than trade debt incurred in the ordinary course of business), whether or not for money borrowed (i) represented by notes payable, or drafts accepted, in each case representing extensions of credit, (ii) evidenced by bonds, debentures, notes or similar instruments, (iii) consisting of repurchase agreements, whether on a recourse or a non-recourse basis, or (iv) constituting purchase money indebtedness, conditional sales contracts, title retention debt instruments or other similar instruments, upon which interest charges are customarily paid or that are issued or assumed as full or partial payment for property, (c) Capitalized Lease Obligations of such Person; (d) all reimbursement obligations of such Person under any letters of credit or acceptances (whether or not the same have been presented for payment), and all obligations of such Person as the issuer of any letters of credit or acceptances (whether or not the same have been presented for payment); and (e) all Indebtedness of other Persons which (i) such Person has guaranteed or which is otherwise recourse to such Person or (ii) are secured by a Lien on any property of such Person. "INTELLECTUAL PROPERTY" has the meaning given that term in Section 6.1(r). "INTEREST EXPENSE" means, with respect to a Person and for any period, the total consolidated interest expense (including, without limitation, capitalized interest expense and interest expense attributable to Capitalized Lease Obligations) of such Person and in any event shall include all interest expense with respect to any Indebtedness in respect of which such Person is wholly or partially liable. "INTEREST PERIOD" means, with respect to any LIBOR Loan, each period commencing on the date such LIBOR Loan is made or the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, or third calendar month thereafter, as the Company may select in a Notice of Borrowing, Notice of Continuation or Notice of Conversion, as the case may be, except that each Interest Period for a LIBOR Loan that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period would otherwise end after the Termination Date, such Interest Period shall end on the Termination Date, (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding the immediately preceding clause (i), no Interest Period for any LIBOR Loan shall have a duration of less than one month and, if the Interest Period for any LIBOR Loan would otherwise be a shorter period, such Loan shall not be available hereunder for such period. -9- 14 "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar contractual agreement or arrangement entered into with a nationally recognized financial institution then having an Investment Grade Rating for the purpose of protecting against fluctuations in interest rates. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended. "INVESTMENT" means, with respect to any Person and whether or not such investment constitutes a controlling interest in such Person (a) the purchase or other acquisition of any share of capital stock, evidence of Indebtedness or other security issued by any other Person; (b) any loan, advance or extension of credit to, or contribution (in the form of money or goods) to the capital of, or the acquisition of a Sale Leaseback Asset from and the lease thereof to, any other Person; (c) any guaranty of the Indebtedness of any other Person; (d) any other investment in any other Person; and (e) any commitment or option to make an Investment in any other Person. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended. "INVESTMENT GRADE RATING" means a Credit Rating of BBB- or higher by S&P, Baa3 or higher by Moody's, or the equivalent or higher of either such rating by another Rating Agency. "LENDER" means each financial institution from time to time party hereto as a "Lender," together with its respective successors and assigns. "LENDING OFFICE" means, for each Lender and for each Type of Loan, the office of such Lender specified as such on its signature page hereto or in the applicable Assignment and Acceptance Agreement, or such other office of such Lender as such Lender may notify the Disbursing Agent in writing from time to time. "LIBOR" means, for any LIBOR Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11 :00 a.m. (London time) two Business Days prior to the first day of such Interest Period. If for any reason such rate is not available, the term "LIBOR" shall mean, for any LIBOR Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period, provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "LIBOR LOAN" means a Loan bearing interest at a rate based on LIBOR. "LIEN" as applied to the property of any Person means: (a) any security interest, encumbrance, mortgage, deed to secure debt, deed of trust, pledge, lien, charge, ground lease or lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security title or encumbrance of any kind in respect of any property of such -10- 15 Person, or upon the income or profits therefrom; (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person; (c) the filing of any financing statement under the Uniform Commercial Code or its equivalent in any jurisdiction; and (d) any agreement by such Person to grant, give, or otherwise convey any of the foregoing. "LOAN" means a loan made by Lender to the Borrowers pursuant to Section 2.1. "LOAN DOCUMENT" means this Agreement, each Note, each Guaranty and each other document or instrument now or hereafter executed and delivered by a Borrower or any Subsidiary in connection with, pursuant to or relating to this Agreement. "MANAGING AGENT" means Riggs Bank N.A., in its capacity as contractual representative of the Lenders under the terms of this Agreement, and any of its successors. "MASS MUTUAL" means Massachusetts Mutual Life Insurance Company. "MASS MUTUAL AGREEMENT" means the Note Agreement, dated as of April 30, 1992, as amended on September 1, 1992, November 19, 1992, October 29, 1993, and February 15, 1998, among Mass Mutual, Allied Capital Corporation, Allied Investment Corporation and Allied Financial Services Corporation, which has been assumed by the Company in connection with the merger described in the Proxy. "MATERIAL ADVERSE EFFECT" means a materially adverse effect on (a) the business, assets, liabilities, financial condition, results of operations or business prospects of the Company and its Subsidiaries taken as a whole, (b) the ability of the Company to perform its obligations under any Loan Document to which it is a party which does not result from a material adverse effect on the items described in the immediate preceding clause (a), (c) the validity or enforceability of any of the Loan Documents, (d) the rights and remedies of the Lenders and the Agents under any of such Loan Documents or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. Except with respect to representations made or deemed made by the Company or any Subsidiary in any of the other Loan Documents to which it is a party, all determinations of materiality shall be made by the Requisite Lenders in their reasonable judgment unless expressly provided otherwise. "MATERIAL CONTRACT" means any contract or other arrangement (other than Loan Documents), whether written or oral, to which the Company or any Subsidiary is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto could have a Material Adverse Effect. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000. -11- 16 "MATERIAL SUBSIDIARY" means, as of the date of any determination thereof, any Subsidiary which has total assets having a value (determined in accordance with the market valuation method pursuant to GAAP) greater than or equal to $20,000,000. "MERRILL LYNCH" means Merrill Lynch Mortgage Capital, Inc. "MERRILL LYNCH AGREEMENT" means, individually and collectively, (a) the Amended and Restated Master Repurchase Agreement, dated as of March 22, 1996, as amended on November 11, 1996, July 30, 1997, and March 18, 1998, among Merrill Lynch, Allied Capital Commercial Corporation and Business Mortgage Investors, Inc., and (b) the Master Repurchase Agreement, dated as of March 22, 1996, as amended on November 11, 1996, and March 18, 1998, between Merrill Lynch and Allied Capital Commercial Corporation, each of which has been assumed by the Company in connection with the merger described in the Proxy. "MEZZANINE LOANS" means loans that are not loans made pursuant to the SBA Act and that are made to businesses for acquisitions, growth, working capital and other business purposes, which may be combined with rights to acquire equity interests in such businesses. "MOODY'S" means Moody's Investors Services, Inc. "MORGAN STANLEY" means Morgan Stanley Mortgage Capital, Inc. "MORGAN STANLEY AGREEMENT" means the Master Loan and Security Agreement, dated as of August 21, 1997, as amended on March 18, 1998, among Morgan Stanley, Allied Capital Commercial Corporation and Business Mortgage Investors, Inc., which has been assumed by the Company in connection with the merger described in the Proxy. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NET PROCEEDS" means, with respect to an Equity Issuance by a Person, the aggregate amount of all cash received by such Person in respect of such Equity Issuance net of investment banking fees, legal fees, accountants fees, underwriting discounts and commissions and other customary fees and expenses actually incurred by such Person in connection with such Equity Issuance. "NOTE" has the meaning given such term in Section 2.8. "NOTICE OF BORROWING" means a notice in the form of Exhibit C to be delivered to the Disbursing Agent pursuant to Section 2.1(b) evidencing a Borrower's request for a borrowing of Loans. -12- 17 "NOTICE OF CONTINUATION" means a notice in the form of Exhibit D to be delivered to the Disbursing Agent pursuant to Section 2.6 evidencing a Borrower's request for the Continuation of a LIBOR Loan. "NOTICE OF CONVERSION" means a notice in the form of Exhibit E to be delivered to the Disbursing Agent pursuant to Section 2.7 evidencing a Borrower's request for the Conversion of a Loan from one Type to another Type. "OBLIGATIONS" means, individually and collectively: (a) the aggregate principal balance of and all accrued and unpaid interest on, all Loans and (b) all other indebtedness, liabilities, obligations, covenants and duties of the Borrowers owing to the Agents or any Lender of every kind, nature and description, under or in respect of this Agreement or any of the other Loan Documents, including, without limitation, all Fees and indemnification obligations, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any promissory note. "OBLIGOR" means each maker, endorser, guarantor and issuer of an Eligible Asset, or, in the case of a Sale Leaseback Asset, the lessee of the applicable real estate. "OPIC" means Overseas Private Investment Corporation. "OPIC AGREEMENT" means the Loan Agreement, dated as of April 10, 1995, as amended on February 25, 1998, between OPIC and Allied Capital Corporation. "OTHER RELEVANT SUBSIDIARY" means any Subsidiary, individually or together with other Subsidiaries, the occurrence of any of the events described in Sections 10.1(f) or 10.1(g) with respect to which could reasonably be expected to have a Material Adverse Effect. "PARTICIPANT" has the meaning given that term in Section 12.5(c). "PBGC" means the Pension Benefit Guaranty Corporation and any successor agency. "PERMITTED LIENS" means, as to any Person: (a) Liens securing taxes, assessments and other charges or levies imposed by any Governmental Authority (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, which are not at the time required to be paid or discharged under Section 7.6; (b) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure payment of, obligations under workmen's compensation, unemployment insurance or similar Applicable Laws; (c) Liens in favor of the Managing Agent for the benefit of the Lenders; and (d) in the case of a Sale Leaseback Asset, covenants, restrictions, rights of way, easements and other matters of public record, and other matters to which like properties are commonly subject, that singly or in the aggregate do not materially and adversely affect the value or marketability of, or materially interfere with the use or enjoyment of, such Sale Leaseback Asset. -13- 18 "PERSON" means an individual, corporation, partnership, limited liability company, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "PORTFOLIO INVESTMENT" means any Investment of a Borrower made or acquired in the ordinary course of business in an eligible portfolio company (within the meaning of the Investment Company Act) or in any other Person, provided that, in each case, such Investment may be classified as a portfolio Investment in accordance with GAAP and such classification is acceptable to the Managing Agent in its reasonable discretion. "POST-DEFAULT RATE" means, in respect of any principal of any Loan or any other Obligation that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum equal to two percent (2.0%) plus the Base Rate as in effect from time to time. "PRINCIPAL OFFICE" means the office of the Disbursing Agent located at 100 Federal Street, Boston, Massachusetts, or such other office of the Disbursing Agent as the Disbursing Agent may designate from time to time. "PRO FORMA DEBT SERVICE" means at any time for the Company and its Subsidiaries on a consolidated basis the sum of principal payments of Indebtedness scheduled to be repaid during the next succeeding 12-month period (excluding principal payments with respect to the Loans) plus estimated Interest Expense for such 12-month period, as determined by the Managing Agent in good faith using reasonable assumptions of outstanding Indebtedness and interest rates applicable thereto. "PROXY" means the Joint Proxy Statement/Prospectus, dated October 9, 1997, furnished to the stockholders of Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Commercial Corporation, Allied Capital Lending Corporation and Allied Capital Advisers, Inc. "QUARTERLY DATE" MEANS the last Business Day of March, June, September and December in each year, the first of which shall be June 30, 1998. "QRS" means a Wholly Owned Subsidiary of REIT that is a qualified real estate investment trust subsidiary within the meaning of the Internal Revenue Code. "RATING AGENCY" means S&P, Moody's or any other nationally recognized securities rating agency selected by the Borrower and acceptable to the Requisite Lenders. -14- 19 "REAL ESTATE SUB" means any Wholly-Owned Subsidiary of the REIT that holds fee simple title to a Sale Leaseback Asset. "REGISTER" has the meaning given that term in Section 12.5(e). "REGULATORY CHANGE" means, with respect to any Lender, any change effective after the Agreement Date in Applicable Law (including without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks, including such Lender, of or under any Applicable Law (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any Governmental Authority or monetary authority charged with the interpretation or administration thereof or compliance by any Lender with any request or directive made or issued after the Agreement Date regarding capital adequacy. "REQUISITE LENDERS" means, as of any date, (a) when there are three or fewer Lenders, all Lenders, and (b) when there are more than three Lenders, Lenders having at least 66 2/3% of the aggregate amount of the Commitments, or if the Commitments have been terminated or reduced to zero, Lenders holding at least 66 2/3% of the principal amount of the Loans. "RIC" means a Person qualifying for treatment as a "regulated investment company" under the Internal Revenue Code. "SALE LEASEBACK ASSET" means (a) commercial real estate that has been acquired in fee simple by a Real Estate Sub in connection with a transaction providing for a purchase of such Real Estate by the Real Estate Sub from the owner thereof and the simultaneous lease of the real estate by the Real Estate Sub to such owner or its designee, and (b) all of such Real Estate Sub's rights as a lessor of such real estate. "SBA" means the Small Business Administration. "SBA ACT" means the Small Business Investment Act of 1958, as amended. "SBIC" means Allied Investment Corporation, a Maryland corporation. "SECURED INDEBTEDNESS" means, with respect to any Person, any Indebtedness of such Person that is secured in any manner by any Lien, and shall include such Person's pro rata share of the Secured Indebtedness of any of such Person's Unconsolidated Affiliates. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, together with all rules and regulations issued thereunder. "SECURITIZED DEBT" means the Indebtedness of a Securitization Issuer evidenced by a CMBS issuance of such Securitization Issuer, the proceeds of which are used to purchase Commercial Mortgage Loans from REIT or a QRS. -15- 20 "SECURITIZATION ISSUER" means a trust or other Person formed for the limited purpose of acquiring Commercial Mortgage Loans from REIT or a QRS with the proceeds of a CMBS issuance. "SOLVENT" means, when used with respect to any Person, that (a) the fair value and the fair salable value of its assets (excluding any Indebtedness due from any affiliate of such Person) are each in excess of the fair valuation of its total liabilities (including all contingent liabilities); and (b) such Person is able to pay its debts or other obligations in the ordinary course as they mature and (c) that the Person has capital not unreasonably small to carry on its business and all business in which it proposes to be engaged. "S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill Companies, Inc. "SSBIC" means Allied Capital Financial Corporation, a Maryland corporation. "SUBORDINATED CMBS TRANCHE" means the series of a CMBS issuance that is junior to all CMBS in such issuance that carry a rating of a Rating Agency and is senior to any other CMBS of such issuance. "SUBORDINATED DEBT" means Indebtedness of the Company or any of its Subsidiaries that is subordinated in right of payment and otherwise to the Loans and the other Obligations in a manner satisfactory to the Managing Agent and the Requisite Lenders in their sole and absolute discretion. "SUBSIDIARY" means, for any Person, any corporation, partnership, limited liability company or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (without regard to the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "MAJORITY OWNED SUBSIDIARY" means any such corporation, partnership, limited liability company or other entity of which greater than 50% of the equity securities or other ownership interests are so owned or controlled. "WHOLLY OWNED SUBSIDIARY" means any such corporation, partnership, limited liability company or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are so owned or controlled. Notwithstanding the foregoing, a Portfolio Investment of a Borrower or a Subsidiary shall not be a Subsidiary of such Borrower or such Subsidiary. "SYNDICATION AGENT" means First Union National Bank, in its capacity as contractual representative of the Lenders under this Agreement, and any of its successors. "TANGIBLE NET WORTH" means, for any Person and as of a given date, such Person's total stockholder's equity minus (to the extent reflected in determining stockholders' equity of such Person): (a) the amount of any net write-up in the book value of any assets contained in any -16- 21 balance sheet of such Person resulting from revaluation thereof or any net write-up in excess of the cost of such assets acquired and (b) the aggregate of all amounts appearing on the assets side of any such balance sheet for franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, goodwill, treasury stock, experimental or organizational expenses and other like assets which would be properly classified as intangible assets under GAAP. "TAXES" has the meaning given that term in Section 3.12. "TERMINATION DATE" means June 30, 1999. "TYPE" with respect to any Loan, refers to whether such Loan is a LIBOR Loan or Base Rate Loan. "UNCONSOLIDATED AFFILIATE" shall mean, with respect to any Person, any other Person in whom such Person holds an Investment, which Investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person. "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (a) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (b) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "UNSECURED INDEBTEDNESS" means, with respect to a Person, all Indebtedness of such Person that is not Secured Indebtedness. SECTION 1.2. GENERAL; REFERENCES TO TIMES. Unless otherwise indicated, all accounting terms, ratios and measurements shall be interpreted or determined in accordance with GAAP in effect as of the Agreement Date. References in this Agreement to "Sections," "Articles," "Exhibits" and "Schedules" are to sections, articles, exhibits and schedules herein and hereto unless otherwise indicated. References in this Agreement to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, to the extent permitted hereby and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, supplemented, restated or otherwise modified from time to time to the extent permitted hereby and in effect at any given time. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the -17- 22 feminine and the neuter. Unless explicitly set forth to the contrary, a reference to "Subsidiary" means a Subsidiary of the Company or a Subsidiary of such Subsidiary and a reference to an "Affiliate" means a reference to an Affiliate of the Company. Titles and captions of Articles, Sections, subsections and clauses in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. Unless otherwise indicated, all references to time are references to Boston, Massachusetts, time. ARTICLE 2 CREDIT FACILITY SECTION 2.1. LOANS. (a) Generally. Subject to the terms and conditions hereof, during the period from the Effective Date to but excluding the Termination Date, each Lender severally and not jointly agrees to make Loans to the Borrowers in an aggregate principal amount at any one time outstanding up to, but not exceeding, the amount of such Lender's Commitment, provided, however, that in no event shall (1) the aggregate principal amount of all outstanding Loans to the Company and REIT exceed the lesser of (i) the Borrowing Base of the Company, and (ii) the aggregate amount of the Commitments as in effect from time to time, and (2) the aggregate principal amount of Loans to SBLC exceed the lesser of (i) the Borrowing Base of SBLC, and (ii) $40,000,000, and (3) the aggregate principal amount of all outstanding Loans exceed the aggregate amount of the Commitments as in effect from time to time. Subject to the terms and conditions of this Agreement, during the period from the Effective Date to but excluding the Termination Date, the Borrowers may borrow, repay and reborrow Loans hereunder. (b) Requesting Loans. The Company and REIT shall give the Disbursing Agent notice pursuant to a Notice of Borrowing or telephonic notice of each borrowing of Loans. Each Notice of Borrowing shall be delivered to the Disbursing Agent before 12:00 noon (a) in the case of LIBOR Loans, on the date two Business Days prior to the proposed date of such borrowing and (b) in the case of Base Rate Loans, on the proposed date of such borrowing. Any such telephonic notice shall include all information to be specified in a written Notice of Borrowing and shall be promptly confirmed in writing by the Company and REIT pursuant to a Notice of Borrowing sent to the Disbursing Agent by telecopy on the same day of the giving of such telephonic notice. The Disbursing Agent will transmit by telecopy the Notice of Borrowing (or the information contained in such Notice of Borrowing) to each Lender promptly upon receipt by the Disbursing Agent (but in any event not later than 1:00 p.m. on the date of receipt thereof). Each Notice of Borrowing or telephonic notice of each borrowing shall be irrevocable once given and binding on the applicable Borrower specified therein. (c) Disbursements of Loan Proceeds. No later than 3:00 p.m. on the date specified in the Notice of Borrowing, each Lender will make available for the account of its applicable Lending Office to the Disbursing Agent at the Principal Office, in immediately available funds, the proceeds of the Loan to be made by such Lender. With respect to Loans to be made after the Effective Date, unless the Disbursing Agent shall have been notified by any Lender prior to the specified date of borrowing that such Lender does not intend to make available to the Disbursing -18- 23 Agent the Loan to be made by such Lender on such date, the Disbursing Agent may assume that such Lender will make the proceeds of such Loan available to the Disbursing Agent on the date of the requested borrowing as set forth in the Notice of Borrowing and the Disbursing Agent may (but shall not be obligated to), in reliance upon such assumption, make available to the applicable Borrower the amount of such Loan to be provided by such Lender. Subject to satisfaction of the applicable conditions set forth in Article 5 for such borrowing, the Disbursing Agent will make the proceeds of such borrowing available to the applicable Borrower no later than 4:00 p.m. on the date and at the account specified by the Company in such Notice of Borrowing. SECTION 2.2. RATES AND PAYMENT OF INTEREST ON LOANS. (a) Rates. The Company and REIT jointly and severally promise to pay to the Disbursing Agent for the account of each Lender with respect to Loans made to the Company or REIT, and SBLC severally promises to pay to the Disbursing Agent for account of each Lender with respect to Loans made to SBLC, interest on the unpaid principal amount of each such Loan for the period from and including the date of the making of such Loan to but excluding the date such Loan shall be paid in full, at the following per annum rates: (1) during such periods as such Loan is a Base Rate Loan, at the Base Rate (as in effect from time to time); and (2) during such periods as such Loan is a LIBOR Loan, at the Adjusted Eurodollar Rate for such Loan for the Interest Period therefor, plus 1.25%. Notwithstanding the foregoing, (i) during the continuance of an Event of Default, and prior to maturity or acceleration of the Obligations, each Borrower hereby promises to pay to the Disbursing Agent for account of each Lender interest at 2% per annum in excess of the rates otherwise payable hereunder on the aggregate outstanding principal of all Loans made by such Lender to such Borrower and on any other amount payable by such Borrower hereunder or under the Notes held by such Lender (including without limitation, overdue accrued but unpaid interest to the extent permitted under Applicable Law), and (ii) upon the maturity or acceleration of the Obligations in accordance with the terms hereof, each Borrower promises to pay to the Disbursing Agent for the account of each Lender interest at the Post-Default Rate on such amounts. (b) Payment of Interest. Accrued interest on each Loan shall be payable as provided in each of the following clauses which apply to such Loan: (i) in the case of a Base Rate Loan, monthly on the last Business Day of each calendar month, (ii) in the case of a LIBOR Loan, on the last day of each Interest Period therefor, (iii) in the case of a LIBOR Loan, upon the payment, prepayment or Continuation thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), and (iv) in the case of any Base Rate Loan, upon the payment or prepayment thereof in full. Interest payable during the continuance of an Event of Default but prior to maturity or acceleration of the Obligations shall be payable in accordance with the immediately preceding sentence. Interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Disbursing -19- 24 Agent shall give notice thereof to the Lenders to which such interest is payable and to the Company. All determinations by the Disbursing Agent of an interest rate hereunder shall be conclusive and binding on the Lenders and the Borrowers for all purposes, absent manifest error. SECTION 2.3. NUMBER OF INTEREST PERIODS. There may be no more than five (5) different Interest Periods for LIBOR Loans outstanding at the same time. SECTION 2.4. REPAYMENT OF LOANS. Each Borrower shall repay the entire outstanding principal amount of, and all accrued but unpaid interest on, the Loans made to it on the Termination Date. The Company and REIT shall be jointly and severally liable for Loans made to the Company or REIT and SBLC shall be severally liable for Loans made to it. SECTION 2.5. PREPAYMENTS. (a) Optional. Subject to Section 4.4, a Borrower may prepay any Loan made to it at any time without premium or penalty. (b) Mandatory. If at any time either (i) the aggregate principal amount of all outstanding Loans, exceeds the aggregate amount of the Commitments in effect at such time, or (ii) the aggregate principal amount of all outstanding Loans to the Company and REIT exceeds the Borrowing Base of the Company in effect at such time, or (iii) the aggregate principal amount of all outstanding Loans to SBLC exceeds the Borrowing Base of SBLC in effect at such time, then in any such case the applicable Borrower shall immediately pay to the Disbursing Agent for the accounts of the Lenders the amount of such excess. If the applicable Borrower is required to pay any outstanding LIBOR Loans by reason of this Section prior to the end of the applicable Interest Period therefor, such Borrower shall pay all amounts due under Section 4.4. SECTION 2.6. CONTINUATION. So long as no Default or Event of Default shall have occurred and be continuing, the Company may on any Business Day, with respect to any LIBOR Loan, elect to maintain such LIBOR Loan or any portion thereof as a LIBOR Loan, as applicable, by selecting a new Interest Period for such Loan. Each new Interest Period selected under this Section shall commence on the last day of the immediately preceding Interest Period. Each selection of a new Interest Period shall be made by the Company giving to the Disbursing Agent a Notice of Continuation not later than 12:00 noon on the second Business Day prior to the date of any such Continuation. Such notice by the Company of a Continuation shall be by telephone or telecopy, confirmed immediately in writing if by telephone, in the form of a Notice of Continuation, specifying (a) the proposed date of such Continuation, (b) the LIBOR Loan, and portion thereof subject to such Continuation and (c) the duration of the selected Interest Period, all of which shall be specified in such manner as is necessary to comply with all limitations on Loans outstanding hereunder. Each Notice of Continuation shall be irrevocable by and binding on the applicable -20- 25 Borrower once given. Promptly after receipt of a Notice of Continuation (and in any event not later than 1:00 p.m. on the date of receipt thereof), the Disbursing Agent shall notify each Lender by telex or telecopy, or other similar form of transmission of the proposed Continuation. If the Company shall fail to select in a timely manner a new Interest Period for any LIBOR Loan in accordance with this Section, such Loan will automatically, on the last day of the current Interest Period therefor, Convert into a Base Rate Loan. SECTION 2.7. CONVERSION. So long as no Default or Event of Default shall have occurred and be continuing, the Company may on any Business Day, upon the Company's giving of a Notice of Conversion to the Disbursing Agent, Convert all or a portion of a Loan of one Type into a Loan of another Type. Any Conversion of a LIBOR Loan into a Base Rate Loan shall be made on, and only on, the last day of an Interest Period for such LIBOR Loan. Each such Notice of Conversion shall be given by the Company not later than 12:00 noon (a) on the Business Day prior to the date of any proposed Conversion into Base Rate Loans or (b) on the second Business Day prior to the date of any proposed Conversion into LIBOR Loans. Promptly upon receipt of a Notice of Conversion (and in any event not later than 1:00 p.m. on the date of receipt thereof), the Disbursing Agent shall notify each Lender by telecopy or other similar form of transmission of the proposed Conversion. Subject to the restrictions specified above, each Notice of Conversion shall be by telephone or telecopy confirmed immediately in writing if by telephone, in the form of a Notice of Conversion specifying (1) the requested date of such Conversion, (2) the Type of Loan to be Converted, (3) the portion of such Type of Loan to be Converted, (4) the Type of Loan such Loan is to be Converted into and (5) if such Conversion is into a LIBOR Loan, the requested duration of the Interest Period of such Loan. Each Notice of Conversion shall be irrevocable by and binding on the applicable Borrower once given. SECTION 2.8. NOTE. (a) Note. The Loans made by each Lender shall, in addition to this Agreement, also be evidenced by a promissory note of the applicable Borrowers substantially in the form of Exhibit F (each a "Note"), payable to the order of such Lender. The Note issued by the Company and REIT to each Lender shall be in a principal amount equal to the amount of such Lender's Commitment as originally in effect. The Note issued by SBLC to each Lender shall be in a principal amount equal to such Lender's pro rata share of $40,000,000. (b) Records; Endorsement on Transfer. The date, amount, interest rate, Type and duration of Interest Periods (if applicable) of each Loan made by each Lender to each Borrower, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and such entries shall be prima facie evidence of such matters. Prior to the transfer of any Note, the Lender shall endorse such items on such Note or any allonge thereof; provided that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of such Borrower to make a payment when due of any amount owing hereunder or under such Note in respect of the Loans evidenced by such Note. -21- 26 SECTION 2.9. VOLUNTARY REDUCTIONS OF THE COMMITMENT. The Company shall have the right to terminate or reduce the aggregate unused amount of the Commitments at any time and from time to time without penalty or premium upon not less than five Business Days prior written notice to the Disbursing Agent of each such termination or reduction, which notice shall specify the effective date thereof and the amount of any such reduction and shall be irrevocable once given and effective only upon receipt by the Disbursing Agent. The Disbursing Agent will promptly transmit such notice to each Lender. The Commitments, once terminated or reduced may not be increased or reinstated. ARTICLE 3 PAYMENTS, FEES AND OTHER GENERAL PROVISIONS SECTION 3.1. PAYMENTS. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrowers under this Agreement or any other Loan Document shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Disbursing Agent at its Principal Office, not later than 2:00 p.m. on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Prior to making any such payment, the Company shall give the Disbursing Agent notice of such payment. Subject to Sections 3.2 and 3.3, the Disbursing Agent, or any Lender for whose account any such payment is made, may (but shall not be obligated to) debit the amount of any such payment which is not made by such time from any special or general deposit account of the applicable Borrower with the Disbursing Agent or such Lender, as the case may be (with notice to the Company, the other Lenders and the Disbursing Agent). The Company shall, at the time of making each payment under this Agreement or any Note, specify to the Disbursing Agent the amounts payable by the applicable Borrower hereunder to which such payment is to be applied. Each payment received by the Disbursing Agent for the account of a Lender under this Agreement or any Note shall be paid to such Lender at the applicable Lending Office of such Lender no later than 5:00 p.m. on the date of receipt. If the Disbursing Agent fails to pay such amount to a Lender as provided in the previous sentence, the Disbursing Agent shall pay interest on such amount until paid at a rate per annum equal to the Federal Funds Rate from time to time in effect. If the due date of any payment under this Agreement or any other Loan Document would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for the period of such extension. SECTION 3.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) each borrowing from the Lenders under Section 2.1(a) shall be made from the Lenders, each payment of the Fees under Section 3.6(a) shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.9 shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (b) each payment or prepayment of principal of Loans shall be made for account of the Lenders pro rata in -22- 27 accordance with the respective unpaid principal amounts of the Loans held by them, provided that if immediately prior to giving effect to any such payment in respect of any Loans the outstanding principal amount of the Loans shall not be held by the Lenders pro rata in accordance with their respective Commitments in effect at the time such Loans were made, then such payment shall be applied to the Loans in such manner as shall result, as nearly as is practicable, in the outstanding principal amount of the Loans being held by the Lenders pro rata in accordance with their respective Commitments; (c) each payment of interest on Loans shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders; and (d) the making, Conversion and Continuation of Loans of a particular Type (other than Conversions provided for by Section 4.5) shall be made pro rata among the Lenders according to the amounts of their respective Commitments (in the case of making of Loans) or their respective Loans (in the case of Conversions and Continuations of Loans) and the then current Interest Period for each Lender's portion of each Loan of such Type shall be coterminous. SECTION 3.3. SHARING OF PAYMENTS, ETC. Each Borrower agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender or an Agent may otherwise have, each Lender and each Agent shall be entitled, at its option, to offset balances held by it for the account of such Borrower at any of such Lender's (or an Agent's) offices, in Dollars or in any other currency, against any principal of, or interest on, any of such Lender's Loans to such Borrower hereunder (or other Obligations of such Borrower owing to such Lender or an Agent hereunder) which is not paid when due (regardless of whether such balances are then due to such Borrower), in which case such Lender shall promptly notify the Company, all other Lenders and the each Agent thereof; provided, however, such Lender's failure to give such notice shall not affect the validity of such offset. If a Lender shall obtain payment of any principal of, or interest on, any Loan made by it to a Borrower under this Agreement, or shall obtain payment on any other Obligation owing by a Borrower through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise or through voluntary prepayments directly to a Lender or other payments made by a Borrower to a Lender not in accordance with the terms of this Agreement and such payment should be distributed to the Lenders pro rata in accordance with Section 3.2 or Section 10.4, as applicable, such Lender shall promptly pay such amounts to the other Lenders and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such payment (net of any reasonable expenses which may be incurred by such Lender in obtaining or preserving such benefit) pro rata in accordance with Section 3.2 or Section 10.4. To such end, all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrowers. -23- 28 SECTION 3.4. SEVERAL OBLIGATIONS. No Lender shall be responsible for the failure of any other Lender to make a Loan or to perform any other obligation to be made or performed by such other Lender hereunder, and the failure of any Lender to make a Loan or to perform any other obligation to be made or performed by it hereunder shall not relieve the obligation of any other Lender to make any Loan or to perform any other obligation to be made or performed by such other Lender. SECTION 3.5. MINIMUM AMOUNTS. (a) Borrowings and Conversions. Each borrowing of Base Rate Loans shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $1,000,000 in excess thereof. Each borrowing of LIBOR Loans, and each Conversion of Loans to LIBOR Loans shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $1,000,000 in excess of that amount. (b) Prepayments. Each voluntary prepayment of Loans shall be in an aggregate minimum amount of $1,000,000. (c) Reductions of Commitments. Each reduction of the Commitments under Section 2.9 shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof. SECTION 3.6. FEES. (a) Commitment Fee. The Company agrees to pay to the Disbursing Agent for the account of the Lenders a commitment fee in respect of the Commitments (whether or not utilized) at the rate of two-tenths of one percent (0.20%) per annum for the period from and including the Agreement Date to but excluding the Termination Date. Such commitment fee shall be payable quarterly in arrears on each Quarterly Date and on the Termination Date. (b) Facility Fee. The Company agrees to pay to the Disbursing Agent for the account of the Lenders on the Agreement Date a facility fee in the amount of 0.05% of the aggregate Commitments. (c) Administrative and Other Fees. The Company agrees to pay the administrative and other fees of each Agent as may be agreed to in writing from time to time. SECTION 3.7. COMPUTATIONS. Unless otherwise expressly set forth herein, any accrued interest on any Loan, any Fees or other Obligations due hereunder shall be computed on the basis of a year of 360 days and the actual number of days elapsed. -24- 29 SECTION 3.8. USURY. In no event shall the amount of interest due or payable on the Loans or other Obligations exceed the maximum rate of interest allowed by Applicable Law and, if any such payment is paid by a Borrower or received by any Lender, then such excess sum shall be credited as a payment of principal, unless such Borrower shall notify the respective Lender in writing that such Borrower elects to have such excess sum returned to it forthwith. It is the express intent of the parties hereto that the Borrowers not pay and the Lenders not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrowers under Applicable Law. SECTION 3.9. AGREEMENT REGARDING INTEREST AND CHARGES. The parties hereto hereby agree and stipulate that the only charge imposed upon the Borrowers for the use of money in connection with this Agreement is and shall be the interest specifically described in Section 2.2(a). Notwithstanding the foregoing, the parties hereto further agree and stipulate that all agency fees, syndication fees, facility fees, underwriting fees, default charges, late charges, funding or "breakage" charges, increased cost charges, attorneys' fees and reimbursement for costs and expenses paid by the Disbursing Agent or any Lender to third parties or for damages incurred by the Disbursing Agent or any Lender, are charges made to compensate the Disbursing Agent or any such Lender for underwriting or administrative services and costs or losses performed or incurred, and to be performed or incurred, by the Disbursing Agent and the Lenders in connection with this Agreement and shall under no circumstances be deemed to be charges for the use of money. SECTION 3.10. STATEMENTS OF ACCOUNT. The Disbursing Agent will account to the Company monthly with a statement of Loans, accrued interest and Fees, charges and payments made pursuant to this Agreement and the other Loan Documents, and such account rendered by the Disbursing Agent shall be deemed prima facie evidence of such matters. The failure of the Disbursing Agent to deliver such a statement of accounts shall not relieve or discharge a Borrower from any of its Obligations hereunder. SECTION 3.11. DEFAULTING LENDERS. (a) Generally. If for any reason any Lender (a "Defaulting Lender") shall fail or refuse to perform any of its obligations under this Agreement or any other Loan Document to which it is a party within the time period specified for performance of such obligation or, if no time period is specified, if such failure or refusal continues for a period of two Business Days after notice from the Disbursing Agent, then, in addition to the rights and remedies that may be available to the Disbursing Agent or the Borrowers under this Agreement or Applicable Law, such Defaulting Lender's right to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of the Disbursing Agent or to be taken into account in the calculation of the Requisite Lenders, shall be suspended during the pendency of such failure or refusal. If a Lender is a Defaulting Lender because it has failed to make timely -25- 30 payment to the Disbursing Agent of any amount required to be paid to the Disbursing Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which the Disbursing Agent or the Borrowers may have under the immediately preceding provisions or otherwise, the Disbursing Agent shall be entitled (i) to collect interest from such Defaulting Lender on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Federal Funds Rate, and (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Lender under this Agreement or any other Loan Document. Any amounts received by the Disbursing Agent in respect of a Defaulting Lender's Loans shall not be paid to such Defaulting Lender and shall be held uninvested by the Disbursing Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Lender upon the Defaulting Lender's curing of its default. Neither Borrower shall have any liability in respect of such action by the Disbursing Agent. (b) Purchase of Defaulting Lender's Commitment. Any Lender who is not a Defaulting Lender shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Lender's Commitment. Any Lender desiring to exercise such right shall give written notice thereof to the Disbursing Agent no sooner than 2 Business Days and not later than 10 Business Days after such Defaulting Lender became a Defaulting Lender. If more than one Lender exercises such right, each such Lender shall have the right to acquire an amount of such Defaulting Lender's Commitment in proportion to the Commitments of the other Lenders exercising such right. Upon any such purchase, the Defaulting Lender's interest in the Loans and its rights hereunder (but not its liability in respect thereof or under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser thereof including an appropriate Assignment and Acceptance Agreement and, notwithstanding Section 12.5(d), shall pay to the Syndication Agent an assignment fee in the amount of $3,000. The purchase price for the Commitment of a Defaulting Lender shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Borrowers to the Defaulting Lender. Prior to payment of such purchase price to a Defaulting Lender, the Disbursing Agent shall apply against such purchase price any amounts retained by the Disbursing Agent pursuant to the last sentence of the immediately preceding subsection (a). The Defaulting Lender shall be entitled to receive amounts owed to it by the Borrowers under the Loan Documents which accrued prior to the date of the default by the Defaulting Lender, to the extent the same are received by the Disbursing Agent from or on behalf of the Borrowers. There shall be no recourse against any Lender or the Disbursing Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans. If, prior to a Lender's acquisition of a Defaulting Lender's Commitment pursuant to this subsection, such Defaulting Lender shall cure the event or condition which caused it to become a Defaulting Lender and shall have paid all amounts owing by it hereunder as a result thereof, then such Lender shall no longer have the right to acquire such Defaulting Lender's Commitment. -26- 31 SECTION 3.12. TAXES. (a) Taxes Generally. All payments by each Borrower of principal of, and interest on, the Loans and all other Obligations shall be made free and clear of and without deduction for any present or future excise, stamp or other taxes, fees, duties, levies, imposts, charges, deductions, withholdings or other charges of any nature whatsoever imposed by any taxing authority in the United States of America, but excluding (i) franchise taxes, (ii) any taxes (other than withholding taxes that do not constitute back-up withholding taxes) that would not be imposed but for a connection between the Disbursing Agent or a Lender and the jurisdiction imposing such taxes (other than a connection arising solely by virtue of the activities of the Disbursing Agent or such Lender pursuant to or in respect of this Agreement or any other Loan Document), (iii) any withholding taxes payable with respect to payments hereunder or under any other Loan Document under Applicable Law in effect on the Agreement Date, (iv) any taxes imposed on or measured by any Lender's assets, net income, receipts or branch profits and (v) any taxes arising after the Agreement Date solely as a result of or attributable to a Lender changing its designated Lending Office after the date such Lender becomes a party hereto (such non-excluded items being collectively called "Taxes"). If any withholding or deduction from any payment to be made by a Borrower hereunder is required in respect of any Taxes pursuant to any Applicable Law, then such Borrower will: (i) pay directly to the relevant Governmental Authority the full amount required to be so withheld or deducted; (ii) promptly forward to the Disbursing Agent an official receipt or other documentation reasonably satisfactory to the Disbursing Agent evidencing such payment to such Governmental Authority; and (iii) pay to the Disbursing Agent for its account or the account of the applicable Lender, as the case may be, such additional amount or amounts as is necessary to ensure that the net amount actually received by the Disbursing Agent or such Lender will equal the full amount that the Disbursing Agent or such Lender would have received had no such withholding or deduction been required . (b) Tax Indemnification. If a Borrower fails to pay any Taxes when due to the appropriate Governmental Authority or fails to remit to the Disbursing Agent, for its account or the account of the respective Lender, as the case may be, the receipts or other documentary evidence described in subsection (a)(ii) above, such Borrower shall indemnify the Disbursing Agent and the Lenders for any incremental Taxes, interest or penalties that may become payable by the Disbursing Agent or any Lender as a result of any such failure. For purposes of this Section, a distribution hereunder by the Disbursing Agent or any Lender to or for the account of any Lender shall be deemed a payment by the applicable Borrower. (c) Tax Forms. Prior to the date that any Lender or Participant organized under the laws of a jurisdiction outside the United States of America becomes a party hereto, such Person shall deliver to the Company and the Disbursing Agent such certificates, documents or other evidence, as required by the Internal Revenue Code or Treasury Regulations issued pursuant -27- 32 thereto (including Internal Revenue Service Forms W-8, 4224 or 1001, as applicable, or appropriate successor forms), properly completed, currently effective and duly executed by such Lender or Participant establishing that payments to it hereunder and under the Notes are (i) not subject to United States Federal backup withholding tax and (ii) not subject to United States Federal withholding tax under the Code because such payment is either effectively connected with the conduct by such Lender or Participant of a trade or business in the United States or totally exempt from United States Federal withholding tax by reason of the application of the provisions of a treaty to which the United States is a party or such Lender or Participant is otherwise exempt. ARTICLE 4 YIELD PROTECTION, ETC. SECTION 4.1. ADDITIONAL COSTS; CAPITAL ADEQUACY. (a) Additional Costs. Each Borrower shall promptly pay to the Disbursing Agent for the account of a Lender from time to time such amounts (without duplication of amounts payable under Section 3.12) as such Lender may determine to be necessary to compensate such Lender for any costs incurred by such Lender that it determines are attributable to its making or maintaining of any LIBOR Loans to such Borrower or its obligation to make any LIBOR Loans to such Borrower hereunder, any reduction in any amount receivable by such Lender under this Agreement or any of the other Loan Documents in respect of any of such Loans or such obligation or the maintenance by such Lender of capital in respect of its Loans or its Commitments (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change (other than those applying solely to a Lender by reason of a formal determination by the applicable regulator to be in a financially troubled condition) that: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement or any of the other Loan Documents in respect of any of such Loans or its Commitments (other than taxes imposed on or measured by the overall net income of such Lender or of its Lending Office for any of such Loans by the jurisdiction in which such Lender has its principal office or such Lending Office), or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than Regulation D of the Board of Governors of the Federal Reserve System or other reserve requirement utilized in the determination of the Adjusted Eurodollar Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender, or any commitment of such Lender (including, without limitation, the Commitments of such Lender hereunder); or (iii) has or would have the effect of reducing the rate of return on capital of such Lender to a level below that which such Lender could have achieved but for such Regulatory Change (taking into consideration such Lender's policies with respect to capital adequacy). (b) Lender's Suspension of LIBOR Loans. Without limiting the effect of the provisions of the immediately preceding subsection (a), if by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender that includes deposits by reference to which the interest rate on LIBOR Loans is determined as -28- 33 provided in this Agreement or a category of extensions of credit or other assets of such Lender that includes LIBOR Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Lender so elects by notice to the Company (with a copy to the Disbursing Agent), the obligation of such Lender to make or Continue, or to Convert any other Type of Loan into LIBOR Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.5 shall apply). (c) Notification and Determination of Additional Costs. Each of the Disbursing Agent and each Lender agrees to notify the Company of any event occurring after the Agreement Date entitling the Disbursing Agent or such Lender to compensation under any of the preceding subsections of this Section as promptly as practicable; provided, however, the failure of the Disbursing Agent or any Lender to give such notice shall not release a Borrower from any of its obligations hereunder. The Disbursing Agent and or such Lender agrees to furnish to the Company a certificate setting forth the basis and amount of each request by the Disbursing Agent or such Lender for compensation under this Section. Determinations by the Disbursing Agent or any Lender of the effect of any Regulatory Change shall be conclusive, provided that such determinations are made on a reasonable basis and in good faith. SECTION 4.2. SUSPENSION OF LIBOR LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Adjusted Eurodollar Rate for any Interest Period: (a) the Disbursing Agent reasonably determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Adjusted Eurodollar Rate for such Interest Period, or (b) the Disbursing Agent reasonably determines (which determination shall be conclusive) that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of making or maintaining LIBOR Loans for such Interest Period; then the Disbursing Agent shall give the Company and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to, and shall not, make additional LIBOR Loans, Continue LIBOR Loans, or Convert Loans into LIBOR Loans, as the case may be, and each Borrower shall, on the last day of each current Interest Period for each affected outstanding LIBOR Loan, either repay such Loan or Convert such Loan into a Base Rate Loan. SECTION 4.3. ILLEGALITY. Notwithstanding any other provision of this Agreement, if it becomes unlawful for any Lender to honor its obligation to make or maintain LIBOR Loans hereunder, then such Lender shall promptly notify the Company thereof (with a copy to the Disbursing Agent) and such Lender's obligation to make or Continue, or to Convert Loans of any other Type into, LIBOR -29- 34 Loans shall be suspended until such time as such Lender may again make and maintain LIBOR Loans (in which case the provisions of Section 4.5 shall be applicable). SECTION 4.4. COMPENSATION. Each Borrower shall pay to the Disbursing Agent for account of each Lender, upon the request of such Lender through the Disbursing Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense that such Lender determines is attributable to: (a) any payment or prepayment (whether mandatory or optional) of a LIBOR Loan, or Conversion of a LIBOR Loan, made by such Lender to such Borrower for any reason (including, without limitation, acceleration) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by such Borrower for any reason (including, without limitation, the failure of any of the applicable conditions precedent specified in Article 5 to be satisfied) to borrow a LIBOR Loan from such Lender on the date for such borrowing, or to Convert a Loan of another Type into a LIBOR Loan or Continue a LIBOR Loan on the requested date of such Conversion or Continuation. SECTION 4.5. TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make LIBOR Loans or to Continue, or to Convert Loans into, LIBOR Loans shall be suspended pursuant to Section 4.1(b), Section 4.2 or Section 4.3, then such Lender's affected LIBOR Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for such LIBOR Loans (or, in the case of a Conversion required by Section 4.1(b) or 4.3, on such earlier date as such Lender may specify to the Company with a copy to the Disbursing Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 4.1, 4.2 or 4.3 that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's LIBOR Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's LIBOR Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as LIBOR Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Lender that would otherwise be Converted into LIBOR Loans shall remain as Base Rate Loans. If such Lender gives notice to the Company (with a copy to the Disbursing Agent) that the circumstances specified in Section 4.1 or 4.3 that gave rise to the Conversion of such Lender's LIBOR Loans pursuant to this Section no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when LIBOR Loans made by other Lenders are outstanding, then such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding LIBOR Loans, to the -30- 35 extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding LIBOR Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. SECTION 4.6. CHANGE OF LENDING OFFICE. Each Lender agrees that it will use reasonable efforts to designate an alternate Lending Office with respect to any of its Loans affected by the matters or circumstances described in Sections 3.12, 4.l or 4.3 to reduce the liability of the Borrowers or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as determined by such Lender in its sole discretion, except that such Lender shall have no obligation to designate a Lending Office located in the United States of America. SECTION 4.7. ASSUMPTIONS CONCERNING FUNDING OF LIBOR LOANS. Calculation of all amounts payable to a Lender under this Article 4 shall be made as though such Lender had actually funded LIBOR Loans through the purchase of deposits in the relevant market bearing interest at the rate applicable to such LIBOR Loans in an amount equal to the amount of the LIBOR Loans and having a maturity comparable to the relevant Interest Period provided, however, that each Lender may fund each of its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be used only for calculation of amounts payable under this Article 4. ARTICLE 5 CONDITIONS PRECEDENT SECTION 5.1. INITIAL CONDITIONS PRECEDENT. The obligation of the Lenders to effect the occurrence of the first Credit Event hereunder is subject to the following conditions precedent: (a) The Managing Agent shall have received each of the following, in form and substance satisfactory to the Lenders: (i) Counterparts of this Agreement executed by each of the parties hereto; (ii) Notes executed by each Borrower, payable to each Lender and complying with the terms of Section 2.8(a); (iii) An opinion of Sutherland, Asbill & Brennan LLP, counsel to the Borrower, addressed to the Managing Agent and the Lenders, in substantially the form of Exhibit G; (iv) The Articles of Incorporation of each Borrower certified as of a recent date by the Secretary of State of the State of Maryland, to the extent not provided to the Existing Lenders; -31- 36 (v) A good standing certificate with respect to each Borrower issued as of a recent date by the Secretary of State of the State of Maryland; (vi) A certificate of incumbency signed by the Secretary or Assistant Secretary of each Borrower with respect to each of the officers of such Borrower authorized to execute and deliver the Loan Documents to which such Borrower is a party and the officers of such Borrower then authorized to deliver Notices of Borrowing, Notices of Continuation and Notices of Conversion; (vii) Copies (certified by the Secretary or Assistant Secretary of such Borrower) of the bylaws of such Borrower, to the extent not provided to the Existing Lenders, and of all corporate action taken by such Borrower to authorize the execution, delivery and performance of the Loan Documents to which it is a party; (viii) To the extent not provided to the Existing Lenders, the articles of incorporation, articles of organization, certificate of limited partnership or other comparable organizational instrument of each of SBIC and SSBIC certified as of a recent date by the Secretary of State of the State of formation of such Subsidiary; (ix) To the extent not provided to the Existing Lenders, a certificate of good standing or certificate of similar meaning with respect to each of SBIC and SSBIC issued as of a recent date by the Secretary of State of the State of formation of each such Subsidiary; (x) To the extent not provided to the Existing Lenders, copies certified by the Secretary or Assistant Secretary of each of SBIC and SSBIC (or other individual performing similar functions) of the by-laws of each of SBIC and SSBIC; (xi) A copy of each of the documents, instruments and agreements evidencing any of the Indebtedness described on Schedule 6.1(g) and a copy of each Material Contract, certified as true, correct and complete by the chief financial officer of the Company; (xii) Evidence that all insurance required to be maintained by the Company and the Subsidiaries under the terms of the Loan Documents is in effect, or a certificate of an officer of the Company to such effect; (xiii) The Fees then due under Section 3.6; (xiv) Subordination agreements with respect to any intercompany Indebtedness of a Borrower or a Guarantor permitted by Section 9.2(a)(4); (xv) A pro-forma Compliance Certificate and pro-forma Borrowing Base Certificates of each Borrower, each calculated as of the Effective Date, together with Borrowing Base Certificates of the Company and SBLC, each calculated as of February 28, 1998, and March 31, 1998, and any other information that should have been delivered to the Existing Lenders pursuant to Article 8 of the Existing Credit Agreement; and -32- 37 (xvi) Such other documents, agreements and instruments as the Managing Agent on behalf of the Lenders may reasonably request; and (b) In the good faith judgment of the Managing Agent and the Lenders: (i) There shall not have occurred or become known to the Managing Agent or the Lenders any event, condition, situation or status since the date of the information contained in the financial and business projections, budgets, pro forma data and forecasts concerning the Company and its Subsidiaries delivered to the Managing Agent and the Lenders prior to the Agreement Date that has had or could reasonably be expected to result in a Material Adverse Effect; (ii) No litigation, action, suit, investigation or other arbitral, administrative or judicial proceeding shall be pending or threatened which could reasonably be expected to (1) result in a Material Adverse Effect or (2) restrain or enjoin, impose materially burdensome conditions on, or otherwise materially and adversely affect the ability of a Borrower to fulfill its obligations under the Loan Documents; (iii) The Company and its Subsidiaries shall have received all approvals, consents and waivers, and shall have made or given all necessary filings and notices as shall be required to consummate the transactions contemplated hereby without the occurrence of any default under, conflict with or violation of (1) any Applicable Law or (2) any agreement, document or instrument to which the Company or any Subsidiary is a party or by which any of them or their respective properties is bound, except for such approvals, consents, waivers, filings and notices the receipt, making or giving of which would not reasonably be likely to (A) have a Material Adverse Effect, or (B) restrain or enjoin, impose materially burdensome conditions on, or otherwise materially and adversely affect the ability of a Borrower to fulfill its obligations under the Loan Documents; and (iv) There shall not have occurred or exist any other material disruption of financial or capital markets that could reasonably be expected to materially and adversely affect the transactions contemplated by the Loan Documents. (c) The Company shall have provided the Lenders with the executed waivers and consents required by Section 7.15(b) of the Existing Credit Agreement. SECTION 5.2. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Lenders to make any Loans is subject to the further condition precedent that: (a) no Default or Event of Default shall have occurred and be continuing as of the date of the making of such Loan or would exist immediately after giving effect thereto; (b) the representations and warranties made or deemed made by the Company and its Subsidiaries in the Loan Documents to which any of them is a party, shall be true and correct on -33- 38 and as of the date of the making of such Loan with the same force and effect as if made on and as of such date except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted hereunder; and (c) in the case of the borrowing of Loans, the Disbursing Agent shall have received a timely Notice of Borrowing. Each Credit Event shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of the giving of notice relating to such Credit Event and, unless the Company otherwise notifies the Managing Agent prior to the date of such Credit Event, as of the date of the occurrence of such Credit Event). In addition, if such Credit Event is the making of a Loan, the Company shall be deemed to have represented to the Managing Agent and the Lenders at the time such Loan is made that all conditions to the making of such Loan contained in Article 5 have been satisfied. ARTICLE 6 REPRESENTATIONS AND WARRANTIES SECTION 6.1. REPRESENTATIONS AND WARRANTIES. In order to induce the Agents and each Lender to enter into this Agreement and to make Loans, each Borrower represents and warrants to the Agents and each Lender as follows: (a) Organization; Power; Qualification. Each of the Borrowers and its Subsidiaries is a corporation, partnership or other legal entity, duly organized or formed, validly existing and in good standing under the jurisdiction of its incorporation or formation, has the power and authority to own or lease its respective properties and to carry on its respective business as now being and hereafter proposed to be conducted and is duly qualified and is in good standing as a foreign corporation, partnership or other legal entity, and authorized to do business, in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization and where the failure to be so qualified or authorized would have, in each instance a Material Adverse Effect. (b) Ownership Structure. As of the Agreement Date, Schedule 6.1(b) correctly sets forth the corporate structure and ownership interests of the Subsidiaries including the correct legal name of each Subsidiary, its jurisdiction of formation, the Persons holding equity interests in such Subsidiary, and their percentage equity or voting interest in such Subsidiary . As of the Agreement Date, SBLC, SBIC, SSBIC, REIT and QRS are the only Material Subsidiaries. Except as set forth in such Schedule, and except for preferred stock of REIT issued to 125 shareholders: (i) no Subsidiary has issued to any third party any securities convertible into such Subsidiary's capital stock or other equity interests or any options, warrants or other rights to acquire any securities convertible into such capital stock or other equity interests, and -34- 39 (ii) the outstanding capital stock of, or other equity interests in, each such Subsidiary are owned by the Company and its Subsidiaries indicated on such Schedule free and clear of all Liens, warrants, options and rights of others of any kind whatsoever. All such outstanding capital stock and other equity interests have been validly issued and, in the case of capital stock, are fully paid and nonassessable. (c) Authorization of Agreement, Notes, Loan Documents and Borrowings. Each Borrower has the right and power, and has taken all necessary action to authorize it, to borrow hereunder. Each Borrower has the right and power, and has taken all necessary action to authorize it to execute, deliver and perform each of the Loan Documents to which it is a party in accordance with their respective terms and to consummate the transactions contemplated hereby and thereby. The Loan Documents to which each Borrower is a party have been duly executed and delivered by the duly authorized officers of such Borrower, as applicable, and each is a legal, valid and binding obligation of such Borrower, as applicable, enforceable against it in accordance with its respective terms. (d) Compliance of Agreement, Notes, Loan Documents and Borrowing with Laws, etc. The execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which each Borrower is a party in accordance with their respective terms and the borrowings hereunder do not and will not, by the passage of time, the giving of notice, or otherwise: (i) require any Governmental Approval, other than such as have been obtained and are in full force and effect, or violate any Applicable Law (including all Environmental Laws) relating to such Borrower or any Subsidiary; (ii) conflict with, result in a breach of or constitute a default under the articles of incorporation or the bylaws of such Borrower or the organizational documents of any Subsidiary, or any indenture, agreement or other instrument to which such Borrower or any Subsidiary is a party or by which it or any of its respective properties may be bound; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Borrower or any Subsidiary. (e) Compliance with Law; Governmental Approvals. Each Borrower and each Subsidiary is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Law relating to it, except for noncompliances which, and Governmental Approvals the failure to possess which, would not, individually or in the aggregate, cause a Default or Event of Default or have a Material Adverse Effect. (f) Ownership of Assets; Liens. Each Borrower has (or in the case of Subordinated CMBS Tranches, the QRS, or in the case of Sale Leaseback Assets, a Real Estate Sub has) good title to all of its Eligible Assets. There are no Liens against any of such Eligible Assets except for Permitted Liens described in clause (a) of the definition of such term, or in the case of Sale Leaseback Assets, Permitted Liens described in clauses (a) and (d) of the definition of such term. (g) Indebtedness. Schedule 6.1(g) is, as of the Agreement Date, a complete and correct listing of all Indebtedness of the Company and its Subsidiaries, including all guaranties of the Company and its Subsidiaries and all letters of credit and acceptance facilities extended to the Company or any Subsidiary. -35- 40 (h) Material Contracts. Schedule 6.1(h) is a true, correct and complete listing of all Material Contracts as of Agreement Date. (i) Litigation. There are no actions, suits or proceedings pending (nor, to the knowledge of the Company or any Subsidiary, are there any actions, suits or proceedings threatened, nor is there any basis therefor) against or in any other way relating adversely to or affecting the Company or any Subsidiary or any of its respective property in any court or before any arbitrator of any kind or before or by any other Governmental Authority which is reasonably likely to be adversely determined and result in a Material Adverse Effect, and there are no strikes, slow downs, work stoppages or walkouts or other labor disputes in progress or threatened relating to the Company or any Subsidiary. (j) Taxes. All federal, state and other tax returns of the Company and its Subsidiaries required by Applicable Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Company and any of its Subsidiaries and their respective properties, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under Section 7.6. None of the United States income tax returns of the Company and its Subsidiaries are under audit as of Agreement Date. All charges, accruals and reserves on the books of the Company and each of its Subsidiaries in respect of any taxes or other governmental charges are in accordance with GAAP. (k) Financial Statements: No Material Adverse Change. The Company has furnished to each Lender copies of (i) the audited consolidated balance sheets of the predecessors to the Company and its consolidated Subsidiaries for the fiscal year ending December 31, 1996, and the related consolidated statements of income, retained earnings and cash flow for the fiscal year ending on such date, with the opinions thereon of Matthews, Carter & Boyce, P.C., and Arthur Andersen, LLP, and (ii) the unaudited consolidated balance sheets of the predecessors to the Company and its consolidated Subsidiaries for the fiscal quarter ending September 30, 1997, and the related consolidated statements of income, retained earnings and cash flow of such predecessors for the fiscal quarter period ending on such date. Such balance sheets and statements (including in each case related schedules and notes) present fairly, in accordance with GAAP consistently applied throughout the periods involved, the consolidated financial position of such predecessors as at their respective dates and the results of operations and the cash flow for such periods (subject, as to interim statements, to changes resulting from normal year-end audit adjustments). Neither the Company nor any of its Subsidiaries has on the Agreement Date any material contingent liabilities, liabilities, liabilities for taxes, unusual or long-term commitments or unrealized or forward anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said financial statements. Since December 31, 1996, there has been no material adverse change in the consolidated financial condition, results of operations, business or prospects of the Company and its Subsidiaries taken as a whole. Each of the Company and its Subsidiaries is Solvent. (l) ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan -36- 41 and is in compliance with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan except for noncompliances which would not, individually or in the aggregate, cause a Default or an Event of Default or have a Material Adverse Effect. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (m) Absence of Defaults. Neither the Company nor any Material Subsidiary is in default under its articles of incorporation, bylaws, partnership agreement or other similar organizational documents, and no event has occurred, which has not been remedied, cured or waived: (i) which constitutes a Default or an Event of Default; or (ii) which constitutes, or which with the passage of time, the giving of notice, a determination of materiality, the satisfaction of any condition, or any combination of the foregoing, would constitute, a default or event of default by the Company or any Subsidiary under any Indebtedness, Material Contract, any other agreement (other than this Agreement) or judgment, decree or order to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties may be bound where such default or event of default could, individually or in the aggregate, have a Material Adverse Effect. (n) Environmental Laws. The Company and its Subsidiaries have obtained all Governmental Approvals which are required under Environmental Laws, and are in compliance with all terms and conditions of such Governmental Approvals, which the failure to obtain or to comply with could reasonably be expected to have a Material Adverse Effect. Each of the Company and its Subsidiaries is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables contained in the Environmental Laws the failure with which to comply could have a Material Adverse Effect. Neither the Company nor any Subsidiary is aware of, or has received notice of, any past, present, or future events, conditions, circumstances, activities, practices, incidents, actions, or plans which, with respect to the Company or any of its Subsidiaries may interfere with or prevent compliance or continued compliance with Environmental Laws, or may give rise to any common-law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study, or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, chemical, or industrial, toxic, or other Hazardous Material that could be reasonably expected to have a Material Adverse Effect; and there is no civil, criminal, or administrative action, suit, demand, claim, hearing, notice, or demand letter, notice of violation, investigation, or proceeding pending or, to the knowledge of the Company or any Subsidiary, after due inquiry, threatened, against the Company or any of its Subsidiaries relating in any way to Environmental Laws that could be reasonably expected to have a Material Adverse Effect. -37- 42 (o) Investment Company; Public Utility Holding Company. Each of the Company and SBLC is a "business development company" within the meaning of the Investment Company Act. Neither the Company nor any Subsidiary is (i) a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (ii) except for other Subsidiaries that are business development companies, subject to any other Applicable Law which purports to regulate or restrict its ability to borrow money or to consummate the transactions contemplated by this Agreement or to perform its obligations under any Loan Document to which it is a party. (p) Margin Stock. Neither the Company nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying "margin stock" within the meaning of Regulations G and U of the Board of Governors of the Federal Reserve System. (q) Affiliate Transactions. Except as permitted by Section 9.10, neither the Company nor any Subsidiary is a party to or bound by any agreement or arrangement (whether oral or written) to which any Affiliate of the Company or any Subsidiary is a party. Neither the Company nor any Subsidiary is a party to any agreement or arrangement which restricts or prohibits the payment of dividends or the repayment of inter-company loans by a Subsidiary to the Company, except for SBA approval of dividends paid by SBIC and SSBIC, which the Company has no reason to believe will not be granted by the SBA. (r) Intellectual Property. The Company and each Subsidiary owns or has the right to use, under valid license agreements or otherwise, all patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights, trade secrets and copyrights (collectively, "Intellectual Property") used in the conduct of its businesses as now conducted and as contemplated by the Loan Documents, which the failure to own or have the right to use could reasonably be expected to have a Material Adverse Effect, without known conflict with any patent, license, franchise, trademark, trade secret, trade name, copyright, or other proprietary right of any other Person. (s) Accuracy and Completeness of Information. All written information, reports and other papers and data furnished to the Managing Agent or any Lender by, on behalf of, or at the direction of, the Company or any Subsidiary were, at the time the same were so furnished, complete and correct in all material respects, to the extent necessary to give the recipient a true and accurate knowledge of the subject matter, or, in the case of financial statements, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the Persons involved as at the date thereof and the results of operations for such periods. As of the Agreement Date, no fact is known to the Company or any Subsidiary which has had, or may in the future have (so far as the Company or any Subsidiary can reasonably foresee), a Material Adverse Effect which has not been set forth in the financial statements referred to in Section 6.1(k) or in such information, reports or other papers or data or otherwise disclosed in writing to the Managing Agent and the Lenders prior to the Effective Date. No document furnished or written statement made to the Managing Agent or any Lender -38- 43 in connection with the negotiation, preparation of execution of this Agreement or any of the other Loan Documents contains or will contain any untrue statement of a fact material to the creditworthiness of the Company or any Subsidiary or omits or will omit to state a material fact necessary in order to make the statements contained therein not misleading. Notwithstanding the first and third sentences of this Section 6.1(s), as to projected financial information, each Borrower represents and warrants only that such information, at the time furnished to the Managing Agent or any Lender, was prepared in good faith based on reasonable assumptions under the circumstances. (t) RIC and REIT Status. The Company is a RIC. REIT qualifies for treatment as a "real estate investment trust" under the Internal Revenue Code. (u) Not Plan Assets. The assets of the Company or any Subsidiary do not and will not constitute "plan assets," within the meaning of ERISA, the Internal Revenue Code and the respective regulations promulgated thereunder. The execution, delivery and performance of this Agreement, and the borrowing and repayment of amounts hereunder, do not and will not constitute "prohibited transactions" under ERISA or the Internal Revenue Code. (v) Business. As of the Agreement Date, the Company and its Subsidiaries are substantially engaged in the businesses described in the Proxy. (w) Borrowing Base Assets. At the time it is initially included in a Borrowing Base, each Borrowing Base Asset: (i) is owned by a Borrower, or in the case of Subordinated CMBS Tranches, by the QRS, or in the case of Sale Leaseback Assets, by a Real Estate Sub, free and clear of all Liens; (ii) represents the valid, binding and enforceable obligation of each Obligor with respect thereto; (iii) complies in all material aspects with all Applicable Laws relating thereto; (iv) is not subject to any restriction or prohibition on the assignment, pledge or transfer thereof; and (v) satisfies all Eligibility Requirements. (x) Year 2000 Compliance. The Company has (i) initiated a review and assessment of all areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Company or any of its Subsidiaries (or suppliers and vendors) may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable. The Company believes that all computer -39- 44 applications (including those of its suppliers and vendors) that are material to its or any of its Subsidiaries' business and operations will on a timely basis be able to perform properly date-sensitive functions for all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure to do so could not reasonably be expected to have Material Adverse Effect. SECTION 6.2. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All statements contained in any certificate, financial statement or other instrument delivered by or on behalf of the Company or any Subsidiary to an Agent or any Lender pursuant to or in connection with this Agreement or any of the other Loan Documents (including, but not limited to, any such statement made in or in connection with any amendment thereto or any statement contained in any certificate, financial statement or other instrument delivered by or on behalf of the Company, REIT or SBLC prior to the Agreement Date and delivered to an Agent or any Lender in connection with closing the transactions contemplated hereby) shall constitute representations and warranties made by the Borrowers under this Agreement. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the Agreement Date, the Effective Date and at and as of the date of the occurrence of any Credit Event, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically permitted hereunder. All such representations and warranties shall survive the effectiveness of this Agreement, the execution and delivery of the Loan Documents and the making of the Loans. ARTICLE 7 AFFIRMATIVE COVENANTS For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.7, all of the Lenders) shall otherwise consent in the manner provided for in Section 12.7, each Borrower shall: SECTION 7.1. PRESERVATION OF EXISTENCE AND SIMILAR MATTERS. Except as otherwise permitted under Section 9.7, preserve and maintain, and the Company shall cause each Material Subsidiary to preserve and maintain, its respective existence, rights, franchises, licenses and privileges in the jurisdiction of its incorporation or formation and qualify and remain qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification and authorization and where the failure to be so authorized and qualified could have a Material Adverse Effect. SECTION 7.2. COMPLIANCE WITH APPLICABLE LAW AND MATERIAL CONTRACTS. Comply, and the Company shall cause each Material Subsidiary to comply, with (a) all Applicable Law, including the obtaining of all Governmental Approvals, the failure with which -40- 45 to comply could have a Material Adverse Effect, and (b) all terms and conditions of all Material Contracts to which it is a party. SECTION 7.3. MAINTENANCE OF PROPERTY. In addition to the requirements of any of the other Loan Documents, (a) protect and preserve, and the Company shall cause each Material Subsidiary to protect and preserve, all of its material properties, including, but not limited to, all Intellectual Property, and maintain in good repair, working order and condition all tangible properties, ordinary wear and tear excepted, and (b) from time to time make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties, so that the business carried on in connection therewith may be properly and effectively conducted at all times. SECTION 7.4. CONDUCT OF BUSINESS. Together with its Subsidiaries, at all times carry on their business described in the Proxy. SECTION 7.5. INSURANCE. In addition to the requirements of any of the other Loan Documents, maintain, and the Company shall cause each Material Subsidiary to maintain, insurance with financially sound and reputable insurance companies against such risks and in such amounts as is customarily maintained by Persons engaged in similar businesses or as may be required by Applicable Law. SECTION 7.6. PAYMENT OF TAXES AND CLAIMS. Pay or discharge, and the Company shall cause each Material Subsidiary to pay and discharge, when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, and (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any properties of such Person; provided, however, that this Section shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings which operate to suspend the collection thereof and for which adequate reserves have been established on the books of such Borrower or such Subsidiary, as applicable, in accordance with GAAP. SECTION 7.7. VISITS AND INSPECTIONS. Permit, and the Company shall cause each Material Subsidiary to permit, representatives or agents of the Managing Agent or any Lender, from time to time, as often as may be reasonably requested and at the expense of the Managing Agent (unless an Event of Default shall be continuing in which case the exercise by the Managing Agent of its rights under this Section shall be at the expense of the Company) or such Lender, but only during normal business hours, to: (a) visit and inspect all properties of such Borrower and each Material Subsidiary; (b) inspect and make extracts from their respective books and records, including but not limited to management letters prepared by independent accountants; and (c) discuss with its principal -41- 46 officers, and its independent accountants, its business, assets, liabilities, financial conditions, results of operations and business prospects. If requested by the Managing Agent, the Company shall execute an authorization letter addressed to its accountants authorizing the Managing Agent or any Lender to discuss the financial affairs of the Company and any Material Subsidiary with its accountants. SECTION 7.8. USE OF PROCEEDS. Use the proceeds of Loans for working capital and general corporate purposes, including without limitation, the origination and interim warehousing of Eligible Assets. The Borrowers shall not, and the Company shall not permit any Subsidiary to, use any part of such proceeds to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulations U and X of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any such margin stock. SECTION 7.9. ENVIRONMENTAL MATTERS. Comply, and the Company shall cause all of its Subsidiaries to comply, with all Environmental Laws, the failure with which to comply could have a Material Adverse Effect. If a Borrower or any Subsidiary shall (a) receive notice that any violation of any Environmental Law may have been committed or is about to be committed by such Person, (b) receive notice that any administrative or judicial complaint or order has been filed or is about to be filed against a Borrower or any Subsidiary alleging violations of any Environmental Law or requiring the Borrower or any Subsidiary to take any action in connection with the release of Hazardous Materials, or (c) receive any notice from a Governmental Authority or private party alleging that a Borrower or any Subsidiary may be liable or responsible for costs associated with a response to or cleanup of a release of a Hazardous Materials or any damages caused thereby, and such notices, individually or in the aggregate, could have a Material Adverse Effect, such Borrower shall provide the Managing Agent with a copy of such notice within 10 days after the receipt thereof by such Borrower or any of the Subsidiaries. The Borrowers and the Subsidiaries shall promptly take all actions necessary to prevent the imposition of any Liens on any of their respective properties arising out of or related to any Environmental Laws. SECTION 7.10. BOOKS AND RECORDS. Maintain, and the Company shall cause each of the Subsidiaries to maintain, books and records pertaining to its business operations in such detail, form and scope as is consistent with good business practice in accordance with GAAP. SECTION 7.11. STATUS OF RIC AND BDC. At all times maintain its status as a RIC under the Internal Revenue Code and as a "business development company" under the Investment Company Act, and cause REIT to maintain its status as a real estate investment trust under the Internal Revenue Code. -42- 47 SECTION 7.12. ERISA EXEMPTIONS. Not, and the Company shall not permit any Subsidiary to, permit any of its respective assets to become or be deemed to be "plan assets" within the meaning of ERISA, the Internal Revenue Code and the respective regulations promulgated thereunder. SECTION 7.13. FURTHER ASSURANCES. At the Company's cost and expense, upon the request of the Managing Agent, duly execute and deliver or cause to be duly executed and delivered, to the Managing Agent and the Lenders such further instruments, documents and certificates, and do and cause to be done such further acts that may be necessary or advisable in the opinion of the Managing Agent to carry out more effectively the provisions and purposes of this Agreement and the other Loan Documents. SECTION 7.14. BORROWING SUBSIDIARIES. If SBLC, SBIC or SSBIC obtains a loan or advance from the Company after the Agreement Date (which loan or advance shall be in compliance with the limitations set forth in Sections 9.2(a) or 9.2(b), as applicable), within three Business Days after receiving such loan or advance, deliver to the Managing Agent each of the following in form and substance satisfactory to the Managing Agent: (a) a Guaranty executed by such Subsidiary in the amount of its borrowing from the Company and (b) the items that would have been delivered under Sections 5.l(a)(iii) through (vii) if such Subsidiary had been a Borrower on the Agreement Date. SECTION 7.15. YEAR 2000 COMPLIANCE. The Company will promptly notify the Bank in the event the Company discovers or determines that any computer application (including those of its suppliers and vendors) that is material to its or any of its Subsidiaries' business and operations will not be Year 2000 compliant, except to the extent that such failure could not reasonably be expected to have a Material Adverse Effect. ARTICLE 8 INFORMATION For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.7, all of the Lenders) shall otherwise consent in the manner set forth in Section 12.7, the Company shall furnish to each Lender (or to the Managing Agent if so provided below) at its Lending Office: SECTION 8.1. QUARTERLY FINANCIAL STATEMENTS. As soon as available and in any event within 45 days after the close of each of the first, second and third fiscal quarters of the Company, the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such period and the related consolidated and consolidating statements of income, retained earnings and cash flows of the -43- 48 Company and its Subsidiaries for such period, setting forth in each case in comparative form the figures for the corresponding periods of the previous fiscal year, all of which shall be certified by the chief financial officer of the Company, in his or her opinion, to present fairly, in accordance with GAAP, the consolidated financial position of the Company and its Subsidiaries as at the date thereof and the results of operations for such period (subject to normal year-end audit adjustments). SECTION 8.2. YEAR-END STATEMENTS. As soon as available and in any event within 90 days after the end of each fiscal year of the Company, the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such fiscal year, setting forth in comparative form the figures as at the end of and for the previous fiscal year, all of which shall be certified by (a) the chief financial officer of the Company, in his or her opinion, to present fairly, in accordance with GAAP, the financial position of the Company and its Subsidiaries as at the date thereof and the result of operations for such period and (b) independent certified public accountants of recognized national standing acceptable to the Requisite Lenders, whose certificate shall be unqualified and in scope and substance satisfactory to the Requisite Lenders and who shall have authorized the Company to deliver such financial statements and certification thereof to the Managing Agent and the Lenders pursuant to this Agreement. SECTION 8.3. COMPLIANCE CERTIFICATE; BORROWING BASE CERTIFICATE. (a) At the time the financial statements are furnished pursuant to Sections 8.1 and 8.2, a certificate in the form of Exhibit H (a "Compliance Certificate") executed by the chief financial officer of the Company: (a) setting forth in reasonable detail as at the end of such quarterly accounting period or fiscal year, as the case may be, the calculations required to establish whether or not the Company, and its Subsidiaries, were in compliance with the covenants contained in Sections 9.1, 9.2(a)(4), 9.2(b)(3), 9.2(b)(4), and 9.4(d), (b) stating that, to the best of his or her knowledge, information and belief, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred and whether it is continuing and the steps being taken by the Company with respect to such event, condition or failure. At the time the financial statements are furnished pursuant to Section 8.2, the Company will deliver to the Lenders a certificate of the independent accountants performing the audit of such financial statements to the effect that, in making such audit, nothing came to their attention that caused them to believe that any Borrower or its Subsidiaries failed to comply with any of the terms, covenants, provisions or conditions contained in this Agreement insofar as they relate to financial matters. Such accountants, however, shall not be liable to any Person by reason of their failure to obtain knowledge of any Event of Default or Default which would not be disclosed in the course of an audit conducted in accordance with GAAP. (b) Within 15 days after the end of each calendar month, certificates of the Company and SBLC, in the forms of Exhibits I-1 and I-2, respectively (each a "Borrowing Base -44- 49 Certificate"), executed by the chief financial officer of the Company, and setting forth a calculation of the Borrowing Base of each such Borrower as of the end of such calendar month, and accompanied by an asset listing and a past due report with respect to the Eligible Assets, in form and scope acceptable to the Requisite Lenders. (c) Within 45 days after the end of each fiscal quarter, a schedule of gains and losses and a valuation report with respect to the Eligible Assets, as of the end of such fiscal quarter, in form and scope acceptable to the Requisite Lenders. SECTION 8.4. OTHER INFORMATION. (a) Not later than 90 days prior to the last day of each fiscal year of the Company, pro forma projected consolidated and consolidating financial statements for the Company and its Subsidiaries reflecting the forecasted financial condition and results of operations of the Company and its Subsidiaries on a quarterly basis for the next succeeding year, accompanied by calculations establishing whether or not the Company would be in compliance on a pro forma basis with the covenants contained in Section 9.1, in each case in form and detail reasonably acceptable to the Requisite Lenders; (b) promptly upon receipt thereof, copies of all reports, if any, submitted to the Company or its Board of Directors by its independent public accountants including, without limitation, any management report; (c) within five Business Days of the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent), reports on Forms 10-K, 10-Q and 8-K (or their equivalents) and all other periodic reports which the Company shall file with the Securities and Exchange Commission (or any Governmental Authority substituted therefor) or any national securities exchange; (d) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed and promptly upon the issuance thereof copies of all press releases issued by the Company; (e) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; -45- 50 (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the controller of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take; (f) to the extent the Company or any Subsidiary is aware of the same, prompt notice of the commencement of any proceeding or investigation by or before any Governmental Authority and any action or proceeding in any court or other tribunal or before any arbitrator against or in any other way relating adversely to, or adversely affecting, the Company or any Subsidiary or any of their respective properties, assets or businesses which, if determined or resolved adversely to such Person, could have a Material Adverse Effect, and prompt notice of the receipt of notice that any United States income tax returns of the Company or any of its Subsidiaries are being audited; (g) to the extent not previously delivered hereunder, a copy of the articles of incorporation, bylaws, partnership agreement or other similar organizational documents of the Company, REIT, the QRS, or any Material Subsidiary, and any amendment thereto, in each case within five Business Days of the effectiveness thereof; (h) prompt notice of any change in the business, assets, liabilities, financial condition, results of operations or business prospects of the Company or any Subsidiary which has had or may have Material Adverse Effect, (i) prompt notice of the occurrence of any Default or Event of Default or any event which constitutes or which with the passage of time, the giving of notice, or otherwise, would constitute a default or event of default by the Company or any Subsidiary under any Material Contract to which any such Person is a party or by which any such Person or any of its respective properties may be bound; (j) prompt notice of any order, judgment or decree in excess of $5,000,000 having been entered against the Company or any Subsidiary or any of their respective properties or assets; (k) prompt notice of the acquisition, incorporation or other creation of any Subsidiary, the purpose for such Subsidiary, the nature of the assets and liabilities thereof and whether such Subsidiary is a Material Subsidiary; (l) notice of any Person becoming a Material Subsidiary within two Business Days of the determination thereof; (m) prompt notice of any strikes, slow downs, work stoppages or walkouts or other labor disputes in progress or threatened relating to the Company or any Subsidiary; -46- 51 (n) promptly upon entering into any Material Contract after the Agreement Date, a copy to the Managing Agent of such Material Contract; and (o) from time to time and promptly upon each request, such data, certificates, reports, statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of the Company or any of its Material Subsidiaries as the Managing Agent or any Lender may reasonably request. ARTICLE 9 NEGATIVE COVENANTS For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.7, all of the Lenders) shall otherwise consent in the manner set forth in Section 12.7, the Borrowers shall not, directly or indirectly: SECTION 9.1. FINANCIAL COVENANTS. Permit: (a) Ratio of Indebtedness to Tangible Net Worth. The ratio of (i) the Indebtedness of the Company and its Subsidiaries determined on a consolidated basis to (ii) Tangible Net Worth, to exceed 1.00 to 1.00 at the end of any fiscal quarter. (b) Ratio of Indebtedness and Securitized Debt to Tangible Net Worth. The ratio of (i) the Indebtedness of the Company and its Subsidiaries determined on a consolidated basis plus Securitized Debt to (ii) Tangible Net Worth, to exceed 2.00 to 1.00 at the end of any fiscal quarter. (c) Minimum Tangible Net Worth. The Tangible Net Worth of the Company and its Subsidiaries determined on a consolidated basis to be less than (i) $375,000,000 plus (ii) 75% of the Net Proceeds of all Equity Issuance effected by the Company or any of its Subsidiaries at any time after the Agreement Date (excluding the Net Proceeds of any Equity Issuance by a Subsidiary to a Subsidiary or to the Company). (d) Ratio of Adjusted EBIT to Interest Expense. The ratio of (i) the Adjusted EBIT as of the end of each fiscal quarter to (ii) Interest Expense of the Company and its Subsidiaries determined on a consolidated basis for such fiscal quarter, to be less than 1.50 to 1.00 at the end of such fiscal quarter. (e) Ratio of Adjusted EBIT to Pro Forma Debt Service. The ratio of (i) Adjusted EBIT of the Company and its Subsidiaries determined on a consolidated basis for the 12-month period ending as of the fiscal quarter most recently ending to (ii) Pro Forma Debt Service for the next succeeding 12-month period, to be less than 1.25 to 1.00 at the end of such fiscal quarter. (f) Mass Mutual Covenants. A violation of the terms of Sections 5.6, 5.7 or 5.8 of the Mass Mutual Agreement, through and including the date on which such terms shall either -47- 52 cease to be binding upon the Company or shall be amended so as to no longer be more restrictive than the terms of Sections 9.1(c) and (d) above. SECTION 9.2. INDEBTEDNESS. (a) Create, incur, assume, or permit or suffer to exist, or permit any Subsidiary other than SBLC or REIT to create incur, assume, or permit or suffer to exist, any Indebtedness other than the following: (1) the Obligations; (2) Indebtedness set forth on Schedule 6.1(g), provided that the terms of any such Indebtedness shall not be amended to provide for covenants or borrowing base limitations that are more restrictive than those contained in this Agreement, except that Secured Indebtedness may be subject to more restrictive covenants concerning the collateral therefor; (3) Subordinated Debt; (4) intercompany Indebtedness among the Company and such Subsidiaries; provided however, that (i) the obligations of each Borrower and Guarantor with respect to such intercompany Indebtedness shall be subordinate to the Obligations on terms acceptable to the Requisite Lenders in their sole discretion; (ii) the obligations of SBIC and SSBIC to the Company (excluding those set forth on Schedule 6.1(g)) shall not exceed $10,000,000 in the aggregate at any one time outstanding; (iii) the Company shall comply with the provisions of Section 7.14; and (iv) the obligations of any such Subsidiary other than SBLC, SBIC, and SSBIC shall be evidenced by promissory notes, which shall have been pledged to the Managing Agent, for the benefit of the Lenders, as security for the Obligations; (5) Indebtedness arising as a result of Contingent Obligations permitted under Section 9.3 or purchase money Indebtedness permitted under Section 9.5; and (6) other Indebtedness incurred or assumed after the Agreement Date in the ordinary course of business to purchase, carry, acquire or refinance Investments so long as immediately prior to the incurring or assumption thereof, and immediately thereafter and after giving effect thereto, (i) no Default or Event of Default is or would be in existence, including without limitation, a Default or Event of Default resulting from a violation of any of the covenants contained in Section 9.1, and (ii) such Indebtedness of a Borrower or a Guarantor shall not be subject to any covenants or borrowing base limitations that are more restrictive than those contained in this Agreement, provided that Secured Indebtedness may be subject to more restrictive covenants concerning the collateral therefor. (b) Permit REIT or SBLC to create, incur, assume or permit to suffer or exist any Indebtedness, other than (1) Indebtedness set forth on Schedule 6.1(g), (2) Indebtedness under -48- 53 the Loan Documents, (3) loans or advances from the Company to SBLC, for general corporate purposes, not to exceed $10,000,000 in the aggregate at any time outstanding, subordinated to the Obligations on terms acceptable to the Requisite Lenders, and the Company shall comply with the provisions of Section 7.14 with regard to such loans or advances to SBLC, and (4) Indebtedness of the Company secured by Commercial Mortgage Loans transferred by the Company to REIT and assumed by REIT in contemplation of a securitization transaction, provided that such Indebtedness is repaid within 21 days of such assumption with the proceeds of such securitization transaction. SECTION 9.3. CONTINGENT OBLIGATIONS. Become or remain liable, or permit any Subsidiary to become or remain liable, on or under any Contingent Obligation other than the following: (a) Contingent Obligations in existence as of the Agreement Date and set forth in Schedule 9.3; (b) Contingent Obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (c) Contingent Obligations under Interest Rate Agreements (i) with respect to the Loans and (ii) indexed to interest rates or yields on United States Treasury Bills or Notes with respect to other Indebtedness incurred or anticipated to be incurred by the Borrower or any of its Subsidiaries; (d) Contingent Obligations incurred in the ordinary course of business with respect to surety and appeal bonds, performance and return-of-money bonds and other similar obligations; (e) Contingent Obligations under letters of credit issued for customers in the ordinary course of business; and (f) Contingent Obligations incurred in the ordinary course of business under foreign currency swap agreements for net Investments in foreign Persons. SECTION 9.4. INVESTMENTS. Acquire, make or purchase after the Agreement Date any Investment other than the following: (a) intercompany Indebtedness among the Company and its Subsidiaries provided that such Indebtedness is permitted by the terms of Section 9.2; (b) the transfer of Commercial Mortgage Loans to REIT in connection with a securitization transaction; (c) Portfolio Investments; and -49- 54 (d) other Investments not to exceed $74,000,000 in the aggregate at any one time outstanding. SECTION 9.5. LIENS; AGREEMENTS REGARDING LIENS; OTHER MATTERS. (a) Create, assume, or incur, or permit or suffer to exist, or permit any Material Subsidiary to create, incur, assume or permit or suffer to exist, any Lien upon any of its assets, including, without limitation, the equity interests of the Company in its Subsidiaries, other than: (1) the Permitted Liens; (2) Liens arising in connection with purchase money Indebtedness, conditional sale agreements and Capitalized Lease Obligations incurred for the acquisition of furniture, fixtures, equipment or leasehold improvements in the ordinary course of business; (3) Liens in existence on the date hereof and securing the Indebtedness described as being secured on Schedule 6.1(g); (4) Liens permitted by Section 9.2(b)(4); and (5) Liens on assets other than the Borrowing Base Assets and equity interests in Subsidiaries to secure Indebtedness permitted by Section 9.2(a). (b) Enter into, assume or otherwise be bound by, or permit any Subsidiary to enter into, assume or otherwise be bound by, any agreement (other than the Loan Documents, the Mass Mutual Agreement and the OPIC Agreement) prohibiting the creation or assumption of any Lien upon Borrowing Base Assets; or (c) Except for SBA consents that may be required for SBIC and SSBIC, create or otherwise cause or suffer to exist or become effective, or permit any Subsidiary to create or otherwise cause or suffer to exist or become effective, any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to: (i) pay dividends or make any other distribution on any of such Subsidiary's capital stock or other equity interests owned by the Company or any other Subsidiary of the Company; (ii) pay any Indebtedness owed to the Company or any other Subsidiary; (iii) make loans or advances to the Company or any other Subsidiary; or (iv) transfer any of its property or assets to the Company or any other Subsidiary. SECTION 9.6. DISTRIBUTIONS TO SHAREHOLDERS. If an Event of Default specified in Section 10.1(a) or Section 10.1(b) occurs and is not cured within ten (10) Business Days thereafter, if a Default or an Event of Default specified in Section 10.1(f) or Section 10.1(g) shall have occurred and be continuing, or if as a result of the occurrence of any other Event of Default the Obligations have been accelerated pursuant to Section 10.2(a), the Company shall not, and shall not permit any Borrower or Guarantor to, make (a) any dividend or other distribution on account of any capital stock or other equity interest of a -50- 55 Borrower or a Guarantor; (b) any acquisition for value of any capital stock or other equity interest of a Borrower or a Guarantor; or (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any capital stock or other equity interest of a Borrower or a Guarantor. SECTION 9.7. MERGER, CONSOLIDATION AND SALES OF ASSETS. (a) Enter into, or permit any Material Subsidiary to enter into, any transaction of merger or consolidation; (b) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) or permit any Material Subsidiary to do any of the foregoing; or (c) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, or the capital stock of or other equity interests in any of its Material Subsidiaries, whether now owned or hereafter acquired or permit any Material Subsidiary to do any of the foregoing; provided, however, that: (i) any Subsidiary of the Company may merge or consolidate with (A) the Company, so long as the Company shall be the surviving entity or (B) a Subsidiary of the Company; (ii) a Subsidiary may sell, transfer or dispose of its assets to the Company or a Wholly Owned Subsidiary of the Company; (iii) a Subsidiary may liquidate provided that immediately prior to such liquidation and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence; (iv) the Company or any Subsidiary may merge or consolidate with any other corporation, provided that (A) the Company or such Subsidiary shall be the continuing or surviving corporation and (B) immediately prior to such merger or consolidation and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence; and (v) the Company may transfer Commercial Mortgage Loans to REIT in connection with a securitization transaction, and such Commercial Mortgage Loans may be transferred or sold to any direct or indirect Wholly Owned Subsidiary of the REIT. SECTION 9.8. FISCAL YEAR. Change its fiscal year from that in effect as of the Agreement Date. SECTION 9.9. MODIFICATIONS TO MATERIAL CONTRACTS. Enter into, or permit any Subsidiary to enter into, any amendment or modification to any Material Contract which could have a Material Adverse Effect or default in the performance of any obligations of the Company or any Subsidiary under any Material Contract or permit any Material Contract to be canceled or terminated prior to its stated maturity. -51- 56 SECTION 9.10. TRANSACTIONS WITH AFFILIATES. Permit to exist or enter into, and will not permit any of its Subsidiaries to permit to exist or enter into, any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Company or with any director, officer or employee of the Company, any Subsidiary or any other Affiliate, except (i) transactions involving consideration in aggregate amount for all such transactions not in excess of $5,000,000 per fiscal year, (ii) Investments permitted by Section 9.4, and (iii) transactions in the ordinary course of, and pursuant to the reasonable requirements of the, business of the Company or any of its Subsidiaries and upon fair and reasonable terms which are no less favorable to the Company or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person that is not an Affiliate. ARTICLE 10 DEFAULT SECTION 10.1. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of Applicable Law or pursuant to any judgment or order of any Governmental Authority: (a) Default in Payment of Principal. A Borrower shall fail to pay when due (whether upon demand, at maturity, by reason of acceleration or otherwise) the principal of any of the Loans. (b) Default in Payment of Other Amounts. A Borrower shall fail to pay when due any interest on any of the Loans or any of the other payment Obligations (other than the principal of any Loan) owing by such Borrower under this Agreement or any other Loan Document and such failure shall continue for a period of three Business Days after the earlier of (i) the date upon which such Borrower or any Subsidiary obtains knowledge of such failure or (ii) the date upon which the Company has received written notice of such failure from the Managing Agent. (c) Default in Performance. (i) A Borrower or any Subsidiary shall fail to perform or observe any term, covenant, condition or agreement on its part to be performed or observed contained in Sections 7.11, 7.12, or 8.4(i) or in Article 9 or (ii) a Borrower or any Subsidiary shall fail to perform or observe any term, covenant, condition or agreement contained in this Agreement or any other Loan Document to which it is a party and not otherwise mentioned in this Section and in the case of this clause (ii) such failure shall continue for a period of 30 days after the earlier of (x) the date upon which a Borrower obtains knowledge of such failure or (y) the date upon which the Borrower has received written notice of such failure from the Managing Agent. (d) Misrepresentations. Any written statement, representation or warranty made or deemed made by or on behalf of a Borrower or any Subsidiary under this Agreement or under any other Loan Document, or any amendment hereto or thereto, or in any other writing or -52- 57 statement at any time furnished or made or deemed made by or on behalf of a Borrower or any Subsidiary to an Agent or any Lender in connection with this Agreement or the other Loan Documents, shall at any time prove to have been incorrect or misleading in any material respect when furnished or made. (e) Indebtedness Cross-Default. (i) A Borrower or any Subsidiary shall fail to pay when due and payable the principal of, or interest on, any Indebtedness (other than the Loans) or any Contingent Obligations having an aggregate outstanding principal amount of $5,000,000 or more, or (ii) the maturity of any Indebtedness (other than the Loans) of a Borrower or any Subsidiary having an aggregate outstanding principal amount of $5,000,000 or more shall have (x) been accelerated in accordance with the provisions of any indenture, contract or instrument evidencing, providing for the creation of or otherwise concerning such Indebtedness or (y) been required to be prepaid prior to the stated maturity thereof; or (iii) any other event shall have occurred and be continuing with respect to any Indebtedness (other than the Loans) of a Borrower or any Subsidiary having an aggregate outstanding principal amount of $10,000,000 or more which, with or without the passage of time, the giving of notice, or otherwise, would permit any holder or holders of such Indebtedness, any trustee or agent acting on behalf of such holder or holders or any other Person, to accelerate the maturity of any such Indebtedness or require any such Indebtedness to be prepaid prior to its stated maturity. (f) Voluntary Bankruptcy Proceeding. A Borrower, any Material Subsidiary or any Other Relevant Subsidiary shall: (i) commence a voluntary case under the Bankruptcy Code of 1978, as amended or other federal bankruptcy laws (as now or hereafter in effect); (ii) file a petition seeking to take advantage of any other Applicable Laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; (iii) consent to, or fail to contest in a timely and appropriate manner, any petition filed against it in an involuntary case under such bankruptcy laws or other Applicable Laws or consent to any proceeding or action described in the immediately following subsection; (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign; (v) admit in writing its inability to pay its debts as they become due; (vi) make a general assignment for the benefit of creditors; (vii) make a conveyance fraudulent as to creditors under any Applicable Law; or (viii) take any corporate or similar action for the purpose of effecting any of the foregoing. (g) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against a Borrower, any Material Subsidiary or any Other Relevant Subsidiary, in any court of competent jurisdiction seeking: (i) relief under the Bankruptcy Code of 1978, as amended or other federal bankruptcy laws (as now or hereafter in effect) or under any other Applicable Laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, -53- 58 winding-up, or composition or adjustment of debts; or (ii) the appointment of a trustee, receiver custodian, liquidator or the like of such Person, or of all or any substantial part of the assets domestic or foreign, of such Person, and such case or proceeding is not dismissed within 60 days after it is commenced. (h) Contest of Loan Documents. A Borrower or any Subsidiary shall disavow, revoke or terminate any Loan Document to which it is a party or shall otherwise challenge or contest in any action, suit or proceeding in any court or before any Governmental Authority the validity or enforceability of this Agreement, any Note or any other Loan Document. (i) Judgment. A judgment or order for the payment of money shall be entered against a Borrower or any Subsidiary by any court or other tribunal which exceeds, individually or together with all other such judgments or orders entered against such Borrower and its Subsidiaries, $5,000,000 in amount (or which shall otherwise have a Material Adverse Effect) and such judgment or order shall continue unpaid for a period of 30 days without being stayed or dismissed through appropriate appellate proceedings. (j) Attachment. A warrant, writ of attachment, execution or similar process shall be issued against any property of a Borrower or any Subsidiary which exceeds, individually or together with all other such warrants, writs, executions and processes, $5,000,000 in amount and such warrant, writ, execution or process shall not be discharged, vacated, stayed or bonded for a period of 30 days; provided, however, that if a bond has been issued in favor of the claimant or other Person obtaining such warrant, writ, execution or process, the issuer of such bond shall execute a waiver or subordination agreement in form and substance satisfactory to the Managing Agent pursuant to which the issuer of such bond subordinates its right of reimbursement, contribution or subrogation to the Obligations and waives or subordinates any Lien it may have on the assets of such Borrower or any of its Subsidiaries. (k) ERISA. Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $5,000,000. (l) Loan Documents. An Event of Default (as defined therein) shall occur under any of the other Loan Documents. -54- 59 (m) Change of Control. (i) Any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 25% of the total voting power of the then outstanding voting stock of the Company; or (ii) During any twelve-month period (commencing on or after the Agreement Date), a majority of the Board of Directors of the Company shall no longer be composed of individuals (A) who were members of such Board of Directors on the first date of such period, (B) whose election or nomination to such Board of Directors was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of such Board of Directors or (C) whose election or nomination to such Board of Directors was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of such Board of Directors. (n) Dissolution. Any order, judgment or decree is entered against a Borrower, any Material Subsidiary or any Other Relevant Subsidiary decreeing the dissolution or split up of such Person and such order remains undischarged or unstayed for a period in excess of 30 days. SECTION 10.2. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default the following provisions shall apply: (a) Acceleration; Termination of Facilities. (i) Automatic. Upon the occurrence of an Event of Default specified in Sections 10.1(f) or 10.1(g), (A)(i) the principal of, and all accrued interest on, the Loans and the Notes at the time outstanding and (ii) all of the other Obligations of the Borrowers, including, but not limited to, the other amounts owed to the Lenders and the Managing Agent under this Agreement, the Notes or any of the other Loan Documents shall become immediately and automatically due and payable by the Borrowers without presentment, demand, protest, or other notice of any kind, all of which are expressly waived by the Borrowers and (B) each of the Commitments and the obligation of the Lenders to make Loans shall immediately and automatically terminate; (ii) Optional. If any other Event of Default shall have occurred and be continuing, the Managing Agent may, and at the direction of the Requisite Lenders shall: (I) declare (l) the principal of, and accrued interest on, the Loans and the Notes at the time outstanding and (2) all of the other Obligations, including, but not limited to, the other amounts owed to the Lenders and the Managing Agent under this Agreement, the Notes or any of the other Loan Documents to be forthwith due and payable, whereupon the -55- 60 same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower and (II) terminate the Commitments and the obligation of the Lenders to make Loans hereunder. (b) Loan Documents. The Requisite Lenders may direct the Managing Agent to, and the Managing Agent if so directed shall, exercise any and all of its rights under any and all of the other Loan Documents. (c) Applicable Law. The Requisite Lenders may direct the Managing Agent to, and the Managing Agent if so directed shall, exercise all other rights and remedies it may have under any Applicable Law. SECTION 10.3. REMEDIES UPON CERTAIN DEFAULTS. Upon the occurrence of a Default specified in Sections 10.1(f) or 10.1(g), the Commitments shall immediately and automatically terminate. SECTION 10.4. ALLOCATION OF PROCEEDS. If an Event of Default shall have occurred and be continuing and the maturity of the Notes has been accelerated, all payments received by an Agent under any of the Loan Documents, in respect of any principal of or interest on the Obligations or any other amounts payable by the Borrowers hereunder or thereunder, shall be applied by the Agents in the following order and priority: (a) amounts due to the Agents and the Lenders in respect of Fees and expenses due under Section 12.2; (b) payments of interest on the Loans, to be applied for the ratable benefit of the Lenders; (c) payments of principal of Loans, to be applied for the ratable benefit of the Lenders; (d) amounts due to the Agents and the Lenders pursuant to Section 12.10; (e) payments of all other amounts due under any of the Loan Documents, if any, to be applied for the ratable benefit of the Lenders; and (f) any amount remaining after application as provided above, shall be paid to the Borrower or whomever else may be legally entitled thereto. SECTION 10.5. PERFORMANCE BY AGENT. If a Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, an Agent may perform or attempt to perform such covenant, duty or agreement on behalf of such Borrower after the expiration of any cure or grace periods set forth -56- 61 herein. In such event, such Borrower shall, at the request of such Agent, promptly pay any amount reasonably expended by such Agent in such performance or attempted performance to such Agent, together with interest thereon at the applicable Post-Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, neither such Agent nor any Lender shall have any liability or responsibility whatsoever for the performance of any obligation of the Borrowers under this Agreement or any other Loan Document. SECTION 10.6. RIGHTS CUMULATIVE. The rights and remedies of the Agents and the Lenders under this Agreement and each of the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which any of them may otherwise have under Applicable Law. In exercising their respective rights and remedies the Agents and the Lenders may be selective and no failure or delay by the Agents or any of the Lenders in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. ARTICLE 11 THE AGENTS SECTION 11.1. AUTHORIZATION AND ACTION. Each Lender hereby appoints and authorizes each Agent to take such action as agent on such Lender's behalf and to exercise such powers under this Agreement and the other Loan Documents as are specifically delegated to such Agent by the terms and thereof, together with such powers as are reasonably incidental thereto. Each Agent shall administer the Loans in the same manner that such Agent administers loans made for its own account. The relationship between each Agent and the Lenders shall be that of principal and agent only and nothing herein shall be construed to deem an Agent a trustee or fiduciary for any Lender nor to impose on the Agent duties or obligations other than those expressly provided for herein. At the request of a Lender, each Agent will forward to each Lender copies or, where appropriate, originals of the documents delivered to such Agent pursuant to this Agreement or the other Loan Documents. Each Agent will also furnish to any Lender, upon the request of such Lender, a copy of any certificate or notice furnished to such Agent by a Borrower or any other Affiliate of a Borrower, pursuant to this Agreement or any other Loan Document not already delivered to such Lender pursuant to the terms of this Agreement or any such other Loan Document. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of any of the Obligations), the Agents shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Requisite Lenders (or all of the Lenders if explicitly required under any other provision of this Agreement), and such instructions shall be binding upon all Lenders and all holders of any of the Obligations, provided, however, that, notwithstanding anything in this Agreement to the contrary, the Agents shall not be required to take any action which is contrary to this Agreement or any other Loan Document or Applicable Law. Not in limitation of the foregoing, an Agent shall not exercise any -57- 62 right or remedy it or the Lenders may have under any Loan Document upon the occurrence of a Default or an Event of Default unless the Requisite Lenders have so directed such Agent to exercise such right or remedy. SECTION 11.2. AGENT'S RELIANCE, ETC. Notwithstanding any other provision of any Loan Document, including without limitation the second sentence of Section 11.1, neither an Agent nor any of its directors, officers, agents, employees or counsel shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, an Agent: (a) may treat the payee of any Note as the holder thereof until such Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to such Agent; (b) may consult with legal counsel (including its own counsel or counsel for the Borrowers), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender or any other Person and shall not be responsible to any Lender or any other Person for any statements, warranties or representations made by any Person in or in connection with this Agreement or any other Loan Document; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any of this Agreement or any other Loan Document or the satisfaction of any conditions precedent under this Agreement or any Loan Document on the part of the Borrowers or other Persons or inspect the property, books or records of the Borrowers or any other Person; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document, any other instrument or document furnished pursuant thereto or any collateral covered thereby or the perfection or priority of any Lien in favor of such Agent on behalf of the Lenders in any such collateral; and (f) shall incur no liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telephone or telecopy) believed by it to be genuine and signed, sent or given by the proper party or parties. SECTION 11.3. DEFAULTS. An Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless such Agent has received notice from a Lender or a Borrower referring to this Agreement, describing with reasonable specificity such Default or Event of Default and stating that such notice is a "notice of default." If any Lender becomes aware of any Default or Event of Default, it shall promptly send to the Managing Agent such a "notice of default" Further, if an Agent receives such a "notice of default," such Agent shall give prompt notice thereof to the Lenders. SECTION 11.4. AGENT AS LENDER. Each Agent, as a Lender, shall have the same rights and powers under this Agreement and any other Loan Document as any other Lender and may exercise the same as though it were not -58- 63 an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include each Agent in each case in its individual capacity. Each Agent and its affiliates may each accept deposits from, maintain deposits or credit balances for, invest in, lend money to, act as trustee under indentures of, serve as financial advisor to, and generally engage in any kind of business with a Borrower, any Subsidiary or any other Affiliate thereof as if it were any other bank and without any duty to account therefor to the other Lenders. Further, each Agent and any affiliate may accept fees and other consideration from a Borrower for services in connection with this Agreement and otherwise without having to account for the same to the other Lenders. SECTION 11.5. APPROVALS OF LENDERS. All communications from an Agent to any Lender requesting such Lender's determination, consent, approval or disapproval (a) shall be given in the form of a written notice to such Lender, (b) shall be accompanied by a description of the matter or issue as to which such determination, approval, consent or disapproval is requested, or shall advise such Lender where information, if any, regarding such matter or issue may be inspected, or shall otherwise describe the matter or issue to be resolved, (c) shall include, if reasonably requested by such Lender and to the extent not previously provided to such Lender, written materials and a summary of all oral information provided to such Agent by a Borrower in respect of the matter or issue to be resolved, and (d) shall include such Agent's recommended course of action or determination in respect thereof. Each Lender shall reply promptly, but in any event within ten Business Days (or such lesser period as may be required under the Loan Documents for such Agent to respond). Unless a Lender shall give written notice to such Agent that it objects to the recommendation or determination of such Agent (together with a written explanation of the reasons behind such objection) within the applicable time period for reply, such Lender shall be deemed to have conclusively approved of or consented to such recommendation or determination. SECTION 11.6. LENDER CREDIT DECISION, ETC. Each Lender expressly acknowledges and agrees that neither an Agent nor any of its officers, directors, employees, agents, counsel, attorneys-in-fact or other affiliates has made any representations or warranties as to the financial condition, operations, creditworthiness, solvency or other information concerning the business or affairs of the Borrowers, any Subsidiary or other Person to such Lender and that no act by an Agent hereinafter taken, including any review of the affairs of the Borrowers, shall be deemed to constitute any such representation or warranty by such Agent to any Lender. Each Lender acknowledges that it has, independently and without reliance upon the Agents, any other Lender or counsel to the Agents, or any of their respective officers, directors, employees and agents, and based on the financial statements of the Borrowers, the Subsidiaries or any other Affiliate thereof, and inquiries of such Persons, its independent due diligence of the business and affairs of the Borrowers, the Subsidiaries and other Persons, its review of the Loan Documents, the legal opinions required to be delivered to it hereunder, the advice of its own counsel and such other documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the transaction contemplated hereby. Each Lender also acknowledges that it will, independently and without reliance upon an Agent, any other Lender or counsel to an Agent or any of their -59- 64 respective officers, directors, employees and agents, and based on such review, advice, documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under the Loan Documents. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by an Agent under this Agreement or any of the other Loan Documents, the Agents shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrowers, any Subsidiary or any other Affiliate thereof which may come into possession of an Agent or any of its officers, directors, employees, agents, attorneys-in-fact or other affiliates. Each Lender acknowledges that the Managing Agent's legal counsel in connection with the transactions contemplated by this Agreement is only acting as counsel to the Managing Agent and is not acting as counsel to such Lender. SECTION 11.7. INDEMNIFICATION OF AGENT. Each Lender agrees to indemnify each Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrowers to do so) pro rata in accordance with such Lender's respective Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against such Agent (in its capacity as "Agent" but not as a "Lender") in any way relating to or arising out of the Loan Documents, any transaction contemplated hereby or thereby or any action taken or omitted by such Agent under the Loan Documents (collectively, "Indemnifiable Amounts"); provided, however, that no Lender shall be liable for any portion of such Indemnifiable Amounts to the extent resulting from such Agent's gross negligence or willful misconduct or if such Agent fails to follow the written direction of the Requisite Lenders unless such failure is pursuant to the advice of counsel that following such written direction would likely violate Applicable Law or the terms of the Loan Documents and of which the Lenders have received notice. Without limiting the generality of the foregoing, each Lender agrees to reimburse each Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees of the counsel(s) of such Agent's own choosing) reasonably incurred by each Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice with respect to the rights or responsibilities of the parties under, the Loan Documents, any suit or action brought by such Agent to enforce the terms of the Loan Documents and/or collect any Obligations, any "lender liability" suit or claim brought against such Agent and/or the Lenders, and any claim or suit brought against such Agent and/or the Lenders arising under any Environmental Laws, to the extent that such Agent is not reimbursed for such expenses by the Borrowers. Such out-of-pocket expenses (including counsel fees) shall be advanced by the Lenders on the request of such Agent notwithstanding any claim or assertion that the Agent is not entitled to indemnification hereunder (other than any claim or assertion that such Agent is not entitled to such out-of-pocket expenses as a result of its gross negligence or willful misconduct or failure to follow the written direction of the Requisite Lenders in the absence of the advice of counsel referred to above) upon receipt of an undertaking by such Agent that such Agent will reimburse the Lenders if it is actually and finally determined by a court of competent jurisdiction that such Agent is not so entitled to indemnification. The -60- 65 agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder or under the other Loan Documents and the termination of this Agreement. If a Borrower shall reimburse an Agent for any Indemnifiable Amount following payment by any Lender to such Agent in respect of such Indemnifiable Amount pursuant to this Section, such Agent shall share such reimbursement on a ratable basis with each Lender making any such payment. SECTION 11.8. SUCCESSOR AGENT. Each Agent may resign at any time as Agent under the Loan Documents by giving at least 30 days' prior written notice thereof to the Lenders and the Company. In the event of a material breach of its duties hereunder, an Agent may be removed as Agent under the Loan Documents at any time by the Requisite Lenders upon 30-days' prior notice. Upon any such resignation or removal, the Requisite Lenders shall have the right to appoint a successor Agent which appointment shall, provided no Default or Event of Default shall have occurred and be continuing, be subject to the Company's approval, which approval shall not be unreasonably withheld or delayed (except that Company shall, in all events, be deemed to have approved each Lender as a successor Agent). If no successor Agent shall have been so appointed by the Requisite Lenders, and shall have accepted such appointment, within thirty days after the resigning Agent's giving of notice of resignation or the Requisite Lenders' removal of the resigning Agent, then the resigning or removed Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a Lender, if any Lender shall be willing to serve, and otherwise shall be a commercial bank having total combined assets of at least $50,000,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents arising or accruing thereafter. After any resigning Agent's resignation or removal hereunder as Agent, the provisions of this Article 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. SECTION 11.9. SYNDICATION AGENT AND CO-AGENT. The Syndication Agent and the Co-Agent in such capacities do not assume any responsibility or obligation hereunder, including, without limitation, for servicing, enforcement or collection of any of the Loans, nor any duties as an agent hereunder for the Lenders, except for the maintenance of the Register in accordance with Section 12.5(e). The titles of "Syndication Agent" and "Co-Agent" imply no fiduciary responsibility on the part of the Syndication Agent or the Co-Agent, in their capacities as such, to the Agents, the Borrowers or any Lender and the use of such titles does not impose on the Syndication Agent or the Co-Agent any duties or obligations greater than those of any other Lender or entitle the Syndication Agent or the Co-Agent to any rights other than those to which any other Lender is entitled. -61- 66 ARTICLE 12 MISCELLANEOUS SECTION 12.1. NOTICES. Unless otherwise provided herein, communications provided for hereunder shall be in writing and shall be mailed, telecopied or delivered as follows: If to the Borrowers: Allied Capital Corporation 1666 K Street, NW 9th Floor Washington, DC 20006 Attention: Joan M. Sweeney, Managing Director Telecopy Number: (202) 659-2053 Telephone Number: (202) 973-6381 If to the Disbursing Agent: BankBoston, N.A. 100 Federal Street Boston, MA 02110 Mail Code: 01-10-08 Attention: Deirdre M. Holland, Vice President Telecopy Number: (617) 434-1537 Telephone Number: (617) 434-0419 If to the Managing Agent: Riggs Bank N.A. 808 17th Street, N.W. 10th Floor Washington, D.C. 20006 Attention: David H. Olson, Vice President Telecopy Number: (202) 835-5977 Telephone Number: (202) 835-5105 -62- 67 If to the Syndication Agent: First Union Capital Markets Group One First Union Center Charlotte, NC 28288-0735 Attention: Allison C. Zollicoffer, Director Telecopier: (704) 383-7611 Telephone: (704) 374-4891 If to the Co-Agent: NationsBank of Texas, N.A. 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Shelly K. Harper Telecopier: (214) 508-0604 Telephone: (214) 508-0567 If to a Lender: To such Lender's address or telecopy number, as applicable, set forth on its signature page hereto or in the applicable Assignment and Acceptance Agreement. or, as to each party at such other address as shall be designated by such party in a written notice to the other parties delivered in compliance with this Section 12.1. All such notices and other communications shall be effective (i) if mailed, when received; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when delivered. Notwithstanding the immediately preceding sentence, all notices or communications to an Agent or any Lender under Article 2 shall be effective only when actually received. Neither an Agent nor any Lender shall incur any liability to the Borrowers (nor shall an Agent incur any liability to the Lenders) for acting upon any telephonic notice referred to in this Agreement which such Agent or such Lender, as the case may be, believes in good faith to have been given by a Person authorized to deliver such notice or for otherwise acting in good faith under hereunder, except in the case of gross negligence or willful misconduct. SECTION 12.2. EXPENSES. The Company agrees (a) to pay or reimburse the Managing Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of, and any amendment, supplement or modification to, any of the Loan Documents (including due diligence expenses and travel expenses relating to closing), and the consummation of the transactions contemplated thereby, including the reasonable fees (not to exceed $30,000) and disbursements (which are in addition to such fee limitation) of counsel to the Managing Agent, (b) to pay or reimburse each Agent and the Lenders for all their costs and expenses incurred in connection with the enforcement or preservation of any rights under the Loan -63- 68 Documents, including the reasonable fees and disbursements of their respective counsel (including the reasonably allocated fees and expenses of in-house counsel) and any payments in indemnification or otherwise payable by the Lenders to the Agents pursuant to the Loan Documents, (c) to pay, indemnify and hold each Agent and the Lenders harmless from any and all recording and filing fees and any and all liabilities with respect to, or resulting from any failure to pay or delay in paying, documentary, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of any of the Loan Documents, or consummation of any amendment, supplement or modification of, or any waiver or consent under or in respect of, any Loan Document, and (d) to the extent not already covered by any of the preceding subsections, to pay or reimburse the Agents and the Lenders for all their costs and expenses incurred in connection with any bankruptcy or other proceeding of the type described in Sections 10.1(f) or 10.1(g), including the reasonable fees and disbursements of counsel to the Agents and any Lender, whether such fees and expenses are incurred prior to, during or after the commencement of such proceeding or the confirmation or conclusion of any such proceeding. SECTION 12.3. SETOFF. Subject to Section 3.3 and in addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, each Agent, each Lender and each Participant is hereby authorized by each Borrower, at any time or from time to time, without notice to such Borrower or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by such Agent, such Lender or any affiliate of such Agent or such Lender, to or for the credit or the account of such Borrower against and on account of any of the Obligations or such Borrower, irrespective of whether or not any or all of the Loans and all other Obligations have been declared to be due and payable as permitted by Section 10 2, and although such obligations shall be contingent or unmatured. SECTION 12.4. JURISDICTION; CONSENT TO SERVICE OF PROCESS; WAIVER OF JURY TRIAL. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against a Borrower or its properties in the courts of any jurisdiction. -64- 69 (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each Borrower and each other party hereto consents to service of process in the manner provided for notices in Section 12.1. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. (d) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (1) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (2) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 12.5. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Lenders. (b) Any Lender may make, carry or transfer Loans at, to or for the account of, any of its branch offices or the office of an affiliate of such Lender except to the extent such transfer would result in increased costs to a Borrower. (c) Any Lender may at any time grant to one or more banks or other financial institutions (each such bank or financial institution, a "Participant") participating interests in its Commitment or the Obligations owing to such Lender; provided however, (i) any such participating interest must be for a constant and not a varying percentage interest, (ii) no Lender may grant a participating interest in its Commitment, or if the Commitments have been terminated, the aggregate outstanding principal balance of Notes held by it, in an amount less than $10,000,000, and (iii) after giving effect to any such participation by a Lender, the amount of its Commitment, or if the Commitments have been terminated, the aggregate outstanding principal balance of Notes held by it, in which it has not granted any participating interests must be at least $10,000,000. No Participant shall have any rights or benefits under this Agreement or any other Loan Document, except (1) as provided in Section 12.3, and (2) a Participant shall be -65- 70 entitled to the benefits of the cost protection provisions contained in Section 3.12 and Article 4 to the same extent as if it were a Lender but not in excess of the cost protections to which the Lender from which it purchased its participation would be entitled. In the event of any such grant by a Lender of a participating interest to a Participant, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Agents shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided, however, such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase, or extend the term or extend the time or waive any requirement for the reduction or termination of, such Lender's Commitment, (ii) extend the date fixed for the payment of principal of or interest on the Loans or portions thereof owing to such Lender, (iii) reduce the amount of any such payment of principal, or (iv) reduce the rate at which interest is payable thereon. An assignment or other transfer which is not permitted by subsection (d) or (e) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (c). The selling Lender shall notify the Agents and the Company of the sale of any participation hereunder and the terms thereof. (d) Any Lender may with the prior written consent of each Agent and, so long as no Default or Event of Default shall have occurred and be continuing, the Company (which consent, in the case of the Agents and the Company, shall not be unreasonably withheld) assign to one or more Eligible Assignees (each an "Assignee") all or a portion of its Commitment and its other rights and obligations under this Agreement and the Notes; provided, however, (i) no such consent by the Company or the Agents shall be required in the case of any assignment to another Lender or any affiliate of such Lender (subject to Section 12.5(b) above) or another Lender; (ii) any partial assignment shall be in an amount at least equal to $10,000,000 and after giving effect to such assignment the assigning Lender retains a Commitment, or if the Commitments have been terminated, holds Notes having an aggregate outstanding principal balance, of at least $10,000,000; (iii) each such assignment shall be effected by means of an Assignment and Acceptance Agreement; and (iv) each Agent, in its capacity as a Lender, shall not effect any assignment of its Commitment, if after giving effect thereto, the amount of such Commitment would be less than the amount of any other Lender's Commitment. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be deemed to be a Lender party to this Agreement as of the effective date of the Assignment and Acceptance Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such Assignment and Acceptance Agreement, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (d), the transferor Lender, the Agents and each Company shall make appropriate arrangements so that new Notes are issued to the Assignee and such transferor Lender, as appropriate. In connection with any such assignment, the transferor Lender shall pay -66- 71 to the Syndication Agent an administrative fee for processing such assignment in the amount of $3,000 provided, however, such fee shall not be payable in connection with the first assignment of all or any portion of the Commitment of any Lender initially a party to this Agreement to an affiliate of such Lender. (e) The Syndication Agent shall maintain at the Principal Office a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of each Lender from time to time (the "Register"). The Syndication Agent shall give each Lender and the Company notice of the assignment by any Lender of its rights as contemplated by this Section. The Company, each Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register and copies of each Assignment and Acceptance Agreement shall be available for inspection by the Company or any Lender at any reasonable time and from time to time upon reasonable prior notice to the Syndication Agent. Upon its receipt of an Assignment and Acceptance Agreement executed by an assigning Lender, together with each Note subject to such assignment (the "Surrendered Note"), the Syndication Agent shall, if such Assignment and Acceptance Agreement has been completed and if the Syndication Agent receives the processing and recording fee described in subsection (d) above, (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Company. (f) In addition to the assignments and participations permitted under the foregoing provisions of this Section, any Lender may assign and pledge all or any portion of its Loans and its Notes to any federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank, and such Loans and Notes shall be fully transferable as provided therein. No such assignment shall release the assigning Lender from its obligations hereunder. (g) A Lender may furnish any information concerning a Borrower or any Subsidiaries in the possession of such Lender from time to time to Assignees and Participants (including prospective Assignees and Participants) subject to compliance with Section 12.9. (h) Anything in this Section to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to a Borrower or any Subsidiary or Affiliate of a Borrower. (i) Each Lender agrees that, without the prior written consent of the Company and the Agents, it will not make any assignment hereunder in any manner or under any circumstances that would require registration or qualification of, or filings in respect of, any Loan or Note under the Securities Act or any other securities laws United States of America or of any other jurisdiction. -67- 72 SECTION 12.6. REMOVAL OF LENDERS. If (a) a Lender or a Participant requests compensation pursuant to Section 3.12 or Section 4.l and the Requisite Lenders are not also doing the same, or (b) the obligation of a Lender to make LIBOR Loans or to Continue, or to Convert Loans into LIBOR Loans shall be suspended pursuant to Section 4.1(b), Section 4.2 or Section 4.3 but the obligation of the Requisite Lenders shall not have been suspended under such Sections, the Company may either (A) demand that such Lender or Participant (the "Affected Lender"), and upon such demand the Affected Lender shall promptly, assign its Commitment and all of its Loans to an Eligible Assignee subject to and in accordance with the provisions of Section 12.5(d) for a purchase price equal to the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon, accrued but unpaid Fees owing to the Affected Lender and any amounts owing the Affected Lender under Section 4.4, or (B) pay to the Affected Lender the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon, accrued but unpaid Fees owing to the Affected Lender and any amounts owing the Affected Lender under Section 4.4, whereupon the Affected Lender shall no longer be a party hereto or have any rights or obligations hereunder or under any of the other Loan Documents. Each of the Agents and the Affected Lender shall reasonably cooperate in effectuating the replacement of an Affected Lender under this Section, but at no time shall the Agents, the Affected Lender or any other Lender be obligated in any way whatsoever to initiate any such replacement or to assist in finding an Eligible Assignee. The exercise by the Company of its rights under this Section shall be at the Company's sole cost and expenses and at no cost or expense to the Agents, the Affected Lender or any of the other Lenders. The terms of this Section shall not in any way limit each Borrower's obligation to pay to any Affected Lender compensation owing to such Affected Lender pursuant to Section 3.12 or Section 4.1. SECTION 12.7. AMENDMENTS. Except as otherwise expressly provided in this Agreement, any consent or approval required or permitted by this Agreement or in any Loan Document to be given by the Lenders may be given, and any term of this Agreement or of any other Loan Document may be amended, and the performance or observance by each Borrower or any Subsidiary of any terms of this Agreement or such other Loan Document or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Requisite Lenders (and, in the case of an amendment to any Loan Document, the written consent of each Borrower). Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in writing, and signed by all of the Lenders (or the Managing Agent at the written direction of all of the Lenders), do any of the following: (i) increase the Commitments of the Lenders or subject the Lenders to any additional obligations; (ii) reduce the principal of, or interest rates that have accrued or that will be charged on the outstanding principal amount of, any Loans or other Obligations; (iii) reduce the amount of any Fees payable hereunder; (iv) postpone any date fixed for any payment of any principal of, interest on, or Fees with respect to, any Loans or any other Obligations; (v) change the Commitment Percentages; (vi) amend this Section or amend the definitions of the terms used in this Agreement or the other Loan Documents insofar as such -68- 73 definitions affect the substance of this Section; (vii) release any Subsidiary from its obligations under a Guaranty; (viii) modify the definition of the term "Requisite Lenders" or modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof; or (ix) amend the definitions of "Borrowing Base" or "Eligible Assets." Further, no amendment, waiver or consent unless in writing and signed by the Agents, in addition to the Lenders required above to take such action, shall affect the rights or duties of the Agents under this Agreement or any of the other Loan Documents. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon and any amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose set forth therein. No course of dealing or delay or omission on the part of the Agents or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. Except as otherwise explicitly provided for herein or in any other Loan Document, no notice to or demand upon a Borrower shall entitle such Borrower to other or further notice or demand in similar or other circumstances. SECTION 12.8. NONLIABILITY OF AGENT AND LENDERS. The relationship between the Borrowers and the Lenders and the Agents shall be solely that of borrower and lender. Neither the Agents nor any Lender shall have any fiduciary responsibilities to a Borrower and no provision in this Agreement or in any of the other Loan Documents, and no course of dealing between or among any of the parties hereto, shall be deemed to create any fiduciary duty owing by the Agents or any Lender to any Lender, a Borrower or any Subsidiary. Neither the Agents nor any Lender undertakes any responsibility to a Borrower to review or inform such Borrower of any matter in connection with any phase of such Borrower's business or operations. SECTION 12.9. CONFIDENTIALITY. Except as otherwise provided by Applicable Law, each Agent and each Lender shall utilize all non-public information obtained pursuant to the requirements of this Agreement which has been identified as confidential or proprietary by the Borrowers in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices but in any event may make disclosure: (a) to any of their respective affiliates (provided they shall agree to keep such information confidential in accordance with the terms of this Section), (b) as reasonably required by any bona fide Assignee, Participant or other transferee in connection with the contemplated transfer of any Commitment or participations therein as permitted hereunder (provided they shall agree to keep such information confidential in accordance with the terms of this Section); (c) as required by any Governmental Authority or representative thereof or pursuant to legal process; (d) to such Agent's or such Lender's independent auditors and other professional advisors (provided they shall be notified of the confidential nature of the information); and (e) after the happening and during the continuance of an Event of Default, to any other Person, in connection with the exercise by the Agents or the Lenders of rights hereunder or under any of the other Loan Documents. -69- 74 SECTION 12.10. INDEMNIFICATION. (a) Each Borrower shall and hereby agrees to indemnify, defend and hold harmless each Agent, any affiliate of each Agent and each of the Lenders and their respective directors, officers, shareholders, agents, employees and counsel (each referred to herein as an "Indemnified Party") from and against any and all losses, costs, claims, damages, liabilities, deficiencies, judgments or expenses of every kind and nature (including, without limitation, amounts paid in settlement, court costs and the fees and disbursements of counsel incurred in connection with any litigation, investigation, claim or proceeding or any advice rendered in connection therewith) (the foregoing items referred to herein as "Claims and Expenses") incurred by an Indemnified Party in connection with, arising out of, or by reason of, any suit, cause of action, claim, arbitration, investigation or settlement, consent decree or other proceeding (the foregoing referred to herein as an "Indemnity Proceeding") arising out of: (i) this Agreement or any other Loan Document or the transactions contemplated thereby, (ii) the making of any Loans hereunder; (iii) any actual or proposed use by a Borrower of the proceeds of the Loans; (iv) an Agent's or any Lender's entering into this Agreement; (v) the fact that the Agents and the Lenders have established the credit facility evidenced hereby in favor of the Borrowers; (vi) the fact that the Agents and the Lenders are creditors of the Borrowers and have or are alleged to have information regarding the financial condition, strategic plans or business operations of the Borrowers and the Subsidiaries; (vii) the fact that the Agents and the Lenders are material creditors of the Borrowers and are alleged to influence directly or indirectly the business decisions or affairs of the Borrowers and the Subsidiaries or their financial condition; (viii) the exercise of any right or remedy the Agents or the Lenders may have under this Agreement or the other Loan Documents; provided, however, that the Borrower shall not be obligated to indemnify any Indemnified Party for any acts or omissions of such Indemnified Party in connection with matters described in this clause (viii) that constitute gross negligence or willful misconduct; (ix) any violation or non-compliance by a Borrower or any Subsidiary of any Applicable Law (including any Environmental Law) including, but not limited to, any Indemnity Proceeding commenced by (A) the Internal Revenue Service or state taxing authority or (B) any Governmental Authority or other Person under any Environmental Law, including any Indemnity Proceeding commenced by a Governmental Authority or other Person seeking remedial or other action to cause a Borrower or its Subsidiaries (or its respective properties) (or the Agents and/or the Lenders as successors to the Borrower) to be in compliance with such Environmental Laws. (b) Each Borrower's indemnification obligations under this Section shall apply to all Indemnity Proceedings arising out of, or related to, the foregoing whether or not an Indemnified Party is a named party in such Indemnity Proceeding. In this connection, this indemnification shall cover all costs and expenses of any Indemnified Party in connection with any deposition of any Indemnified Party or compliance with any subpoena (including any subpoena requesting the production of documents). This indemnification shall, among other things, apply to any Indemnity Proceeding commenced by other creditors of a Borrower or any Subsidiary, any shareholder of a Borrower or any Subsidiary (whether such shareholder(s) are prosecuting such Indemnity Proceeding in their individual capacity or derivatively on behalf of a Borrower), any account debtor of a Borrower or any Subsidiary or by any Governmental Authority. This -70- 75 indemnification shall apply to any Indemnity Proceeding arising during the pendency of any bankruptcy proceeding filed by or against a Borrower and/or any Subsidiary. (c) All out-of-pocket fees and expenses of, and all amounts paid to third-persons by, an Indemnified Party shall be advanced by the Borrowers at the request of such Indemnified Party notwithstanding any claim or assertion by the Borrowers that such Indemnified Party is not entitled to indemnification hereunder upon receipt of an undertaking by such Indemnified Party that such Indemnified Party will reimburse the Borrowers if it is actually and finally determined by a court of competent jurisdiction that such Indemnified Party is not so entitled to indemnification hereunder. (d) An Indemnified Party may conduct its own investigation and defense of, and may formulate its own strategy with respect to, any Indemnified Proceeding covered by this Section and, as provided above, all costs and expenses incurred by the Indemnified Party shall be reimbursed by the Borrowers. No action taken by legal counsel chosen by an Indemnified Party in investigating or defending against any such Indemnified Proceeding shall vitiate or in any way impair the obligations and duties of the Borrowers hereunder to indemnify and hold harmless each such Indemnified Party, provided, however, that (i) if a Borrower is required to indemnify an Indemnified Party pursuant hereto and (ii) such Borrower has provided evidence reasonably satisfactory to such Indemnified Party that such Borrower has the financial wherewithal to reimburse such Indemnified Party for any amount paid by such Indemnified Party with respect to such Indemnified Proceeding, such Indemnified Party shall not settle or compromise any such Indemnified Proceeding without the prior written consent of such Borrower (which consent shall not be unreasonably withheld or delayed). (e) If and to the extent that the obligations of a Borrower hereunder are unenforceable for any reason, such Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under Applicable Law. Each Borrower's obligations hereunder shall survive any termination of this Agreement and the other Loan Documents and the payment in full of the Obligations, and are in addition to, and not in substitution of, any other of their obligations set forth in this Agreement or any other Loan Document to which it is a party. SECTION 12.11. TERMINATION; SURVIVAL. At such time as (a) all of the Commitments have been terminated, (b) none of the Lenders is obligated any longer under this Agreement to make any Loans and (c) all Obligations (other than obligations which survive as provided in the following sentence) have been paid and satisfied in full, this Agreement shall terminate. Notwithstanding any termination of this Agreement, or of the other Loan Documents, the indemnities to which the Agents and the Lenders are entitled under the provisions of Sections 11.7, 12.2 and 12.10 and any other provision of this Agreement and the other Loan Documents, and the waivers of jury trial and submission to jurisdiction contained in Section 12.4, shall continue in full force and effect and shall protect the Agents and the Lenders against events arising after such termination as well as before. -71- 76 SECTION 12.12. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 12.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICTS OF LAWS PRINCIPLES OR PROVISIONS. SECTION 12.14. COUNTERPARTS. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute but one and the same instrument. SECTION 12.15. LIMITATION OF LIABILITY. (a) Neither an Agent nor any Lender, nor any affiliate, officer, director, employee, attorney, or agent of an Agent or any Lender shall have any liability with respect to, and each Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by a Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Each Borrower hereby waives, releases, and agrees not to sue an Agent or any Lender or any of an Agent's or any Lender's affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or financed hereby. (b) Notwithstanding any provisions to the contrary contained herein or in any other Loan Document, to the extent that the obligations of REIT would be unenforceable because of any federal or state law relating to fraudulent conveyance or transfers, then the obligations of REIT under the Loan Documents shall be limited to the maximum amount that would be permitted under such applicable laws in order to avoid such invalidity or unenforceability. SECTION 12.16. ENTIRE AGREEMENT. This Agreement, the Notes, and the other Loan Documents embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof -72- 77 and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. SECTION 12.17. CONSTRUCTION. The Agents, each Borrower and each Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the Agents, the Borrowers and each Lender. [Signatures on Following Pages] -73- 78 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be executed by their authorized officers all as of the day and year first above written. BORROWERS: ALLIED CAPITAL CORPORATION By: /s/JON A. DELUCA ----------------------------------------- Name: Jon A. DeLuca --------------------------------------- Title: Principal and Chief Financial Officer -------------------------------------- ALLIED CAPITAL REIT, INC. By: /s/JON A. DELUCA ---------------------------------------- Name: Jon A. DeLuca -------------------------------------- Title: Principal and Chief Financial Officer ------------------------------------- ALLIED CAPITAL SBLC CORPORATION By: /s/JON A. DELUCA ---------------------------------------- Name: Jon A. DeLuca -------------------------------------- Title: Principal and Chief Financial Officer ------------------------------------- [Signatures Continued on Next Page] -74- 79 [SIGNATURE PAGE TO CREDIT AGREEMENT DATED AS OF APRIL 20, 1998, WITH ALLIED CAPITAL CORPORATION AND ALLIED CAPITAL SBLC CORPORATION] BANKBOSTON, N.A., AS DISBURSING AGENT AND AS A LENDER By: /s/DEIRDRE M. HOLLAND ---------------------------------- Name: Deirdre M. Holland --------------------------------- Title: Vice President -------------------------------- INITIAL COMMITMENT AMOUNT: $50,000,000 LENDING OFFICE (ALL TYPES OF LOANS): -------------------------------------- -------------------------------------- -------------------------------------- Attn: ---------------- Telecopier: -------------- Telephone: -------------- [Signatures Continued on Next Page] -75- 80 [SIGNATURE PAGE TO CREDIT AGREEMENT DATED AS OF APRIL 20, 1998, WITH ALLIED CAPITAL CORPORATION AND ALLIED CAPITAL SBLC CORPORATION] RIGGS BANK N.A., AS MANAGING AGENT AND AS A LENDER By: /s/DAVID H. OLSON -------------------------------------------------- Name: David H. Olson ------------------------------------------------ Title: Vice President ----------------------------------------------- INITIAL COMMITMENT AMOUNT: $50,000,000 LENDING OFFICE (ALL TYPES OF LOANS): ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- Attn: ---------------- Telecopier: -------------- Telephone: -------------- [Signatures Continued on Next Page] -76- 81 [SIGNATURE PAGE TO CREDIT AGREEMENT DATED AS OF APRIL 20, 1998, WITH ALLIED CAPITAL CORPORATION AND ALLIED CAPITAL SBLC CORPORATION] FIRST UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS A LENDER By: /s/JANE W. WORKMAN --------------------------------------------- Name: Jane W. Workman ------------------------------------------- Title: Senior Vice President ------------------------------------------ INITIAL COMMITMENT AMOUNT: $50,000,000 LENDING OFFICE (ALL TYPES OF LOANS): ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ Attn: ---------------- Telecopier: -------------- Telephone: -------------- [Signatures Continued on Next Page] -77- 82 [SIGNATURE PAGE TO CREDIT AGREEMENT DATED AS OF APRIL 20, 1998, WITH ALLIED CAPITAL CORPORATION AND ALLIED CAPITAL SBLC CORPORATION] NATIONSBANK OF TEXAS, N.A., AS CO-AGENT AND AS A LENDER By: /s/SHELLY K. HARPER --------------------------------------- Name: Shelly K. Harper ------------------------------------- Title: Vice President ------------------------------------ INITIAL COMMITMENT AMOUNT: $50,000,000 LENDING OFFICE (ALL TYPES OF LOANS): ------------------------------------------ ------------------------------------------ ------------------------------------------ Attn: ---------------- Telecopier: -------------- Telephone: -------------- -78- 83 EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT THIS ASSIGNMENT AND ACCEPTANCE AGREEMENT dated as of ____________, 19___ (the "Agreement"), by and among _________________________ (the "Assignor"), _______________________, (the "Assignee"), ALLIED CAPITAL CORPORATION, ALLIED CAPITAL REIT, INC., and ALLIED CAPITAL SBLC CORPORATION (the "Borrowers") and BANKBOSTON, N.A., FIRST UNION NATIONAL BANK, RIGGS BANK N.A., and NATIONSBANK OF TEXAS, N.A., as Agents (the "Agents"). WHEREAS, the Assignor is a Lender under that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among the Borrowers, the financial institutions party thereto and their assignees under Section 12.5(d) thereof (the "Lenders"), BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, and First Union National Bank, as Syndication Agent; WHEREAS, the Assignor desires to assign to the Assignee all or a portion of the Assignor's Commitment under the Credit Agreement, all on the terms and conditions set forth herein; WHEREAS, the Borrowers and the Agents consent to such assignment on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by the parties hereto, the parties hereto hereby agree as follows: Section l. Assignment. (a) Subject to the terms and conditions of this Agreement and in consideration of the payment to be made by the Assignee to the Assignor pursuant to Section 2 of this Agreement, effective as of __________________ (the "Assignment Date"), the Assignor hereby irrevocably sells, transfers and assigns to the Assignee, without recourse, a $______________ interest (such interest being the "Assigned Commitment") in and to the Assignor's Commitment and all of the other rights and obligations of the Assignor under the Credit Agreement, such Assignor's Notes and the other Loan Documents (representing _______% in respect of the aggregate amount of all Lenders' Commitments), including without limitation, a principal amount of outstanding Loans equal to $____________, all voting rights of the Assignor associated with the Assigned Commitment, all rights to receive interest on such amount of Loans and all commitment and other Fees with respect to the Assigned Commitment and other rights of the Assignor under the Credit Agreement and the other Loan Documents with respect to the Assigned Commitment, all as if the Assignee were an original Lender under and signatory to the Credit Agreement having a Commitment equal to such amount of the Assigned Commitment. The Assignee, subject to the terms and conditions hereof, hereby assumes all obligations of the Assignor with respect to the A-1 84 Assigned Commitment as if the Assignee were an original Lender under and signatory to the Credit Agreement having a Commitment equal to the Assigned Commitment, which obligations shall include, but shall not be limited to, the obligation of the Assignor to make Loans to the Borrowers with respect to the Assigned Commitment and the obligation to indemnify the Agent as provided therein (the foregoing enumerated obligations, together with all other similar obligations more particularly set forth in the Credit Agreement and the other Loan Documents, shall be referred to hereinafter, collectively, as the "Assigned Obligations"). The Assignor shall have no further duties or obligations with respect to, and shall have no further interest in, the Assigned Obligations or the Assigned Commitment from and after the Assignment Date. (b) The assignment by the Assignor to the Assignee hereunder is without recourse to the Assignor. The Assignee makes and confirms to the Agents, the Assignor, and the other Lenders all of the representations, warranties and covenants of a Lender under Article 11 of the Credit Agreement. Not in limitation of the foregoing, the Assignee acknowledges and agrees that, except as set forth in Section 4 below, the Assignor is making no representations or warranties with respect to, and the Assignee hereby releases and discharges the Assignor for any responsibility or liability for: (i) the present or future solvency or financial condition of any Borrower or any of its Subsidiaries, (ii) any representations, warranties, statements or information made or furnished by any Borrower or any of its Subsidiaries in connection with the Credit Agreement or otherwise, (iii) the validity, efficacy, sufficiency, or enforceability of the Credit Agreement, any Loan Document or any other document or instrument executed in connection therewith, or the collectibility of the Assigned Obligations, (iv) the perfection, priority or validity of any Lien with respect to any collateral at any time securing the Obligations or the Assigned Obligations under the Notes or the Credit Agreement and (v) the performance or failure to perform by any Borrower or any of its Subsidiaries of any obligation under the Credit Agreement or any other Loan Document. Further, the Assignee acknowledges that it has, independently and without reliance upon the Agents, or on any affiliate or subsidiary thereof, or any other Lender and based on the financial statements supplied by the Borrowers and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to become a Lender under the Credit Agreement. The Assignee also acknowledges that it will, independently and without reliance upon the Agents or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any Note or pursuant to any other obligation. Except as expressly provided in the Credit Agreement, the Agents shall have no duty or responsibility whatsoever, either initially or on a continuing basis, to provide the Assignee with any credit or other information with respect to any Borrower or any of its Subsidiaries or to notify the Assignee of any Default or Event of Default. The Assignee has not relied on the Agents as to any legal or factual matter in connection therewith or in connection with the transactions contemplated thereunder. Section 2. Payment by Assignee. In consideration of the assignment made pursuant to Section 1 of this Agreement, the Assignee agrees to pay to the Assignor on the Assignment Date, an amount equal to $____________ representing the aggregate principal amount outstanding of the Loans owing to the Assignor under the Credit Agreement and the other Loan Documents being assigned hereby. A-2 85 Section 3. Payments by Assignor. The Assignor agrees to pay to the Syndication Agent on the Assignment Date the administration fee, if any, payable under the applicable provisions of the Credit Agreement. Section 4. Representations and Warranties of Assignor. The Assignor hereby represents and warrants to the Assignee that (a) as of the Assignment Date (i) the Assignor is a Lender under the Credit Agreement having a Commitment under the Credit Agreement (without reduction by any assignments thereof which have not yet become effective), equal to $_________ and that the Assignor is not in default of its obligations under the Credit Agreement; and (ii) the outstanding balance of Loans owing to the Assignor (without reduction by any assignments thereof which have not yet become effective) is $____________; and (b) it is the legal and beneficial owner of the Assigned Commitment which is free and clear of any adverse claim created by the Assignor. Section 5. Representations, Warranties and Agreements of Assignee. The Assignee (a) represents and warrants that it is (i) legally authorized to enter into this Agreement and (ii) an "accredited investor" (as such term is used in Regulation D of the Securities Act) and an Eligible Assignee; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant thereto and such other documents and information (including without limitation the Loan Documents) as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; (c) appoints and authorizes each Agent to take such action as contractual representative on its behalf and to exercise such powers under the Loan Documents as are delegated to such Agent by the terms thereof together with such powers as are reasonably incidental thereto; and (d) agrees that it will become a party to and shall be bound by the Credit Agreement, the other Loan Documents to which the other Lenders are a party on the Assignment Date and will perform in accordance therewith all of the obligations which are required to be performed by it as a Lender. Section 6. Recording and Acknowledgment by the Syndication Agent. Following the execution of this Agreement, the Assignor will deliver to the Syndication Agent (a) a duly executed copy of this Agreement for acknowledgment and recording by such Agent and (b) the Assignor's Notes. Each Borrower agrees to exchange such Note for a new Note as provided in Section 12.5(d) of the Credit Agreement. Upon such acknowledgment and recording, from and after the Assignment Date, the Syndication Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, Fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Assignment Date directly between themselves. [Include this Section only if Company's consent is required under Section 12.5(d)] Section 7. Agreements of the Company. The Company hereby agrees that the Assignee shall be a Lender under the Credit Agreement having a Commitment equal to the Assigned Commitment. The Company agrees that the Assignee shall have all of the rights and remedies of a Lender under the Credit Agreement and the other Loan Documents as if the Assignee were an original Lender under and signatory to the Credit Agreement, including, but A-3 86 not limited to, the right of a Lender to receive payments of principal and interest with respect to the Assigned Obligations, and to the Loans made by the Lenders after the date hereof and to receive the commitment and other Fees payable to the Lenders as provided in the Credit Agreement. Further, the Assignee shall be entitled to the indemnification provisions from the Borrowers in favor of the Lenders as provided in the Credit Agreement and the other Loan Documents. The Company further agrees, upon the execution and delivery of this Agreement, to execute, and to cause SBLC to execute, in favor of the Assignee a Note in an initial amount equal to the Assigned Commitment for each Borrower. Further, the Company agrees that, upon the execution and delivery of this Agreement, the Borrowers shall owe the Assigned Obligations to the Assignee as if the Assignee were the Lender originally making such Loans and entering into such other obligations. Upon receipt by the Assignor of the amounts due the Assignor under Section 2, the Assignor agrees to surrender to each Borrower such Assignor's Note. Section 8. Addresses. The Assignee specifies as its address for notices and its Lending Office for all Loans, the offices set forth below: Notice Address: ----------------------------------- ----------------------------------- ----------------------------------- Telephone No.: --------------------- Telecopy No.: ---------------------- Domestic Lending Office: ----------------------------------- ----------------------------------- ----------------------------------- Telephone No.: --------------------- Telecopy No.: ---------------------- LIBOR Lending Office: ----------------------------------- ----------------------------------- ----------------------------------- Telephone No.: --------------------- Telecopy No.: ---------------------- Section 9. Payment Instructions. All payments to be made to the Assignee under this Agreement by the Assignor, and all payments to be made to the Assignee under the Credit Agreement, shall be made as provided in the Credit Agreement in accordance with the following instructions: Section 10. Effectiveness of Assignment. This Agreement, and the assignment and assumption contemplated herein, shall not be effective until (a) this Agreement is executed and delivered by each of the Assignor, the Assignee, the Agents, and if required under Section 12.5(d) of the Credit Agreement, the Company, and (b) the payment to the Assignor of the amounts owing by the Assignee pursuant to Section 2 hereof and (c) the payment to the Syndication Agent of the amounts owing by the Assignor pursuant to Section 3 hereof. Upon A-4 87 recording and acknowledgment of this Agreement by the Agents, from and after the Assignment Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Agreement, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Agreement, relinquish its rights and be released from its obligations under the Credit Agreement; provided, however, that if the Assignor does not assign its entire interest under the Loan Documents, it shall remain a Lender entitled to all of the benefits and subject to all of the obligations thereunder with respect to its Commitment. Section 11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES OR PROVISIONS. Section 12. Counterparts. This Agreement may be executed in any number of counterparts each of which, when taken together, shall constitute one and the same agreement. Section 13. Headings. Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof. Section 14. Amendments; Waivers. This Agreement may not be amended, changed, waived or modified except by a writing executed by the Assignee and the Assignor; provided, however, any amendment, waiver or consent which shall affect the rights or duties of the [Company or the] Agents under this Agreement shall not be effective unless signed by the [Company or the] Agents[, as applicable]. Section 15. Entire Agreement. This Agreement embodies the entire agreement between the Assignor and the Assignee with respect to the subject matter hereof and supersedes all other prior arrangements and understandings relating to the subject matter hereof. Section 16. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 17. Definitions. Terms not otherwise defined herein are used herein with the respective meanings given them in the Credit Agreement. [Signatures on Following Pages] A-5 88 IN WITNESS WHEREOF, the parties hereto have duly executed this Assignment and Acceptance Agreement as of the date and year first written above. ASSIGNOR: [NAME OF ASSIGNOR] By: ------------------------------- Name: ----------------------------- Title: ---------------------------- ASSIGNEE: [NAME OF ASSIGNEE] By: ------------------------------- Name: ----------------------------- Title: ---------------------------- [Include signature of the Company only if required under Section 12.5(d) of the Credit Agreement] Agreed and consented to as of the date first written above. COMPANY: ALLIED CAPITAL CORPORATION By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- [Signatures Continued on Following Page] A-6 89 Accepted as of the date first written above. AGENTS: BankBoston, N.A., as Disbursing Agent By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- First Union National Bank, as Syndication Agent By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- NationsBank of Texas, N.A., as Co-Agent By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- Riggs Bank N.A., as Managing Agent By: ------------------------------------------------ Name: ---------------------------------------------- Title: --------------------------------------------- A-7 90 EXHIBIT B FORM OF GUARANTY THIS GUARANTY dated as of ___________________ executed and delivered by __________________________, a ______________________ (the "Guarantor") in favor of (a) Riggs Bank N.A., in its capacity as Managing Agent (the "Agent") for the Lenders under that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms, the "Credit Agreement"), by and among Allied Capital Corporation, a Maryland corporation, Allied Capital REIT, Inc., a Maryland corporation, and Allied Capital SBLC Corporation, a Maryland corporation (the "Borrowers"), the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof (the "Lenders"), BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent and (b) the Lenders. WHEREAS, pursuant to the Credit Agreement, the Agents and the Lenders have agreed to make available to the Borrowers certain financial accommodations on the terms and conditions set forth in the Credit Agreement, WHEREAS, the Company owns, directly or indirectly, _________________ of the issued and outstanding capital stock of, or other equity interests in, the Guarantor; WHEREAS, the Borrowers, the Guarantor and the other Subsidiaries of the Borrower, though separate legal entities, are mutually dependent on each other in the conduct of their respective businesses as an integrated operation and have determined it to be in their mutual best interests to obtain financing from the Agents and the Lenders through their collective efforts; WHEREAS, the Guarantor acknowledges that it has received advances from the Company and will receive other direct and indirect benefits from the Agents and the Lenders making such financial accommodations available to the Borrowers under the Credit Agreement and, accordingly, the Guarantor is willing to guarantee the Borrowers' obligations to the Agent and the Lenders on the terms and conditions contained herein; and WHEREAS, the Guarantor's execution and delivery of this Guaranty is a condition to the Agents and the Lenders making, and continuing to make, such financial accommodations to the Borrowers. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Guarantor, the Guarantor agrees as follows: Section 1. Guaranty. The Guarantor hereby absolutely, irrevocably and unconditionally guaranties the due and punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of all of the following (collectively referred to as the "Guaranteed Obligations"): (a) all indebtedness and obligations owing by the Borrowers to any Lender or the Agents under or in connection with the Credit Agreement and any other Loan B-1 91 Document, including without limitation, the repayment of all principal of the Loans, and the payment of all interest, Fees, charges, attorneys fees and other amounts payable to any Lender or the Agent thereunder or in connection therewith; (b) any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (c) all expenses, including, without limitation, attorneys' fees and disbursements, that are incurred by the Lenders and the Agents in the enforcement of any of the foregoing or any obligation of the Guarantor hereunder and (d) all other Obligations, provided, however, that the Guarantor's obligations hereunder shall not exceed a principal sum of $_____________ plus interest thereon on the applicable default rate provided for in the Credit Agreement from the date demand is made hereunder. Section 2. Guaranty of Pavement and Not of Collection. This Guaranty is a guaranty of payment, and not of collection, and a debt of the Guarantor for its own account. Accordingly, the Lenders and the Agents shall not be obligated or required before enforcing this Guaranty against the Guarantor: (a) to pursue any right or remedy the Lenders or the Agent may have against the Borrowers or any other Person or commence any suit or other proceeding against the Borrowers or any other Person in any court or other tribunal; (b) to make any claim in a liquidation or bankruptcy of the Borrower or any other Person; or (c) to make demand of the Borrowers or any other Person or to enforce or seek to enforce or realize upon any collateral security held by the Lenders or the Agents which may secure any of the Guaranteed Obligations. Section 3. Guaranty Absolute. The Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of the documents evidencing the same, regardless of any Applicable Law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Agents or the Lenders with respect thereto. The liability of the Guarantor under this Guaranty shall be absolute and unconditional in accordance with its terms and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including without limitation, the following (whether or not the Guarantor consents thereto or has notice thereof): (a) (i) any change in the amount, interest rate or due date or other term of any of the Guaranteed Obligations, (ii) any change in the time, place or manner of payment of all or any portion of the Guaranteed Obligations, (iii) any amendment or waiver of, or consent to the departure from or other indulgence with respect to, the Credit Agreement, any other Loan Document, or any other document or instrument evidencing or relating to any Guaranteed Obligations, or (iv) any waiver, renewal, extension, addition, or supplement to, or deletion from, or any other action or inaction under or in respect of, the Credit Agreement, any of the other Loan Documents, or any other documents, instruments or agreements relating to the Guaranteed Obligations or any other instrument or agreement referred to therein or evidencing any Guaranteed Obligations or any assignment or transfer of any of the foregoing; (b) any lack of validity or enforceability of the Credit Agreement, any of the other Loan Documents, or any other document, instrument or agreement referred to therein or evidencing any Guaranteed Obligations or any assignment or transfer of any of the foregoing; B-2 92 (c) any furnishing to the Agents or the Lenders of any additional security for the Guaranteed Obligations, or any sale, exchange, release or surrender of, or realization on, any security for the Guaranteed Obligations; (d) any settlement or compromise of any of the Guaranteed Obligations, any security therefor, or any liability of any other party with respect to the Guaranteed Obligations, or any subordination of the payment of the Guaranteed Obligations to the payment of any other liability of the Borrowers or any other obligor with respect to the Guaranteed Obligations; (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Guarantor, the Borrowers or any other Person, or any action taken with respect to this Guaranty by any trustee or receiver, or by any court, in any such proceeding; (f) any act or failure to act by the Borrowers or any other Person which may adversely affect the Guarantor's subrogation rights, if any, against the Borrowers to recover payments made under this Guaranty; (g) any nonperfection of any security interest or other Lien on any collateral securing in any way any of the Obligations; (h) any application of sums paid by the Borrowers or any other Person with respect to the liabilities of the Borrowers to the Agents or the Lenders, regardless of what liabilities of the Borrowers remain unpaid; (i) any defect, limitation or insufficiency in the borrowing powers of the Borrowers or in the exercise thereof; or (j) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Guarantor hereunder. Section 4. Action with Respect to Guaranteed Obligations. The Lenders and the Agents may, at any time and from time to time, without the consent of, or notice to, the Guarantor, and without discharging the Guarantor from its obligations hereunder take any and all actions described in Section 3 and may otherwise: (a) amend, modify, alter or supplement the terms of any of the Guaranteed Obligations, including, but not limited to, extending or shortening the time of payment of any of the Guaranteed Obligations or changing the interest rate that may accrue on any of the Guaranteed Obligations; (b) amend, modify, alter or supplement the Credit Agreement or any other Loan Document; (c) sell, exchange, release or otherwise deal with all, or any part, of any collateral; (d) release any Person liable in any manner for the payment or collection of the Guaranteed Obligations; (e) exercise, or refrain from exercising, any rights against the Borrowers or any other Person; and (f) apply any sum, by whomsoever paid or however realized, to the Guaranteed Obligations in such order as the Lenders shall elect. Section 5. Representations and Warranties. The Guarantor hereby makes to the Agents and the Lenders all of the representations and warranties made by the Borrowers with B-3 93 respect to or in any way relating to the Guarantor in the Credit Agreement and the other Loan Documents, as if the same were set forth herein in full. Section 6. Covenants. The Guarantor will comply with all covenants which the Company is to cause the Guarantor to comply with under the terms of the Credit Agreement or any of the other Loan Documents. Section 7. Waiver. The Guarantor, to the fullest extent permitted by Applicable Law, hereby waives notice of acceptance hereof or any presentment, demand, protest or notice of any kind, and any other act or thing, or omission or delay to do any other act or thing, which in any manner or to any extent might vary the risk of the Guarantor or which otherwise might operate to discharge the Guarantor from its obligations hereunder. Section 8. Inability to Accelerate Loan. If the Agents and/or the Lenders are prevented under Applicable Law or otherwise from demanding or accelerating payment of any of the Guaranteed Obligations by reason of any automatic stay or otherwise, the Agents and/or the Lenders shall be entitled to receive from the Guarantor, upon demand therefor, the sums which otherwise would have been due had such demand or acceleration occurred. Section 9. Reinstatement of Guaranteed Obligations. If claim is ever made on the Agents or any Lender for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations, and such Agent or such Lender repays all or part of said amount by reason of (a) any judgment, decree or order of any court or administrative body of competent jurisdiction, or (b) any settlement or compromise of any such claim effected by such Agent or such Lender with any such claimant (including a Borrower or a trustee in bankruptcy for a Borrower), then and in such event the Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding on it, notwithstanding any revocation hereof or the cancellation of the Credit Agreement, any of the other Loan Documents, or any other instrument evidencing any liability of a Borrower, and the Guarantor shall be and remain liable to such Agent or such Lender for the amounts so repaid or recovered to the same extent as if such amount had never originally been paid to the Agent or such Lender. Section 10. Subrogation. Upon the making by the Guarantor of any payment hereunder for the account of the Borrower, the Guarantor shall be subrogated to the rights of the payee against the Borrower; provided, however, that the Guarantor shall not enforce any right or receive any payment by way of subrogation or otherwise take any action in respect of any other claim or cause of action the Guarantor may have against a Borrower arising by reason of any payment or performance by the Guarantor pursuant to this Guaranty, unless and until all of the Guaranteed Obligations have been indefeasibly paid and performed in full. If any amount shall be paid to the Guarantor on account of or in respect of such subrogation rights or other claims or causes of action, the Guarantor shall hold such amount in trust for the benefit of the Agents and the Lenders and shall forthwith pay such amount to the Managing Agent to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement or to be held by the Managing Agent as collateral security for any Guaranteed Obligations existing. B-4 94 Section 11. Payments Free and Clear. (a) All payments by the Guarantor of principal of, and interest on, Loans and all other Guaranteed Obligations shall be made free and clear of and without deduction for any present or future excise, stamp or other taxes, fees, duties, levies, imposts, charges, deductions, withholdings or other charges of any nature whatsoever imposed by any taxing authority in the United States of America, but excluding (1) franchise taxes, (2) any taxes (other than withholding taxes that do not constitute back-up withholding taxes) that would not be imposed but for a connection between an Agent or a Lender and the jurisdiction imposing such taxes (other than a connection arising solely by virtue of the activities of an Agent or such Lender pursuant to or in respect of this Agreement or any other Loan Document), (3) any withholding taxes payable with respect to payments hereunder or under any other Loan Document under Applicable Law in effect on the Agreement Date, (4) any taxes imposed on or measured by any Lender's assets, net income, receipts or branch profits, and (5) any taxes arising after the Agreement Date solely as a result of or attributable to a Lender changing its designated Lending Office after the date such Lender becomes a party hereto (such non-excluded items being collectively called "Taxes"). If any withholding or deduction from any payment to be made by the Guarantor hereunder is required in respect of any Taxes pursuant to any Applicable Law, then such Guarantor will: (i) pay directly to the relevant Governmental Authority the full amount required to be so withheld or deducted; (ii) promptly forward to the Disbursing Agent an official receipt or other documentation reasonably satisfactory to the Disbursing Agent evidencing such payment to such Governmental Authority; and (iii) pay to the Disbursing Agent for its account or the account of the applicable Lender, as the case may be, such additional amount or amounts as is necessary to ensure that the net amount actually received by the Disbursing Agent or such Lender will equal the full amount that the Disbursing Agent or such Lender would have received had no such withholding or deduction been required . (b) If the Guarantor fails to pay any Taxes when due to the appropriate Governmental Authority or fails to remit to the Disbursing Agent, for its account or the account of the respective Lender, as the case may be, the receipts or other documentary evidence described in subsection (a)(ii) above, the Guarantor shall indemnify the Disbursing Agent and the Lenders for any incremental Taxes, interest or penalties that may become payable by the Disbursing Agent or any Lender as a result of any such failure. For purposes of this Section, a distribution hereunder by the Disbursing Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Guarantor. Section 12. Set-off. In addition to any rights now or hereafter granted under any of the other Loan Documents or Applicable Law and not by way of limitation of any such rights, the Guarantor hereby authorizes each Lender, at any time or from time to time, without any prior notice to the Guarantor or to any other Person, any such notice being hereby expressly waived, to B-5 95 set-off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by any Lender, or any affiliate of any Lender, to or for the credit or the account of the Guarantor against and on account of any of the Guaranteed Obligations, although such obligations shall be contingent or unmatured. Each Lender agrees to give the Guarantor prompt notice after the exercise by the Lender of such right of set-off but the failure of a Lender to give such notice shall not affect the validity of any such set-off. The Guarantor agrees, to the fullest extent permitted by Applicable Law, that any Participant may exercise rights of setoff or counterclaim and other rights with respect to its participation as fully as if such Participant were a direct creditor of the Guarantor in the amount of such participation. Section 13. Subordination. The Guarantor hereby expressly covenants and agrees for the benefit of the Agents and the Lenders that all obligations and liabilities of the Borrowers to the Guarantor of whatever description, including without limitation, all intercompany receivables of the Guarantor from the Borrower (collectively, the "Junior Claims") shall be subordinate and junior in right of payment to all Guaranteed Obligations. If an Event of Default shall have occurred and be continuing, then the Guarantor shall not accept any direct or indirect payment (in cash, property, securities by setoff or otherwise) from the Borrower on account of or in any manner in respect of any Junior Claim until all of the Guaranteed Obligations have been indefeasibly paid in full. Section 14. Avoidance Provisions. It is the intent of the Guarantor, the Agents and the Lenders that in any Proceeding, the Guarantor's maximum obligation hereunder shall equal, but not exceed, the maximum amount which would not otherwise cause the obligations of the Guarantor hereunder (or any other obligations of the Guarantor to the Agents and the Lenders) to be avoidable or unenforceable against the Guarantor in such Proceeding as a result of Applicable Law, including without limitation, (a) Section 548 of the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code") and (b) any state fraudulent transfer or fraudulent conveyance act or statute applied in such Proceeding, whether by virtue of Section 544 of the Bankruptcy Code or otherwise. The Applicable Laws under which the possible avoidance or unenforceability of the obligations of the Guarantor hereunder (or any other obligations of the Guarantor to the Agents and the Lenders) shall be determined in any such Proceeding are referred to as the "Avoidance Provisions." Accordingly, to the extent that the obligations of the Guarantor hereunder would otherwise be subject to avoidance under the Avoidance Provisions, the maximum Guaranteed Obligations for which the Guarantor shall be liable hereunder shall be reduced to that amount which, as of the time any of the Guaranteed Obligations are deemed to have been incurred under the Avoidance Provisions, would not cause the obligations of the Guarantor hereunder (or any other obligations of the Guarantor to the Agents and the Lenders), to be subject to avoidance under the Avoidance Provisions. This Section is intended solely to preserve the rights of the Agent and the Lenders hereunder to the maximum extent that would not cause the obligations of the Guarantor hereunder to be subject to avoidance under the Avoidance Provisions, and neither the Guarantor nor any other Person shall have any right or claim under this Section as against the Agent and the Lenders that would not otherwise be available to such Person under the Avoidance Provisions. B-6 96 Section 15. Information. The Guarantor assumes all responsibility for being and keeping itself informed of the financial condition of the Borrowers, and of all other circumstances bearing upon the risk of nonpayment of any of the Guaranteed Obligations and the nature, scope and extent of the risks that the Guarantor assumes and incurs hereunder, and agrees that neither the Agents nor any Lender shall have any duty whatsoever to advise the Guarantor of information regarding such circumstances or risks. Section 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES OR PROVISIONS. Section 17. Jurisdiction; Consent to Service of Process; Waiver of Jury Trial. (a) The Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Guarantor or its properties in the courts of any jurisdiction. (b) The Guarantor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) The Guarantor and each other party hereto consents to service of process in the manner provided for notices in Section 24. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. (d) Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement or any of the other Loan Documents. Each party hereto (1) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (2) acknowledges that it and the other parties hereto have been induced B-7 97 to enter into this Agreement and the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications in this Section. Section 18. Loan Accounts. The Agents and each Lender may maintain books and accounts setting forth the amounts of principal, interest and other sums paid and payable with respect to the Guaranteed Obligations, and in the case of any dispute relating to any of the outstanding amount, payment or receipt of any of the Guaranteed Obligation or otherwise, the entries in such books and accounts shall be deemed prima facie evidence of the matters set forth therein. The failure of the Agents or any Lender to maintain such books and accounts shall not in any way relieve or discharge the Guarantor of any of its obligations hereunder. Section l9. Waiver of Remedies. No delay or failure on the part of the Agents or any Lender in the exercise of any right or remedy it may have against the Guarantor hereunder or otherwise shall operate as a waiver thereof, and no single or partial exercise by the Agents or any Lender of any such right or remedy shall preclude other or further exercise thereof or the exercise of any other such right or remedy. Section 20. Termination. This Guaranty shall remain in full force and effect until indefeasible payment in full of the Guaranties Obligations and the other Obligations and the termination or cancellation of the Credit Agreement. Section 21. Successors and Assigns. Each reference herein to the Agents or the Lenders shall be deemed to include such Person's respective successors and assigns (including, but not limited to, any holder of the Guaranteed Obligations) in whose favor the provisions of this Guaranty also shall inure, and each reference herein to the Guarantor shall be deemed to include the Guarantor's successors and assigns, upon whom this Guaranty also shall be binding. The Lenders may, in accordance with the applicable provisions of the Credit Agreement, assign, transfer or sell any Guaranteed Obligation, or grant or sell participations in any Guaranteed Obligations, to any Person without the consent of, or notice to, the Guarantor and without releasing, discharging or modifying the Guarantor's obligations hereunder. The Guarantor hereby consents to the delivery by the Agents or any Lender to any Assignee or Participant (or any prospective Assignee or Participant) of any financial or other information regarding the Borrowers or the Guarantor. The Guarantor may not assign or transfer its obligations hereunder to any Person. Section 22. Amendments. This Guaranty may not be amended except in writing signed by the Requisite Lenders (or all of the Lender if required under the terms of the Credit Agreement), the Agent and the Guarantor. Section 23. Payments. All payments to be made by the Guarantor pursuant to this Guaranty shall be made in Dollars, in immediately available funds to the Managing Agent at the Principal Office, not later than 2:00 p.m. on the date of demand therefor. Section 24. Notices. All notices and other communications required or provided for hereunder shall be in writing (including facsimile transmission or similar writing) and all such notices and other communications shall be deemed effective (a) if mailed, when received; (b) if B-8 98 telecopied, when transmitted, or (c) if hand delivered, when delivered; provided, however, that any notice of a change of address for notices shall not be effective until received. Section 25. Severability. In case any provision of this Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 26. Headings. Section headings used in this Guaranty are for convenience only and shall not affect the construction of this Guaranty. Section 27. Definitions. (a) For the purposes of this Guaranty: "Proceeding" means any of the following: (i) a voluntary or involuntary case concerning the Guarantor shall be commenced under the Bankruptcy Code of 1978, as amended; (ii) a custodian (as defined in such Bankruptcy Code or any other applicable bankruptcy laws) is appointed for, or takes charge of, all or any substantial part of the property of the Guarantor (iii) any other proceeding under any Applicable Law, domestic or foreign, relating to bankruptcy insolvency, reorganization, winding-up or composition for adjustment of debts, whether now or hereafter in effect, is commenced relating to the Guarantor; (iv) the Guarantor is adjudicated insolvent or bankrupt; (v) any order of relief or other order approving any such case or proceeding is entered by a court of competent jurisdiction; (vi) the Guarantor makes a general assignment for the benefit of creditors; (vii) the Guarantor shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; (viii) the Guarantor shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; (ix) the Guarantor shall by any act or failure to act indicate its consent to approval of or acquiescence in any of the foregoing; or (x) any corporate action shall be taken by the Guarantor for the purpose of effecting any of the foregoing. (b) Terms not otherwise defined herein are used herein with the respective meanings given them in the Credit Agreement. [Signature on Next Page] B-9 99 IN WITNESS WHEREOF, the Guarantor has duly executed and delivered this Guaranty as of the date and year first written above. [GUARANTOR] By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Address for Notices: ------------------------------------------- ------------------------------------------- ------------------------------------------- Attention: --------------------------------- Telecopier ( ) -------------------------- Telephone: ( ) ------------------------ B-10 100 EXHIBIT C FORM OF NOTICE OF BORROWING __________________, _____ BankBoston, N.A. 100 Federal Street Boston, MA 02110 Mail Code: 01-10-08 Attention: Deirdre M. Holland, Vice President Ladies and Gentlemen: Reference is made to that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Allied Capital Corporation, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation (the "Borrowers"), the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof (the "Lenders"), BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent (the "Agents"). Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. 1. Pursuant to Section 2.1(b) of the Credit Agreement, the Company and REIT hereby request that the Lenders make Loans to [the Company] [REIT] [SBLC] in an aggregate amount equal to $__________________. 2. The Company and REIT request that such Loans be made available on ________________, ____. 3. The Company and REIT hereby request that the requested Loans all be of the following Type: [CHECK ONE BOX ONLY] [ ] Base Rate Loans [ ] LIBOR Loans, each with an initial Interest Period for a duration of: [CHECK ONE BOX ONLY] [ ] one month [ ] two months [ ] three months 4. The proceeds of this borrowing of Loans will be used for the following purpose: C-1 101 5. The Company and REIT request that the proceeds of this borrowing of Loans be made available by: ----------------- The Company and REIT hereby certify to the Disbursing Agent and the Lenders that as of the date hereof and as of the date of the making of the requested Loans and after giving effect thereto, (a) no Default or Event of Default has or shall have occurred and be continuing, and (b) the representations and warranties made or deemed made by each Borrower and its Subsidiaries in the Loan Documents to which any of them is a party, are and shall be true and correct, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. In addition, the Company and REIT certify to the Disbursing Agent and the Lenders that all conditions to the making of the requested Loans contained in Article 5 of the Credit Agreement will have been satisfied at the time such Loans are made. If notice of the requested borrowing of Loans was previously given by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.1(b) of the Credit Agreement. ALLIED CAPITAL CORPORATION By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- ALLIED CAPITAL REIT, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- C-2 102 EXHIBIT D FORM OF NOTICE OF CONTINUATION _________________, _____ BankBoston, N.A. 100 Federal Street Boston, MA 02110 Mail Code: 01-10-08 Attention: Deirdre M. Holland, Vice President Ladies and Gentlemen: Reference is made to that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Allied Capital Corporation, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation (the "Borrowers"), the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof (the "Lenders"), BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent (the "Agents"). Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. Pursuant to Section 2.6 of the Credit Agreement, the Company hereby requests a Continuation of a borrowing of LIBOR Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Continuation as required by such Section of the Credit Agreement: 1. The proposed date of such Continuation is _________________, ____. 2. The aggregate principal amount of LIBOR Loans subject to the requested Continuation is $_______________ and was originally borrowed by [the Company] [REIT] [SBLC] on ________________, ____. 3. The portion of such principal amount subject to such Continuation is $__________________. 4. The current Interest Period for each of the LIBOR Loans subject to such Continuation ends on _________________, ____. D-1 103 5. The duration of the new Interest Period for each of such LIBOR Loans or portion thereof subject to such Continuation is: [CHECK ONE BOX ONLY] [ ] one month [ ] two months [ ] three months The Company hereby certifies to the Agents and the Lenders that as of the date hereof, as of the proposed date of the requested Continuation, and after giving effect to such Continuation, no Default or Event of Default has or shall have occurred and be continuing. If notice of the requested Continuation was given previously by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.6 of the Credit Agreement. ALLIED CAPITAL CORPORATION By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- D-2 104 EXHIBIT E FORM OF NOTICE OF CONVERSION _________________, _____ BankBoston, N.A. 100 Federal Street Boston, MA 02110 Mail Code: 01-10-08 Attention: Deirdre M. Holland, Vice President Ladies and Gentlemen: Reference is made to that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Allied Capital Corporation, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation (the "Borrowers"), the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof (the "Lenders"), BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent (the "Agents"). Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. Pursuant to Section 2.7 of the Credit Agreement, the Company hereby requests a Conversion of a borrowing of Loans of one Type into Loans of another Type under the Credit Agreement, and in that connection sets forth below the information relating to such Conversion as required by such Section of the Credit Agreement: l. The proposed date of such Conversion is _________________, _____. 2. The Loans to be Converted pursuant hereto are currently: [CHECK ONE BOX ONLY] [ ] Base Rate Loans [ ] LIBOR Loans 3. The aggregate principal amount of Loans subject to the requested Conversion is $____________ and was originally borrowed by [the Company] [REIT] [SBLC] on ____________, _____. 4. The portion of such principal amount subject to such Conversion is $_________________. E-1 105 5. The amount of such Loans to be so Converted is to be converted into Loans of the following Type: [CHECK ONE BOX ONLY] [ ] Base Rate Loans [ ] LIBOR Loans, each with an initial Interest Period for a duration of: [CHECK ONE BOX ONLY] [ ] one month [ ] two months [ ] three months The Company hereby certifies to the Agents and the Lenders that as of the date hereof and as of the date of the requested Conversion and after giving effect thereto, (a) no Default or Event of Default has or shall have occurred and be continuing, and (b) the representations and warranties made or deemed made by the Company and its Subsidiaries in the Loan Documents to which any of them is a party, are and shall be true and correct, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. If notice of the requested Conversion was given previously by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.7 of the Credit Agreement. ALLIED CAPITAL CORPORATION By: -------------------------------- Name: ------------------------------ Title: ----------------------------- E-2 106 EXHIBIT F FORM OF NOTE $_____________________ _________________, 19___ FOR VALUE RECEIVED, the undersigned, [ALLIED CAPITAL CORPORATION and ALLIED CAPITAL REIT, INC.] [ALLIED CAPITAL SBLC CORPORATION], [each] a Maryland corporation (the "Borrower[s]"), hereby [jointly and severally] promise[s] to pay to the order of ___________________________ (the "Lender"), in care of BankBoston, N.A., as Disbursing Agent (the "Disbursing Agent") at _______________ __________________________________________, or at such other address as may be specified by the Disbursing Agent to the Borrower[s], the principal sum of _______________________ AND ___/100 DOLLARS (or such lesser amount as shall equal the aggregate unpaid principal amount of Loans made by the Lender to the Borrower[s] under the Credit Agreement), on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount owing hereunder, at the rates and on the dates provided in the Credit Agreement. The date, amount of each Loan made by the Lender to the Borrower[s], and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof, provided that the failure of the Lender to made any such recordation or endorsement shall not affect the obligations of the Borrower[s] to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of such Loans made by the Lender. This Note is one of the Notes referred to in the Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time in accordance with its terms, the "Credit Agreement") among Allied Capital Corporation, Allied Capital REIT, Inc., Allied Capital SBLC Corporation, the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof, BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent, and evidences Loans made by the Lender thereunder. Terms used but not otherwise defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 12.5(d) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person. F-1 107 THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE, AND WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES OR PROVISIONS. The Borrower hereby waives presentment for payment; demand, notice of demand, notice of non-payment, protest, notice of protest and all other similar notices. Time is of the essence for this Note. IN WITNESS WHEREOF, the undersigned has executed and delivered this Note under seal as of the date first written above. [ALLIED CAPITAL CORPORATION] [ALLIED CAPITAL SBLC CORPORATION] By: -------------------------------- Name: ------------------------------ Title: ----------------------------- ATTEST: By: -------------------------------- Name: ------------------------------ Title: ----------------------------- [CORPORATE SEAL] [ALLIED CAPITAL REIT, INC.] By: -------------------------------- Name: ------------------------------ Title: ----------------------------- ATTEST: By: -------------------------------- Name: ------------------------------ Title: ----------------------------- [CORPORATE SEAL] F-2 108 SCHEDULE OF LOANS This Note evidences Loans made under the within-described Credit Agreement to the Borrower[s], on the dates and in the principal amounts set forth below, subject to the payments and prepayments of principal set forth below: DATE OF LOAN PRINCIPAL AMOUNT PAID UNPAID PRINCIPAL NOTATION ------------ --------- ----------- ---------------- -------- AMOUNT OF LOAN OR PREPAID AMOUNT MADE BY -------------- ---------- ------ ------- F-3 109 EXHIBIT G FORM OF OPINION OF COUNSEL 110 EXHIBIT H FORM OF COMPLIANCE CERTIFICATE Riggs Bank N.A. 808 17th Street, N.W. 10th Floor Washington, D.C. 20006 Attention: David H. Olson, Vice President Each of the Lenders Party to the Credit Agreement referred to below Ladies and Gentlemen: Reference is made to that certain Amended and Restated Credit Agreement dated as of April 20, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Allied Capital Corporation, Allied Capital REIT, Inc., and Allied Capital SBLC Corporation (the "Borrowers"), the financial institutions initially party thereto and their assignees under Section 12.5(d) thereof, BankBoston, N.A., as Disbursing Agent, Riggs Bank N.A., as Managing Agent, NationsBank of Texas, N.A., as Co-Agent, and First Union National Bank, as Syndication Agent (the "Agents"). Capitalized terms not otherwise defined herein are used herein with the respective meanings given them in the Credit Agreement. Pursuant to Section 8.3 of the Credit Agreement, the undersigned hereby certifies to the Lender as follows: (l) The undersigned is the chief financial officer of the Company. (2) The undersigned has examined the books and records of the Borrowers and has conducted such other examinations and investigations as are reasonably necessary to provide this Compliance Certificate. (3) To the best of the undersigned's knowledge, information and belief, no Default or Event of Default exists [if such is not the case, specify such Default or event of Default and its nature, when if occurred and whether it is continuing and the steps being taken by the Borrower with respect to such event, condition or failure.] (4) To the best of the undersigned's knowledge, information and belief, the representations and warranties made or deemed made by each Borrower and its Subsidiaries in the Loan Documents to which any of them is a party, are true and correct on and as of the date hereof except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate H-1 111 on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. (5) Attached hereto as Schedule l are the calculations required to establish whether or not the Company and its Subsidiaries, were in compliance with the covenants contained in Sections 9.1, 9.2(a)(4), 9.2(b)(3), and 9.4(d). IN WITNESS WHEREOF, the undersigned has executed this certificate as of the date first above written. --------------------------------------- Title: of ------------------------------- Allied Capital Corporation H-2 EX-99.2F.7.A 4 SALE AND SERVICING AGREEMENT 1 EXHIBIT F.7.a EXECUTION COPY SALE AND SERVICING AGREEMENT among ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, Issuer, ALLIED CAPITAL CMT, INC., Seller, ALLIED CAPITAL CORPORATION, Servicer and Special Servicer, LASALLE NATIONAL BANK, Indenture Trustee and Custodian, and ABN AMRO BANK N.V., Fiscal Agent Dated as of January 1, 1998 2
TABLE OF CONTENTS Page ---- ARTICLE I Definitions SECTION 1.01. Definitions........................................................................ 1 SECTION 1.02. Other Definitional Provisions...................................................... 23 ARTICLE II Conveyance of Mortgage Loans and the Funding Note SECTION 2.01. Conveyance of Mortgage Loans and the Funding Note.................................. 24 ARTICLE III The Mortgage Loans and the Funding Note SECTION 3.01. Representations and Warranties of Allied REIT and BMI REIT......................... 25 SECTION 3.02. Representations and Warranties of the Seller....................................... 26 SECTION 3.03. Repurchase upon Breach............................................................. 27 SECTION 3.04. Delivery and Possession of Servicing Files; Custody of Mortgage Files; Review of Mortgage Files .................................................................... 27 SECTION 3.05. Instructions; Authority to Act..................................................... 30 SECTION 3.06. Custodian's Indemnification........................................................ 30 SECTION 3.07. Effective Period and Termination................................................... 31 SECTION 3.08. Delivery of the Mortgage Files to the Servicer or Special Servicer................. 31 ARTICLE IV Administration and Servicing of Mortgage Loans SECTION 4.01. Duties of Servicer................................................................. 31 SECTION 4.02. Collection and Mortgage Loan Payments; Modifications of Mortgage Loans............. 33 SECTION 4.03. Realization upon Mortgage Loans.................................................... 35 SECTION 4.04. Maintenance of Insurance Policies; Errors and Omissions and Fidelity Coverage...... 37 SECTION 4.05. Reserved........................................................................... 39 SECTION 4.06. Recordation of Mortgages and Other Documents....................................... 39 SECTION 4.07. Reserved........................................................................... 39 SECTION 4.08. Servicing Fee...................................................................... 39 SECTION 4.09. Servicer's Certificate............................................................. 40 SECTION 4.10. Annual Statement as to Compliance; Notice of Servicer Event of Default............. 40 SECTION 4.11. Annual Independent Accountants' Report............................................. 41 SECTION 4.12. Access to Certain Documentation and Information Regarding Mortgage Loans........... 41 SECTION 4.13. Reserved........................................................................... 41 SECTION 4.14. "Due-on-Sale" Clauses: Assumption Agreements........................................ 41 SECTION 4.15. Management of REO Property......................................................... 43
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SECTION 4.16. Sale of REO Properties............................................................. 44 SECTION 4.17. Inspections; Collection of Operating Statements.................................... 45 SECTION 4.18. Reports of Foreclosures of Mortgaged Property...................................... 46 SECTION 4.19. Notification of Adjustments........................................................ 46 SECTION 4.20. Appraisals......................................................................... 46 SECTION 4.21. Certain Matters Regarding the Servicer and the Special Servicer.................... 46 SECTION 4.22. Eligibility of Servicer and Special Servicer....................................... 47 ARTICLE V Distributions; Statements to Certificateholders and Bondholders SECTION 5.01. Establishment of and Deposits to Collection Account ............................... 47 SECTION 5.02. Trust Accounts..................................................................... 48 SECTION 5.03. Application of Collections......................................................... 49 SECTION 5.04. Purchase Price..................................................................... 50 SECTION 5.05. Permitted Withdrawals From Collection Account...................................... 50 SECTION 5.06. Distributions...................................................................... 51 SECTION 5.07. Deposits to Escrow Account. ....................................................... 52 SECTION 5.08. Permitted Withdrawals from Escrow Account: Payment of Taxes and Insurance.......... 53 SECTION 5.09. P&I Advances....................................................................... 54 SECTION 5.10. Servicing Advances................................................................. 56 SECTION 5.11. Reserved........................................................................... 56 SECTION 5.12. Statements to Securityholders...................................................... 56 ARTICLE VI The Seller SECTION 6.01. Representations of Seller.......................................................... 59 SECTION 6.02. Corporate Existence................................................................ 61 SECTION 6.03. Liability of Seller; Indemnities................................................... 61 SECTION 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Seller............ 61 SECTION 6.05. Limitation on Liability of Seller and Others....................................... 62 SECTION 6.06. Seller May Own Securities.......................................................... 62 ARTICLE VII The Servicer SECTION 7.01. Representations of Servicer and Special Servicer................................... 62 SECTION 7.02. Indemnities of Servicer and the Special Servicer................................... 64 SECTION 7.03. Merger or Consolidation of, or Assumption of the Obligations of, Servicer and the Special Servicer .............................................................. 65 SECTION 7.04. Limitation on Liability of Servicer, the Special Servicer and Others............... 67 SECTION 7.05. Appointment of Subservicer......................................................... 68 SECTION 7.06. Servicer Not to Resign............................................................. 70 SECTION 7.07. Merger or Consolidation of, or
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Assumption of the Obligations of, Custodian........................................ 71 ARTICLE VIII Default SECTION 8.01. Servicer Events of Default......................................................... 74 SECTION 8.02. Consequences of a Servicer Event of Default........................................ 75 SECTION 8.03. Appointment of Successor........................................................... 76 SECTION 8.04. Notification to Bondholders and Certificateholders................................. 77 SECTION 8.05. Waiver of Past Defaults............................................................ 77 ARTICLE IX Termination SECTION 9.01. Optional Redemption of Bonds....................................................... 77 ARTICLE X Miscellaneous SECTION 10.01. Amendment......................................................................... 78 SECTION 10.02. Reserved.......................................................................... 79 SECTION 10.03. Notices........................................................................... 79 SECTION 10.04. Assignment by the Seller or the Servicer.......................................... 79 SECTION 10.05. Limitations on Rights of Others................................................... 80 SECTION 10.06. Severability...................................................................... 80 SECTION 10.07. Separate Counterparts............................................................. 80 SECTION 10.08. Headings.......................................................................... 80 SECTION 10.09. Governing Law..................................................................... 80 SECTION 10.10. Assignment by Issuer.............................................................. 80 SECTION 10.11. Nonpetition Covenants............................................................. 80 SECTION 10.12. Limitation of Liability of Owner Trustee and Indenture Trustee.................... 81 SECTION 10.13. Servicer Payment Obligation....................................................... 81
SCHEDULE A Schedule of Mortgage Loans SCHEDULE B Mortgage Loan Data Tables EXHIBIT A Form of Distribution Date Statement to Securityholders EXHIBIT B Form of Servicer's Certificate 3 5 SALE AND SERVICING AGREEMENT dated as of January 1, 1998 (the "Agreement"), among Allied Capital Commercial Mortgage Trust 1998-1, a Delaware business trust (the "Issuer"), Allied Capital CMT, Inc., a Delaware corporation (the "Seller"), Allied Capital Corporation, a Maryland corporation, as servicer (in such capacity, the "Servicer") and special servicer (in such capacity, the "Special Servicer"), LaSalle National Bank, a national banking association, as indenture trustee (in such capacity, the "Indenture Trustee") and custodian (in such capacity, the "Custodian"), and ABN AMRO Bank N.V., a banking corporation formed under the laws of the Netherlands (the "Fiscal Agent"). WHEREAS the Issuer desires to purchase the Allied Interests and the Funding Note; WHEREAS the Seller is willing to sell the Allied Interests and the Funding Note to the Issuer; WHEREAS the Servicer is willing to service the Mortgage Loans; and WHEREAS the Servicer will perform certain functions relating to the Funding Note as set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I Definitions SECTION 1.01. Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: "ACC" means Allied Capital Corporation. "ACC Guaranty" means the guaranty of ACC dated as of January 1, 1998 in favor of the Issuer. "Advance" means a P&I Advance or a Servicing Advance. "Affiliate" means, with respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Aggregate Stated Balance" means, with respect to any Determination Date, an amount equal to the aggregate of the Stated Principal Balances of the Mortgage Loans included in the Mortgage Pool as of the end of the immediately preceding Prepayment Period. "Allied Interests" means, collectively, the Allied Participations and the Allied Mortgage Loans. 6 "Allied Mortgage Loan Purchase Agreement" means the Mortgage Loan Purchase Agreement dated as of January 1, 1998, between Allied REIT, as seller, and the Seller, as purchaser. "Allied Mortgage Loans" means the Mortgage Loans identified as such on the Mortgage Loan Schedule attached hereto. "Allied Participation" means, with respect to each Participation Mortgage Loan, the participation interest of such Participation Mortgage Loan transferred by Allied REIT to the Seller pursuant to the Allied Mortgage Loan Purchase Agreement. "Allied Principal Collections" means, with respect to any Distribution Date, that portion of the following amounts attributable to the Allied Interests: (a) that portion of the aggregate of the principal portions of all Scheduled Payments (other than Balloon Payments) due and any Assumed Scheduled Payments deemed due in respect of the Mortgage Loans for their respective Due Dates occurring during the related Collection Period; (b) the aggregate of all Principal Prepayments received on the Mortgage Loans during the related Prepayment Period; (c) with respect to any Mortgage Loan as to which the related Stated Maturity Date occurred during or prior to the related Collection Period, any payment of principal made by or on behalf of the related Mortgagor during the related Collection Period, net of any portion of such payment that represents a recovery of the principal portion of any Scheduled Payment (other than a Balloon Payment) due, or the principal portion of any Assumed Scheduled Payment deemed due, in respect of such Mortgage Loan on a Due Date during or prior to the related Collection Period and not previously recovered; and (d) the Liquidation Principal Amount for such Distribution Date. "Allied REIT" means Allied Capital REIT, Inc., a Maryland corporation. "Assignment" means, with respect to each Mortgage Loan, the original assignments from the related Mortgage Loan holder, in favor of the Indenture Trustee, described in clauses (iv) and (v) of the definition of "Mortgage File" herein, pertaining to such Mortgage Loan. "Assumed Scheduled Payment" means, with respect to any Balloon Loan that is delinquent in respect of its Balloon Payment beyond the first Determination Date that follows its Stated Maturity Date, an amount deemed to be due for such Balloon Loan on its Stated Maturity Date and on each successive related Due Date on which it remains or is deemed to remain outstanding equal to the Scheduled Payment that would have been due thereon on such date if the related Balloon Payment had not come due but rather such Mortgage Loan had continued to amortize in accordance with such loan's amortization schedule, if any, in effect prior to its Stated Maturity Date. With respect to any delinquent Balloon Loan that provides for Monthly Payments of interest only prior to its Stated Maturity Date, the Assumed 2 7 Scheduled Payment for such Balloon Loan will equal the amount of such payment of interest. "Available Funds" means, with respect to each Distribution Date, an amount equal to the sum, without duplication, of the following amounts: (a) that portion of Scheduled Payments due in respect of the Allied Interests during the related Collection Period and collected during such Collection Period; (b) all P&I Advances made with respect to such Distribution Date; (c) that portion of all full and partial Principal Prepayments received in respect of the Allied Interests during the related Prepayment Period; (d) with respect to the Funding Note, all payments of principal and interest due thereon on the related Remittance Date and received thereon prior to such Distribution Date; (e) all other proceeds received in respect of the Allied Interests and the Funding Note during the related Prepayment Period (excluding any Prepayment Premiums); and (f) any other amounts allocable to the Allied Interests required to be deposited into the Collection Account (including without limitation Investment Earnings on amounts on deposit in the Collection Account and modification fees and extension fees to the extent collected from Mortgagors) during the related Collection Period or the related Prepayment Period, as applicable, and received no later than the last day of such Collection Period or Prepayment Period, as applicable; but net of the following amounts allocable to the Allied Interests: (i) the Servicing Fee paid with respect to the related Collection Period; (ii) amounts applied to reimburse P&I Advances for prior Distribution Dates and unreimbursed Servicing Advances (and interest thereon at the related Reimbursement Rate), and all other amounts permitted to be withdrawn from the Collection Account in accordance with the terms of this Agreement; and (iii) any late payment fees, assumption fees and escrow payments paid by Mortgagors. "Balloon Loan" means a Mortgage Loan whose amortization schedule includes a Balloon Payment. "Balloon Payment" means, with respect to any Mortgage Loan which is not fully amortizing over its term to maturity, a lump-sum payment equal to the unpaid principal balance of such Mortgage Loan due on the Stated Maturity Date thereof. "Basic Documents" means the Certificate of Trust, the Trust Agreement, the Indenture, this Agreement, the Mortgage Loan Purchase Agreements, the Funding Note, the Funding Note Purchase Agreement, 3 8 the Administration Agreement and the ACC Guaranty. "BMI Collections" shall have the meaning specified in Section 5.06(d)(1) hereof. "BMI LLC" means BMI Funding, LLC, a limited liability company organized under the laws of the State of Delaware. "BMI Mortgage Loan Purchase Agreement" means the Mortgage Loan Purchase Agreement dated as of January 1, 1998 between BMI REIT, as seller, and BMI LLC, as purchaser. "BMI Participation" means, with respect to each Participation Mortgage Loan, the participation interest in such Participation Mortgage Loan transferred by BMI REIT to BMI LLC pursuant to the BMI Mortgage Loan Purchase Agreement. "BMI REIT" means Business Mortgage Investors, Inc., a Maryland corporation. "Bond" means a Class A, Class B or Class C Bond. "Bond Balance" shall have the meaning specified in the Indenture. "Bond Class Balance" shall have the meaning specified in the Indenture. "Bond Distribution Account" means the account designated as such, and established and maintained pursuant to Section 5.02(a)(i) hereof. "Bondholder" means the Person in whose name a Bond is registered in the Bond Register. "Bond Rate" means a per annum rate equal to, with respect to (i) the Class A Bonds, 6.31%, (ii) the Class B Bonds, 6.60%, and (iii) the Class C Bonds, 6.71%. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions or trust companies in New York, New York or the city in which the Corporate Trust Office of the Indenture Trustee are authorized or obligated by law, regulation or executive order to remain closed. "Certificate Distribution Account" has the meaning assigned to such term in the Trust Agreement. "Certificateholders" has the meaning assigned to such term in the Trust Agreement. "Certificates" means the Trust Certificates (as defined in the Trust Agreement). "Class" means any class of Bonds. "Closing Date" means January 30, 1998. "Collection Account" means the account designated as such, established and maintained pursuant to Section 5.01. 4 9 "Collection Period" means, with respect to any Remittance Date or Distribution Date, the calendar month preceding the month in which such Remittance Date or Distribution Date occurs (except that, in the case of the first Remittance Date and Distribution Date, the related Collection Period will commence on the day after the Cut-off Date). "Condemnation Proceeds" means all awards or settlements in respect of a Mortgaged Property, whether permanent or temporary, partial or entire, by exercise of the power of eminent domain, condemnation, or otherwise. "Control" shall have the meaning specified in Section 8-106 of the UCC. "Corporate Trust Office" means (i) with respect to the Indenture Trustee, the principal office of the Indenture Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of the execution of this Agreement is located at LaSalle National Bank, 135 South LaSalle Street, Suite 1625, Chicago, Illinois 60674-4107, Attention: Asset Backed Securities Trust Services Group-Allied Capital 1998-1, or at such other address as the Indenture Trustee may designate from time to time by notice to the Bondholders, the Seller and the Servicer, or the principal corporate trust office of any successor Indenture Trustee (of which address such successor Indenture Trustee shall notify the Bondholders, the Seller, and the Servicer) and (ii) with respect to the Owner Trustee, as defined in the Trust Agreement. "Corrected Mortgage Loan" means any Specially Serviced Mortgage Loan as to which any of the following as are applicable occur with respect to circumstances that caused such Mortgage Loan to be characterized as a Specially Serviced Mortgage Loan (and provided that no other Servicing Transfer Event then exists): 1. with respect to the circumstances described in clauses (i) and (ii) of the definition of Servicing Transfer Event, the related Mortgagor has made three consecutive full and timely Monthly Payments under the terms of such Mortgage Loan (as such terms may be changed or modified in connection with a bankruptcy or similar proceeding involving the related borrower or by reason of a modification, waiver or amendment granted or agreed to by the Special Servicer); (b) with respect to the circumstances described in clauses (iii), (v), (vi) and (vii) of the definition of Servicing Transfer Event, such circumstances cease to exist in the good faith and reasonable judgment of the Special Servicer; (c) with respect to the circumstance described in clause (iv) of the definition of Servicing Transfer Event, such default is cured; and (d) with respect to the circumstances described in clause (viii) of the definition of Servicing Transfer Event, such proceedings are terminated. "Custodian" means LaSalle National Bank and its successors in interest, when acting in its capacity as Custodian under this Agreement. 5 10 "Cut-off Date" means January 1, 1998. "Defect" shall have the meaning assigned to such term in Section 3.04(c). "Depositor" means the Seller in its capacity as Depositor under the Trust Agreement. "Determination Date" means, with respect to each Remittance Date and Distribution Date, the fifth Business Day preceding such Distribution Date. "Discount Rate" means the rate which, when compounded monthly, is equivalent to the Treasury Rate when compounded semi-annually. "Distribution Date" means the 25th day of each month, or, if such day is not a Business Day, the immediately following Business Day, commencing in February 1998. "Due Date" means, with respect to any Mortgage Loan, the date each month on which the Scheduled Payment for such Mortgage Loan is due. _. "Eligible Account" means either(_) (a) a segregated account with an Eligible Institution or (b) (_)a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any State (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution shall have a credit rating from each Rating Agency in one of its generic rating categories that signifies investment grade. _. "Eligible Institution" means either (a) the corporate trust department of the Indenture Trustee or the Owner Trustee or (_)(b) a depository institution organized under the laws of the United States of America or any State (or any domestic branch of a foreign bank), the long-term unsecured debt obligations of which are rated AA- or better by Standard & Poor's and AA or better by Fitch or the short-term debt obligations of which are rated AA or better by Standard & Poor's and F-1+ or better by Fitch, or any other long-term, short-term or certificate of deposit rating acceptable to the Rating Agencies and(_) whose deposits are insured by the FDIC. If so qualified, the Indenture Trustee or the Owner Trustee may be considered an Eligible Institution for the purposes of clause (b) of this definition. _. "Eligible Investments" means book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (a) direct obligations of, and obligations fully guaranteed as to the full and timely payment by, the United States of America; (b) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any State (or any domestic branch of a foreign bank) and subject to supervision and examination by federal or state banking or depository institution authorities; provided, however, that at the time of the investment or contractual commitment to invest 6 11 therein, the commercial paper or other short-term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a Person other than such depository institution or trust company) thereof shall have a credit rating from each of the Rating Agencies in the highest investment category granted thereby; (c) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from each of the Rating Agencies in the highest investment category granted thereby; (d) investments in money market funds having a rating from each of the Rating Agencies in the highest investment category granted thereby (including funds for which the Indenture Trustee or the Owner Trustee or any of their respective Affiliates is investment manager or advisor); (e) bankers' acceptances issued by any depository institution or trust company referred to in clause (b) above; (f) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) described in clause (b) above; (g) securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States or any State which, at the time of such investment or contractual commitment providing for such investments, are then rated in the highest rating category of each Rating Agency; and (h) any other investment with respect to which the Issuer or the Servicer has received written notification from the Rating Agencies that the acquisition of such investment as an Eligible Investment will not result in a downgrade, withdrawal or qualification of the ratings on the Bonds; provided, however, that (A) no such instrument shall be an Eligible Investment if an "r" highlighter is affixed to its rating by S&P and (B) no such instrument shall be an Eligible Investment (1) if such instrument evidences either (a) a right to receive only interest payments or only principal payments with respect to the obligations underlying such instrument or (b) a right to receive both principal and interest payments derived from obligations underlying such instrument and the principal and interest payments with respect to such instrument provide a yield to maturity of greater than 120% of the yield to maturity at par of such underlying obligations or (2) if it may be redeemed at a price below the purchase price therefor (the foregoing clause (2) shall not apply to investments in units of money market funds pursuant to clause (vi) or clause (viii) above); and provided, further, that interest on any variable rate instrument shall be tied to a single interest rate index plus a single fixed spread (if any) and move proportionately with that index. "Eligible Servicer" means any Person which at the time of its appointment as Servicer (i) is servicing a portfolio of commercial 7 12 mortgage loans, (ii) is legally qualified and has the capacity to service the Mortgage Loans, (iii) has demonstrated the ability professionally and competently to service a portfolio of commercial mortgage loans similar to the Mortgage Loans with reasonable skill and care, (iv) has a minimum net worth of $100,000,000 and (v) the appointment of which will satisfy the Rating Agency Condition. "Eligible Special Servicer" means any Person whose appointment will satisfy the Rating Agency Condition. "Environmental Law" means any present or future federal, state or local law, statute, regulation or ordinance, and any judicial order, administrative order or consent, unilateral administrative order, judgment, voluntary cleanup agreement, Brownfields agreement, or memorandum of understanding thereunder, pertaining to (i) health, safety and the indoor and outdoor environment; (ii) the conservation, management or use of natural resources and wildlife; (iii) the protection or use of groundwater and surface water; (iv) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, release, threatened release, abatement, removal, remediation, or handling of or exposure to any Environmental Material; or (v) pollution, including any release to air, land, surface water and groundwater, including but not limited to each of the following, as enacted as of the date hereof or as hereafter amended: (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. ' 9601 et seq.; (ii) the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ' 6901 et seq.; (iii) the Toxic Substances Control Act, 15 U.S.C. ' 2601 et seq.; (iv) the Water Pollution Control Act (also known as the Clean Water Act), 33 U.S.C. ' 1251 et seq.; (v) the Clean Air Act, 42 U.S.C. ' 7401 et seq.; (vi) the Hazardous Materials Transportation Act, 49 U.S.C. ' 1801 et seq.; (vii) the Occupational Safety and Health Act, 29 U.S.C. ' 651 et seq.; (viii) the Oil Pollution Act of 1990, 33 U.S.C. ' 2701 et seq.; and (ix) the Emergency Planning and Community Right to Know Act of 1986, 42 U.S.C. ' 11001 et seq. "Environmental Material" means any material (i) that is regulated by an Environmental Law or (ii) the existence of which would give rise to an "unacceptable environmental condition" under Section 501.04 of Part II of the Multifamily Guide of the Federal National Mortgage Association as in effect at the date of determination. "Environmental Professional" shall have the meaning assigned thereto in Section 4.03(b) hereof. "Escrow Account" means the separate account or accounts created and maintained pursuant to Section 5.02(a)(ii), which account may be a sub-account within the Collection Account. "Escrow Payments" means, with respect to any Mortgage Loan, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, fire, hazard, liability and other insurance premiums, condominium charges and any other payments required to be escrowed by the Mortgagor with the Mortgagee pursuant to the Mortgage or any other document. "FDIC" means the Federal Deposit Insurance Corporation. 8 13 "Final Rated Distribution Date" means January 25, 2028. "Fiscal Agent" means ABN AMRO Bank N.V., a banking organization formed under the laws of the Netherlands, in its capacity as fiscal agent under this Agreement. "Fitch" means Fitch IBCA, Inc., or its successor. "Funding Note" means the Funding Note issued by BMI LLC to the order of the Seller pursuant to the Funding Note Purchase Agreement. "Funding Note Balance" means, with respect to any Determination Date, the initial principal balance of the Funding Note reduced by all payments of principal made thereon prior to such Determination Date. "Funding Note Principal Payment Amount" means, with respect to the Funding Note and any Distribution Date, the Principal Payment Amount (as such term is defined in the Funding Note) due on the related Remittance Date. "Funding Note Purchase Agreement" means the Funding Note Purchase and Security Agreement dated as of January 1, 1998, among the Seller, BMI REIT and BMI LLC. "Holder" means Bondholder in connection with the Bonds and Certificateholder in connection with the Certificates. "Indenture" means the Indenture dated as of January 1, 1998, between the Issuer and the Indenture Trustee. "Indenture Trustee" means LaSalle National Bank, in its capacity as Indenture Trustee under the Indenture, its successors in interest and any successor trustee under the Indenture. "Independent" means, when used with respect to any specified Person, that the Person (a) is in fact independent of the Issuer, any other obligor on the Bonds, the Seller and any Affiliate of any of the foregoing Persons, (b) does not have any direct financial interest or any material indirect financial interest in the Issuer, any such other obligor, the Seller or any Affiliate of any of the foregoing Persons and (c) is not connected with the Issuer, any such other obligor, the Seller or any Affiliate of any of the foregoing Persons as an officer, employee, promoter, underwriter, trustee, partner, director or person performing similar functions. "Initial Pool Balance" means $310,336,239, the aggregate outstanding unpaid scheduled principal balance of the Mortgage Loans as of the close of business on the Cut-off Date. "Insolvency Event" means, with respect to a specified Person, (a)(_) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of such Person or any substantial part of its property in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or ordering the winding-up or liquidation of such Person's affairs, if such decree or order remains unstayed and in effect for 9 14 a period of 60 consecutive days or (_)(b) the commencement by such Person of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by such Person to the entry of an order for relief in an involuntary case under any such law, or the consent by such Person to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for such Person or for any substantial part of its property, or the making by such Person of any general assignment for the benefit of creditors, or the failure by such Person generally to pay its debts as such debts become due, or the taking of action by such Person in furtherance of any of the foregoing. "Insurance Policies" means all insurance policies insuring any Mortgage Loan or Mortgaged Property, to the extent the Issuer or the Owner Trustee has any interest therein. "Insurance Proceeds" means, with respect to any Mortgage Loan, the proceeds of any Insurance Policies insuring such Mortgage Loan or the related Mortgaged Property that are not applied to the restoration or repair of the related Mortgaged Property in accordance with the Servicing Standard. "Interest Accrual Amount" means, with respect to each Class of Bonds and (i) with respect to the first Distribution Date, interest accrued for the related Interest Accrual Period at the related Bond Rate on the outstanding principal amount of the related Class of Bonds on the Closing Date and (ii) with respect to any Distribution Date other than the first Distribution Date, the interest accrued for the related Interest Accrual Period at the related Bond Rate on the outstanding principal amount of the related Class of Bonds on the immediately preceding Distribution Date, after giving effect to all distributions of principal to the related Bondholders on or prior to such preceding Distribution Date. For all purposes of this Agreement and the Basic Documents, interest with respect to the Bonds shall be computed on the basis of a 360-day year consisting of twelve thirty-day months. "Interest Accrual Period" means, with respect to any Distribution Date, the calendar month immediately preceding the month in which such Distribution Date occurs. "Interest Carryover Shortfall" means, with respect to a Class of Bonds and any Distribution Date after the first Distribution Date, the amount, if any, by which the sum of the related Interest Accrual Amount for the immediately preceding Distribution Date and any related outstanding Interest Carryover Shortfall on such preceding Distribution Date exceeds the amount in respect of interest actually distributed on such Bonds on such preceding Distribution Date, plus interest on the amount of interest due but not paid to the related Bondholders on such preceding Distribution Date, to the extent permitted by law, at the related Bond Rate. "Interest Distribution Amount" means, with respect to a Class of Bonds and any Distribution Date, the sum of the related Interest Accrual Amount and the related Interest Carryover Shortfall for such Distribution Date. "Investment Earnings" means, with respect to any Distribution Date, the investment earnings (net of losses and investment 10 15 expenses) on amounts on deposit in the Collection Account to be deposited into the Collection Account on such Distribution Date pursuant to Section 5.02(a)(iii). "Issuer" means Allied Capital Commercial Mortgage Trust 1998-1, a Delaware business trust. "Liquidated Mortgage Loan" means, with respect to any Distribution Date, a defaulted Mortgage Loan (including any REO Property) which was liquidated in the related Prepayment Period for such Distribution Date and as to which the Special Servicer has certified (in accordance with this Agreement) that it has received all amounts it expects to receive in connection with the liquidation of such Mortgage Loan, including the final disposition of an REO Property. "Liquidation Date" means, with respect to any Mortgage Loan, the date of the final receipt of all Liquidation Proceeds or other payments with respect to such Mortgage Loan. "Liquidation Principal Amount" means, with respect to any Distribution Date, the aggregate of all Liquidation Proceeds, Insurance Proceeds, Condemnation Proceeds and proceeds of Mortgage Loan repurchases that were received on or in respect of Mortgage Loans during the related Prepayment Period and that were identified and applied by the Servicer or the Special Servicer, as applicable, as recoveries of principal, in each case net of any portion of such amounts that represents a recovery of the principal portion of any Scheduled Payment (other than a Balloon Payment) due, or of the principal portion of any Assumed Scheduled Payment deemed due, in respect of the related Mortgage Loan on a Due Date during or prior to the related Collection Period and not previously recovered. "Liquidation Proceeds" means, with respect to any Liquidated Mortgage Loan, the moneys (other than Insurance Proceeds, Condemnation Proceeds and any REO Proceeds) collected in respect thereof, from whatever source, on such Liquidated Mortgage Loan during the Prepayment Period in which such Mortgage Loan became a Liquidated Mortgage Loan, net of the sum of any amounts expended by the Servicer or the Special Servicer in connection with such liquidation and any amounts required by law to be remitted to the Mortgagor on such Liquidated Mortgage Loan. "Lock-out Period" means, with respect to any Mortgage Loan, the period of time specified in the related Mortgage Note during which voluntary Principal Prepayments are prohibited. "Money Term" means, with respect to any Mortgage Loan, the maturity date, Mortgage Rate, principal balance, amortization term or payment frequency of such Mortgage Loan. "Monthly Payment" means, with respect to any Mortgage Loan, the scheduled monthly payment of principal and/or interest on such Mortgage Loan (including any Balloon Payment) which is payable by a Mortgagor from time to time under the related Mortgage Note. "Mortgage" means, with respect to any Mortgage Loan, the original mortgage, deed of trust or other similar security instrument that creates a first mortgage lien on a fee simple or leasehold estate in a Mortgaged Property securing such Mortgage 11 16 Loan. "Mortgagee" means the obligee on a Mortgage Note. "Mortgage File" means, with respect to each Mortgage Loan: (i) the original Mortgage Note, endorsed (at the direction of the Issuer given to the Seller pursuant to this Agreement) by the Seller, in the form "Pay to the order of LaSalle National Bank, as Indenture Trustee for the benefit of the registered Holders of Allied Capital Commercial Mortgage Trust 1998-1 Commercial Mortgage Collateralized Bonds, without recourse", together with all intervening endorsements evidencing a complete chain of endorsements from the originator of the Mortgage Loan to the Seller and in an amount at least equal to the outstanding principal amount of the Mortgage Loan as reported on the related Mortgage Loan Schedule; (ii) the original of the Mortgage, with evidence of recording indicated thereon; (iii) an original assignment of the Mortgage duly executed by the Seller in blank and sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the transfer of the Mortgage, together with originals of all intervening assignments of the Mortgage evidencing a complete chain of assignments of the Mortgage from the originator of the Mortgage Loan to the Seller, with evidence of recording indicated on such intervening assignments; (iv) if separate from the related Mortgage, an original assignment of any leases, rents, income or profits derived from the ownership, operation or disposition of all or a portion of the related Mortgaged Property (an "Assignment of Leases"), duly executed by the related Mortgagor, with evidence of recording indicated thereon; (v) an original assignment, duly executed by the Seller in blank, of any related Assignment of Leases, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the transfer of such Assignment of Leases, together with all intervening assignments of such Assignment of Leases evidencing a complete chain of assignments of such Assignment of Leases from the originator of the Mortgage Loan to the Seller, with evidence of recording on such intervening assignments; (vi) if separate from the related Mortgage, an original or copy of each security agreement that creates a lien in any personal property that constitutes collateral for the Mortgage Loan (a "Security Agreement"), duly executed by the related Mortgagor; (vii) an original assignment, duly executed by the Seller in blank, of any related Security Agreement, together with all intervening assignments of such Security Agreement evidencing a complete chain of assignments of such Security Agreement from the originator of the Mortgage Loan to the Seller, with evidence of recording on such intervening assignments; (viii) originals or copies of all written modification, 12 17 assumption, written assurance and substitution agreements in those instances in which the terms or provisions of the Mortgage or Mortgage Note or any related security document have been modified or the Mortgage Loan has been assumed; (ix) the original or a copy of the policy or certificate of lender's title insurance issued on the date of the origination of such Mortgage Loan, or, if such policy has not been issued, an irrevocable, binding commitment to issue such title insurance policy, or an attorney's title opinion, if customary in the related jurisdiction where the related Mortgaged Property is located; (x) any file copies of any UCC-1, UCC-2 and UCC-3 financing statements and continuation statements necessary to perfect and/or maintain the perfection of the security interest held by the originator of the Mortgage Loan (and each assignee before the Indenture Trustee) in the personal property subject to any related security agreement (to the extent such file copies are in the possession of Allied REIT or BMI REIT), and to transfer such security interest to the Indenture Trustee; (xi) when relevant, the related ground lease or certified copies thereof; and (xii) if any document referred to above has been signed by a person or entity on behalf of the Mortgagor pursuant to a power of attorney, an original or a copy of such power of attorney, together with evidence of the recordation of such power of attorney in the same jurisdiction in which the Mortgage was recorded, and if a copy of such power of attorney is provided, an officer's certificate certifying that such copy represents a true and correct reproduction of the original. In such cases where the original document required in (ii) through (x) above is not available, a copy accompanied by an officer's certificate certifying that such copy represents a true and correct reproduction of the original shall be included as part of the Mortgage File for the related Mortgage Loan. With respect to any Participation Mortgage Loan, the related Mortgage File shall also include (i) the participation agreements, if any, relating to the related Allied Participation and BMI Participation, (ii) originals of all assignments of the interest being conveyed hereunder in such Participation Mortgage Loan and (iii) copies of all notices required to be given or consents required to be obtained in connection with the assignment of the interest that is being conveyed hereunder in such Participation Mortgage Loan. "Mortgage Loan" means a mortgage loan, including any Participation Mortgage Loan, identified in the Mortgage Loan Schedule attached hereto, as well as any REO Property related thereto. With respect to any Participation Mortgage Loan, references to any rights to payments, receipts or recoveries will be limited to the percentage ownership interest owned by the Issuer in such Participation Mortgage Loan. "Mortgage Loan Purchase Agreements" means the Allied Mortgage Loan Purchase Agreement and the BMI Mortgage Loan Purchase Agreement. 13 18 "Mortgage Loan Schedule" means the list of Mortgage Loans set forth on Schedule A attached hereto. "Mortgage Note" means the originally executed note or other evidence of indebtedness of a Mortgagor under the related Mortgage Loan. "Mortgage Pool" means as of any date, the pool of all Mortgage Loans (consisting of the Allied Mortgage Loans and the Participation Mortgage Loans) outstanding on such date. "Mortgaged Property" means, with respect to any Mortgage Loan, land and improvements thereon (or leasehold estate interests therein) securing the indebtedness of a Mortgagor under such Mortgage Loan. "Mortgagor" means a person who is indebted under a Mortgage Note or who has acquired real property subject to the Mortgage securing a Mortgage Note. "Mortgage Rate" means, with respect to each Mortgage Loan, the fixed or adjustable rate per annum set forth in the related Mortgage Note from time to time at which interest accrues on such Mortgage Loan, as of the Closing Date (in the case of a fixed rate mortgage loan) or as of the most recent interest rate adjustment pursuant to such Mortgage Note (in the case of an adjustable rate Mortgage Loan), in each case after giving effect to any modification of such Mortgage Loan for any period in connection with a bankruptcy or similar proceeding involving the related Mortgagor or a modification, waiver or amendment of such Mortgage Loan granted or agreed to by the Servicer or the Special Servicer, as applicable, in accordance with this Agreement. "Net Mortgage Rate" means, with respect to each Mortgage Loan, the Mortgage Rate net of the Servicing Fee Rate (and, if applicable, the Special Servicing Fee Rate) on such Mortgage Loan. "Nonrecoverable Advance" means any portion of (i) any Advance (together with interest thereon at the Reimbursement Rate) that, in the reasonable good faith business judgment of the Servicer or the Special Servicer (or, if applicable, the Indenture Trustee or the Fiscal Agent), would not, if made, be ultimately recoverable (a) in the case of a P&I Advance, from collections in respect of the Allied Interests and the Funding Note or (b) in the case of a Servicing Advance, from amounts to be realized on the related Mortgaged Property or (ii) any Advance previously made in respect of a Mortgage Loan that is determined, in the good faith business judgment of the Servicer or the Special Servicer (or, if applicable, the Indenture Trustee or the Fiscal Agent), not to be ultimately recoverable, together with interest thereon at the Reimbursement Rate, (a) in the case of a P&I Advance, from collections in respect of the Allied Interests and the Funding Note or (b) in the case of a Servicing Advance, from amounts to be realized on the related Mortgaged Property. The determination by the Servicer or the Special Servicer (or, if applicable, the Indenture Trustee or the Fiscal Agent)that any Advance, if made, would (or, if previously made, does) constitute a Nonrecoverable Advance shall be evidenced by an Officer's Certificate delivered to the Issuer and the Indenture Trustee, detailing the reasons for such determination with copies of appraisals performed within the last twelve months, 14 19 prepared by an Independent appraiser in accordance with the Servicing Standard, and any other information relevant thereto which supports such determination. Any successor to the Servicer or the Special Servicer (including the Indenture Trustee or the Fiscal Agent acting on behalf of the Indenture Trustee as successor to the Servicer, or the Fiscal Agent acting on behalf of the Indenture Trustee) shall be entitled to rely on any Nonrecoverable Advance determination made by the Servicer or the Special Servicer prior to termination or resignation thereof. "Officer's Certificate" means a certificate signed by (a) the chairman of the board, president, managing director, any vice president, the controller or any assistant controller and (b) a treasurer, assistant treasurer, secretary or assistant secretary of the Seller, the Servicer or the Special Servicer, as appropriate. "Opinion of Counsel" means one or more written opinions of counsel, who may be external counsel to the Seller, the Servicer or the Special Servicer, as appropriate, which counsel shall be reasonably acceptable to the Indenture Trustee, the Owner Trustee or the Rating Agencies, as applicable. "Overcollateralization Level" means, as to any Distribution Date, the result, expressed as a percentage, obtained by dividing (i) the excess of the Aggregate Stated Balance for the related Determination Date, over the aggregate Bond Balance of Bonds (computed after taking into account the principal payment to be made on such Distribution Date) by (ii) the Aggregate Stated Balance for the related Determination Date. "Owner Trustee" means Wilmington Trust Company, not in its individual capacity, but solely in its capacity as Owner Trustee under the Trust Agreement, its successors in interest and any successor owner trustee under the Trust Agreement. "Owner Trust Estate" has the meaning assigned to such term in the Trust Agreement. "P&I Advance" means, as to any Remittance Date, any advance made by the Servicer (or the Indenture Trustee, as successor Servicer, or the Fiscal Agent on behalf of the Indenture Trustee) pursuant to Section 5.09. "Participation Mortgage Loan" means any Mortgage Loan with respect to which the percentage ownership interest owned by Allied REIT prior to transfer to the Issuer of the related Allied Participation is less than 100%. "Paying Agent" shall mean any Paying Agent appointed under the Trust Agreement or the Indenture. "Person" means any individual, corporation, estate, partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Prepayment Period" means, with respect to any Remittance Date or Distribution Date, the period commencing on the 16th day of the calendar month preceding the month in which such Remittance Date or 15 20 Distribution Date occurs and ending on the 15th day of the calendar month in which such Remittance Date or Distribution Date occurs (except that, in the case of the first Remittance Date and Distribution Date, the related Prepayment Period will commence on the day after the Cut-off Date). "Prepayment Premium" any premium, penalty or fee (including any yield maintenance or comparable charges) paid or payable, as the context requires, by a Mortgagor in connection with a Principal Prepayment. "Principal Distribution Amount" means, with respect to any Distribution Date, the sum of the Allied Principal Collections for such Distribution Date and the Funding Note Principal Payment Amount for such Distribution Date. "Principal Prepayment" means any payment or other recovery of principal on a Mortgage Loan which is received in advance of its scheduled Due Date (excluding any Prepayment Premium thereon) and is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. "Purchase Price" means, with respect to any Allied Mortgage Loan that became a Purchased Mortgage Loan, or any Allied Participation or BMI Participation that became a Purchased Participation, the sum of (i) the unpaid principal balance of such Allied Mortgage Loan, Allied Participation or BMI Participation, as applicable, (ii) unpaid accrued interest thereon through the last day of the related Collection Period in which the purchase is to occur, and (iii) certain servicing expenses related to such Mortgage Loan that are reimbursable to the Servicer and/or the Special Servicer. "Purchased Mortgage Loan" means an Allied Mortgage Loan required to be purchased by the Seller or Allied REIT pursuant to Section 3.03. "Purchased Participation" means an Allied Participation required to be purchased by the Seller or Allied REIT, or a BMI Participation required to be purchased by BMI REIT, pursuant to Section 3.03. "Qualified Insurer" means an insurance company duly qualified as such under the laws of the state in which the related Mortgaged Property is located (with respect to hazard and flood insurance), duly authorized and licensed to transact the applicable insurance business and to write the insurance provided, and whose claims-paying ability is rated no lower than "A" by Fitch and S&P and no lower than A:IX (or the equivalent in any successor rating system) by Best's Key Rating Guide, in each case, with respect to hazard and flood insurance, errors and omissions insurance and fidelity bonds, unless each of the Rating Agencies has confirmed in writing that an insurance carrier with lower claims-paying ability ratings would not result, in and of itself, in a downgrade, withdrawal or qualification of the then current rating assigned by such Rating Agency to any Class of Bonds. "Rating Agency" means either Fitch or Standard & Poor's or, when used in the plural form, Fitch and Standard & Poor's. If none of Fitch, Standard & Poor's or a successor to either of them remains in existence, "Rating Agency" shall mean any nationally recognized 16 21 statistical rating organization or other comparable Person designated by the Seller, notice of which designation shall be given to the Issuer, the Indenture Trustee, the Servicer and the Special Servicer. "Rating Agency Condition" means, with respect to any action specified herein, that each Rating Agency shall have been given 10 days' (or such shorter period as shall be acceptable to each Rating Agency) prior notice thereof and that each of the Rating Agencies shall have notified the Seller, the Servicer, the Special Servicer, the Issuer and the Indenture Trustee in writing that such action will not result in a downgrade, withdrawal or qualification of the then current rating of the Bonds. "Realized Losses" means, with respect to any Liquidated Mortgage Loan, the excess, if any, of (a) the outstanding principal balance thereof as of the Liquidation Date plus (i) all accrued and unpaid interest thereon at the related Mortgage Rate in effect from time to time through the end of the Collection Period in which the liquidation occurred and (ii) related Servicing Advances plus interest thereon at the Reimbursement Rate, over (b) the aggregate amount of related Liquidation Proceeds or Insurance Proceeds, if any, recovered in connection with such liquidation. Realized Losses shall also include any portion of the amount due under a Mortgage Loan that is forgiven, whether in connection with a modification, waiver or amendment granted or agreed to by the Servicer or the Special Servicer, as applicable, or in connection with the bankruptcy or similar proceeding involving the related Mortgagor. "Reimbursement Rate" means, with respect to an Advance, a rate per annum equal to the "prime rate" as published in the "Money Rates" section of The Wall Street Journal as most recently available as of the date of such Advance, or if such rate is not published for any reason, a daily prime loan rate from a comparable financial publication. "Remittable Funds" means, with respect to any Distribution Date, Available Funds net of the related P&I Advance. "Remittance Date" means, with respect to any Distribution Date, the Business Day that is two Business Days prior to such Distribution Date. "REO Proceeds" means proceeds, net of any related expenses of the Special Servicer, received in respect of any REO Property (including, without limitation, proceeds from the rental of the related Mortgaged Property) which are received prior to the final liquidation of such Mortgaged Property. "REO Property" means a Mortgaged Property acquired by the Special Servicer on behalf of the Bondholders and in the name of the Issuer through foreclosure, acceptance of a deed in lieu of foreclosure or otherwise in accordance with this Agreement and applicable law in connection with the default of a Mortgage Loan. "Responsible Officer" means the chairman of the board, the president, managing director, any vice president, and the treasurer of the Servicer or the Special Servicer, as applicable. "Scheduled Payment" means, with respect to any Mortgage Loan and 17 22 any Due Date for such Mortgage Loan, the amount of the Monthly Payment that would have been due thereon on such date, without regard to any waiver, modification or amendment of such Mortgage Loan granted or agreed to by the Servicer or the Special Servicer, as applicable, or otherwise in connection with a bankruptcy or similar proceeding involving the related Mortgagor, and assuming that each prior Scheduled Payment has been made in a timely manner and notwithstanding that the Mortgaged Property securing any such Mortgage Loan is acquired by the Servicer or the Special Servicer, as applicable, through foreclosure or otherwise. "Securities" means the Bonds and the Certificates. "Securityholders" means the Bondholders and/or the Certificateholders, as the context may require. "Seller" means Allied Capital CMT, Inc. and its successors in interest to the extent permitted hereunder. "Servicer" means ACC, as the servicer of the Mortgage Loans hereunder, and each successor thereto (in the same capacity) pursuant to Section 7.03 or 8.03. "Servicer Event of Default" means an event specified in Section 8.01. "Servicer's Certificate" means an Officer's Certificate of the Servicer delivered pursuant to Section 4.09, substantially in the form of Exhibit C. "Servicing Advances" means any cost or expense of the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent designated as a Servicing Advance herein and any other cost or expense incurred by the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent to protect and preserve the security for the Mortgage Loans, including, but not limited to, the cost of (a) the preservation, restoration and protection of the related Mortgaged Properties, (b) any enforcement or judicial proceedings, including, but not limited to, foreclosures, and (c) compliance with the obligations specified in the second sentence of Section 5.08(b). Notwithstanding the foregoing, none of the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent shall be required to advance any Nonrecoverable Advance. "Servicing Fee" means the fee payable to the Servicer for services rendered during each Collection Period, determined pursuant to Section 4.08. "Servicing Fee Rate" means a rate of 0.0865% per annum. "Servicing File" means, with respect to each Mortgage Loan, the file held by the Servicer or the Special Servicer (or in either case, any related Subservicer), as the case may be, consisting of all documents relating to such Mortgage Loan that are not included in the definition of Mortgage File and that are necessary or appropriate to service the Mortgage Loans. "Servicing Standard" means the requirement that the Mortgage Loans be serviced and administered in accordance with the higher of the following standards of care: 18 23 (a) in the same manner in which and with the same care, skill, prudence and diligence with which the Servicer or Special Servicer, as applicable, services and administers similar mortgage loans for other third-party portfolios, giving due consideration to customary and usual standards of practice of prudent institutional commercial mortgage lenders servicing their own mortgage loans and to the maximization of the net present value of the Mortgage Loans; and (b) the care, skill, prudence and diligence the Servicer or the Special Servicer, as applicable, uses for loans which it owns and which are substantially the same as the Mortgage Loans, giving due consideration to the maximization of the net present value of the Mortgage Loans. "Servicing Transfer Event" means, with respect to any Mortgage Loan, any of the following events: (i) the related Mortgagor has failed to make when due a Balloon Payment, which failure has continued unremedied for 30 days; (ii) the related Mortgagor has failed to make when due any Monthly Payment (other than a Balloon Payment) or any other payment required under the related Mortgage Note or the related Mortgage(s), which failure has continued unremedied for 60 days; (iii) the Servicer has determined, in its good faith and reasonable judgment, that a default in the making of a Monthly Payment or any other payment required under the related Mortgage Note or the related Mortgage(s) is likely to occur within 30 days and is likely to remain unremedied for at least 60 days or, in the case of a Balloon Payment, for at least 30 days; (iv) there shall have occurred a default under the related loan documents, other than as described in clause (i) or (ii) above, that (in the Servicer's good faith and reasonable judgment) materially impairs the value of the related Mortgaged Property as security for the Mortgage Loan or otherwise materially and adversely affects the interests of Bondholders, which default has continued unremedied for the applicable grace period under the terms of the Mortgage Loan (or, if no grace period is specified, 60 days); (v) a decree or order of a court or agency or supervisory authority having jurisdiction in the premises in an involuntary case under any present or future federal or state bankruptcy, insolvency or similar law or the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of the related Mortgagor's affairs, shall have been entered against it and such decree or order shall have remained in force undischarged or unstayed for a period of 60 days; (vi) the related Mortgagor shall have consented to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings of or relating to such Mortgagor or of or relating to all or substantially all of its property; (vii) the related Mortgagor shall have admitted in writing its inability to pay its debts generally as they become due, filed a petition to take advantage of any applicable insolvency or reorganization statute, made an assignment for the benefit of its creditors, or voluntarily suspended payment of its obligations; and (viii) the Servicer shall have received notice of the commencement of foreclosure or similar proceedings with respect to the related Mortgaged Property. "Specially Serviced Mortgage Loan" means a Mortgage Loan as to which a Servicing Transfer Event has occurred and is continuing. 19 24 "Special Servicer" means ACC, as the special servicer of the Mortgage Loans hereunder, and each successor thereto (in the same capacity) pursuant to Section 7.03 or 8.03. "Special Servicing Fee" means the fee payable to the Special Servicer for services rendered during each Collection Period, determined pursuant to Section 4.08. "Special Servicing Fee Rate" means a rate of 0.40% per annum. "Standard & Poor's" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or its successor. "State" means any one of the 50 states of the United States of America or the District of Columbia. "Stated Maturity Date" means, with respect to any Mortgage Loan, the month in which the last payment of principal of such Mortgage Loan shall be due and payable after taking into account all partial Principal Prepayments received prior to the date of determination, without regard to any change in or modification of such terms in connection with a bankruptcy or similar proceeding involving the related Mortgagor or a modification, waiver or amendment of such Mortgage Loan granted or agreed to by the Servicer or the Special Servicer. "Stated Principal Balance" means, with respect to each Mortgage Loan outstanding at the date of determination, the principal balance of such Mortgage Loan ultimately due and payable by the related Mortgagor and equal to the principal balance thereof as of the Cut-off Date, reduced (to not less than zero) by (a) any payments or other collections of principal of such Mortgage Loan actually received during all prior Collection Periods or Prepayment Periods, as applicable; (b) the principal portions of all Scheduled Payments (other than Balloon Payments) due but not received, and the principal portion of any Assumed Scheduled Payment deemed due, during all prior Collection Periods; and (c) without duplication, the principal portion of any Realized Loss incurred in respect of such Mortgage Loan during all prior Prepayment Periods. "Total Bond Interest Amount" means, with respect to any Distribution Date, the sum of the Interest Distribution Amounts for all Classes of Bonds for such Distribution Date. "Treasury Rate" is the yield calculated by the linear interpolation of the yields, as reported in Federal Reserve Statistical Release H.15-Selected Interest Rates under the heading "U.S. government securities/Treasury constant maturities" for the week ending prior to the date of the relevant principal prepayment, of U.S. Treasury constant maturities with a maturity date (one longer and one shorter) most nearly approximating the maturity date of the Mortgage Loan prepaid. If Release H.15 is no longer published, the Trustee shall select a comparable publication to determine the Treasury Rate. 20 25 "Trust Account" means any of the Collection Account, the Escrow Account or the Bond Distribution Account. "Trust Agreement" means the Amended and Restated Trust Agreement dated as of January 1, 1998, between the Seller, as depositor, Wilmington Trust Company, as Owner Trustee and LaSalle National Bank, as Paying Agent. "Trust Officer" means, in the case of the Indenture Trustee, any officer within the Corporate Trust Office, including any Assistant Vice President, Assistant Treasurer, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above-designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject and, with respect to the Owner Trustee, any officer in the Corporate Trust Administration Department of the Owner Trustee with direct responsibility for the administration of the Trust Agreement and the Basic Documents on behalf of the Owner Trustee. "UCC" means the Uniform Commercial Code as in effect in the relevant jurisdiction. SECTION 1.02 Other Definitional Provisions. (_) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture or, if not defined therein, in the Trust Agreement. (_) All terms defined in this Agreement shall have such defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (_) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (_) The words "hereof," "herein," "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; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (_) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. 21 26 (_) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II Conveyance of Mortgage Loans and the Funding Note SECTION 2.01. Conveyance of Mortgage Loans and the Funding Note. The Seller, in consideration for the delivery of the Securities by the Issuer, concurrently with the execution and delivery of this Agreement, does hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse, all right, title and interest of the Seller, including any security interest therein for the benefit of the Seller, in, to and under: (a) the Allied Interests, including the related Mortgage Files and all interest and principal due with respect to the Allied Mortgage Loans and the Allied Participations after the Cut-off Date, but excluding any payments of interest and principal due on or prior to the Cut-off Date, (b) the Funding Note and all interest and principal due with respect thereto after the Cut-off Date, but excluding any payments of interest and principal due on or prior to the Cut-off Date, (c) the Allied Mortgage Loan Purchase Agreement, (d) the Insurance Policies relating to the Allied Mortgage Loans and the Allied Participations, (e) all funds in respect of the Allied Interests on deposit from time to time in the Trust Accounts and the Certificate Distribution Account and all investments and proceeds thereof (including all income thereon), (f) the Funding Note Purchase Agreement and (g) the proceeds of any and all of the foregoing. Although it is the intent of the parties to this Agreement that the conveyance of the Seller's right, title and interest in, to and under the Allied Interests, the Funding Note and the other assets in the Owner Trust Estate pursuant to this Agreement shall constitute a purchase and sale and not a loan, in the event that such conveyance is deemed to be a loan, it is the intent of the parties to this Agreement that the Seller shall be deemed to have granted to the Issuer a first priority perfected security interest in all of the Seller's right, title and interest in, to and under the Allied Interests, the Funding Note and the other assets in the Owner Trust Estate and that this Agreement shall constitute a security agreement under applicable law. The Issuer hereby directs the Seller to endorse each Mortgage Note in the name of the Indenture Trustee for the benefit of the Bondholders. ARTICLE III The Mortgage Loans and the Funding Note 22 27 SECTION 3.01. Representations and Warranties of Allied REIT and BMI REIT. (a) Allied REIT has made certain representations and warranties relating to the Mortgage Loans and the Allied Participations under the Allied Mortgage Loan Purchase Agreement and has consented to the assignment by the Seller to the Issuer of the Seller's rights with respect thereto. Such representations and warranties speak as of the execution and delivery of the Allied Mortgage Loan Purchase Agreement and as of the Closing Date, but shall survive the sale, transfer and assignment of the Allied Interests to the Issuer. Pursuant to Section 2.01 of this Agreement, the Seller has sold, assigned, transferred and conveyed to the Issuer the Seller's rights under the Allied Mortgage Loan Purchase Agreement, including its rights in respect of the representations and warranties of Allied REIT therein, upon which the Issuer relies in accepting the Allied Interests and delivering the Securities, together with all rights of the Seller with respect to any breach thereof, including the right to require Allied REIT to repurchase any Allied Mortgage Loans and/or Allied Participations in accordance with the Allied Mortgage Loan Purchase Agreement. It is understood and agreed that the representations and warranties referred to in this Section shall survive the delivery of such Mortgage Files to the Issuer or any custodian. (b) Pursuant to Section 15 of the Allied Mortgage Loan Purchase Agreement, Allied REIT has agreed that the Issuer shall have the right to enforce any and all rights under the Allied Mortgage Loan Purchase Agreement assigned to the Issuer herein, including the right to cause Allied REIT to repurchase any Allied Mortgage Loan and/or Allied Participation with respect to which it is in breach of any of its representations and warranties as specified therein, directly against Allied REIT as though the Issuer were a party to the Allied Mortgage Loan Purchase Agreement, and the Issuer shall not be obligated to exercise any such rights indirectly through the Seller. (c) BMI REIT has made certain representations and warranties relating to the Participation Mortgage Loans under the BMI Mortgage Loan Purchase Agreement and has consented to the assignment (i) by BMI LLC to the Seller under the Funding Note Purchase Agreement of BMI LLC's rights with respect thereto (ii) and by the Seller to the Issuer under this Agreement of the Seller's rights in such assigned rights of BMI LLC. Such representations and warranties speak as of the execution and delivery of the BMI Mortgage Loan Purchase Agreement and as of the Closing Date, but shall survive the sale, transfer and assignment of the Funding Note to the Issuer. Pursuant to Section 2.01 of this Agreement, the Seller has sold, assigned, transferred and conveyed to the Issuer the Seller's rights under the Funding Note Purchase Agreement, including its rights in respect of the representations and warranties of BMI REIT in the BMI Mortgage Loan Purchase Agreement, upon which the Issuer relies in accepting the Funding Note and delivering the Securities, together with all rights of BMI LLC with respect to any breach thereof, including the right to require BMI REIT to repurchase any BMI Participation securing the Funding Note in accordance with the BMI Mortgage Loan Purchase Agreement. (d) Pursuant to Section 15 of the BMI Mortgage Loan Purchase Agreement, BMI REIT has agreed that the Issuer shall have the right to enforce any and all rights under the BMI Mortgage Loan Purchase 23 28 Agreement assigned to the Issuer herein, including the right to cause BMI REIT to repurchase BMI Participation with respect to which it is in breach of any of its representations and warranties as specified therein, directly against BMI REIT as though the Issuer were a party to the BMI Mortgage Loan Purchase Agreement, and the Issuer shall not be obligated to exercise any such rights indirectly through the Seller or BMI LLC. SECTION 3.02. Representations and Warranties of the Seller. The Seller makes the following representations and warranties as to the Allied Interests and the Funding Note on which the Issuer relies in accepting the Allied Interests and the Funding Note and delivering the Securities. Such representations and warranties speak as of the execution and delivery of this Agreement and as of the Closing Date, but shall survive the sale, transfer and assignment of the Allied Interests and the Funding Note by the Seller to the Issuer and the pledge thereof by the Issuer to the Indenture Trustee pursuant to the Indenture. (i) Neither the Funding Note nor any Allied Mortgage Loan nor any Allied Participation has been sold, transferred, assigned or pledged by the Seller to any Person other than the Issuer. (ii) Immediately prior to the transfer and assignment herein contemplated, the Seller had good and marketable title to each Allied Mortgage Loan, each Allied Participation and the Funding Note, free and clear of all liens and rights of others and, immediately upon the transfer thereof, the Issuer shall have good and marketable title to each such Allied Mortgage Loan, Allied Participation and the Funding Note, free and clear of all liens and rights of others. SECTION 3.03. Repurchase upon Breach. The Seller and either the Servicer or the Special Servicer, as the case may be, shall inform the other parties to this Agreement promptly, in writing, upon the discovery of any breach of (a) Allied REIT's representations and warranties made pursuant to Section 3 of the Allied Mortgage Loan Purchase Agreement, (b) BMI REIT's representations and warranties made pursuant to Section 3 of the BMI Mortgage Loan Purchase Agreement or (c) the Seller's representations and warranties made pursuant to Section 3.02 of this Agreement. Unless any such breach shall have been cured by the last day of the first Collection Period following the discovery thereof by, or notice thereof to, the Seller, the Servicer or the Special Servicer, (i) in the case of clause (a) above, the Seller or the Issuer shall enforce the obligation of Allied REIT under the Allied Mortgage Loan Purchase Agreement to repurchase, as of such last day, any Allied Mortgage Loan or any Allied Participation materially and adversely affected by any such breach, (ii) in the case of clause (b) above, the Seller or the Issuer shall enforce the obligation of BMI REIT under the BMI Mortgage Loan Purchase Agreement to repurchase, as of such last day, any BMI Participation materially and adversely affected by any such breach and (iii) in the case of clause (c) above, the Seller shall repurchase, as of such last day, the Funding Note or any Allied Mortgage Loan or any Allied Participation materially and adversely affected by any such breach. In connection with any such repurchase, the Seller, shall, or shall require Allied REIT to, remit the Purchase Price to the Collection Account in the manner specified in Section 5.04 or the Seller shall require BMI 24 29 REIT to cause a partial redemption of the Funding Note in an amount equal to the Purchase Price, as applicable. Upon the receipt of the Purchase Price by the Servicer, the Servicer shall give notice thereof to the Indenture Trustee. The sole remedy of the Issuer, the Indenture Trustee, the Bondholders or the Certificateholder with respect to a breach of representations and warranties pursuant to Sections 3.01 and 3.02 and the agreement contained in this Section shall be to enforce the Seller's obligation to repurchase Allied Mortgage Loans, Allied Participations or the Funding Note or to require the Seller or the Issuer to enforce Allied REIT's obligation to repurchase Allied Mortgage Loans or Allied Participations and BMI REIT's obligation to cause a partial redemption of the Funding Note, as applicable, pursuant to this Section 3.03, subject to the conditions contained herein, as applicable. SECTION 3.04. Delivery and Possession of Servicing Files; Custody of Mortgage Files; Review of Mortgage Files. (a) On or before the Closing Date, the Seller shall cause to be transferred and delivered to the Servicer the Servicing File for each Mortgage Loan. Each Servicing File so transferred and delivered to the Servicer shall be held by the Servicer or the Special Servicer, as applicable, in order to service the Mortgage Loans pursuant to this Agreement and is and shall be held in trust by the Servicer or the Special Servicer, as applicable, for the benefit of the Indenture Trustee as the record owner of the Mortgage Loans. The Servicer's or Special Servicer's, as applicable, possession of any portion of any Servicing File and any portion of any Mortgage File shall be at the will of the Indenture Trustee for the sole purpose of facilitating servicing of the Mortgage Loans pursuant to this Agreement and such retention and possession by the Servicer or Special Servicer, as applicable, shall be in a custodial capacity only. The ownership of each Mortgage Note, Mortgage, and the contents of the Servicing File shall be vested in the Indenture Trustee and the ownership of all records and documents with respect to the Mortgage Loans prepared by or which come into the possession of the Servicer or Special Servicer, as applicable, shall immediately vest in the Indenture Trustee and shall be retained and maintained, in trust, by the Servicer or Special Servicer, as applicable, at the will of the Indenture Trustee in such custodial capacity only. The portion of each Servicing File retained by the Servicer or Special Servicer, as applicable, pursuant to this Agreement shall be segregated from the other books and records of the Servicer or Special Servicer, as applicable, and shall be appropriately marked to clearly reflect the record ownership of the related Mortgage Loan by the Indenture Trustee. The Servicer or Special Servicer, as applicable, shall release from its custody the contents of any Servicing File retained by it only in accordance with this Agreement. (b) The Seller shall deliver and release the Mortgage Files to the Custodian on behalf of the Indenture Trustee on or prior to the Closing Date. On or prior to the Closing Date, the Indenture Trustee shall have certified its receipt of each Mortgage Note, as evidenced by the certificate of the Indenture Trustee with any exceptions noted on the list attached thereto, a copy of which shall be provided to the Servicer and the Seller. The Seller shall be responsible for, as and when due, any and all initial document review fees, initial and final certification fees and recertification fees and any costs 25 30 associated with correcting any deficiencies identified in connection with such review(s). The Special Servicer or the Servicer, as applicable, shall notify the Indenture Trustee, the Owner Trustee and each Rating Agency of any assumption, modification, consolidation, waiver, amendment or extension entered into in respect of any Mortgage Loan in accordance with this Agreement. The Servicer or Special Servicer, as applicable, shall forward to the Custodian original executed documents evidencing any such assumption, modification, consolidation or extension within ten Business Days of the execution thereof; provided, however, that the Servicer or Special Servicer, as applicable, shall provide to the Custodian, for inclusion in such Mortgage File, a certified true copy of any such document submitted for recordation within ten Business Days of its execution, and shall provide the original of any document submitted for recordation or a copy of such document certified by the appropriate public recording office to be a true and complete copy of the original promptly upon receipt of the recorded original or the certified copy of such document. (c) The Indenture Trustee agrees, for the benefit of the Holders of the Bonds, to review, within 90 days after the Closing Date, the Mortgage Files delivered to it in connection with the Grant of the Allied Interests and the Funding Note under the Indenture and after completion of such review to provide a final certification to the Seller, the Issuer and the Servicer. The Indenture Trustee's review shall be limited to a determination that all documents comprising the Mortgage Files in respect of the Mortgage Loans have been delivered with respect to each such Mortgage Loan, that all such documents have been executed, and that all such documents purport on their face to relate to the Mortgage Loans. In performing such review the Indenture Trustee may rely upon the purported genuineness of any signature thereon. If the Indenture Trustee discovers any defect or omission in the applicable Mortgage Files or that any document required to be delivered to it has not been delivered or that any document so delivered has not been executed or does not relate to any of the Mortgage Loans (any of the foregoing, a "Defect" in the related Mortgage File), it shall promptly notify the Issuer, the Seller and the Servicer. In conducting any such review, the Indenture Trustee shall be entitled to rely conclusively upon the accuracy, sufficiency and genuineness of any recording or filing information contained in each Mortgage File. If any Defect in a Mortgage File materially and adversely affects the interests of the Bondholders, then the Indenture Trustee shall direct the Issuer to promptly request (a) Allied REIT (if such Mortgage Loan is an Allied Mortgage Loan), or (b) Allied REIT or BMI REIT (if such Mortgage Loan is a Participation Mortgage Loan) (i) to cure such Defect in all material respects not later than 90 days from receipt by Allied REIT or BMI REIT, as applicable, of such request or (ii) to repurchase the affected Allied Mortgage Loan, Allied Participation or BMI Participation at the applicable Purchase Price pursuant to the related Mortgage Loan Purchase Agreement. If the related Defect is not cured within a period of 90 days following receipt of notice thereof, (i) Allied REIT will be obligated pursuant to the Allied Mortgage Loan Purchase Agreement to repurchase the affected Allied Participation or Allied Mortgage 26 31 Loan, as the case may be, or (ii) BMI REIT will be obligated pursuant to the BMI Mortgage Loan Purchase Agreement to repurchase the affected BMI Participation, as applicable, in each case within such 90-day period at the Purchase Price, provided that Allied REIT and BMI REIT, as applicable, will have an additional 90-day period to deliver the document or cure the defect, as the case may be, if it is diligently proceeding to effect such delivery or cure and has delivered to the Indenture Trustee an Officer's Certificate that describes the reasons that such delivery or cure was not effected within the first 90-day cure period and the actions it intends to take to effect such delivery or cure, and that states that it anticipates such delivery or cure will be effected within the additional 90-day period; and provided further that if any document required to be included in the Mortgage File is not included therein because it has been delivered to a recording office for recording and has not been returned, no repurchase is required if Allied REIT or BMI REIT, as applicable, provides the Indenture Trustee with an Officer's Certificate to such effect. The foregoing repurchase obligations will constitute the sole remedy available to the Bondholders and the Indenture Trustee for any uncured failure to deliver, or any uncured defect in, a constituent Mortgage Loan document. In addition, in the event that (a) Allied REIT is required to reacquire any Allied Participation as described above, BMI shall be obligated to reacquire the BMI Participation which evidences an interest in the same Participation Mortgage Loan as such Allied Participation, and (b) in the event that BMI REIT is required to reacquire any BMI Participation as described above, Allied REIT shall be obligated to reacquire the Allied Participation which evidences an interest in the same Participation Mortgage Loan as such BMI Participation, in each case, in the manner described above. SECTION 3.05. Instructions; Authority to Act. The Custodian shall be deemed to have received proper instructions with respect to the Mortgage Files upon its receipt of written instructions signed by a Trust Officer of the Indenture Trustee (if the Custodian is not the Indenture Trustee) or by a Responsible Officer of the Servicer or the Special Servicer, as applicable. SECTION 3.06. Custodian's Indemnification. The Custodian shall indemnify the Issuer, the Owner Trustee and the Indenture Trustee (if the Custodian is not the Indenture Trustee) and each of their officers, directors, employees and agents for any and all liabilities, obligations, losses, compensatory damages, payments, costs, or expenses of any kind whatsoever that may be imposed on, incurred by or asserted against the Issuer, the Owner Trustee or the Indenture Trustee or any of their officers, directors, employees or agents as the result of any improper act or omission in any way relating to the maintenance and custody by the Custodian of the Mortgage Files; provided, however, that the Custodian shall not be liable to the Issuer, the Owner Trustee, the Indenture Trustee or any such officer, director, employee or agent of the Owner Trustee or the Indenture Trustee for any portion of any such amount resulting from the willful misfeasance or bad faith of the Owner Trustee or the Indenture Trustee, as the case may be, or for the gross negligence of the Owner Trustee or the negligence of the Indenture Trustee, as the case may be, or any such officer, director, employee or agent of the Owner Trustee or the Indenture Trustee, as the case may be. 27 32 Indemnification under this Section shall survive the resignation or removal of the Custodian or the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Custodian shall have made any indemnity payments pursuant to this Section and the Person to or on behalf of whom such payments are made thereafter collects any of such amounts from others, such Person shall promptly repay such amounts to the Custodian, without interest. (b) Neither the Custodian nor any of its officers, directors, employees or agents shall be liable, directly or indirectly, for any damages or expenses arising out of the services performed under this Agreement other than damages which result from the negligence or willful misconduct of it or them. SECTION 3.07. Effective Period and Termination. (a) The Custodian's appointment as custodian shall continue in full force and effect unless and until terminated pursuant to this Section 3.07. The appointment of the Custodian as custodian may be terminated by the Indenture Trustee or the Holders of at least 51% of the Bond Balance, by notice given in writing to the Custodian (and to the Indenture Trustee, the Issuer and the Seller if given by such Bondholders) in the same manner as the Indenture Trustee or such Bondholders, as the case may be, may terminate the rights and obligations of the Servicer under Section 8.02. With the consent of the Indenture Trustee, the Issuer, may terminate the Custodian's appointment as custodian, with cause, at any time upon written notification to the Custodian. As soon as practicable after any termination of such appointment (but in no event more than 10 Business Days after any such termination of appointment), the Custodian shall deliver the Mortgage Files to the Indenture Trustee or the Indenture Trustee's agent at such place or places as the Indenture Trustee may reasonably designate. SECTION 3.08. Delivery of the Mortgage Files to the Servicer or Special Servicer. As is appropriate for the servicing or foreclosure of any Mortgage Loan, the Custodian shall deliver to the Servicer or the Special Servicer, as applicable, the Mortgage Files for such Mortgage Loan upon receipt by the Custodian, on or prior to the date such release is to be made, of a trust receipt and request for release executed by the Servicer or Special Servicer, as applicable, providing the reason that the Servicer or Special Servicer, as applicable, is requesting such release and providing that such entity will hold or retain the Mortgage Files in trust for the benefit of the Indenture Trustee and the Holders of Bonds. ARTICLE IV 28 33 Administration and Servicing of Mortgage Loans SECTION 4.01. Duties of Servicer. (a) The Servicer, for the benefit of the Issuer and the Indenture Trustee, shall manage, service, administer and make collections on all Mortgage Loans (other than Specially Serviced Mortgage Loans) and all Corrected Mortgage Loans and shall perform the other actions required by the Servicer under this Agreement. The Special Servicer, for the benefit of the Issuer and the Indenture Trustee, shall manage, service, administer and make collections on all Specially Serviced Mortgage Loans and all REO Properties and shall perform the other actions required by the Special Servicer under this Agreement. The Servicer and the Special Servicer shall service the Mortgage Loans that each of them is primarily responsible for servicing and administering, in accordance with their customary and usual procedures and consistent with the Servicing Standard. The Servicer and the Special Servicer shall adhere to the Servicing Standard without regard to any conflict of interest that either of them may have (including, without limitation, debt extended to any Mortgagor or its obligation to make Advances), any fees or other compensation to which they are respectively entitled and any relationship with the Mortgagor and without regard to the different payment priorities among the Classes of Bonds. The Servicer's duties shall include the collection and posting of all payments, responding to inquiries of Mortgagors, investigating delinquencies, sending payment coupons to Mortgagors, reporting any required tax information to Mortgagors, monitoring the collateral, accounting for collections, furnishing monthly and annual statements to the Owner Trustee and the Indenture Trustee with respect to distributions, monitoring the compliance by Mortgagors with the insurance requirements contained in the related Mortgages and/or Mortgage Notes, and performing the other duties specified herein. The Servicer shall continue to collect information and prepare all reports to the Indenture Trustee required hereunder with respect to any Specially Serviced Mortgage Loans and REO Properties, and shall render such incidental services with respect to any Specially Serviced Mortgage Loans and REO Properties as are specifically provided for herein. The Servicer also shall administer and enforce, on behalf of the Securityholders, all rights of the Issuer, as holder of each Mortgage Loan under the related Mortgage Note. To the extent consistent with the standards, policies and procedures otherwise required hereby (including without limitation the Servicing Standard), each of the Servicer and the Special Servicer shall follow its customary standards, policies and procedures and shall have full power and authority, acting alone, to do any and all things in connection with the managing, servicing, administration and collection of the Mortgage Loans that it may deem necessary or desirable. Neither the Servicer nor the Special Servicer shall have any responsibility for the performance by the other of its duties under this Agreement. (b) Without limiting the generality of the foregoing, the Servicer and the Special Servicer are hereby authorized and empowered to execute and deliver, on behalf of itself, the Issuer, the Owner Trustee (solely on behalf of the Issuer), the Indenture Trustee, the Certificateholders and the Bondholders or any of them, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments with respect to the Mortgage Loans and with respect to the Mortgaged Properties. 29 34 (c) The Servicer and the Special Servicer are hereby authorized to commence, each in its own name or in the name of the Issuer, the Indenture Trustee, the Owner Trustee (solely on behalf of the Issuer), the Certificateholders or the Bondholders, a legal proceeding to enforce any Mortgage Loan pursuant to Section 4.03 or to commence or participate in any other legal proceeding (including a bankruptcy proceeding) relating to or involving a Mortgage Loan, a Mortgagor or a Mortgaged Property. If the Servicer or the Special Servicer commences or participates in any such legal proceeding in its own name, the Indenture Trustee and/or the Issuer shall thereupon be deemed to have automatically assigned the applicable Mortgage Loan to the Servicer or the Special Servicer, as applicable, solely for purposes of commencing or participating in such proceeding as a party or claimant, and the Servicer and the Special Servicer are authorized and empowered by the Indenture Trustee and the Issuer to execute and deliver in the Indenture Trustee's or the Issuer's name any notices, demands, claims, complaints, responses, affidavits, or other documents or instruments in connection with any such proceeding. If in any enforcement suit or legal proceeding it shall be held that the Servicer or the Special Servicer may not enforce a Mortgage Loan, on the ground that it shall not be a real party in interest or a holder entitled to enforce such Mortgage Loan, the Issuer shall, at the expense and direction of the Servicer or the Special Servicer, as the case may be, take steps to enforce such Mortgage Loan, including bringing suit in the name of the Issuer (or in the name of the Owner Trustee on behalf of the Issuer), the Indenture Trustee, the Certificateholders or the Bondholders. The Owner Trustee and the Indenture Trustee shall upon the Servicer's or the Special Servicer's written request furnish the Servicer or the Special Servicer with any powers of attorney and other documents reasonably necessary or appropriate to enable it to carry out its servicing and administrative duties hereunder. Neither the Indenture Trustee nor the Owner Trustee will have any liability for the misuse by the Servicer or the Special Servicer of any power of attorney granted pursuant to this Section 4.01(c). (d) Each of the Servicer and Special Servicer shall service and administer the respective groups of cross-collateralized Mortgage Loans as a single Mortgage Loan as and when it deems necessary and appropriate, consistent with the Servicing Standard. If any cross-collateralized Mortgage Loan becomes a Specially Serviced Mortgage Loan, then each other Mortgage Loan with which it is cross-collateralized shall also become a Specially Serviced Mortgage Loan. No cross-collateralized Mortgage Loan may subsequently become a Corrected Mortgage Loan unless and until all Servicing Transfer Events in respect of each other Mortgage Loan in its group are cured or otherwise addressed as provided in the definition of Corrected Mortgage Loan. SECTION 4.02. Collection and Mortgage Loan Payments; Modifications of Mortgage Loans. (a) Consistent with the standards, policies and procedures required by this Agreement (including without limitation the Servicing Standard), the Servicer (and, if applicable, the Special Servicer) shall make reasonable efforts to collect all payments called for under the terms and provisions of the Mortgage Loans as and when the same shall become due, and shall ascertain and estimate Escrow Payments and all other charges that will become due and payable with respect to the Mortgage Loans and each related Mortgaged Property, to the end that 30 35 the installments payable by the Mortgagors will be sufficient to pay such charges as and when they become due and payable. The Servicer (with respect to Mortgage Loans other than the Specially Serviced Mortgage Loans) and the Special Servicer (with respect to Specially Serviced Mortgage Loans) are authorized in their discretion to waive any late payment charge or any other similar fees that may be collected in the ordinary course of servicing any such Mortgage Loan. (b)(i) (A) The Servicer may amend any term, other than a Money Term of a Mortgage Loan that is not a Specially Serviced Mortgage Loan; (B) the Servicer or the Special Servicer, as applicable, may, in its discretion, but only upon determining that the coverage under any related hazard insurance policy will not be affected, extend or cause to be extended the Due Dates for payments due on a Mortgage Loan for such period as is consistent with the Servicing Standard; and (C) the Special Servicer shall be permitted to enter into a modification, waiver or amendment of the terms of any Specially Serviced Mortgage Loan to (i) reduce the amounts owing under such Specially Serviced Mortgage Loan by forgiving principal, accrued interest and/or any Prepayment Premium, (ii) reduce the amount of the Monthly Payment on such Specially Serviced Mortgage Loan, including by way of a reduction in the related Mortgage Rate, (iii) forbear in the enforcement of any right granted under any Mortgage Note or Mortgage relating to such Specially Serviced Mortgage Loan, (iv) extend the maturity date of such Mortgage Loan, and/or (v) accept a principal prepayment during any Lock-Out Period, so long as, in each case, (x) the related Mortgagor is in default with respect to such Specially Serviced Mortgage Loan or, in the reasonable judgment of the Special Servicer, such default is reasonably foreseeable and (y) in the reasonable judgment of the Special Servicer, such modification, waiver or amendment would increase the recovery to Bondholders on a net present value basis, as documented by the Special Servicer to the Indenture Trustee. (ii) In no event shall the Special Servicer be permitted to (i) extend the maturity date of a Mortgage Loan beyond a date that is two years prior to the Final Rated Distribution Date, (ii) extend the maturity date of a Mortgage Loan that has a Mortgage Rate below the then-prevailing interest rate for comparable loans, as determined by the Special Servicer, unless such Mortgage Loan is a Balloon Loan that has failed to make the Balloon Payment at its Stated Maturity Date and such Balloon Loan is not a Specially Serviced Mortgage Loan (other than by reason of failure to make the Balloon Payment) and has not been delinquent in the preceding 12 months (other than with respect to the Balloon Payment), in which case the Special Servicer may make up to three one-year extensions at the existing Mortgage Rate for such Mortgage Loan (such limitation of extensions made at a below market rate shall not limit the ability of the Special Servicer to extend the maturity date of any Mortgage Loan at an interest rate at or in excess of the prevailing rate for comparable loans at the time of such modification), (iii) if the Mortgage Loan is secured by a ground lease, extend the maturity date of such Mortgage Loan beyond a date that is ten years prior to the expiration of the term of the related ground lease, (iv) reduce the Mortgage Rate to a rate below the then-prevailing interest rate for comparable loans, as determined by 31 36 the Special Servicer or (v) defer interest due on any Mortgage Loan in excess of 10% of the Stated Principal Balance of such Mortgage Loan or defer the collection of interest on any Mortgage Loan without accruing interest on such deferred interest at a rate at least equal to the Mortgage Rate of such Mortgage Loan. SECTION 4.03. Realization upon Mortgage Loans. (a)(i) The Special Servicer may, consistent with the provisions of any Mortgage and this Agreement, at any time institute foreclosure proceedings, exercise any power of sale contained in such Mortgage, obtain a deed in lieu of foreclosure or otherwise acquire title to the related Mortgaged Property, by operation of law or otherwise, in the event of a default under such Mortgage, as permitted under such Mortgage. The foregoing is subject to the proviso that the Special Servicer shall not be required to advance its own funds to restore any property damaged with respect to which Insurance Proceeds will not cover the damage unless it shall determine that (A) such restoration will increase the Liquidation Proceeds in respect of the related Mortgage Loan after reimbursement to itself for such expenses plus interest, if any, at the Reimbursement Rate as provided under the terms of this Agreement (such advances to be treated as a Servicing Advance) and (B) such expenses will be recoverable by it through Insurance Proceeds or Liquidation Proceeds from the related Mortgaged Property, as contemplated by Section 5.05(a)(i). The Special Servicer shall be responsible for all costs and expenses incurred by it in any such proceedings; provided, however, that it shall be entitled to reimbursement thereof from related Liquidation Proceeds or REO Proceeds to the extent provided in Section 5.05. (ii) If title to any Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale shall be taken in the name of the Indenture Trustee. Notwithstanding any such acquisition of title and cancellation of the related Mortgage Loan, such Mortgage Loan shall be considered to be a Mortgage Loan until such time as the related REO Property is sold pursuant to this Agreement and shall be reduced only by collections net of expenses. Consistent with the foregoing, for purposes of all calculations hereunder, so long as such Mortgage Loan shall be considered to be an outstanding Mortgage Loan: (A) it shall be assumed that, notwithstanding that the indebtedness evidenced by the related Mortgage Note shall have been discharged, such Mortgage Note and, for purposes of determining the Monthly Payments thereof, the related amortization schedule in effect at the time of any such acquisition of title remain in effect; and (B) REO Proceeds received in any month shall be applied to amounts which would have been payable under the related Mortgage Note in accordance with the terms of such Mortgage Note. In the absence of such terms, REO Proceeds shall be deemed to have been received, first, in payment of the accrued interest that remained unpaid on the date that the related REO Property was acquired by the Issuer; second, in respect of the delinquent principal installments that remained unpaid on such date; and, thereafter, in respect of installments of principal and accrued interest on such Mortgage Loan deemed to be due and payable in accordance with the terms of such Mortgage Note and such 32 37 amortization schedule. If such REO Proceeds exceed the Monthly Payment then payable, the excess shall be treated as a Principal Prepayment received in respect of such Mortgage Loan. (b) The Special Servicer shall not obtain title to a Mortgaged Property as a result or in lieu of foreclosure or otherwise, and shall not otherwise acquire possession of, or take any other action with respect to, any Mortgaged Property, if, as a result of any such action, the Issuer, the Owner Trust Estate, the Owner Trustee, the Indenture Trustee or the Special Servicer would be considered to have participated in management of, or to hold title to, or be a "mortgagee-in-possession," an "owner" or an "operator" of, such Mortgaged Property, or otherwise be a "responsible party" for Environmental Materials at, on, under or adjacent to the Mortgaged Property, within the meaning of any Environmental Law, unless the Special Servicer has previously determined, based solely (as to environmental matters) on an environmental report prepared by an Independent Person who regularly performs environmental audits and is able to perform such work with the degree of care and due diligence and good workmanship customarily provided by an expert professional environmental consultant providing the same or similar work ("Environmental Professional"), that: (i) such Mortgaged Property is in compliance with applicable Environmental Laws or, if not, that taking such actions as are necessary to bring the Mortgaged Property in compliance therewith is reasonably more likely to produce a greater recovery on a present value basis than not taking such actions; (ii) there are no circumstances or conditions present at such Mortgaged Property that have resulted in any contamination for which investigation, testing, monitoring, containment, clean-up or remediation could be required under any Environmental Law, or if such circumstances or conditions are present for which any such action could be required, taking such actions with respect to such Mortgaged Property is reasonably likely to produce a greater recovery on a present value basis than not taking such actions; and (iii) the Servicer has determined based on satisfaction of the criteria in clauses (i) and (ii) above that it would be in the best economic interest of the Issuer, the Indenture Trustee and the Bondholders to take such actions. If the environmental report first obtained by the Special Servicer with respect to a Mortgaged Property indicates that such Mortgaged Property may not be in compliance with applicable Environmental Laws or that Environmental Materials may be present but does not definitely establish such fact, the Special Servicer shall cause such further environmental tests as the Special Servicer shall deem prudent to protect the interests of the Indenture Trustee, the Owner Trustee and the Bondholders to be conducted by an Environmental Professional. Any such tests shall be deemed part of the environmental reports obtained by the Special Servicer for purposes of this Section 4.03. The cost of preparation of any environmental report shall be advanced by the Special Servicer as a Servicing Advance and the Special Servicer shall be reimbursed therefor, together with interest thereon, if any, at the Reimbursement Rate computed in accordance with the terms of this Agreement, from the Collection Account as provided in Section 5.05. 33 38 (c) If the Special Servicer determines, pursuant to paragraph (b) of this Section 4.03, that taking such actions as are necessary to bring any such Mortgaged Property into compliance with applicable Environmental Laws, or taking such actions with respect to the containment, clean-up, removal or remediation of Environmental Materials affecting any such Mortgaged Property, is not reasonably likely to produce a greater recovery on a present value basis than not taking such actions, then the Special Servicer shall take such action as it deems to be in the best economic interests of the Bondholders, including without limitation releasing the lien of the Mortgage with respect to the affected Mortgaged Property. The cost of any such compliance, containment, clean-up or remediation may be reimbursed to the Special Servicer from the Collection Account as a Servicing Advance pursuant to Section 5.05. SECTION 4.04. Maintenance of Insurance Policies; Errors and Omissions and Fidelity Coverage. (a) The Servicer or the Special Servicer, as applicable, shall maintain, or cause each Mortgagor to maintain for each Mortgaged Property (including any REO Property) a hazard insurance policy that has been obtained from an insurance company duly qualified as such under the laws of the state in which the related Mortgaged Property is located, duly authorized and licensed in such state to transact the applicable insurance business and to write the insurance provided (and, if the Servicer or the Special Servicer shall obtain such hazard insurance policy on behalf of the related Mortgage, such insurance policy shall be obtained from a Qualified Insurer), and that provides for such coverage as is required by the terms of the related Mortgage in the amounts set forth therein or, if such Mortgage permits the holder thereof to dictate to the Mortgagor the insurance coverage to be maintained on such Mortgaged Property, such coverage shall be in an amount equal to the lesser of (i) the principal balance owing on such Mortgage Loan and (ii) the full replacement cost of such Mortgaged Property (together with flood insurance coverage, if obtainable and if such Mortgaged Property is located in a federally designated flood area, in an amount equal to the lesser of (i) the amount necessary to fully compensate for any damage or loss to the improvements which are part of such Mortgaged Property on a replacement cost basis and (ii) the maximum amount of insurance available from time to time under the federal flood insurance program, whether or not the area is participating in the program), but in any event not less than the amount necessary to avoid the application of any co-insurance clause contained in the hazard insurance policy. Each such insurance policy shall (i) contain a "standard" mortgagee clause, and proceeds will be payable to the Servicer (in the case of insurance maintained in respect of Mortgage Loans other than REO Properties) or (ii) be in the name of the Special Servicer (in the case of insurance maintained in respect of REO Properties) on behalf of the Indenture Trustee. All amounts collected by the Servicer or the Special Servicer under any such policies (other than amounts to be applied to the restoration or repair of the related Mortgaged Property or REO Property or amounts released to the Mortgagor in accordance with normal servicing procedures of the Servicer or Special Servicer, as applicable, and/or the terms of the related Mortgage and Mortgage Note) shall be deposited in the Collection Account, subject to withdrawal pursuant to Section 5.05. To the extent the Servicer has expended its own funds to pay for insurance premiums under this paragraph (a), the cost of such premiums shall be recoverable by the Servicer out of the collections of delinquent premiums by the Mortgagor on the related Mortgage Loan or from the sources permitted 34 39 by Section 5.05 or Section 5.08. (b) The Servicer or the Special Servicer, as applicable, shall be permitted to obtain and maintain a blanket policy insuring against hazard losses on all of the Mortgaged Properties with a Qualified Insurer, in which event the Servicer or the Special Servicer, as applicable, shall conclusively be deemed to have satisfied its obligations as set forth in paragraph (a) of this Section 4.04, it being understood and agreed that such policy may contain a deductible clause, in which case the Servicer or the Special Servicer, as applicable, shall, in the event that there shall not have been maintained on the related Mortgaged Property a policy complying with paragraph (a) of this Section 4.04 and there shall have been a loss which would have been covered by such policy but for such deductible clause, deposit in the Collection Account the amount not otherwise payable under the blanket policy because of such deductible clause. Any such deposit by the Servicer or the Special Servicer, as applicable, shall be made on the date preceding the Remittance Date upon which the proceeds represented by such deposit are required to be distributed and shall not be reimbursable to the Servicer or the Special Servicer, as applicable. The Servicer, in connection with its activities as servicer of the Mortgage Loans, and the Special Servicer, in connection with its activities as servicer of the Specially Serviced Mortgage Loans, agrees to present or cause to be presented, on behalf of itself, the Indenture Trustee, the Issuer and the Owner Trustee, claims under any such blanket policy. (c) The Servicer and the Special Servicer shall each obtain and maintain at their own expense, and keep in full force and effect throughout the term of this Agreement, a blanket fidelity bond issued by a Qualified Insurer. The amount of fidelity bond coverage shall be in form and amount consistent with the Servicing Standard. (d) Each of the Servicer and the Special Servicer shall at all times during the term of this Agreement keep in force a policy or policies of insurance covering loss occasioned by the errors and omissions of the officers, employees and agents of the Servicer or the Special Servicer, as applicable, in connection with its obligations hereunder, which policy or policies shall be obtained from a Qualified Insurer and provide for coverage consistent with the Servicing Standard. The Servicer and the Special Servicer must each maintain in effect the related errors and omissions policy at all times and such errors and omissions policy may not be canceled, permitted to lapse or otherwise terminated without 30 days' prior written notice by registered mail to the Servicer or the Special Servicer, as applicable, and to the Indenture Trustee and Owner Trustee. Further, each such errors and omissions policy must provide or the insurer must state in writing to the Indenture Trustee and Owner Trustee, that such errors and omissions policy shall not be cancelable without the giving of notice as provided for in the prior sentence. (e) Coverage of the Servicer or the Special Servicer under a policy or bond obtained by an Affiliate of the Servicer or the Special Servicer, as applicable, and providing the coverage required by this Section 4.04 shall satisfy the requirements of this Section. SECTION 4.05. Reserved. 35 40 SECTION 4.06. Recordation of Mortgages and Other Documents. (a) Record title to each Mortgage and the endorsement on the related Mortgage Note shall be in the name of the Indenture Trustee. At the Servicer's expense, the Indenture Trustee shall prepare (i) the Assignments and (ii) the UCC-2s and UCC-3s referred to in clause (x) of the definition of "Mortgage File," and, not later than 45 days after the Closing Date, the Indenture Trustee shall cause the Assignments to be duly recorded in the public records in which the related Mortgage shall have been recorded. The Servicer shall pay all necessary recording fees associated with preparing and recording the Assignments. The Seller shall cooperate with the Servicer and the Issuer in the preparation and recording of any and all Assignments. All rights arising out of the Mortgage Loans shall be vested in the Indenture Trustee pursuant to the Indenture. All funds received on or in connection with a Mortgage Loan shall be received and held by the Servicer in trust for the benefit of the Indenture Trustee as the record owner of the Mortgage Loans and the Mortgagors as their respective interests may appear. SECTION 4.07. Reserved. SECTION 4.08. Servicing Fee. As consideration for servicing the Mortgage Loans, the Servicer shall be entitled to receive the Servicing Fee, and as consideration for servicing the Specially Serviced Mortgage Loans, the Special Servicer shall be entitled to receive the Special Servicing Fee. The Servicing Fee and Special Servicing Fee with respect to any Collection Period shall equal the product of (i) the Servicing Fee Rate or the Special Servicing Fee Rate, as applicable, and (ii) the Stated Principal Balance of the Mortgage Loans or Specially Serviced Mortgage Loans, respectively, at the beginning of such Collection Period. Such fees are limited to, and shall be paid solely from, the interest portion (including recoveries with respect to interest from Liquidation Proceeds, to the extent permitted by Section 5.05) of such Monthly Payment actually collected by the Servicer or Special Servicer, as applicable, or as otherwise provided under Section 5.05. Each of the Servicer and the Special Servicer shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder, including the fees of any Subservicer retained by it, and shall not be entitled to reimbursement thereof except as specifically provided for herein. The Servicer shall be entitled to retain all late payment fees accrued and paid from time to time by any Mortgagor and any fees collected from time to time from any Mortgagor with respect to assumptions or substitutions of liability effected during the period the related Mortgage Loan is subject to this Agreement. The Servicer shall be required to pay, out of its Servicing Fee, the compensation of the Indenture Trustee and the Owner Trustee. SECTION 4.09. Servicer's Certificate. Not later than 10:00 a.m. New York City time on each Determination Date, the Servicer shall deliver to the Owner Trustee, each Paying Agent, the Indenture Trustee and the Seller, with a copy to the Rating Agencies, a Servicer's Certificate containing all information set forth in Section 5.12 for the related Collection Period in such form as shall be reasonably acceptable to the Indenture Trustee. Mortgage Loans or Allied Participations to be repurchased by the Seller or Allied 36 41 REIT, as well as each Mortgage Loan that became a Liquidated Mortgage Loan, shall be identified by the Servicer by account number with respect thereto. SECTION 4.10. Annual Statement as to Compliance; Notice of Servicer Event of Default. (a) Each of the Servicer and the Special Servicer shall deliver to the Owner Trustee, the Indenture Trustee and each Rating Agency, within 120 days after the end of each fiscal year (with the first such certificate being delivered no later than April 30, 1999), an Officer's Certificate of the Servicer or Special Servicer, stating that (i) a review of the activities of the Servicer or Special Servicer, as applicable, during the preceding 12-month period (or such shorter period as shall have elapsed from the Closing Date to the end of the first such fiscal year) and of the performance of its obligations under this Agreement has been made under the supervision of the officers signing such Officer's Certificate and (ii) to such officers' knowledge, based on such review, the Servicer or Special Servicer has fulfilled all its obligations under this Agreement throughout such period or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof. (b) The Servicer, the Special Servicer or the Seller shall deliver to the Owner Trustee, the Indenture Trustee and each Rating Agency, promptly after having obtained knowledge thereof, but in no event later than two Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time or both would become a Servicer Event of Default under Section 8.01. SECTION 4.11. Annual Independent Accountants' Report. Within 120 days after the end of each fiscal year of each of the Servicer and the Special Servicer, beginning with the 1998 fiscal year, each of the Servicer and the Special Servicer, as applicable, at their expense, shall cause a firm of Independent public accountants that is a member of the American Institute of Certified Public Accountants to furnish a statement to the Indenture Trustee and Owner Trustee to the effect that such firm has examined certain documents and records relating to the servicing of the mortgage loan portfolios of the Servicer and the Special Servicer, as applicable, for the preceding calendar year (or during the period from the Closing Date until the end of the preceding calendar year in the case of the first such certificate) and that on the basis of such examination conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers, such firm is of the opinion that such servicing has been conducted in compliance with the Uniform Single Attestation Program for Mortgage Bankers except for such exceptions as such firm believes to be immaterial, in which case such exceptions shall be set forth in such statement. SECTION 4.12. Access to Certain Documentation and Information Regarding Mortgage Loans. The Servicer, the Special Servicer and the Custodian shall provide to representatives of the Owner Trustee, the Indenture Trustee, the Certificateholders and Bondholders reasonable access to the documentation regarding the Mortgage Loans. Access shall be afforded without charge, but only upon reasonable request and during the normal business hours at the offices of the Servicer, the Special Servicer or Custodian, as applicable. Nothing in this Section shall affect the obligation of the Servicer, the 37 42 Special Servicer or the Custodian, as applicable, to observe any applicable law prohibiting disclosure of information regarding the Mortgagors and the failure of the Servicer, the Special Servicer or the Custodian, as applicable, to provide access to information as a result of such obligation shall not constitute a breach of this Section 4.12. SECTION 4.13. [Reserved]. Section 4.14. "Due-on-Sale" Clauses: Assumption Agreements. (a) When the Servicer or Special Servicer, as applicable, receives notice that any Mortgaged Property has been or is about to be conveyed by the Mortgagor, the Servicer or Special Servicer, as applicable, shall immediately give notice to the Indenture Trustee and the Owner Trustee of the contemplated conveyance and take such actions as are consistent with the Servicing Standard including waiving or enforcing any due-on-sale clause or due-on-encumbrance clause contained in any Mortgage Note or Mortgage, to the extent permitted under the terms of the Mortgage Loan and applicable law and governmental regulations, taking or entering into an assumption or substitution agreement from or with the Person to whom such property has been or is about to be conveyed, and releasing the original Mortgagor from liability upon the Mortgage Loan and substituting the new Mortgagor as obligor thereon. If a Mortgagor applies for approval to place a subordinate lien on a Mortgaged Property in accordance with the terms of the Mortgage Note, the Servicer or Special Servicer, as applicable, shall immediately give notice to the Indenture Trustee of the requested encumbrance and obtain at the expense of the Mortgagor and deliver to the Indenture Trustee such appraisals and other supporting documentation as are required by the terms of the Mortgage Note together with such additional information as the Indenture Trustee shall request to facilitate its review and approval of the requested encumbrance; provided, however, that prior to the Indenture Trustee granting permission for additional indebtedness, the Servicer or the Special Servicer, as applicable, shall confirm that such grant satisfies the Rating Agency Condition. The Indenture Trustee (in such capacity) shall be permitted to rely exclusively on the affirmation of each Rating Agency in determining whether to approve any request for a subordinate lien. If the Indenture Trustee advises the Servicer or Special Servicer, as applicable, that it has approved the requested encumbrance, the Servicer or Special Servicer, as applicable, shall cause to be prepared at the expense of the Servicer or Special Servicer, as applicable, and presented to the Indenture Trustee for execution and obtain the Mortgagor's signature on a subordination and intercreditor agreement acceptable to the Indenture Trustee. Any processing fees paid by a Mortgagor in connection with such application shall be retained by the Servicer or Special Servicer, as applicable, as additional servicing compensation. (b) If a Mortgaged Property is to be conveyed by a Mortgagor, and the Person to which the Mortgaged Property is to be conveyed is to enter into an assumption agreement or supplement to the Mortgage Note or Mortgage which requires the signature of the Indenture Trustee, or if an instrument of release to be signed by the Indenture Trustee is required releasing the Mortgagor from liability on the Mortgage Loan, the Servicer or the Special Servicer, as applicable, shall deliver or cause to be delivered to the Indenture Trustee for signature such assumption agreement, modification agreement, supplement or release and all such other instruments as 38 43 are reasonable or necessary to carry out the terms of the Mortgage Note or Mortgage or otherwise to comply with any applicable laws regarding assumptions or the transfer of the Mortgaged Property to such Person; provided, however, that prior to granting permission for any such assumption, supplement or release, the Servicer or the Special Servicer, as applicable, shall confirm that such grant satisfies the Rating Agency Condition. The Indenture Trustee (in such capacity) shall be permitted to rely exclusively on the affirmation of each Rating Agency in determining whether to approve a request for assumption, supplement or release. The Servicer or the Special Servicer, as applicable, shall also deliver or cause to be delivered to the Indenture Trustee with the foregoing documents a letter explaining the nature of such documents. With such letter, the Servicer or the Special Servicer, as applicable, shall deliver to the Indenture Trustee a certificate of a Responsible Officer certifying that: (i) a Responsible Officer has examined and approved such documents, (ii) any required consents of insurers under any insurance policies required by this Agreement have been obtained and (iii) there are no changes or modifications other than those previously approved in accordance with this Agreement. Upon the closing of the transactions contemplated by such documents, the Servicer or the Special Servicer, as applicable, shall cause the originals of the assumption agreement, release (if any), modification or supplement to be delivered to the Indenture Trustee. Any fee collected by the Servicer or Special Servicer, as applicable, for entering into an assumption or substitution of liability agreement with respect to such Mortgage Loan shall be retained by the Servicer or Special Servicer, as additional servicing compensation. Section 4.15. Management of REO Property. (a) The Special Servicer shall manage, conserve, protect and operate each REO Property in a separate account solely for the purpose of its prompt disposition and sale. The Special Servicer shall either itself or, subject to Section 4.15(c), through an agent selected by the Special Servicer, manage, conserve, protect and operate the REO Property in the same manner that it manages, conserves, protects and operates other foreclosed real property for its own account, in the same manner that similar property in the same locality as the REO Property is managed and in a manner that would to the extent commercially feasible, maximize the net after-tax proceeds from such REO Property (but in any event in accordance with the Servicing Standard). The Special Servicer shall attempt to sell the same as expeditiously as possible (and may temporarily rent the same) on such terms and conditions as the Special Servicer deems to be in the best interest of the Bondholders. (b) If any REO Property is acquired, the Special Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection therewith as are consistent with the Servicing Standard, all on terms and for such period as the Special Servicer deems to be in the best interest of the Issuer, the Owner Trustee, the Indenture Trustee and the Bondholders and, consistent therewith, shall advance from its own funds: (i) all insurance premiums due and payable in respect of such REO Property; (ii) all taxes in respect of such REO Property that could result 39 44 or have resulted in the imposition of a lien thereon; (iii) all ground rental payments, if applicable, with respect to the REO Property; and (iv) all costs and expenses necessary to maintain such REO Property; if, but only if, (A) the Special Servicer would make such an advance if it owned such REO Property and (B) in the Special Servicer's judgment, such amounts will be recoverable from related REO Proceeds or Liquidation Proceeds. (c) The Special Servicer may contract with any Independent Person for the operation and management of any REO Property, provided that: (i) the terms and conditions of any such contract shall not be inconsistent herewith; (ii) any such contract shall require, or shall be administered to require, that the Independent Person (A) pay all costs and expenses incurred in connection with the operation and management of such REO Property and (B) deposit on a daily basis all operating income in an Eligible Account; (iii) none of the provisions of this Section 4.15 relating to any such contract or to actions taken through any such Independent Person shall be deemed to relieve the Special Servicer of any of its duties and obligations to the Issuer, the Owner Trustee or the Indenture Trustee with respect to the operation and management of any such REO Property; and (iv) the Special Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such REO Property. The Special Servicer shall be entitled to enter into any agreement with any Independent Person performing services for it related to its duties and obligations hereunder for indemnification of the Special Servicer by such Independent Person, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Special Servicer shall be solely liable for all fees owed by it to any such Independent Person, irrespective of whether the Special Servicer's compensation pursuant to Section 4.08 is sufficient to pay such fees. Section 4.16. Sale of REO Properties. (a) The Special Servicer may offer to sell to any Person any REO Property, if and when the Special Servicer determines consistent with this Agreement that such a sale would be in the best economic interests of the Bondholders, but shall, in any event, so offer to sell any REO Property no later than the time determined by the Special Servicer to be sufficient to result in the sale of such REO Property on or prior to three years from the date of acquisition thereof. The Special Servicer shall (i) give the Indenture Trustee and the Owner Trustee not less than five days' prior notice of its intention to sell any REO Property, (ii) solicit bids for the purchase of such REO Property and (iii) accept the highest bid received from any Person for such REO 40 45 Property in an amount at least equal to the sum of: (A) the actual outstanding principal balance of the related Mortgage Loan, plus all Advances together with interest thereon, if any, at the Reimbursement Rate as provided under the terms of this Agreement; and (B) all unpaid interest accrued thereon at the Mortgage Rate that would have been in effect from time to time through the date of sale. In the absence of any such bid after such REO Property has been marketed for six (6) months, the Special Servicer shall offer such REO Property for sale, in a commercially reasonable manner, to any Person which is not affiliated with the Special Servicer or the related Mortgagor and shall accept the highest cash bid received therefor. (b) Subject to the provisions of Sections 4.03 and 4.14, the Special Servicer shall negotiate and take any other action necessary or appropriate in connection with the sale of any REO Property, including the collection of all amounts payable in connection therewith. Any sale of any REO Property shall be without recourse to the Special Servicer, Issuer, Owner Trustee, Indenture Trustee, Fiscal Agent or any other Person. Section 4.17. Inspections; Collection of Operating Statements. (a) The Servicer shall inspect or cause to be inspected each Mortgaged Property at such times and in such manner as are consistent with the provisions of Sections 4.01 and 4.02, provided that each of the Mortgaged Properties shall be inspected at least once per calendar year. If any Mortgage Loan becomes a Specially Serviced Mortgage Loan, the Special Servicer shall inspect the related Mortgaged Property as soon as practicable thereafter. The Servicer or the Special Servicer, as applicable, shall prepare a written report of each such inspection performed by it, which report shall describe the condition of the related Mortgaged Property and shall specify the existence with respect thereto of any sale, transfer or abandonment or any material change in its condition or value. (b) With respect to each Mortgage Loan, the Servicer or the Special Servicer, as applicable, shall use reasonable efforts to collect and review the annual operating statements of the related Mortgaged Property. (c) The Servicer and the Special Servicer, as applicable, shall make available at their offices, for review by Securityholders and the Rating Agencies during normal business hours, copies of the inspection reports and operating statements referred to in Sections 4.17(a) and 4.17(b). Section 4.18. Reports of Foreclosures of Mortgaged Property. Each year beginning in 1998, the Servicer shall file information returns with respect to the receipt of mortgage interest received in a trade or business, the reports of foreclosures and abandonments of any Mortgaged Property and information returns relating to cancellation of indebtedness income with respect to any Mortgaged Property as required by Sections 6050H, 6050J and 6050P of the Code, 41 46 respectively. Section 4.19. Notification of Adjustments. With respect to each adjustable rate Mortgage Loan, the Servicer shall adjust the Mortgage Rate on each related interest rate adjustment date occurring after the Cut-off Date for such Mortgage Loans in compliance with the requirements of applicable law and the related Mortgage and Mortgage Note. The Servicer shall execute and deliver any and all necessary notices required under applicable law and the terms of the related Mortgage Note and Mortgage regarding the Mortgage Rate adjustments. The Servicer shall promptly, upon written request therefor, deliver to the Indenture Trustee and the Owner Trustee such notifications and any additional applicable data regarding such adjustments and the methods used to calculate and implement such adjustments. Section 4.20. Appraisals. As soon as reasonably practicable (but in any event within 60 days) following the earliest of (i) the date 90 days after the occurrence of any delinquency in payment with respect to a Mortgage Loan if such delinquency remains uncured, (ii) the date 90 days after the related Mortgagor files a bankruptcy petition or a receiver is appointed in respect of the related Mortgaged Property, provided such petition or appointment is still in effect, (iii) the effective date of any modification to a Money Term of a Mortgage Loan, other than the extension of the date that a Balloon Payment is due for a period of less than six months and (iv) the date 30 days following the date a Mortgaged Property becomes an REO Property (in the case of each of clauses (i), (ii), (iii) and (iv), the affected Mortgage Loan, a "Required Appraisal Loan"), the Special Servicer shall obtain an MAI appraisal of the related Mortgaged Property or REO Property, as the case may be (or, at its discretion, if the Stated Principal Balance of such Required Appraisal Loan is less than or equal to $1,000,000, to perform an internal valuation of such property). The Special Servicer shall consider the results of such appraisal or market study, in accordance with the Servicing Standard, in determining how to maximize the net present value of the related Mortgage Loan. Section 4.21. Certain Matters Regarding the Servicer and the Special Servicer. (a) The Servicer or the Special Servicer, as applicable, shall be entitled to become the owner or pledgee of Bonds with the same rights as each would have if it were not the Servicer or the Special Servicer, as applicable. Any such interest of the Servicer or the Special Servicer in the Bonds shall not be taken into account when evaluating whether actions of the Servicer or the Special Servicer, as applicable, are consistent with its obligations in accordance with the Servicing Standard, regardless of whether such actions may have the effect of benefitting the Class or Classes of Bonds owned by it. (b) The Servicer and the Special Servicer shall be entitled to lend money on an unsecured basis and otherwise generally engage in any kind of business or dealings with, any Mortgagor as though the Servicer or the Special Servicer, as applicable, were not a party to the transactions contemplated hereby. Section 4.22. Eligibility of Servicer and Special Servicer. (a) The Servicer shall at all times during the term of this Agreement qualify as an Eligible Servicer. 42 47 (b) The Special Servicer shall at all times during the term of this Agreement qualify as an Eligible Special Servicer. ARTICLE V Distributions; Statements to Certificateholders and Bondholders SECTION 5.01. Establishment of and Deposits to Collection Account. The Servicer shall segregate and hold all funds collected and received on or in respect of the Mortgage Loans separate and apart from any of its own funds and general assets and shall establish and maintain an account held in trust for the benefit of the Indenture Trustee and the Securityholders, bearing a designation clearly indicating that the amounts deposited thereto are held for the benefit of the Securityholders (the "Collection Account"). The Collection Account shall be an Eligible Account and may include one or more sub-accounts. Funds deposited in the Collection Account that are not specifically designated for deposit into sub-accounts maintained as the Escrow Account under this Agreement may be drawn on by the Servicer only in accordance with Section 5.05. The Servicer and the Special Servicer shall deposit in the Collection Account as soon as practicable, but in no event later than the close of business on the second Business Day after its receipt thereof, the following collections received by the Servicer or the Special Servicer, as applicable, after the Cut-off Date: (i) all payments on account of principal on the Mortgage Loans, including all Principal Prepayments; (ii) all payments on account of interest on the Mortgage Loans, adjusted to the related Net Mortgage Rate; (iii) all Liquidation Proceeds; (iv) all REO Proceeds; (v) all Insurance Proceeds; (vi) all Condemnation Proceeds which are to be applied as a Principal Prepayment; (vii) without duplication, all payments of interest and principal received on the Funding Note; and (viii) any other amounts received in respect of any Mortgage Loan which amounts are not otherwise specifically designated herein, other than amounts Servicer or the Special Servicer, as applicable, is authorized to retain pursuant to Section 4.08; In addition, the Servicer and the Special Servicer shall each deposit in the Collection Account all payments required to be made by the Servicer or the Special Servicer, as applicable, pursuant to Section 4.04(b). The foregoing requirements for deposit in the Collection Account shall be exclusive, it being understood that, without limiting the generality of the foregoing, actual payments from Mortgagors in the nature of Escrow Payments, charges for beneficiary statements or demands, and any other administrative fees or charges or amounts 43 48 collected for checks returned for insufficient funds and all late payment fee and assumption fees collected from Mortgagors need not be deposited by the Servicer or the Special Servicer, as applicable, in the Collection Account. If the Servicer or the Special Servicer, as applicable, shall deposit in the Collection Account any amount not required to be deposited therein, it may at any time withdraw such amount from the Collection Account, any provision herein to the contrary notwithstanding. SECTION 5.02. Trust Accounts. (a)(i) The Indenture Trustee for the benefit of the Bondholders, shall establish and maintain in the name of the Indenture Trustee an Eligible Account (the "Bond Distribution Account"), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Bondholders. The Indenture Trustee is under no obligation to invest the amounts on deposit in the Bond Distribution Account. (ii) The Servicer shall segregate and hold all funds collected and received constituting Escrow Payments separate and apart from any of its own funds and general assets and shall establish and maintain an Eligible Account (the "Escrow Account") (which may be a sub-account maintained within the Collection Account), bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Securityholders. (iii) Funds on deposit in the Collection Account shall be invested by the Servicer in Eligible Investments. All such Eligible Investments shall be held by the Servicer for the benefit of the Securityholders; provided that, on each Remittance Date all interest and other investment income (net of losses and investment expenses) on funds on deposit in the Collection Account shall be retained in the Collection Account and shall be deemed to constitute a portion of Available Funds for the related Distribution Date. Other than as permitted by the Rating Agencies, funds on deposit in the Collection Account shall be invested in Eligible Investments that will mature not later than the Business Day immediately preceding the next Remittance Date. Funds deposited in the Collection Account upon the maturity of any Eligible Investments on a day which immediately precedes a Remittance Date are not required to be invested overnight. (iv) The Indenture Trustee shall not be held liable in any way by reason of any insufficiency in the Collection Account resulting from any loss on an Eligible Investment included therein, except for losses attributable to the Indenture Trustee's failure to make payments on such Eligible Investments issued by the Indenture Trustee, in its commercial capacity as principal obligor and not as Indenture Trustee, in accordance with their terms. (b)(i) The Indenture Trustee shall possess all right, title and interest in all funds on deposit in the Trust Accounts and in all proceeds thereof (including all income thereon). The Bond Distribution Account shall be under the sole dominion and control of the Indenture Trustee for the benefit of the Bondholders, and the Collection Account and the Escrow Account shall be under the sole dominion and control of the Servicer, on behalf of the Indenture Trustee, for the benefit of the 44 49 Bondholders. If, at any time, any Trust Account ceases to be an Eligible Account, the Indenture Trustee, in the case of the Bond Distribution Account, or the Servicer, in the case of the Collection Account or the Escrow Account shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) establish a new Trust Account, as applicable, as an Eligible Account and shall transfer any cash and/or any investments from the account that is no longer an Eligible Account to the new Trust Account. (ii) The Servicer and the Special Servicer, as applicable, shall have the power, revocable by the Indenture Trustee or by the Issuer with the consent of the Indenture Trustee, to instruct the Indenture Trustee to make withdrawals and payments from the Bond Distribution Account for the purpose of permitting the Servicer or the Special Servicer to carry out its respective duties hereunder or permitting the Indenture Trustee to carry out its duties under the Indenture. SECTION 5.03. Application of Collections. With respect to each Mortgage Loan (other than a Purchased Mortgage Loan), all amounts received with respect to such Mortgage Loan during each Collection Period shall be applied by the Servicer by or on behalf of the Mortgagor to interest and principal in accordance with the related amortization schedule and the terms of such Mortgage Loan. If, in any month, the payment received with respect to a Mortgage Loan is less than the payment of principal and interest due in that month, the amount received shall be allocated first to interest and then to principal unless, in the case of a Mortgage Loan, such Mortgage Loan provides otherwise. Notwithstanding the foregoing, in the case of any Mortgage Loan that provides for Scheduled Payments on a semi-annual basis, (a) for all purposes of this Agreement, any payment in respect of such Mortgage Loans shall be applied as if only one-sixth of such Scheduled Payment was received in each month over a six-month period commencing in the month of receipt of such payment, (b) for purposes of calculating the Principal Distribution Amount for any Distribution Date, the Scheduled Payment for any such Mortgage Loan shall equal the portion of the related payment allocable to principal to be applied during the immediately preceding Collection Period and (c) any amounts in respect of such payments not applied in any Collection Period shall remain on deposit in the Collection Account for application in one or more subsequent Collection Periods in accordance with this paragraph. SECTION 5.04. Purchase Price. The Seller shall or, if applicable, shall require Allied REIT or BMI REIT to, deposit in the Collection Account, on or prior to each Determination Date, the aggregate Purchase Price with respect to Purchased Mortgage Loans and the Funding Note, as applicable. With respect to a redemption of the Bonds pursuant to Section 9.01, the Seller or the Successor Servicer shall deposit the Redemption Price in the Collection Account on or prior to the Redemption Date. SECTION 5.05. Permitted Withdrawals From Collection Account. (a) The Servicer and, where applicable, the Special Servicer, may, from time to time, withdraw funds from the Collection Account for any of the following purposes: 45 50 (i) to reimburse itself, the Indenture Trustee or the Fiscal Agent for unreimbursed Servicing Advances plus interest, if any, accrued thereon at the Reimbursement Rate as provided under the terms of this Agreement, not otherwise reimbursed or reimbursable under Section 5.08, and any unpaid Servicing Fees, the Servicer's and Special Servicer's right to reimburse itself, the Indenture Trustee or the Fiscal Agent pursuant to this subclause (i) being limited to Liquidation Proceeds, REO Proceeds, Condemnation Proceeds, Insurance Proceeds and such other amounts collected or received on the related Mortgage Loan; (ii) to clear and terminate the Collection Account upon the termination of this Agreement; (iii) to transfer funds to another Eligible Account in accordance with Section 5.02(b)(i); (iv) to make payments to the Servicer as provided in Section 4.08 with respect to assumption fees and late payment fees, but only to the extent such amounts were deposited in the Collection Account; (v) to reimburse itself, the Indenture Trustee or the Fiscal Agent for any Advance that, following the date such Advance is made, becomes a Nonrecoverable Advance; (vi) to remove funds not required to be deposited in the Collection Account; and (vii) in the case of the Servicer, to reimburse itself, the Indenture Trustee or the Fiscal Agent from collections in respect of the Allied Interests and the Funding Note for any previously unreimbursed P&I Advance plus interest, if any, accrued thereon at the Reimbursement Rate as provided under the terms of this Agreement. (b)(_) The Servicer and the Special Servicer shall each keep and maintain separate accounting records, on a Mortgage Loan-by-Mortgage Loan basis, for the purpose of justifying any withdrawal from the Collection Account pursuant to clauses (i) and (v) of Section 5.05(a). SECTION 5.06. Distributions. (a) On each Determination Date, the Servicer shall calculate all amounts required to be deposited in the Bond Distribution Account and the Certificate Distribution Account and all amounts to be distributed to BMI LLC. (b) On each Remittance Date, the Servicer shall instruct the Indenture Trustee in writing (based on the information contained in the Servicer's Certificate delivered on the related Determination Date pursuant to Section 4.09) to make the following deposits and distributions in the applicable accounts by 11:00 a.m. (New York City time), to the extent of amounts available for distribution in the Collection Account, to make required payments and distributions on such date, in the following order and priority: (1) to the Bond Distribution Account, from Available Funds, the Total Bond Interest Amount; 46 51 (2) to the Bond Distribution Account, from Available Funds, the Principal Distribution Amount; (3) to the Certificate Distribution Account, the remainder of Available Funds. (c) In addition, any Prepayment Premium collected with respect to an Allied Mortgage Loan during any Prepayment Period will be distributed on the following Remittance Date as follows: (1) to the Bond Distribution Account, an aggregate amount equal to the lesser of (a) such Prepayment Premium, and (b) such Prepayment Premium multiplied by a fraction, the numerator of which is equal to the excess, if any, of the Bond Rate applicable to the most senior of such Classes of Bonds then outstanding, over the relevant Discount Rate, and the denominator of which is equal to the excess, if any, of the Mortgage Rate for the prepaid Mortgage Loan, over the relevant Discount Rate; and (2) to the Certificate Distribution Account, the remainder of any such Prepayment Premium. If a Prepayment Premium is collected with respect to a Mortgage Loan that is a Participation Mortgage Loan, that portion of the Prepayment Premium attributable to the Allied Interests shall be allocated as set forth above. That portion of the Prepayment Premium attributable to the BMI Participations shall be allocated to the Funding Note in the same proportion as the Prepayment Premium attributable to the Allied Interests is allocated to the Bonds. Such Prepayment Premiums allocated to the Funding Note shall be distributed to that Class or Classes of Bonds entitled to distributions of principal for such Distribution Date as set forth above. (d) On each Remittance Date, the Servicer shall: (i) retain in the Collection Account as part of Available Funds for the related Distribution Date, out of collections in respect of the Participation Mortgage Loans (the "BMI Collections"), an amount equal to the sum of accrued and unpaid interest on the Funding Note and the Funding Note Principal Payment Amount for such Remittance Date; and (ii) distribute to BMI LLC, the remaining BMI Collections, if any, after giving effect to the application of the amount specified in Section 5.06(d)(i). Section 5.07. Deposits to Escrow Account. The Servicer or Special Servicer, as applicable, shall deposit in the Escrow Account or Escrow Accounts as soon as practicable, but in no event later than the close of business on the second Business Day after its receipt thereof, and shall retain therein: (i) all Escrow Payments collected on account of the Mortgage Loans for the purpose of effecting timely payment of any such items as required under the terms of this Agreement; (ii) all amounts representing Insurance Proceeds which are to be applied to the restoration or repair of any Mortgaged Property; 47 52 and (iii) all Liquidation Proceeds or REO Proceeds in connection with Escrow Payments and property liquidation expenses. The Servicer shall make withdrawals from the Escrow Account only to effect such payments as are required under this Agreement, as set forth in Section 5.08. Section 5.08. Permitted Withdrawals from Escrow Account: Payment of Taxes and Insurance. (a) Withdrawals from the Escrow Account or Accounts may be made only by the Servicer and only: (i) to effect timely payments of ground rents, taxes, assessments, water rates, condominium charges, fire and hazard, liability and other insurance premiums or other items constituting Escrow Payments for the related Mortgage; (ii) to reimburse the Servicer, Special Servicer, Indenture Trustee or Fiscal Agent, as applicable, for any Servicing Advance not otherwise reimbursed or reimbursable under Section 5.05, plus interest at the Reimbursement Rate as provided under the terms of this Agreement, relating to taxes, assessments, water rates, sewer rates and other charges which are or may become a lien upon the Mortgaged Property and fire, hazard, liability and other insurance coverage premium payments made by the Servicer with respect to a related Mortgage Loan, but only from amounts received on the related Mortgage Loan which represent late collections of Escrow Payments thereunder; (iii) (A) to refund to any Mortgagor any funds found to be in excess of the amounts required under the terms of the related Mortgage Loan or applicable federal or state law or judicial or administrative ruling or (B) to pay interest to any Mortgagor on balances in the Escrow Account, if required by applicable law or the terms of the related Mortgage Loan, or if not so required, to transfer such funds to the Collection Account pursuant to Section 5.02(a)(iii); (iv) for application to restoration or repair of the Mortgaged Property in accordance with the Servicing Standard and the servicing provisions set forth herein; (v) to clear and terminate the Escrow Account on the termination of this Agreement; (vi) to transfer funds to another Eligible Account in accordance with Section 5.02(b)(i); and (vii) to remove funds the Servicer or Special Servicer, as applicable, deposited in the Escrow Account in error. (b) The Servicer or Special Servicer, as applicable, shall maintain accurate records with respect to each Mortgaged Property reflecting the status of taxes, assessments, basic carrying costs and other similar items that are or may become a lien thereon and the status of insurance premiums and ground rents, if applicable, payable in respect thereof. The Servicer or Special Servicer, as applicable, shall obtain, from time to time, all bills for the payment of such items (including renewal premiums) and shall effect 48 53 payment thereof prior to the applicable penalty or termination date, employing for such purpose amounts in the Escrow Account as allowed under the terms of the Mortgage Loan. If not paid from amounts on deposit in the Escrow Account, the Servicer or Special Servicer, as applicable, shall pay or cause to be paid all such taxes, insurance premiums, ground rents or comparable items related to any Mortgaged Property when and as the same shall become due and payable, and shall be reimbursed therefor pursuant to Section 5.05 or this Section 5.08. In the event that the Servicer or the Special Servicer, as the case may be, fails to pay all such taxes, insurance premiums, ground rents or comparable items related to any Mortgaged Property when and as the same shall become due and payable, then, in addition to the indemnification provisions set forth in Section 7.02, the Servicer or the Special Servicer, as the case may be, shall pay any penalties and/or late payment charges assessed with respect thereto. Section 5.09. P&I Advances. (a) On or before 1:00 p.m., New York City time, on each Remittance Date, the Servicer shall deposit immediately available funds to the Bond Distribution Account in an amount equal to the P&I Advance, if any, to be made in respect of the related Distribution Date, from either (i) the Servicer's own funds, (ii) amounts allocable to the Allied Interests or the Funding Note held in the Collection Account for future remittances hereunder in discharge of any such obligation to make such P&I Advance or (iii) any combination of (i) and (ii) aggregating the total amount of the P&I Advance to be made on such Remittance Date. Any amounts allocable to the Allied Interests and the Funding Note held in the Collection Account for future remittances hereunder and so used to make a P&I Advance shall be appropriately reflected in the Servicer's records and replaced by the Servicer from its own funds by deposit in the Collection Account on or before the next succeeding Remittance Date (to the extent not previously replaced through the deposit of collections of the delinquent principal and/or interest in respect of which such P&I Advance was made). (b) The amount of the P&I Advance to be made on any Remittance Date shall, subject to subsection (c) below, equal the excess, if any, of (i) the sum of the Interest Distribution Amount for the related Distribution Date and the Principal Distribution Amount for such Distribution Date over (ii) the Remittable Funds for such Remittance Date, reduced by any amounts then held by the Indenture Trustee in the Bond Distribution Account and available for payment to Bondholders on the related Distribution Date. (c) The obligation of the Servicer to make any P&I Advance is mandatory; provided, however, that notwithstanding anything herein to the contrary, no P&I Advance shall be required to be made hereunder if and to the extent such P&I Advance would, if made, constitute a Nonrecoverable Advance. The determination by the Servicer that any proposed P&I Advance, if made, would constitute a Nonrecoverable Advance, shall be evidenced by an Officer's Certificate delivered to the Indenture Trustee and the Issuer, detailing a basis for such determination, together with a copy of an appraisal of each related Mortgaged Property or REO Property, as the case may be, performed within the twelve months preceding such determination by the Servicer and prepared by an Independent appraiser in accordance with the Servicing Standard, and any other information relevant thereto which supports such determination by the Servicer. The Servicer shall not have any liability to the 49 54 Indenture Trustee, the Issuer or any other Person if its analysis and determination with respect to a Nonrecoverable Advance proves to be wrong or incorrect, so long as the analysis and determination was made by the Servicer in good faith. (d) If, as of the close of business, on any Remittance Date, the Servicer has failed to make a deposit to the Collection Account in an amount equal to the sum of the Remittable Funds plus any P&I Advance required for such Remittance Date, then the Indenture Trustee shall, by 10:00 a.m. New York City time on the immediately succeeding Business Day, send a notice to the Servicer that it has failed to remit such amount and that such failure, if not cured by the close of business on such Business Day, will constitute a Servicer Event of Default pursuant to Section 8.01(a) hereof. If the Servicer fails to make such remittance as described in the immediately preceding sentence, then by 10:00 a.m. New York City time on the related Distribution Date, the Indenture Trustee shall simultaneously send a notice to the Servicer terminating it from all of its rights hereunder pursuant to Section 8.01 and make a deposit in an amount equal to the Remittable Funds plus the required P&I Advance for such Distribution Date that the Servicer has failed to remit and the entire amount of such deposit shall constitute a "P&I Advance" for purposes of this Agreement; provided, however, that no P&I Advance shall be required to be made by the Indenture Trustee if such P&I Advance would, if made, constitute a Nonrecoverable Advance. To the extent of any P&I Advance made by the Indenture Trustee pursuant to this Section 5.09, all references to the Servicer in this Agreement relating to the reimbursement of the Servicer for P&I Advances, including interest thereon at the Reimbursement Rate, shall instead be references to the Indenture Trustee to the extent of P&I Advances made pursuant to this Section 5.09 and the Indenture Trustee shall be entitled to reimbursement therefor, with interest at the Reimbursement Rate, as provided herein, provided that the Indenture Trustee shall have first priority over the Servicer for reimbursement of its P&I Advances, with interest, hereunder. If the Indenture Trustee fails to make any P&I Advance as described in the immediately preceding paragraph, the Fiscal Agent shall make such P&I Advance by 12:00 noon New York City time on such Distribution Date; provided, however, that no P&I Advance shall be required to be made by the Fiscal Agent if such P&I Advance would, if made, constitute a Nonrecoverable Advance. To the extent of P&I Advances made by the Fiscal Agent, the Fiscal Agent shall have the rights to reimbursement therefor as are given to the Indenture Trustee in the immediately preceding paragraph; provided, however, that the Fiscal Agent's right to reimbursement for P&I Advances, with interest thereon at the Reimbursement Rate, shall be senior to both the Indenture Trustee and the Servicer. (e) Any P&I Advance made pursuant to the terms of this Agreement shall accrue interest at the Reimbursement Rate from the time the funds are advanced by the Servicer from its own funds until such time as the Servicer is reimbursed for such P&I Advance. Such interest shall be paid to the Servicer at the time the related advance is reimbursed in accordance with the provisions of Section 5.05. The Servicer shall reimburse itself for any outstanding P&I Advance as soon as practicably possible after funds are or become available for such purpose in the Collection Account. 50 55 SECTION 5.10. Servicing Advances. (a) Notwithstanding anything to the contrary contained herein, neither the Servicer nor the Special Servicer shall be obligated to make a Servicing Advance otherwise required pursuant to the terms of this Agreement if the Servicer or the Special Servicer, as applicable, determines, in its good faith judgment, that such Servicing Advance would constitute a Nonrecoverable Advance. Any such determination must be evidenced by an Officer's Certificate delivered to the Indenture Trustee and the Issuer setting forth such determination of nonrecoverability and the procedure and considerations of the Servicer or the Special Servicer, as applicable, forming the basis of such determination. (b) Any Servicing Advance (including any advance under Subsection (b) of Section 5.08) made pursuant to the terms of this Agreement shall accrue interest at the Reimbursement Rate from the time the funds are advanced by the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent, as applicable, from its own funds until such time as the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent, as applicable, is reimbursed for such Servicing Advance. Such interest shall be paid to the Servicer, the Special Servicer, the Indenture Trustee or the Fiscal Agent, as applicable, at the time the related advance is reimbursed in accordance with the provisions of Section 5.05 or 5.08. (c) If the Servicer fails to make any Servicing Advance required to be made by it pursuant to this Agreement and a Trust Officer of the Indenture Trustee has actual knowledge that such Servicing Advance is required to be made, the Indenture Trustee shall make such Servicing Advance no later than the date on which the Servicer's failure to make such Servicing Advance would constitute a Servicer Event of Default; provided, however, that the Indenture Trustee shall make such Servicing Advance on such earlier date as shall be necessary to protect the interest of the Issuer, on behalf of the Bondholders, in the related Mortgaged Property. If the Indenture Trustee fails to make any Servicing Advance required to be made by it pursuant to the preceding sentence, the Fiscal Agent shall make such Servicing Advance within two Business Days, in each case, subject to such Servicing Advance not being a Nonrecoverable Advance. SECTION 5.11. Reserved. SECTION 5.12. Statements to Securityholders. Not later than 10:00 A.M. on each Determination Date, the Servicer shall provide to the Indenture Trustee, in electronic form (with a copy to the Rating Agencies and each Paying Agent), and the Indenture Trustee shall forward to each Bondholder of record as of the most recent Record Date and to the Owner Trustee (with a copy to each Paying Agent under the Trust Agreement for such Paying Agent to forward to each Certificateholder of record as of the most recent Record Date) the following statements: (a) a statement substantially in the form of Exhibit B, setting forth, to the extent applicable: (i) the amount, if any, of the distributions to the holders of each Class of Bonds on such Distribution Date applied to reduce the aggregate Bond Class Balance thereof; (ii) the amount of the distributions to holders of each Class of Bonds on such Distribution Date allocable to (A) interest, (B) Interest Carryover Shortfalls and (C) Prepayment Premiums; 51 56 (iii) the outstanding Funding Note Balance as of the related Determination Date; (iv) the number and Aggregate Stated Principal Balance of outstanding Mortgage Loans in the Mortgage Pool; (v) the number and aggregate Stated Principal Balance of Mortgage Loans in the Mortgage Pool (A) delinquent one month, (B) delinquent two months, (C) delinquent three or more months or (D) as to which foreclosure proceedings have been commenced; (vi) with respect to any REO Property acquired during the related Collection Period, the Stated Principal Balance of the related Mortgage Loan as of the date of acquisition of the REO Property; (vii) (A) the most recent appraised value of any REO Property as of the related Determination Date, (B) as to any REO Property sold during the related Collection Period, the date of the related determination by the Special Servicer that it has recovered all related proceeds that it expects to be finally recoverable and the amount of the proceeds of such sale deposited into the Collection Account, and (C) the aggregate amount of other revenues collected by the Servicer or the Special Servicer with respect to each REO Property during the related Collection Period and credited to the Collection Account, in each case identifying such REO Property by the loan number of the related Mortgage Loan; (viii) the aggregate Bond Class Balance of each Class of Bonds before and after giving effect to the distributions made on such Distribution Date; (ix) the aggregate amount of Principal Prepayments made during the related Prepayment Period; (x) the aggregate amount of servicing compensation retained by or paid to the Servicer and the Special Servicer; (xi) the amount of Realized Losses, if any, incurred with respect to the Mortgage Loans during the related Collection Period; (xii) the aggregate amount of Servicing Advances and P&I Advances outstanding as of the end of the prior calendar month that have been made by the Servicer, the Special Servicer, the Indenture Trustee and the Fiscal Agent, separately stated; (xiii) the Overcollateralization Level at the close of business on such Distribution Date; (xiv) the amount, if any, withdrawn from the Collection Account and paid to the Fiscal Agent, the Indenture Trustee, the Servicer or the Special Servicer as reimbursement for Nonrecoverable Advances; (xv) with respect to any Mortgage Loan that is delinquent in respect of three or more Monthly Payments, (A) the loan number thereof, (B) the unpaid balance thereof, (C) whether the delinquency is in respect of any Balloon Payment, (D) the aggregate amount of unreimbursed P&I Advances and Servicing 52 57 Advances in respect thereof, (E) if applicable, the aggregate amount of any interest accrued and payable to the Servicer or the Special Servicer (or the Indenture Trustee or Fiscal Agent, if applicable) for related P&I Advances and Servicing Advances, (F) whether a notice of acceleration has been sent to the Mortgagor and, if so, the date of such notice and (G) a brief description of the status of any foreclosure proceedings or negotiations with the Mortgagor; (xvi) with respect to any Mortgage Loan liquidated during the related Prepayment Period in connection with a default thereon or by reason of being purchased out of the Owner Trust Estate due to a missing or defective Mortgage File document or a material breach of a representation or warranty that is not cured or otherwise, (A) the loan number thereof, (B) the manner in which it was liquidated, (C) the aggregate amount of proceeds received, (D) the portion of such liquidation proceeds payable or reimbursable to the Special Servicer in respect of such Mortgage Loan and (E) the amount of any Realized Loss in respect of such Mortgage Loan; (xvii) with respect to each REO Property included in the Owner Trust Estate as of the end of the related Collection Period, (A) the loan number of the related Mortgage Loan, (B) the date of acquisition, (C) the Stated Principal Balance of the related Mortgage Loan (calculated as if such Mortgage Loan were still outstanding), (D) the aggregate amount of unreimbursed Servicing Advances in respect thereof and (E) if applicable, the aggregate amount of interest accrued and payable to the Servicer or the Special Servicer (or the Indenture Trustee or Fiscal Agent, if applicable) for related Servicing Advances; (xviii) with respect to each REO Property sold during the related Prepayment Period, (A) the loan number of the related Mortgage Loan, (B) the aggregate amount of sales proceeds, (C) the portion of such sales proceeds payable or reimbursable to the Servicer or the Special Servicer in respect of such REO Property or such Mortgage Loan and (D) the amount of any Realized Loss in respect of such Mortgage Loan; and (xix) the number of Mortgage Loans (not counting any Mortgage Loan that is delinquent with respect to any Balloon Payment or 60 or more days delinquent with respect to any other Scheduled Payment) remaining in the Mortgage Pool at the close of business on such Distribution Date; and (b) a report containing information regarding the Mortgage Loans as of the end of the related Prepayment Period, which report will contain substantially the categories of information regarding the Mortgage Loans set forth in Schedule A and Schedule B, will be presented in a tabular format substantially similar to the respective format utilized in Schedule A and Schedule B or such other form as shall be acceptable to the Indenture Trustee and will be updated within a reasonable period after the requisite underlying information is available. 53 58 In the case of information furnished pursuant to subclauses (i), (ii) and (x) of clause (a) above, the amounts shall be expressed as a dollar amount per $1,000 original principal amount of the Bonds for all Bonds of each applicable Class. The Indenture Trustee shall be under no obligation to recompute, recalculate or verify any of the information provided by the Servicer pursuant to this Section 5.12. ARTICLE VI The Seller SECTION 6.01. Representations of Seller. The Seller makes the following representations on which the Issuer relies in accepting the Allied Interests and the Funding Note and delivering the Securities, and on which the Indenture Trustee and the Fiscal Agent rely in executing this Agreement. The representations speak as of the execution and delivery of this Agreement and as of the Closing Date, but shall survive the sale, transfer and assignment of the Allied Interests and the Funding Note by the Seller to the Issuer and the pledge thereof by the Issuer to the Indenture Trustee pursuant to the Indenture. (a) Organization and Good Standing. The Seller is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with the corporate power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (b) Due Qualification. The Seller is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions where the failure to do so would materially and adversely affect the Seller's ability to transfer the Allied Interests and the Funding Note to the Issuer pursuant to this Agreement or the validity or enforceability of the Allied Interests or the Funding Note. (c) Power and Authority. The Seller has the corporate power and authority to execute and deliver this Agreement and the other Basic Documents to which it is a party and to carry out their respective terms; the Seller has full power and authority to sell and assign the property to be sold and assigned to and deposited with the Issuer, and the Seller has duly authorized such sale and assignment to the Issuer by all necessary corporate action; the execution, delivery and performance of this Agreement and the other Basic Documents to which the Seller is a party have been duly authorized by the Seller by all necessary corporate action; and this Agreement and such other Basic Documents have been duly executed and delivered by the Seller. (d) Binding Obligation. This Agreement and the other Basic Documents to which the Seller is a party, when duly executed and delivered by the other parties hereto and thereto, shall constitute legal, valid and binding obligations of the Seller, enforceable against the Seller in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, and similar laws now or hereafter in effect relating to or affecting creditors' rights generally and to general principles of equity (whether applied in a proceeding at law 54 59 or in equity). (e) No Violation. The consummation of the transactions contemplated by this Agreement and the other Basic Documents and the fulfillment of the terms of this Agreement and the other Basic Documents does not conflict with, and will not result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time, or both) a default under, the certificate of incorporation or bylaws of the Seller, or any indenture, agreement, mortgage, deed of trust, or other instrument to which the Seller is a party or by which it is bound; or result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust, or other instrument, other than this Agreement and the other Basic Documents; or violate any law, order, rule or regulation applicable to the Seller of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Seller or its properties. (f) No Proceedings. There are no proceedings or investigations pending or, to the Seller's knowledge, threatened against the Seller, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality having jurisdiction over the Seller or its properties: (1) asserting the invalidity of this Agreement or any other Basic Document; (2) seeking to prevent the issuance of the Bonds or the Certificates or the consummation of any of the transactions contemplated by this Agreement or any other Basic Document; (3) seeking any determination or ruling that might materially and adversely affect the performance by the Seller of its obligations under, or the validity or enforceability of, this Agreement or any other Basic Document; or (4) seeking to adversely affect the federal income tax attributes of the Issuer, the Bonds or the Certificates. (g) No Consents. The Seller is not required to obtain the consent of any other party or any consent, license, approval, registration, authorization, or declaration of or with any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity, or enforceability of this Agreement or any other Basic Document to which it is a party that has not already been obtained. SECTION 6.02. Corporate Existence. During the term of this Agreement, the Seller will keep in full force and effect its existence, rights and franchises as a corporation under the laws of the jurisdiction of its incorporation and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Basic Documents and each other instrument or agreement necessary or appropriate to the proper administration of this Agreement and the transactions contemplated hereby. In addition, all transactions and dealings between the Seller and its Affiliates will be conducted on an arm's-length basis. SECTION 6.03. Liability of Seller; Indemnities. The Seller shall be liable in accordance herewith only to the extent of the obligations specifically undertaken by the Seller under this 55 60 Agreement (which shall not include distributions on account of the Bonds or Certificates). SECTION 6.04. Merger or Consolidation of, or Assumption of the Obligations of, Seller. The Seller will keep in full effect its existence, rights and franchises as a corporation under the laws of the state of its incorporation, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Securities, the Funding Note or any of the Allied Interests and to perform its respective duties under this Agreement. The Seller shall provide prompt notice of any merger, consolidation or succession pursuant to this Section 6.04 to the Owner Trustee, the Indenture Trustee, the Securityholders and the Rating Agencies. Notwithstanding the foregoing, the Seller shall not merge or consolidate with any other Person or permit any other Person to become a successor to the Seller's business unless immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 3.02 or 6.01 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction). Any Person into which the Seller may be merged or consolidated, or any corporation resulting from any merger or consolidation to which the Seller shall be a party, or any Person succeeding to the business of the Seller, shall be the successor of the Seller hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. SECTION 6.05. Limitation on Liability of Seller and Others. The Seller and any director, officer, employee or agent of the Seller may rely in good faith on the advice of counsel or on any document of any kind, prima facie properly executed and submitted by any Person respecting any matters arising hereunder. The Seller shall not be under any obligation to appear in, prosecute or defend any legal action that shall not be incidental to its obligations under this Agreement, and that in its opinion may involve it in any expense or liability. SECTION 6.06. Seller May Own Securities. The Seller and any Affiliate thereof may in its individual or any other capacity become the owner or pledgee of Securities with the same rights as it would have if it were not the Seller or an Affiliate thereof, except as expressly provided herein or in any Basic Document. ARTICLE VII The Servicer and the Special Servicer 56 61 SECTION 7.01. Representations of Servicer and Special Servicer. Each of the Servicer and Special Servicer makes the following representations applicable to it on which the Issuer is deemed to have relied in acquiring the Allied Interests and the Funding Note and on which the Indenture Trustee and the Fiscal Agent rely in executing this Agreement. The representations speak as of the execution and delivery of this Agreement and as of the Closing Date and shall survive the sale of the Allied Interests and the Funding Note to the Issuer and the pledge thereof by the Issuer to the Indenture Trustee pursuant to the Indenture. (a) Organization and Good Standing. Each of the Servicer and the Special Servicer, as applicable, is duly organized and validly existing as a corporation in good standing under the laws of the state of its incorporation, with the corporate power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted, and had at all relevant times, and has, the corporate power, authority and legal right to acquire, own, sell and service the Mortgage Loans and to hold the Mortgage Files as custodian. (b) Due Qualification. Each of the Servicer and the Special Servicer, as applicable, is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business (including the servicing of the Mortgage Loans as required by this Agreement) shall require such qualifications. (c) Power and Authority. Each of the Servicer and the Special Servicer, as applicable, has the power and authority to execute and deliver this Agreement and the other Basic Documents to which it is a party and to carry out their respective terms; the execution, delivery and performance of this Agreement and the other Basic Documents to which it is a party have been duly authorized by the Servicer or the Special Servicer, as applicable, by all necessary corporate action; and this Agreement and such other Basic Documents have been duly executed and delivered by the Servicer or the Special Servicer, as applicable. (d) Binding Obligation. This Agreement and the Basic Documents to which it is a party constitute legal, valid and binding obligations of the Servicer or the Special Servicer, as applicable, enforceable against the Servicer or the Special Servicer, as applicable, in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the Basic Documents to which it is a party and the fulfillment of their respective terms shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a default under, the articles of incorporation or bylaws of the Servicer or the Special Servicer, as applicable, or any indenture, agreement, mortgage, deed of trust, or other 57 62 instrument to which the Servicer or the Special Servicer, as applicable, is a party or by which it is bound; or result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust, or other instrument other than this Agreement and the Basic Documents, or violate any law, order, rule or regulation applicable to the Servicer or the Special Servicer, as applicable, of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or the Special Servicer, as applicable, or any of its properties. (f) No Proceedings. There are no proceedings or investigations pending or, to the Servicer's or the Special Servicer's, as applicable, knowledge, threatened against the Servicer or the Special Servicer, as applicable, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality having jurisdiction over the Servicer or the Special Servicer, as applicable, or its properties: (i) asserting the invalidity of this Agreement or any of the Basic Documents; (ii) seeking to prevent the issuance of the Securities or the consummation of any of the transactions contemplated by this Agreement or any of the Basic Documents; (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer or the Special Servicer, as applicable, of its respective obligations under, or the validity or enforceability of, this Agreement or any of the Basic Documents; or (iv) seeking to adversely affect the federal income tax or other federal, state or local tax attributes of the Securities. (g) No Consents. The Servicer or the Special Servicer, as applicable, is not required to obtain the consent of any other party or any consent, license, approval, registration, authorization, or declaration of or with any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity, or enforceability of this Agreement or any other Basic Document to which it is a party that has not already been obtained. SECTION 7.02. Indemnities of Servicer and the Special Servicer. (a) The Servicer shall indemnify the Issuer, the Indenture Trustee, the Fiscal Agent, the Seller and the Owner Trustee (in its individual and trust capacities) and hold them harmless against any and all claims, losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments and any other costs, fees and expenses that such parties may sustain as a result of the failure of the Servicer to perform its duties and service the Mortgage Loans in strict compliance with the terms of this Agreement or a breach by the Servicer of the representations and warranties made herein. The Servicer shall immediately notify the Indenture Trustee and Owner Trustee if a claim is made by a third party with respect to this Agreement or the Mortgage Loans, and the Servicer shall assume the defense of any such claim and pay all expenses in connection therewith, including counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Seller, Special Servicer, Issuer, Indenture Trustee, the Fiscal Agent or Owner Trustee in any capacity in respect of such claim. The provisions of this Section 7.02 shall survive the termination of this Agreement. The Issuer will notify the Servicer of any claim with respect to this Section 7.02, provided that the failure of the Issuer to so notify the Servicer 58 63 will not relieve the Servicer of its obligations hereunder, except to the extent that the Servicer is prejudiced by such failure to give notice. For purposes of this Section, in the event of the termination of the rights and obligations of ACC (or any successor thereto pursuant to Section 7.03) as Servicer pursuant to Section 8.02, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer (other than the Indenture Trustee) pursuant to Section 8.03. (b) The Special Servicer shall indemnify the Issuer, the Indenture Trustee, the Fiscal Agent, the Seller and the Owner Trustee (in its individual and trust capacities) and hold them harmless against any and all claims, losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments and any other costs, fees and expenses that such parties may sustain as a result of the failure of the Special Servicer to perform its duties and service the Mortgage Loans in strict compliance with the terms of this Agreement or a breach by the Special Servicer of the representations and warranties made herein. The Special Servicer shall immediately notify the Indenture Trustee and Owner Trustee if a claim is made by a third party with respect to this Agreement or the Mortgage Loans, and the Special Servicer shall assume the defense of any such claim and pay all expenses in connection therewith, including counsel fees, and promptly pay, discharge and satisfy any judgment or decree which may be entered against the Seller, Servicer, Issuer, Indenture Trustee, the Fiscal Agent or Owner Trustee in respect of such claim. The provisions of this Section 7.02 shall survive the termination of this Agreement. The Issuer will notify the Special Servicer of any claim with respect to this Section 7.02, provided that the failure of the Issuer to so notify the Special Servicer will not relieve the Special Servicer of its obligations hereunder, except to the extent that the Special Servicer is prejudiced by such failure to give notice. For purposes of this Section, in the event of the termination of the rights and obligations of ACC (or any successor thereto pursuant to Section 7.03) as Special Servicer pursuant to Section 8.02, or a resignation by such Special Servicer pursuant to this Agreement, such Special Servicer shall be deemed to be the Special Servicer pending appointment of a successor Special Servicer (other than the Indenture Trustee) pursuant to Section 8.03. (c) Indemnification under this Section shall survive the resignation or removal of any indemnified party or the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Servicer or the Special Servicer shall have made any indemnity payments pursuant to this Section and the Person to or on behalf of whom such payments are made thereafter collects any of such amounts from others, such Person shall promptly repay such amounts to the Servicer or the Special Servicer, as applicable, without interest. SECTION 7.03. Merger or Consolidation of, or Assumption of the Obligations of, Servicer and the Special Servicer. (a) Each of the Servicer and the Special Servicer will keep in full effect its existence, rights and franchises as a corporation under the laws of 59 64 the state of its incorporation, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Agreement, the Securities, the Funding Note or any of the Mortgage Loans and to perform its respective duties under this Agreement. Neither the Servicer nor the Special Servicer shall merge or consolidate with any other Person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Servicer's or the Special Servicer's, as applicable, business unless, after the merger, consolidation, conveyance, transfer, lease, or succession, the successor or surviving entity shall be capable of fulfilling the duties of the Servicer or the Special Servicer, as applicable, contained in this Agreement and shall be reasonably acceptable to the Indenture Trustee. (b) The Servicer or the Special Servicer, as applicable, shall provide notice of any merger, consolidation or succession pursuant to this Section 7.03(a) to the Owner Trustee, each Rating Agency and the Indenture Trustee. Notwithstanding the foregoing, the Servicer or the Special Servicer, as applicable, shall not merge or consolidate with any other Person or permit any other Person to become a successor to the Servicer's or the Special Servicer's, as applicable, business unless (x) immediately after giving effect to such transaction, no representation or warranty made by it pursuant to Section 7.01 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction) and no event that, after notice or lapse of time or both, would become a Servicer Event of Default with respect to it shall have occurred and be continuing and (y) immediately after giving effect to such transaction, the successor to the Servicer or the Special Servicer, as applicable, shall become the Administrator under the Administration Agreement in accordance with Section 8 of such Agreement. (c) Any Person into which the Servicer or the Special Servicer, as applicable, may be merged or consolidated, or any corporation resulting from any merger or consolidation to which the Servicer or the Special Servicer, as applicable, shall be a party, or any Person succeeding to the business of the Servicer, shall be the successor of the Servicer or the Special Servicer, as applicable, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. (d) Notwithstanding any provision herein or in the Basic Documents to the contrary, the Servicer shall be liable as primary obligor for, and shall defend and indemnify the Owner Trustee (in its individual and trust capacities) and its successors, assigns, agents and servants (collectively, the "OT Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any OT Indemnified Party in any way relating to or arising out of this Agreement, the Basic Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action 60 65 or inaction of the Owner Trustee hereunder, thereunder or in connection therewith, except only that the Servicer shall not be liable for or required to indemnify an OT Indemnified Party from and against expenses arising or resulting from any of the matters described in the third sentence of Section 7.01 of the Trust Agreement. The indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement and the Basic Documents. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's choice of legal counsel shall be subject to the approval of the Servicer, which approval shall not be unreasonably withheld. SECTION 7.04. Limitation on Liability of Servicer, the Special Servicer and Others. (a) Neither the Servicer, the Special Servicer nor any of the officers, employees or agents of the Servicer or the Special Servicer shall be under any liability to the Issuer, the Owner Trustee, the Indenture Trustee, the Fiscal Agent or any other person for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Servicer or the Special Servicer or any such person against any breach of warranties or representations made herein, or failure to perform its respective obligations in strict compliance with any standard of care set forth in this Agreement, or any liability which would otherwise be imposed by reason of any breach of the terms and conditions of this Agreement. The Servicer, the Special Servicer and any officer, employee or agent of the Servicer or the Special Servicer may rely in good faith on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising hereunder. Neither the Servicer nor the Special Servicer shall be under any obligation to appear in, prosecute or defend any legal action which is not incidental to its duties to service the Mortgage Loans in accordance with this Agreement and which in its opinion may involve it in any expenses or liability; provided, however, that the Servicer or the Special Servicer, as applicable, may undertake any such action which it may deem necessary or desirable in respect of this Agreement and the rights and duties of the parties hereto. In such event, the legal expenses and costs of such action and any liabilities for which the Issuer will be liable, the Servicer shall be entitled to be reimbursed therefor from the Issuer upon written demand. (b) Reserved. (c) The parties expressly acknowledge and consent to LaSalle National Bank simultaneously acting in the capacity of Custodian and Indenture Trustee. LaSalle National Bank may, in such capacities, discharge its separate functions fully, without hindrance or regard to conflict of interest principles, duty of loyalty principles or other breach of fiduciary duties to the extent that any such conflict or breach arises from the performance by LaSalle National Bank of express duties set forth in this Agreement in any of such capacities. SECTION 7.05. Appointment of Subservicer. (a) Each of the Servicer and the Special Servicer may enter into Subservicing Agreements with Subservicers for the servicing and administration of all or a portion of the Mortgage Loans serviced by it hereunder, provided that each such Subservicing Agreement satisfies the Rating 61 66 Agency Condition. References in this Agreement to actions taken or to be taken by the Servicer or the Special Servicer, as applicable, in servicing the Mortgage Loans serviced by it hereunder include actions taken or to be taken by a Subservicer on behalf of the Servicer or the Special Servicer, as applicable, pursuant to a Subservicing Agreement. Each Subservicer shall be authorized to transact business in the state or states in which the related Mortgaged Properties it is to service are situated, if and to the extent required by applicable law to enable the Subservicer to perform its obligations hereunder and under the applicable Subservicing Agreement. Each Subservicing Agreement will be upon such terms and conditions as the Servicer or the Special Servicer, as applicable, and the Subservicer have agreed and which terms and conditions shall not be inconsistent with this Agreement and shall provide that such Subservicing Agreement is terminable or assumable by a successor servicer without charge or penalty if the Servicer or the Special Servicer, as applicable, is terminated hereunder. The Servicer or the Special Servicer, as applicable, shall notify the Indenture Trustee and the Owner Trustee of its intention to appoint any Subservicer. (b) As part of its servicing activities hereunder, the Servicer or the Special Servicer, as applicable, shall enforce the obligations of each Subservicer appointed by it under the related Subservicing Agreement, including, without limitation, the obligation to make advances in respect of delinquent payments if required by the related Subservicing Agreement. Such enforcement, including, without limitation, the legal prosecution of claims, and the pursuit of other appropriate remedies, including the termination of Subservicing Agreements, shall be in such form and carried out to such an extent and at such time as the Servicer or the Special Servicer, as applicable, in its good faith business judgment, would require were it the owner of the Mortgage Loans. The Servicer or the Special Servicer, as applicable, shall pay the costs of such enforcement at its own expense and shall be reimbursed therefor only (i) from a general recovery resulting from such enforcement only to the extent, if any, that such recovery exceeds all amounts due in respect of the related Mortgage Loan or (ii) from a specific recovery of costs, expenses or attorneys' fees against the party against whom such enforcement is directed. (c) Notwithstanding any Subservicing Agreement, any of the provisions of this Agreement relating to agreements or arrangements between the Servicer or the Special Servicer, as applicable, and a Subservicer or reference to actions taken through a Subservicer or otherwise, the Servicer or the Special Servicer, as applicable, shall remain obligated and liable to the Issuer for the servicing and administration of the Mortgage Loans serviced by it hereunder in accordance with the provisions of this Agreement without diminution of such obligation or liability by virtue of indemnification from a Subservicer and to the same extent and under the same terms and conditions as if the Servicer or the Special Servicer, as applicable, alone were servicing and administering the Mortgage Loans serviced by it hereunder. (d) At the cost and expense of the Servicer or the Special Servicer, as applicable, without any right of reimbursement, the Servicer or the Special Servicer, as applicable, shall be entitled to terminate the rights and responsibilities of a Subservicer appointed by it and arrange for any servicing responsibilities to be 62 67 performed by a successor Subservicer meeting the eligibility requirements for Subservicers set forth in paragraph (a) of this Section 7.05, provided, however, that nothing contained herein shall be deemed to prevent or prohibit the Servicer or the Special Servicer, as applicable, at the Servicer's or the Special Servicer's, as applicable, option, from electing to service the related Mortgage Loans itself. If the Servicer's or the Special Servicer's, as applicable, responsibilities and duties under this Agreement are terminated pursuant to this Agreement, the Servicer or the Special Servicer, as applicable, shall at its own cost and expense promptly, but in no event later than three Business Days after receipt of notice of such termination, terminate the rights and responsibilities of any and all Subservicers except as provided in paragraph (f) below. The Servicer or the Special Servicer, as applicable, shall pay from its own funds, without any right of reimbursement, all fees, expenses or penalties necessary in order to terminate the rights and responsibilities of the Subservicers appointed by it. (e) Any Subservicing Agreement and any other transactions or services relating to the Mortgage Loans involving a Subservicer shall be deemed to be between such Subservicer and Servicer or the Special Servicer, as applicable, alone, and the Issuer shall have no obligations, duties or liabilities with respect to such Subservicer, including no obligation, duty or liability to pay such Subservicer's fees and expenses. For purposes of distributions by the Servicer or the Special Servicer, as applicable, pursuant to this Agreement, the Servicer or the Special Servicer, as applicable, shall be deemed to have received a payment on a Mortgage Loan when the applicable Subservicer has received such payment. (f) If the Indenture Trustee assumes the obligations of the Servicer in accordance with Section 8.02, the Indenture Trustee, to the extent necessary to permit the Indenture Trustee to carry out the provisions of Section 8.02, shall, without act or deed on the part of the Indenture Trustee, succeed to all of the rights of the Servicer under any Subservicing Agreement entered into pursuant to this Section 7.05. In such event, the Indenture Trustee as the successor to the Servicer shall be deemed to have assumed all of the Servicer's interest therein and to have replaced the Servicer as a party to such Subservicing Agreement to the same extent as if such Subservicing Agreement had been assigned to the Indenture Trustee as such successor to the Servicer, except that the Servicer shall not thereby be relieved of any liability which has accrued or arisen under a provision of such Subservicing Agreement prior to the assumption by the Indenture Trustee or a successor to the Servicer under the terms of this Section 7.05. In the event that the Indenture Trustee or any successor to the Servicer or the Special Servicer, as applicable, shall succeed to the servicing obligations of the Servicer or the Special Servicer, as applicable, upon request of the Indenture Trustee or such successor to the Servicer or the Special Servicer, as applicable, the Servicer or the Special Servicer, as applicable, shall at its own expense deliver to the Indenture Trustee or such successor to the Servicer or the Special Servicer (as the case may be) all documents and records relating to any Subservicing Agreement and the Mortgage Loans then being serviced thereunder and an accounting of amounts collected and held by it, if any, and will otherwise use its best efforts to effect the orderly and efficient transfer of any 63 68 Subservicing Agreement to the Indenture Trustee or the successor to the Servicer or the Special Servicer, as applicable. SECTION 7.06. Servicer and Special Servicer Not to Resign. (a) With respect to the responsibility of the Servicer to service the Mortgage Loans or the Special Servicer to service the Specially Serviced Mortgage Loans hereunder, the Servicer and the Special Servicer each acknowledges that the Issuer, Seller, Indenture Trustee and Owner Trustee have acted in reliance upon the Servicer's and the Special Servicer's, as applicable, the adequacy of its servicing facilities, plan, personnel, records and procedures, its integrity, reputation and financial standing and the continuance thereof. Without in any way limiting the generality of this Section 7.06, neither the Servicer nor the Special Servicer shall either assign this Agreement or its servicing obligations or delegate its rights or duties hereunder (other than to a Subservicer) or any portion thereof, except as provided in Section 7.06(b). (b) Neither the Servicer nor the Special Servicer may resign from its obligations under this Agreement unless such resignation, and the appointment of a successor, will not result in a downgrade, withdrawal or qualification of the rating of any Class of the Bonds or unless a determination is made that such obligations are no longer permissible under applicable law or are in material conflict by reason of applicable law with any other activities carried on by the Servicer or the Special Servicer, as applicable, on the date hereof. Notice of any determination that the performance by the Servicer or the Special Servicer, as applicable, of its duties hereunder is no longer permitted under applicable law shall be communicated to the Owner Trustee and the Indenture Trustee at the earliest practicable time (and, if such communication is not in writing, shall be confirmed in writing at the earliest practicable time) and any such determination shall be evidenced by an Opinion of Counsel to such effect delivered by the Servicer or the Special Servicer, as applicable, to each Rating Agency, the Issuer, the Owner Trustee and the Indenture Trustee concurrently with or promptly after such notice. No such resignation of the Servicer or the Special Servicer, as applicable, shall become effective until the Indenture Trustee has assumed the obligations and duties of the Servicer or until a successor servicer has assumed the obligations and duties of the Servicer or the Special Servicer in accordance with Section 8.03. SECTION 7.07. Merger or Consolidation of, or Assumption of the Obligations of, Custodian. Any person (i) into which the Custodian may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Custodian shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Custodian or (iv) succeeding to the business of the Custodian, which Person shall execute an agreement of assumption to perform every obligation of the Custodian under this Agreement, shall be the successor to the Custodian under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement. SECTION 7.08. Representations and Warranties of the Indenture Trustee and the Fiscal Agent. (a) The Indenture Trustee hereby represents and warrants as of the execution and delivery of this Agreement and as of the 64 69 Closing Date that: (a) The Indenture Trustee is a national banking association, duly organized, validly existing and in good standing under the laws governing its creation and existence and has full corporate power and authority to own its property, to carry on its business as presently conducted, and to enter into and perform its obligations under this Agreement and the Indenture and the Administration Agreement; (ii) The execution and delivery by the Indenture Trustee of this Agreement, the Indenture and the Administration Agreement have been duly authorized by all necessary corporate action on the part of the Indenture Trustee; neither the execution and delivery of this Agreement, the Indenture or the Administration Agreement, nor the consummation of the transactions contemplated in this Agreement, the Indenture and the Administration Agreement, nor compliance with the provisions of this Agreement, the Indenture and the Administration Agreement, will conflict with or result in a breach of, or constitute a default under, (i) any of the provisions of any law, governmental rule, regulation, judgment, decrees or order binding on the Indenture Trustee or its properties that would materially and adversely affect the Indenture Trustee's ability to perform its obligations under this Agreement, the Indenture or the Administration Agreement, (ii) the organizational documents of the Indenture Trustee, or (iii) the terms of any material agreement or instrument to which the Indenture Trustee is a party or by which it is bound; the Indenture Trustee is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default would materially and adversely affect its performance under this Agreement, the Indenture or the Administration Agreement; (iii) The execution, delivery and performance by the Indenture Trustee of this Agreement, the Indenture or the Administration Agreement and the consummation of the transactions contemplated by this Agreement, the Indenture and the Administration Agreement do not require the consent, approval, authorization or order of, the giving of notice to or the registration with any state, federal or other governmental authority or agency, except such as has been or will be obtained, given, effected or taken in order for the Indenture Trustee to perform its obligations under this Agreement, the Indenture and the Administration Agreement; (iv) This Agreement, the Indenture and the Administration Agreement have been duly executed and delivered by the Indenture Trustee and, assuming due authorization, execution and delivery by the other parties hereto, constitute valid and binding obligations of the Indenture Trustee, enforceable against the Indenture Trustee in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting creditors' rights generally as from time to 65 70 time in effect, and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (v) There are no actions, suits or proceedings pending or, to the best of the Indenture Trustee's knowledge, threatened, against the Indenture Trustee that, either in one instance or in the aggregate, would draw into question the validity of this Agreement, the Indenture, or which would be likely to impair materially the ability of the Indenture Trustee to perform under the terms of this Agreement, the Indenture or the Administration Agreement. (b) The Fiscal Agent hereby represents and warrants as of the execution and delivery of this Agreement and as of the Closing Date that: (i) The Fiscal Agent is a foreign banking corporation duly organized, validly existing and in good standing under the laws governing its creation and existence and has full corporate power and authority to own its property, to carry on its business as presently conducted, and to enter into and perform its obligations under this Agreement; (ii) The execution and delivery by the Fiscal Agent of this Agreement have been duly authorized by all necessary corporate action on the part of the Fiscal Agent; neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated in this Agreement, nor compliance with the provisions of this Agreement, will conflict with or result in a breach of, or constitute a default under, (i) any of the provisions of any law, governmental rule, regulation, judgment, decrees or order binding on the Fiscal Agent or its properties that would materially and adversely affect the Fiscal Agent's ability to perform its obligations under this Agreement, (ii) the organizational documents of the Fiscal Agent, or (iii) the terms of any material agreement or instrument to which the Fiscal Agent is a party or by which it is bound; the Fiscal Agent is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default would materially and adversely affect its performance under this Agreement; (iii) The execution, delivery and performance by the Fiscal Agent of this Agreement and the consummation of the transactions contemplated by this Agreement do not require the consent, approval, authorization or order of, the giving of notice to, or the registration with, any state, federal or other governmental authority or agency, except such as has been obtained, given, effected or taken prior to the date hereof; (iv) This Agreement has been duly executed and delivered by the Fiscal Agent and, assuming due authorization, execution and delivery by the other parties hereto, constitutes a valid and binding obligation of the Fiscal Agent, enforceable against the Fiscal Agent in accordance with its terms, subject, as to enforcement of 66 71 remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting creditors' rights generally as from time to time in effect, and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (v) There are no actions, suits or proceedings pending or, to the best of the Fiscal Agent's knowledge, threatened, against the Fiscal Agent that, either in any one instance or in the aggregate, would draw into question the validity of this Agreement, or which would be likely to impair materially the ability of the Fiscal agent to perform under the terms of this Agreement. (c) The representations and warranties set forth in Sections 7.08(a) and 7.08(b) shall survive the sale, transfer and assignment of the Allied Interests and the Funding Note by the Seller to the Issuer and the pledge thereof by the Issuer to the Indenture Trustee pursuant to the Indenture. ARTICLE VIII Default SECTION 8.01. Servicer Events of Default. For purposes of this Agreement, each of the following shall constitute a "Servicer Event of Default": (a) (i) any failure by the Servicer to remit to the Bond Distribution Account or the Certificate Distribution Account when due any amount required to be so remitted or (ii) any failure by the Servicer or the Special Servicer, as applicable, to deposit in the Collection Account or Escrow Account any payment required to be made, which failure continues unremedied for two days (or, in the case of any P&I Advance, one day ); or (b) any failure by the Servicer or the Special Servicer, as applicable, duly to observe or perform in any material respect any other of its other covenants or obligations set forth in this Agreement that continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, has been given to the Servicer or the Special Servicer, as applicable, by or on behalf of the Indenture Trustee or the Issuer; or (c) an Insolvency Event shall have occurred with respect to the Servicer or the Special Servicer, as applicable; or (d) any failure of the Servicer or the Special Servicer to satisfy the requirements of Section 4.22(a) or Section 4.22(b), respectively. So long as a Servicer Event of Default exists and has not been remedied, the Issuer or the Indenture Trustee, by notice in writing to the Servicer may, and at the direction of Bondholders holding not less than 51% of the then outstanding Bond Balance, the Indenture Trustee shall, in addition to whatever rights the Issuer or the Indenture Trustee may have at law or equity to damages, including 67 72 injunctive relief and specific performance, terminate all the rights and obligations (but not the liabilities that accrued prior to such termination) of the Servicer and/or the Special Servicer, as applicable, under this Agreement, whereupon, if such termination relates to the Servicer, the Indenture Trustee shall succeed to all of the responsibilities, duties and liabilities of the Servicer under this Agreement (except that if the Servicer is required to make P&I Advances in respect of any Mortgage Loans, but the Indenture Trustee or, if applicable, the Fiscal Agent, is prohibited by law from obligating itself to do so, the Indenture Trustee or, if applicable, the Fiscal Agent, will not be obligated to make such P&I Advances) or, if such termination relates to the Special Servicer, the Indenture Trustee shall appoint a successor to the Special Servicer; and the Indenture Trustee or any such successor to the Special Servicer shall be entitled to similar compensation arrangements. On or after the receipt by the Servicer of such written notice, all authority and power of the Servicer under this Agreement, whether with respect to the Mortgage Loans or otherwise, shall pass to and be vested in the Indenture Trustee pursuant to Section 8.02. Upon such termination, the Servicer or the Special Servicer, as applicable, shall prepare, execute and deliver any and all documents and other instruments, place in the Indenture Trustee's or any such successor's possession any portion of any Mortgage File that may then be in its possession and all Servicing Files, and do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement or assignment of the Mortgage Loans and related documents, or otherwise, at the sole expense of the Servicer or the Special Servicer, as applicable. Each of the Servicer and the Special Servicer agree that, if it is terminated hereunder, it shall cooperate with the Indenture Trustee, the Issuer and the Owner Trustee in effecting the termination of its responsibilities and rights hereunder, including, without limitation, the transfer to such successor for administration by it of all cash amounts which shall at the time be credited to the Collection Account or Escrow Account by the Servicer or thereafter received with respect to the Mortgage Loans. SECTION 8.02. Consequences of a Servicer Event of Default. On or after the receipt by the Servicer or the Special Servicer, as applicable, of written notice terminating its rights under this Agreement, all authority, power, obligations and responsibilities of the Servicer under this Agreement automatically shall pass to, be vested in and become obligations and responsibilities of the Indenture Trustee or the successor servicer appointed by the Indenture Trustee (in either case, the "Successor Servicer") or of the successor Special Servicer appointed by the Indenture Trustee (the "Successor Special Servicer"); provided, however, that neither the Successor Servicer nor the Successor Special Servicer shall have any liability with respect to any obligation that was required to be performed by its terminated predecessor prior to the date that the Successor Servicer or Successor Special Servicer, as applicable, becomes the Servicer or the Special Servicer, as applicable, or any claim of a third party based on any alleged action or inaction of the terminated Servicer or the terminated Special Servicer, as applicable. The Successor Servicer or Successor Special Servicer, as applicable, is authorized and empowered by this Agreement to execute and deliver, on behalf of the terminated Servicer or the terminated Special Servicer, as applicable, as attorney-in-fact or otherwise, any and all documents and other instruments and to do or 68 73 accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination. The terminated Servicer or the terminated Special Servicer, as applicable, agrees to cooperate with the Successor Servicer or Successor Special Servicer, as applicable, in effecting the termination of the responsibilities and rights of the terminated Servicer or the terminated Special Servicer, as applicable, under this Agreement, including the transfer to the Successor Servicer or Successor Special Servicer, as applicable, for administration by it of all money and property held by the terminated Servicer or the terminated Special Servicer, as applicable, with respect to the Mortgage Loans and the delivery to the Successor Servicer or Successor Special Servicer, as applicable, of all Mortgage Files, Servicing Files and other records relating to the Mortgage Loans serviced by it hereunder and a computer tape in readable form as of the most recent Business Day containing all information necessary to enable the Successor Servicer or the Successor Special Servicer, as applicable, to service such Mortgage Loans. SECTION 8.03. Appointment of Successor. (a) On and after the time the Servicer or the Special Servicer, as applicable, receives a notice of termination pursuant to Section 8.02 or upon the resignation of the Servicer or the Special Servicer, as applicable, pursuant to Section 7.06, the Successor Servicer or the Successor Special Servicer, as applicable, shall be the successor in all respects to the Servicer or the Special Servicer, as applicable, in its capacity as Servicer or Special Servicer, as applicable, under this Agreement (including, in the case of the Servicer, its appointment as Administrator under the Administration Agreement as set forth in Section 8.03(c)) and shall be subject to all the rights, responsibilities, restrictions, duties, liabilities, and termination provisions relating to the Servicer or the Special Servicer, as applicable, under this Agreement, except as otherwise stated herein. The Seller, the Issuer, the Indenture Trustee and such Successor Servicer or Successor Special Servicer, as applicable, shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If a Successor Servicer or Successor Special Servicer, as applicable, is acting as Servicer or Special Servicer, as applicable, hereunder, it shall be subject to termination under Section 8.02 upon the occurrence of any Servicer Event of Default applicable to it as Servicer or Special Servicer, as applicable. (b) If the Indenture Trustee is unwilling or unable to act as Successor Servicer, it may (or, at the written request of Bondholders holding not less than 51% of the then outstanding Bond Balance, it will be required to) appoint, or petition a court of competent jurisdiction to appoint, a loan-servicing institution that is an Eligible Servicer to act as successor to the Servicer hereunder. Pending such appointment, the Indenture Trustee will be obligated to act in such capacity. (c) Upon appointment, the Successor Servicer or Successor Special Servicer shall (i) be the successor in all respects to the predecessor Servicer or Special Servicer, as applicable, and shall be subject to all the responsibilities, duties and liabilities arising thereafter relating thereto placed on the predecessor Servicer or Special Servicer, as applicable, and shall be entitled, subject to the following sentence, to all the rights granted to the predecessor Servicer or Special Servicer, as applicable, by the 69 74 terms and provisions of this Agreement and (ii) in the case of a successor Servicer, become the Administrator under the Administration Agreement in accordance with Section 8 of such Agreement. The Indenture Trustee and any such successor may agree upon the servicing compensation to be paid, which in no event may be greater than the compensation payable to the Servicer or the Special Servicer, as applicable, under this Agreement. SECTION 8.04. Notification to Bondholders and Certificateholders. Upon any termination of, or appointment of a successor to, the Servicer or Special Servicer, as applicable, pursuant to this Article VIII, the Issuer shall give prompt written notice thereof to Certificateholders, and the Indenture Trustee shall give prompt written notice thereof to Bondholders and the Rating Agencies. If the Indenture Trustee is the Paying Agent under the Trust Agreement, it shall give such notice to the Certificateholders on behalf of the Issuer. SECTION 8.05. Waiver of Past Defaults. The Holders of at least 51% of the Bond Balance may, on behalf of all Securityholders, waive in writing any default by the Servicer or Special Servicer in the performance of its obligations hereunder and its consequences, except a default in making any required deposits to or payments from any of the Trust Accounts in accordance with this Agreement. Upon any such waiver of a past default, such default shall cease to exist from the time of occurrence and shall be deemed not to have occurred, and any Servicer Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereto. ARTICLE IX Termination SECTION 9.01. Optional Redemption of Bonds. (a) (i) At the option of the Seller on any Distribution Date on or after the Distribution Date on which the Bond Balance is less than 10% of the initial Bond Balance or (ii) in the event that ACC is no longer the Servicer, at the option of the Successor Servicer on any Distribution Date on or after the Distribution Date on which the Bond Balance is less than 10% of the initial Bond Balance (each, a "Redemption Date"), the Seller or the Successor Servicer, as applicable, shall be entitled to redeem the Bonds in full, but not in part. To exercise such option, the Seller or the Successor Servicer, as applicable, shall deposit to the Collection Account on the Redemption Date, pursuant to Section 5.04, an amount (the "Redemption Price") equal to the aggregate Purchase Price for the Funding Note and Allied Interests and shall succeed to all interests in and to the Funding Note and Allied Interests. (b) As described in Article IX of the Trust Agreement, notice of any termination of the existence of the Issuer shall be given by the Servicer to the Owner Trustee and the Indenture Trustee as soon as practicable after the Servicer has received notice thereof. (c) Following the satisfaction and discharge of the Indenture and the payment in full of the principal of and interest on the Bonds, the Certificateholders will succeed to the rights of 70 75 the Bondholders hereunder and the Issuer will succeed to the rights of, and assume the obligations of, the Indenture Trustee pursuant to this Agreement. ARTICLE X Miscellaneous SECTION 10.01. Amendment. (a) This Agreement may be amended by the Seller, the Servicer, the Special Servicer, the Indenture Trustee, the Fiscal Agent, the Custodian and the Issuer, without the consent of any of the Securityholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Securityholders; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, at the expense of the party seeking such amendment, delivered to the Owner Trustee and the Indenture Trustee, adversely affect in any material respect the interests of the Issuer, the Owner Trustee, the Indenture Trustee or any Bondholder or Certificateholder; provided further that the indemnification obligations hereunder in favor of the Owner Trustee may not be amended in any respect without the prior written consent of the Owner Trustee. (b) This Agreement may also be amended from time to time by the Seller, the Servicer, the Special Servicer, the Indenture Trustee, the Fiscal Agent, the Custodian and the Issuer, the Bondholders holding not less than 51% of the Bond Balance and the Holders of outstanding Certificates evidencing not less than a majority of the outstanding Percentage Interest, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Securityholders; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the Mortgage Loans or distributions required to be made for the benefit of the Securityholders or (b) reduce the aforesaid portion of the Bond Balance, or the Percentage Interest of the Certificates, whose Holders are required to consent to any such amendment, without (i) the consent of the Bondholders holding all the outstanding Bonds and Certificateholders holding all the outstanding Certificates and (ii) receipt from each Rating Agency of a written affirmation that such amendment shall not result in the downgrade, reduction or withdrawal of the ratings then assigned by such Rating Agency to each Class of Bonds. Promptly after the execution of any amendment or consent, the Issuer shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee and each of the Rating Agencies. It shall not be necessary for the consent of Securityholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Owner Trustee and the Indenture Trustee shall be entitled to receive 71 76 and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Owner Trustee (on behalf of the Issuer) and the Indenture Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's or the Indenture Trustee's, as applicable, own rights, duties or immunities under this Agreement or otherwise. SECTION 10.02. Reserved. SECTION 10.03. Notices. All demands, notices, communications and instructions upon or to the Seller, the Servicer, the Special Servicer, the Issuer, the Owner Trustee, the Indenture Trustee or the Rating Agencies under this Agreement shall be in writing, personally delivered or mailed by certified mail, return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of the Seller, to Allied Capital CMT, Inc., 1666 K Street, N.W., Washington, D.C. 20006, Attention: Joan M. Sweeney; (b) in the case of the Servicer or the Special Servicer, to Allied Capital Corporation, 1666 K Street, N.W., Washington, D.C. 20006, Attention: Christina L. DelDonna; (c) in the case of the Custodian or the Indenture Trustee, to LaSalle National Bank, 135 S. LaSalle Street, Suite 1625, Chicago, Illinois 60674-4107, Attention: Asset-Backed Securities Trust Services Group-Allied Capital 1998-1; (d) in the case of the Issuer or the Owner Trustee, at the Corporate Trust Office (as defined in the Trust Agreement), with a copy to any Administrator appointed under the Administration Agreement (as defined in the Trust Agreement); (e) in the case of Fitch, to Fitch IBCA, Inc., One State Street Plaza, New York, New York 10004, (f) in the case of Standard & Poor's, to Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., 25 Broadway (15th Floor), New York, New York 10004, Attention: Asset Backed Surveillance Department and (g) in the case of the Fiscal Agent, to ABN AMRO Bank N.V., 135 S. LaSalle Street, Suite 1625, Chicago, Illinois 60674, Attention: Asset-Backed Securities Trust Services Group-Allied Capital 1998-1; or, as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 10.04. Assignment by the Seller or the Servicer. Notwithstanding anything to the contrary contained herein, except as provided in the remainder of this Section, as provided in Sections 6.04 and 7.03 herein and as provided in the provisions of this Agreement concerning the resignation of the Servicer or the Special Servicer, this Agreement may not be assigned by the Seller, the Servicer or the Special Servicer. SECTION 10.05. Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the Seller, the Servicer, the Special Servicer, the Issuer, the Owner Trustee (as an intended third party beneficiary hereof in its individual and trust capacities), the Certificateholders, the Indenture Trustee, the Fiscal Agent and the Bondholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 10.06. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to 72 77 such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 10.07. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 10.08. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 10.09. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. SECTION 10.10. Assignment by Issuer. The Seller hereby acknowledges and consents to any mortgage, pledge, assignment and grant of a security interest by the Issuer to the Indenture Trustee pursuant to the Indenture for the benefit of the Bondholders of all right, title and interest of the Issuer in, to and under the Funding Note, the Allied Interests and the ACC Guaranty and/or the assignment of any or all of the Issuer's rights and obligations hereunder to the Indenture Trustee. SECTION 10.11. Nonpetition Covenants. Notwithstanding any prior termination of this Agreement, the Servicer, the Special Servicer and the Seller shall not, prior to the date which is one year and one day after the termination of this Agreement, acquiesce, petition or otherwise invoke or cause the Issuer or the Seller to invoke the process of any court or government authority for the purpose of commencing or sustaining a case against the Issuer or the Seller under any federal or state bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Issuer or the Seller or any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Issuer or the Seller. SECTION 10.12. Limitation of Liability of Owner Trustee and Indenture Trustee. (a) Notwithstanding anything contained herein to the contrary, this Agreement has been countersigned by Wilmington Trust Company not in its individual capacity but solely in its capacity as Owner Trustee of the Issuer and in no event shall Wilmington Trust Company in its individual capacity have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer or the Owner Trustee hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Issuer. For all purposes of this Agreement, in the performance of any duties or obligations by or on behalf of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of the Trust Agreement including, without limitation, Articles VI, VII and VIII 73 78 (b) Notwithstanding anything contained herein to the contrary, this Agreement has been accepted by LaSalle National Bank, not in its individual capacity but solely in its capacities as Indenture Trustee and Custodian and in no event shall LaSalle National Bank have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Issuer. (c) Notwithstanding anything contained herein to the contrary, this Agreement has been accepted by ABN AMRO Bank N.V., not in its individual capacity but solely in its capacity as Fiscal Agent and in no event shall ABN AMRO Bank N.V. have any liability for the representations, warranties, covenants, agreements or other obligations of the Issuer hereunder or in any of the certificates, notices or agreements delivered pursuant hereto, as to all of which recourse shall be had solely to the assets of the Issuer. SECTION 10.13. Servicer Payment Obligation. The Servicer shall be responsible for payment of the Administrator's fees under the Administration Agreement and shall reimburse the Administrator for all expenses and liabilities of the Administrator incurred thereunder. The Servicer shall also be responsible for payment of the fees of the Indenture Trustee under the Indenture and the fees of the Owner Trustee under the Trust Agreement. 74 79 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 By:WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee on behalf of the Issuer By: /s/ W. CHRIS SPONENBERG --------------------------------------- Name: W. Chris Sponenberg Title: Senior Financial Services Officer ALLIED CAPITAL CMT, INC., Seller By: /s/ JOAN M. SWEENEY --------------------------------------- Name: Joan M. Sweeney Title: Managing Director ALLIED CAPITAL CORPORATION, Servicer and Special Servicer By: /s/ JOAN M. SWEENEY --------------------------------------- Name: Joan M. Sweeney Title: Managing Director LASALLE NATIONAL BANK, Indenture Trustee and Custodian By: /s/ MICHAEL B. EVANS --------------------------------------- Name: Michael B. Evans Title: First Vice President ABN AMRO BANK N.V., Fiscal Agent By: /s/ MARY C. CASEY --------------------------------------- Name: Mary C. Casey Title: Vice President By: /s/ ROBERT C. SMOLKA --------------------------------------- Name: Robert C. Smolka Title: Group Vice President 80 SCHEDULE A Schedule of Mortgage Loans 81 SCHEDULE B Mortgage Loan Data Tables 82 EXHIBIT A FORM OF DISTRIBUTION DATE STATEMENT TO SECURITYHOLDERS On file with Allied Capital A-1 83 EXHIBIT B FORM OF SERVICER'S CERTIFICATE On file with Allied Capital (1) Denominations of $100,000 and integral multiples of $1 in excess thereof. B-1 EX-99.2F.7.B 5 INDENTURE 1 EXHIBIT F.7.b EXECUTION COPY ================================================================================ INDENTURE between ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, as Issuer, and LASALLE NATIONAL BANK, as Indenture Trustee Dated as of January 1, 1998 ================================================================================ 2
TABLE OF CONTENTS Page ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. Definitions.................................................. 3 SECTION 1.02. Rules of Construction........................................ 10 ARTICLE II The Bonds SECTION 2.01. Form......................................................... 11 SECTION 2.02. Execution, Authentication and Delivery..................................................... 11 SECTION 2.03. Temporary Bonds.............................................. 12 SECTION 2.04. Registration; Registration of Transfer and Exchange........................................ 12 SECTION 2.05. Restrictions on Transfer..................................... 14 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Bonds................................................. 17 SECTION 2.07. Persons Deemed Owner......................................... 18 SECTION 2.08. Payment of Principal and Interest; Defaulted Interest........................................... 18 SECTION 2.09. Cancellation................................................. 19 SECTION 2.10. Book-Entry Bonds............................................. 20 SECTION 2.11. Notices to Clearing Agency................................... 23 SECTION 2.12. Definitive Bonds............................................. 23 SECTION 2.13. Tax Treatment................................................ 24 ARTICLE III Covenants SECTION 3.01. Payment of Principal and Interest............................ 24 SECTION 3.02. Maintenance of Office or Agency.............................. 24 SECTION 3.03. Money for Payments To Be Held in Trust........................................................ 25 SECTION 3.04. Existence.................................................... 26 SECTION 3.05. Protection of Trust Estate................................... 26 SECTION 3.06. Opinions as to Trust Estate.................................. 27 SECTION 3.07. Performance of Obligations; Servicing of Mortgage Loans and Funding Note................................................. 28 SECTION 3.08. Negative Covenants........................................... 30 SECTION 3.09. Annual Statement as to Compliance............................ 30 SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms............................................. 31 SECTION 3.11. Successor or Transferee...................................... 32 SECTION 3.12. No Other Business............................................ 33 SECTION 3.13. No Borrowing................................................. 33 SECTION 3.14. Servicer's and Special Servicer's Obligations.................................................. 33 SECTION 3.15. Guarantees, Loans, Advances and
3 Other Liabilities............................................ 33 SECTION 3.16. Capital Expenditures......................................... 33 SECTION 3.17. Removal of Administrator..................................... 33 SECTION 3.18. Restricted Payments.......................................... 33 SECTION 3.19. Notice of Events of Default.................................. 34 SECTION 3.20. Further Instruments and Acts................................. 34 ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture.................................................... 34 SECTION 4.02. Application of Trust Money................................... 35 SECTION 4.03. Repayment of Moneys Held by Paying Agent........................................................ 35 SECTION 4.04. Release of Collateral........................................ 36 ARTICLE V Remedies SECTION 5.01. Events of Default............................................ 36 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment..................................... 37 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Indenture Trustee;..................................................... 38 SECTION 5.04. Remedies; Priorities......................................... 40 SECTION 5.05. Optional Preservation of the Trust Estate....................................................... 41 SECTION 5.06. Limitation of Suits.......................................... 42 SECTION 5.07. Unconditional Rights of Bondholders To Receive Principal and Interest............................ 42 SECTION 5.08. Restoration of Rights and Remedies........................... 43 SECTION 5.09. Rights and Remedies Cumulative............................... 43 SECTION 5.10. Delay or Omission Not a Waiver............................... 43 SECTION 5.11. Control by Bondholders....................................... 43 SECTION 5.12. Waiver of Past Defaults...................................... 44 SECTION 5.13. Undertaking for Costs........................................ 44 SECTION 5.14. Waiver of Stay or Extension Laws............................. 45 SECTION 5.15. Action on Bonds.............................................. 45 SECTION 5.16. Performance and Enforcement of Certain Obligations.......................................... 45 ARTICLE VI The Indenture Trustee SECTION 6.01. Duties of Indenture Trustee.................................. 46 SECTION 6.02. Rights of Indenture Trustee.................................. 47 SECTION 6.03. Individual Rights of Indenture Trustee...................................................... 48 SECTION 6.04. Indenture Trustee's Disclaimer............................... 48
2 4 SECTION 6.05. Notice of Defaults........................................... 48 SECTION 6.06. Reports by Indenture Trustee to Holders...................................................... 48 SECTION 6.07. Compensation and Indemnity................................... 49 SECTION 6.08. Replacement of Indenture Trustee............................. 49 SECTION 6.09. Successor Indenture Trustee by Merger....................................................... 50 SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee................................ 51 SECTION 6.11. Eligibility; Disqualification................................ 52 ARTICLE VII Bondholders' Lists and Reports SECTION 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of Bondholders........................... 52 SECTION 7.02. Preservation of Information; Communications to Bondholders................................ 53 SECTION 7.03. Fiscal Year of Issuer........................................ 53 ARTICLE VIII Accounts, Disbursements and Releases SECTION 8.01. Collection of Money.......................................... 53 SECTION 8.02. Trust Accounts............................................... 54 SECTION 8.03. [RESERVED]................................................... 54 SECTION 8.04. Release of Trust Estate...................................... 55 SECTION 8.05. Opinion of Counsel........................................... 55 ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Bondholders....................................... 56 SECTION 9.02. Supplemental Indentures with Consent of Bondholders....................................... 56 SECTION 9.03. Execution of Supplemental Indentures................................................... 57 SECTION 9.04. Effect of Supplemental Indenture............................. 58 SECTION 9.05. Reference in Bonds to Supplemental Indentures................................................... 58 ARTICLE X Redemption of Bonds SECTION 10.01. Redemption................................................... 58 SECTION 10.02. Form of Redemption Notice.................................... 59 SECTION 10.03. Bonds Payable on Redemption Date............................. 59 ARTICLE XI
3 5
Miscellaneous SECTION 11.01. Compliance Certificates and Opinions, etc................................................ 59 SECTION 11.02. Form of Documents Delivered to Indenture Trustee............................................ 61 SECTION 11.03. Acts of Bondholders.......................................... 62 SECTION 11.04. Notices, etc., to Indenture Trustee, Issuer and Rating Agencies..................................................... 63 SECTION 11.05. Notices to Bondholders; Waiver............................... 63 SECTION 11.06. Alternate Payment and Notice Provisions................................................... 64 SECTION 11.07. Effect of Headings and Table of Contents..................................................... 64 SECTION 11.08. Successors and Assigns....................................... 64 SECTION 11.09. Separability................................................. 65 SECTION 11.10. Benefits of Indenture........................................ 65 SECTION 11.11. Legal Holidays............................................... 65 SECTION 11.12. GOVERNING LAW................................................ 65 SECTION 11.13. Counterparts................................................. 65 SECTION 11.14. Recording of Indenture....................................... 65 SECTION 11.15. Trust Obligation............................................. 65 SECTION 11.16. No Petition.................................................. 66 SECTION 11.17. Inspection................................................... 66 Section 11.18. Limitation on Liability of Owner Trustee...................................................... 66 SCHEDULE A Schedule of Mortgage Loans EXHIBIT A Form of Rule 144A-IAI Bond Form of Regulation S Permanent Global Bond EXHIBIT B Form of Regulation S Temporary Global Bond EXHIBIT C Form of Regulation S Certification EXHIBIT D Form of Purchaser's Letter EXHIBIT E Form of Exchange Certificate
4 6 INDENTURE dated as of January 1, 1998 (the "Indenture"), between ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, a Delaware business trust (the "Issuer"), and LASALLE NATIONAL BANK, a national banking association, as trustee and not in its individual capacity (the "Indenture Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Commercial Mortgage Collateralized Bonds, Class A, Class B and Class C: GRANTING CLAUSE The Issuer hereby Grants to the Indenture Trustee at the Closing Date, as Indenture Trustee for the benefit of the Holders of the Bonds, all of the Issuer's right, title and interest, including any security interest therein for the benefit of the Issuer, in, to and under (_) the Mortgage Loans represented by the Allied Mortgage Loans and the Allied Participations and identified on the attached Mortgage Loan Schedule, including the related Mortgage Files and all interest and principal due with respect to the Mortgage Loans after the Cut-off Date and allocable to the Allied Interests, but excluding any payments of interest and principal due on or prior to the Cut-off Date, (_) the Funding Note and all interest and principal due with respect to the Funding Note after the Cut-off Date, but excluding any payments of interest and principal due on or prior to the Cut-off Date including the security interest in the BMI Participations granted as security for the Funding Note pursuant to the Funding Note Purchase and Security Agreement, (_) the Allied Mortgage Loan Purchase Agreement, (_) the BMI Mortgage Loan Purchase Agreement, (_) the Insurance Policies, (_) all funds on deposit from time to time in the Trust Accounts and all investments and proceeds thereof (including all income thereon), (_) the Sale and Servicing Agreement (including the Issuer's right to cause the Seller to repurchase Mortgage Loans from the Issuer under certain circumstances described therein), (_) the Funding Note Purchase and Security Agreement, (_) the ACC Guaranty and (_) all present and future claims, demands, causes of action and choses in action in respect of any or all of the foregoing and all payments on or under and all proceeds of every kind and nature whatsoever in respect of any or all of the foregoing, including all proceeds of the conversion thereof, voluntary or involuntary, into cash or other liquid property, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind and other forms of obligations and receivables, instruments and other property which at any time constitute all or part of or are included in the proceeds of any of the foregoing (collectively, the "Collateral"). The foregoing Grant is made in trust to secure the payment of principal of and interest on, and any other amounts owing in respect of, the Bonds, equally and ratably without prejudice, priority or distinction, and to secure compliance with the provisions of this Indenture, all as provided in this Indenture. The Indenture Trustee, on behalf of the Holders of the Bonds, acknowledges such Grant, accepts the trusts under this Indenture in 7 accordance with the provisions of this Indenture and agrees to perform its duties required in this Indenture to the best of its ability to the end that the interests of the Holders of the Bonds may be adequately and effectively protected. 2 8 ARTICLE I Definitions and Incorporation by Reference SECTION 1.01. (a) Definitions. Except as otherwise specified herein or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Indenture. "Act" has the meaning specified in Section 11.03(a). "Administration Agreement" means the Administration Agreement dated as of January 1, 1998, among the Administrator, the Issuer and the Indenture Trustee, as amended or supplemented from time to time, in accordance with the terms thereof. "Administrator" means Allied Capital Corporation, or any successor Administrator under the Administration Agreement. "Authorized Officer" means, with respect to the Issuer, any officer of the Owner Trustee who is authorized to act for the Owner Trustee in matters relating to the Issuer and who is identified on the list of Authorized Officers delivered by the Owner Trustee to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from time to time thereafter) and, so long as the Administration Agreement is in effect, any Vice President or more senior officer of the Administrator who is authorized to act for the Administrator in matters relating to the Issuer and to be acted upon by the Administrator pursuant to the Administration Agreement and who is identified on the list of Authorized Officers delivered by the Administrator to the Indenture Trustee on the Closing Date (as such list may be modified or supplemented from time to time thereafter). "Bond" means a Class A, Class B or Class C Bond. "Bond Balance" means, as of any date of determination, the sum of the Bond Class Balances for each Class of Bonds as of such date of determination. "Bond Class Balance" means, as of any date of determination and with respect to each Class of Bonds, the aggregate principal amount of all Bonds of such Class Outstanding as of such date of determination. "Bond Owner" means, with respect to a Book-Entry Bond, the Person who is the beneficial owner of such Book-Entry Bond, as reflected on the books of the Clearing Agency or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Bond Rate" shall have the meaning specified in the Sale and 3 9 Servicing Agreement. "Bond Register" and "Bond Registrar" have the respective meanings specified in Section 2.04. "Book-Entry Bonds" means a beneficial interest in the Bonds, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 2.10. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in New York, New York or the city in which the Corporate Trust Office is located are authorized or obligated by law, regulation or executive order to remain closed. "Cede" means Cede & Co., as nominee of the Depository. "CEDEL" means Cedel Bank, societe anonyme. "Certificate of Trust" means the certificate of trust of the Issuer issued pursuant to the Trust Agreement. "Class A Bonds" means the Allied Capital Commercial Mortgage Trust 1998-1 Commercial Mortgage Collateralized Bonds, Class A. "Class B Bonds" means the Allied Capital Commercial Mortgage Trust 1998-1 Commercial Mortgage Collateralized Bonds, Class B. "Class C Bonds" means the Allied Capital Commercial Mortgage Trust 1998-1 Commercial Mortgage Collateralized Bonds, Class C. "Clearing Agency" means an organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means January 30, 1998. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and Treasury Regulations promulgated thereunder. "Collateral" has the meaning specified in the Granting Clause of this Indenture. "Corporate Trust Office" means the principal office of the Indenture Trustee at which at any particular time its corporate trust business is administered, which office at the date of execution of this Indenture is located at LaSalle National Bank, 135 South LaSalle Street, Suite 1625, Chicago, Illinois, 60674- 4107, Attention: Asset Backed Securities Trust Services Group- Allied Capital 1998-1, or at such other address as the Indenture Trustee 4 10 may designate from time to time by notice to the Bondholders, the Issuer and the Servicer, or the principal corporate trust office of any successor Indenture Trustee at the address designated by such successor Indenture Trustee by notice to the Bondholders, the Issuer and the Servicer. "Default" means any occurrence that is, or with notice or the lapse of time or both would become, an Event of Default. "Definitive Bond" has the meaning specified in Section 2.10(a). "Depository" means The Depository Trust Company, the initial Clearing Agency. "Depository Agreement" means the Depository Agreement, dated January 29, 1998, among the Issuer, the Administrator, the Indenture Trustee and The Depository Trust Company. "Distribution Date" means the 25th day of each month, or, if such day is not a Business Day, the immediately following Business Day, commencing in February 1998. "DTC Custodian" means LaSalle National Bank, in its capacity as custodian for The Depository Trust Company. "Euroclear" means the Euroclear System. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Certification" has the meaning specified in Section 2.10(f). "Executive Officer" means, with respect to any corporation, the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, Managing Director, any Vice President, the Secretary or the Treasurer of such corporation; and with respect to any partnership, any general partner thereof. "Final Rated Distribution Date" shall have the meaning assigned thereto in the Sale and Servicing Agreement. "Fitch" means Fitch IBCA, Inc. "Global Bonds" means, collectively, the Rule 144A-IAI Global Bonds, the Regulation S Permanent Global Bonds and the Regulation S Temporary Global Bonds. "Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, create, and grant a lien upon and a first priority security interest in and a right of set-off against, deposit, set over and confirm pursuant to this 5 11 Indenture. A Grant of the Collateral or of any other agreement or instrument shall include all rights, powers and options (but none of the obligations) of the granting party thereunder, including the immediate and continuing right to claim for, collect, receive and give receipt for principal and interest payments in respect of the Collateral and all other moneys payable thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring Proceedings in the name of the granting party or otherwise, and generally to do and receive anything that the granting party is or may be entitled to do or receive thereunder or with respect thereto. "Holder" or "Bondholder" means a Person in whose name a Bond is registered in the Bond Register on the applicable Record Date. "Indenture Trustee" means LaSalle National Bank, a national banking association, not in its individual capacity, but as Indenture Trustee under this Indenture, or any successor Indenture Trustee under this Indenture. "Independent Certificate" means a certificate or opinion to be delivered to the Indenture Trustee under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, made by an Independent appraiser or other expert appointed by an Issuer Order and approved by the Indenture Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read the definition of "Independent" in the Sale and Servicing Agreement and that the signer is Independent within the meaning thereof. "Institutional Accredited Investor" means an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D. "Interest Accrual Period" shall have the meaning assigned thereto in the Sale and Servicing Agreement. "Issuer" means Allied Capital Commercial Mortgage Trust 1998-1, a Delaware Business Trust, until a successor replaces it and, thereafter, means the successor. "Issuer Order" or "Issuer Request" means a written order or request signed in the name of the Issuer by any one of its Authorized Officers and delivered to the Indenture Trustee. "Legended Definitive Bond" has the meaning specified in Section 2.05(a). "Officer's Certificate" means a certificate signed by any Authorized Officer of the Issuer, under the circumstances described in, and otherwise complying with, the applicable requirements of Section 11.01, and delivered to the Indenture Trustee. Unless otherwise specified, any reference in this Indenture to an Officer's Certificate shall be to an Officer's Certificate of any Authorized 6 12 Officer of the Issuer. "Opinion of Counsel" means one or more written opinions of counsel who may, except as otherwise expressly provided in this Indenture, be an employee of or counsel to the Issuer and who shall be reasonably satisfactory to the Indenture Trustee, and which opinion or opinions shall be addressed to the Indenture Trustee, shall comply with any applicable requirements of Section 11.01 and shall be in form and substance reasonably satisfactory to the Indenture Trustee. "Outstanding" means, as of any date of determination, all Bonds theretofore authenticated and delivered under this Indenture except: (i) Bonds theretofore cancelled by the Bond Registrar or delivered to the Bond Registrar for cancellation; (ii) Bonds or portions thereof the payment for which money in the necessary amount has been theretofore deposited with the Indenture Trustee or any Paying Agent in trust for the Holders of such Bonds (provided, however, that if such Bonds are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision for such notice has been made, reasonably satisfactory to the Indenture Trustee); and (iii) Bonds in exchange for or in lieu of which other Bonds have been authenticated and delivered pursuant to this Indenture unless proof reasonably satisfactory to the Indenture Trustee is presented that any such Bonds are held by a bona fide purchaser; provided, however, that in determining whether the Holders of the requisite Bond Balance have given any request, demand, authorization, direction, notice, consent or waiver hereunder or under any Basic Document, Bonds owned by the Issuer, any other obligor upon the Bonds, the Seller or any Affiliate of any of the foregoing Persons shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Indenture Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds that the Indenture Trustee knows to be so owned shall be so disregarded. Bonds so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the reasonable satisfaction of the Indenture Trustee the pledgee's right so to act with respect to such Bonds and that the pledgee is not the Issuer, any other obligor upon the Bonds, the Seller or any Affiliate of any of the foregoing Persons. "Owner Trustee" means Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement, or any successor Owner Trustee under the Trust Agreement. "Participant" means an account holder of The Depository Trust Company. 7 13 "Paying Agent" means the Indenture Trustee or any other Person that meets the eligibility standards for the Indenture Trustee specified in Section 6.11 and is authorized by the Issuer to make payments to and distributions from the Collection Account and the Bond Distribution Account, including payments of principal of or interest on the Bonds on behalf of the Issuer. "Private Placement Memorandum" means the Private Placement Memorandum of the Seller dated January 28, 1998 with respect to the Bonds. "Proceeding" means any suit in equity, action at law or other judicial or administrative proceeding. "QIB" means a qualified institutional buyer within the meaning of Rule 144A. "Rating Agency Condition" means, with respect to any action specified herein, that each Rating Agency shall have been given 10 days, (or such shorter period as is acceptable to each Rating Agency) prior notice thereof and that each of the Rating Agencies shall have notified the Seller, the Servicer, the Indenture Trustee and the Issuer in writing that such action will not result in a downgrade, withdrawal or qualification of the then current rating of any Class of the Bonds. "Rating Agency" means each of Fitch and Standard & Poor's. If such organization or successor is no longer in existence, "Rating Agency" shall be a nationally recognized statistical rating organization or other comparable Person designated by the Issuer, notice of which designation shall be given to the Indenture Trustee, the Owner Trustee, the Servicer and the Special Servicer. "Record Date" means, with respect to a Distribution Date or Redemption Date, the close of business on the last day of the month immediately preceding the month in which such Distribution Date or Redemption Date occurs, or if such day is not a Business Day, the Business Day immediately preceding such day. "Redemption Date" means, in the case of a redemption of the Bonds pursuant to Section 10.01, the Distribution Date specified therefor by the Seller or a Successor Servicer, as applicable, pursuant to Section 10.01. "Redemption Price" means, with respect to the Redemption Date, an amount equal to then outstanding Bond Balance plus accrued and unpaid interest thereon through the end of the related Interest Accrual Period at the related Bond Rate for each Bond being redeemed. "Registered Holder" means the Person in whose name a Bond is registered in the Bond Register on the applicable Record Date. "Regulation D" means Regulation D under the Securities Act. 8 14 "Regulation S" means Regulations S under the Securities Act. "Regulation S Global Bonds" means the Regulation S Permanent Global Bonds and Regulation S Temporary Global Bonds. "Regulation S Permanent Global Bond" means any single permanent global certificate, in definitive, fully registered form without interest coupons received in exchange for a Regulation S Temporary Global Certificate. "Regulation S Temporary Global Bond" means, with respect to any Class of Bonds offered and sold outside of the United States in reliance upon Regulation S, a single temporary global certificate, in definitive, fully registered form without interest coupons. "Release Date" means the date 40 days after the later of (i) the commencement of the offering of the Bonds and (ii) the Closing Date. "Responsible Officer" means, with respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Assistant Treasurer, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Rule 144A" means Rule 144A under the Securities Act. "Rule 144A-IAI Global Bond" means, with respect to any Class of Bonds, the single permanent global certificate, in definitive, fully registered form, without interest coupons, representing the Bonds of such Class sold pursuant to Rule 144A. "Sale and Servicing Agreement" means the Sale and Servicing Agreement, dated as of January 1, 1998, among the Issuer, the Seller, the Servicer, the Special Servicer, the Indenture Trustee, as Custodian and Indenture Trustee, and ABN AMRO Bank N.V., as fiscal agent. "Schedule of Mortgage Loans" means the list of Mortgage Loans set forth in Schedule A (which Schedule may be in the form of microfiche). "Securities Act" means the Securities Act of 1933, as amended. "Securities Legend" has the meaning specified in Section 2.05(a). "Seller" means Allied Capital CMT, Inc., in its capacity as seller under the Sale and Servicing Agreement, and its successors in interest. "Servicer" means Allied Capital Corporation, in its capacity as 9 15 servicer under the Sale and Servicing Agreement, and any Successor Servicer thereunder. "Special Servicer" means Allied Capital Corporation, in its capacity as special servicer under the Sale and Servicing Agreement, and any Successor Special Servicer thereunder. "State" means any one of the 50 states of the United States of America or the District of Columbia. "Successor Servicer" has the meaning specified in Section 3.07(e). "Trust Estate" means the Collateral, all money, instruments, rights and other property that are subject or intended to be subject to the lien and security interest of this Indenture for the benefit of the Bondholders (including, without limitation, all property and interests Granted to the Indenture Trustee), including all proceeds thereof. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force on the date hereof, unless otherwise specifically provided. "UCC" means, unless the context otherwise requires, the Uniform Commercial Code, as in effect in the relevant jurisdiction, as amended from time to time. "Unlegended Definitive Bond" has the meaning specified in Section 2.05(a). (b) Except as otherwise specified herein or as the context may otherwise require, capitalized terms used but not otherwise defined herein have the respective meanings set forth in the Sale and Servicing Agreement for all purposes of this Indenture. SECTION 1.02. Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including without limitation; (v) definitions are applicable to the singular and plural forms of such terms and to the masculine, feminine and neuter genders of such terms; and (vi) any agreement, instrument or statute defined or 10 16 referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II The Bonds SECTION 2.01. Form. The Bonds, in each case together with the Indenture Trustee's certificate of authentication, shall be in substantially the form set forth in Exhibit A, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistently herewith, be determined by the officers executing such Bonds, as evidenced by their execution of the Bonds. Any portion of the text of any Bond may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Bond. The definitive Bonds shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods (with or without steel engraved borders), all as determined by the officers executing such Bonds, as evidenced by their execution of such Bonds. Each Bond shall be dated the date of its authentication. The terms of the Bonds set forth in Exhibit A are part of the terms of this Indenture. SECTION 2.02. Execution, Authentication and Delivery. The Bonds shall be executed on behalf of the Issuer by any of its Authorized Officers. The signature of any such Authorized Officer on the Bonds may be manual or facsimile. Bonds bearing the manual or facsimile signature of individuals who were at any time Authorized Officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Bonds or did not hold such offices at the date of such Bonds. The Indenture Trustee shall upon Issuer Order authenticate and deliver Class A, Class B and Class C Bonds for original issue in aggregate principal amounts of $195,511,831, $21,723,537 and $21,723,537, respectively. The aggregate principal amount of Class A, Class B and Class C Bonds outstanding at any time may not exceed such respective amounts except as provided in Section 2.06. Each Bond shall be dated the date of its authentication. The 11 17 Bonds shall be issuable as registered Bonds in the minimum denomination of $100,000 and in integral multiples of $1 in excess thereof. No Bond shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Bond a certificate of authentication substantially in the form provided for herein executed by the Indenture Trustee by the manual signature of one of its authorized signatories, and such certificate upon any Bond shall be conclusive evidence, and the only evidence, that such Bond has been duly authenticated and delivered hereunder. SECTION 2.03. Temporary Bonds. Pending the preparation of definitive Bonds, the Issuer may execute, and upon receipt of an Issuer Order the Indenture Trustee shall authenticate and deliver, temporary Bonds that are printed, lithographed, typewritten, mimeographed or otherwise produced, of the tenor of the definitive Bonds in lieu of which they are issued and with such variations not inconsistent with the terms of this Indenture as the officers executing such Bonds may determine, as evidenced by their execution of such Bonds. If temporary Bonds are issued, the Issuer shall cause definitive Bonds to be prepared without unreasonable delay. After the preparation of definitive Bonds, the temporary Bonds shall be exchangeable for definitive Bonds upon surrender of the temporary Bonds at the office or agency of the Issuer to be maintained as provided in Section 3.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Bonds, the Issuer shall execute, and the Indenture Trustee shall authenticate and deliver in exchange therefor, a like principal amount of definitive Bonds of authorized denominations. Until so exchanged, the temporary Bonds shall in all respects be entitled to the same benefits under this Indenture as definitive Bonds. SECTION 2.04. Registration; Registration of Transfer and Exchange. The Issuer shall cause to be kept a register (the "Bond Register") in which, subject to such reasonable regulations as it may prescribe and the restrictions on transfers of the Bonds set forth herein, the Issuer shall provide for the registration of Bonds and the registration of transfers of Bonds. The Indenture Trustee initially shall be the "Bond Registrar" for the purpose of registering Bonds and transfers of Bonds as herein provided. Upon any resignation of any Bond Registrar, the Issuer shall promptly appoint a successor. If a Person other than the Indenture Trustee is appointed by the Issuer as Bond Registrar, the Issuer will give the Indenture Trustee prompt written notice of the appointment of such Bond Registrar and of the location, and any change in the location, of the Bond Register, and the Indenture Trustee shall have the right to inspect the Bond Register at all reasonable times and to obtain copies thereof, and the Indenture Trustee shall have the right to conclusively rely upon a certificate executed on behalf of the Bond 12 18 Registrar by an Executive Officer thereof as to the names and addresses of the Holders of the Bonds and the principal amounts and number of such Bonds. Upon surrender for registration of transfer of any Bond at the office or agency of the Issuer to be maintained as provided in Section 3.02, if the requirements of Section 8-401(1) of the UCC are met the Issuer shall execute, and the Indenture Trustee shall authenticate and the Bondholder shall obtain from the Indenture Trustee, in the name of the designated transferee or transferees, one or more new Bonds of the same Class in any authorized denominations, of a like aggregate principal amount. At the option of the Holder, Bonds may be exchanged for other Bonds of the same Class in any authorized denominations, of a like aggregate principal amount, upon surrender of the Bonds to be exchanged at such office or agency. Whenever any Bonds are so surrendered for exchange, if the requirements of Section 8-401(1) of the UCC are met the Issuer shall execute, and the Indenture Trustee shall authenticate and the Bondholder shall obtain from the Indenture Trustee, the Bonds which the Bondholder making the exchange is entitled to receive. All Bonds issued upon any registration of transfer or exchange of Bonds shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Bonds surrendered upon such registration of transfer or exchange. Every Bond presented or surrendered for registration of transfer or exchange shall be duly endorsed by, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Indenture Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the requirements of the Bond Registrar, which requirements include membership or participation in the Securities Transfer Agent's Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Bond Registrar in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act. No service charge shall be made to a Holder for any registration of transfer or exchange of Bonds, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Bonds, other than exchanges pursuant to Section 2.03, 2.05(a) or 9.05 not involving any transfer. The preceding provisions of this Section notwithstanding, the Issuer shall not be required to make and the Bond Registrar need not register transfers or exchanges of Bonds selected for redemption or of any Bond for a period of 15 days preceding the due date for any payment with respect to the Bond. 13 19 SECTION 2.05. Restrictions on Transfer. (a) Except as set forth in the second following paragraph, all Definitive Bonds shall bear upon the face thereof, the following legend (the "Securities Legend"): "THE BONDS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE UNITED STATES SECURITIES ACT OF SECURITIES, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A BUYER THAT THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (4) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT THAT DELIVERS TO THE INDENTURE TRUSTEE A LETTER IN THE FORM ATTACHED TO THE INDENTURE AND SUCH CERTIFICATIONS, LEGAL OPINIONS AND OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT THE PROPOSED TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION." By acceptance of a Definitive Bond bearing the Securities Legend (a "Legended Definitive Bond"), whether upon original issuance or subsequent transfer, each Holder of such a Bond acknowledges the restrictions on the transfer of such Bond set forth in the Securities Legend and agrees that it will transfer such Bond only as provided herein. A transferee shall be permitted to take delivery of a Definitive Bond not bearing the Securities Legend (an "Unlegended Definitive Bond") only if and after the Issuer submits to the Indenture Trustee an Opinion of Counsel of the Issuer stating that the Securities Legend is not required on such Definitive Bond by applicable law. Upon the Issuer submitting such Opinion of Counsel to the Indenture Trustee, the Holder of such Bond may submit such Bond to the Indenture Trustee to exchange such Bond for an Unlegended Definitive Bond and the Indenture Trustee shall satisfy such request notwithstanding anything else herein to the contrary, and delivery permitted herein of a Legended Definitive Bond may be made in the form of an Unlegended Definitive Bond. Except as described below in Sections 2.05(b) and 2.05(c), no restrictions to transfer shall apply to the transfer or registration of transfer of an Unlegended Definitive Bond to a transferee that takes delivery in the form of an Unlegended Definitive Bond. 14 20 (b) No transfer of a Legended Definitive Bond shall be made unless the transfer is (v) to the Issuer, (w) to a QIB who has provided the Indenture Trustee with a Purchaser's Letter in the form of Exhibit D hereto, (x) to a Person who has provided the Indenture Trustee with a Regulation S Certification in the form of Exhibit C hereto, (y) being made pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), or (z) to an Institutional Accredited Investor who has provided the Indenture Trustee with a Purchaser's Letter in the form of Exhibit D hereto and such other certifications, opinions of counsel or other information (at the transferor's expense) as it may reasonably require to confirm that the proposed transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. (c) No transfer of a Bond that is a Definitive Bond shall be made unless the prospective transferee of a Bondholder desiring to transfer such Bond provides the Indenture Trustee with a certification as set forth in paragraph f. of Exhibit D or an Opinion of Counsel, or both at the request of the Indenture Trustee, which establishes to the reasonable satisfaction of the Indenture Trustee that no employee benefit plan or other plan that is subject to ERISA or Section 4975 of the Code (each, a "Plan"), as to which the Initial Purchasers, the Issuer, the Seller, the Servicer, the Special Servicer, the Fiscal Agent, or the Indenture Trustee is a party in interest or disqualified person, and no qualified institutional buyer acting on behalf of or with "plan assets" of any such Plan may acquire such Bonds unless pursuant to a statutory exemption or any of the administrative exemptions issued by the U.S. Department of Labor, such that the acquisition and holding of the Bonds by, on behalf of or with "plan assets" of such Plan would not constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code by reason of the application of one or more of the statutory or administrative exemptions from the prohibited transaction rules described under the heading "ERISA MATTERS" in the Private Placement Memorandum. (d) Each investor purchasing Bonds shall be deemed to have represented and agreed as follows (terms used herein that are defined in Rule 144A, in Regulation S or in Regulation D are used herein as defined therein): (i) The investor understands that the Bonds have not been registered under the Securities Act, and that if in the future it decides to offer, resell, pledge or otherwise transfer such Bonds within two years after the later of the original issuance of the Bonds or the last date on which such Bonds are held by an Affiliate of the Issuer, it will do so only (A) to the Issuer, (B) to a person that the seller reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, (C) in an offshore transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S, (D) pursuant to an exemption 15 21 from registration under the Securities Act provided by Rule 144 thereunder (if available), or (E) in certificated form to an Institutional Accredited Investor that delivers to the Indenture Trustee a letter in the form of Exhibit D hereto and such certifications, legal opinions and other information as it may reasonably require to confirm that the proposed transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction. (ii) The investor understands that the Bonds will be issued only in the form of the Global Bonds, which will be held by the DTC Custodian. Purchasers of such Bonds will acquire beneficial interests in the Global Bonds, which interests will be held directly or indirectly through Participants. (iii) The investor understands that Bonds will bear a Securities Legend unless the Issuer determines otherwise consistent with applicable law. (iv) The investor is either (A) a QIB purchasing for its own account or for the account of another QIB and it and such other person are aware that the sale to it is being made in reliance on Rule 144A or (B) an Institutional Accredited Investor and is purchasing the Bonds for its own account or for an account with respect to which it exercises sole investment discretion. (v) If the investor is a QIB, the investor understands that the Bonds offered in reliance on Rule 144A will be represented by the Global Bonds. Before any interest in the Global Bonds may be offered, sold, pledged or otherwise transferred to an Institutional Accredited Investor, the transferee will be required to provide the Indenture Trustee with a Purchaser's Letter in the form attached hereto as Exhibit D as to compliance with the transfer restrictions referred to above. (vi) The investor will deliver to each Institutional Accredited Investor to whom it transfers Bonds notice of any restrictions on transfer of such Bonds. (vii) It understands that, in accordance with the prohibited transaction rules of ERISA and Section 4975 of the Code described under "ERISA Matters" in the Private Placement Memorandum, no Plan as to which any of the Initial Purchasers, the Seller, the Issuer, the Servicer, the Special Servicer, the Fiscal Agent or the Indenture Trustee is a party in interest or disqualified person, and no investor acting on behalf of or with "plan assets" of any such Plan may acquire such Bonds unless pursuant to a statutory exemption or any of the administrative exemptions from the prohibited transaction rules issued by the 16 22 U.S. Department of Labor, such that the acquisition and holding of Bonds by, on behalf of or with "plan assets" of such Plan would not constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code. (viii) If it is acquiring any Bond as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to such account and that it has full power to make the acknowledgments, representations and agreements contained herein on behalf of each such account. (ix) It acknowledges that the Depositor, the Initial Purchasers, the Issuer, the Indenture Trustee, the Fiscal Agent and others will rely on the truth and accuracy of the foregoing acknowledgments, representations and agreements, and agrees that if any of the foregoing acknowledgments, representations and agreements deemed to have been made by it by its purchase are no longer accurate, it shall promptly notify the Seller, the Issuer and the Initial Purchasers. (e) The Indenture Trustee shall have no liability to the Issuer arising from a transfer of any Bond in reliance upon a certification, ruling or Opinion of Counsel described in this Section 2.05. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Bonds. If (i) any mutilated Bond is surrendered to the Indenture Trustee, or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Bond, and (ii) there is delivered to the Indenture Trustee such security or indemnity as may be reasonably required by it to hold the Issuer and the Indenture Trustee harmless, then, in the absence of notice to the Issuer, the Bond Registrar or the Indenture Trustee that such Bond has been acquired by a bona fide purchaser, and provided that the requirements of Section 8-405 of the UCC are met, the Issuer shall execute, and upon its request the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Bond, a replacement Bond of the same Class; provided, however, that if any such destroyed, lost or stolen Bond, but not a mutilated Bond, shall have become or within seven days shall be due and payable, or shall have been called for redemption, instead of issuing a replacement Bond, the Issuer may pay such destroyed, lost or stolen Bond when so due or payable or upon the Redemption Date without surrender thereof. If, after the delivery of such replacement Bond or payment of a destroyed, lost or stolen Bond pursuant to the proviso to the preceding sentence, a bona fide purchaser of the original Bond in lieu of which such replacement Bond was issued presents for payment such original Bond, the Issuer and the Indenture Trustee shall be entitled to recover such replacement Bond (or such payment) from the Person to whom it was delivered or any Person taking such replacement Bond from such Person to whom such replacement Bond was delivered or any assignee of such Person, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the 17 23 extent of any loss, damage, cost or expense incurred by the Issuer or the Indenture Trustee in connection therewith. Upon the issuance of any replacement Bond under this Section, the Issuer may require the payment by the Holder of such Bond of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other reasonable expenses (including the fees and expenses of the Indenture Trustee) connected therewith. Every replacement Bond issued pursuant to this Section in replacement of any mutilated, destroyed, lost or stolen Bond shall constitute an original additional contractual obligation of the Issuer, whether or not the mutilated, destroyed, lost or stolen Bond shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Bonds duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Bonds. SECTION 2.07. Persons Deemed Owner. Prior to due presentment for registration of transfer of any Bond, the Issuer, the Indenture Trustee and any agent of the Issuer and the Indenture Trustee may treat the Person in whose name any Bond is registered (as of the day of determination) as the owner of such Bond for the purpose of receiving payments of principal of and interest, if any, on such Bond and for all other purposes whatsoever, whether or not such Bond be overdue, and none of the Issuer, the Indenture Trustee or any agent of the Issuer and the Indenture Trustee shall be affected by notice to the contrary. SECTION 2.08. Payment of Principal and Interest; Defaulted Interest. (a) The Bonds shall accrue interest at their respective Bond Rates and such interest shall be payable on each Distribution Date, subject to Section 3.01. Any installment of interest or principal payable on a Bond that is punctually paid or duly provided for by the Issuer on the applicable Distribution Date shall be paid to the Person in whose name such Bond is registered on the Record Date by check mailed first-class postage prepaid to such Person's address as it appears on the Bond Register on such Record Date, except that, (i) unless Definitive Bonds have been issued pursuant to Section 2.12, with respect to Bonds registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payment will be made by wire transfer in immediately available funds to the account designated by such nominee and (ii) if Definitive Bonds have been issued pursuant to Section 2.12, payment thereon shall be made by wire transfer in immediately available funds to the account designated by the holder of such Bonds if such Bondholder (a) is the registered holders of such Bonds and (b) has provided the Indenture Trustee with wiring instructions in writing five Business Days prior to the related 18 24 Distribution Date or has provided the Indenture Trustee with such instructions for any previous Distribution Date; provided, however, that the final installment of principal payable with respect to such Bond on a Distribution Date or on the Final Rated Distribution Date (including that portion of the Redemption Price allocable to any Bond upon redemption pursuant to Section 10.01) shall be payable as provided in paragraph (b) below. The funds represented by any such checks returned undelivered shall be held in accordance with Section 3.03. (b) The principal of each Bond shall be payable monthly on each Distribution Date. Notwithstanding the foregoing, the entire unpaid principal amount of the Bonds may be declared immediately due and payable, if not previously paid, in the manner provided in Section 5.02 on the date on which an Event of Default shall have occurred and be continuing by the Indenture Trustee or Holders of Bonds representing not less than 51% of the then outstanding Bond Balance. All principal payments on each Class of Bonds shall be made pro rata to the Bondholders of each Class entitled thereto. The Indenture Trustee shall notify the Person in whose name a Bond is registered at the close of business on the Record Date preceding the Distribution Date on which the Issuer expects the final installment of principal of and interest on such Bond to be paid. Such notice shall be mailed no later than five days prior to such final Distribution Date and shall specify that such final installment will be payable only upon presentation and surrender of such Bond and shall specify the place where such Bond may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Bonds shall be mailed to Bondholders as provided in Section 10.02. (c) Reserved. (d) If the Issuer defaults in a payment of interest on the Bonds, the Issuer shall pay defaulted interest (plus interest on such defaulted interest to the extent lawful) at the applicable Bond Rate in any lawful manner on the next Distribution Date. SECTION 2.09. Cancellation. All Bonds surrendered for payment, registration of transfer, exchange or redemption shall, if surrendered to any Person other than the Indenture Trustee, be delivered to the Indenture Trustee and shall be promptly cancelled by the Indenture Trustee. The Issuer may at any time deliver to the Indenture Trustee for cancellation any Bonds previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Bonds so delivered shall be promptly cancelled by the Indenture Trustee. No Bonds shall be authenticated in lieu of or in exchange for any Bonds cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Bonds may be held or disposed of by the Indenture Trustee in accordance with its standard retention or disposal policy as in effect at the time unless the Issuer shall direct by an Issuer Order that they be destroyed or returned to it; provided, that such Issuer Order is timely and the Bonds have not 19 25 been previously disposed of by the Indenture Trustee. SECTION 2.10. Book-Entry Bonds. (a) The Bonds, upon original issuance, will be issued in the form of typewritten Bonds representing the Book-Entry Bonds, to be delivered to the DTC Custodian as custodian for The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Issuer. The Bonds shall initially be registered in the Bond Register in the name of Cede & Co., the nominee of The Depository Trust Company, as the initial Clearing Agency, and no Bond Owner will receive a definitive bond representing such Bond Owners's interest in the Bonds, except as provided in Section 2.12. Unless and until definitive, fully registered Bonds (the "Definitive Bonds") have been issued to the Bond Owners pursuant to Section 2.12: (i) the provisions of this Section 2.10 shall be in full force and effect with respect to each such Class; (ii) the Issuer, the Owner Trustee, the Administrator, the Servicer, the Special Servicer, the Paying Agent, the Bond Registrar and the Indenture Trustee may deal with the Clearing Agency for all purposes (including the making of distributions on the Bonds) as the authorized representative of the Bond Owners; (iii) to the extent that the provisions of this Section 2.10 conflict with any other provisions of this Indenture, the provisions of this Section 2.10 shall control with respect to each such Class; and (iv) the rights of the Bond Owners of each such Class shall be exercised only through the Clearing Agency and the applicable Participants and shall be limited to those established by law and agreements between such Bond Owners and the Clearing Agency and/or the Participants. Pursuant to the Depository Agreement, unless and until Bonds are issued pursuant to Section 2.12, the initial Clearing Agency will make book-entry transfers among the Participants and receive and transmit distributions of principal and interest on the related Bonds to such Participants. (b) For purposes of any provision of this Indenture requiring or permitting actions with the consent of, or at the direction of, Holders of the Bonds evidencing a specified percentage of the outstanding Bond Balance, such direction or consent may be given by the Clearing Agency at the direction of Bond Owners whose beneficial ownership in the Bonds evidences such percentage of such Bond Balance. The Clearing Agency may take conflicting actions with respect to the Bonds to the extent that such actions are taken on behalf of the Bond Owners. (c) The Bonds of each Class initially sold in reliance on Rule 144A or to Institutional Accredited Investors shall be represented by the Rule 144A-IAI Global Bond for such Class. The 20 26 Rule 144A-IAI Global Bond for each Class shall be deposited with the DTC Custodian and registered in the name of Cede. All Rule 144A-IAI Global Bonds and any Bonds issued in exchange therefor shall be subject to the restrictions on transfer set forth in Section 2.04 hereof and shall bear legend(s) regarding such restrictions, as provided herein. (d) The Bonds of each Class initially sold in offshore transactions in reliance on Regulation S shall be represented by the Regulation S Temporary Global Bond for such Class, which shall be deposited with the DTC Custodian and registered in the name of Cede. Upon the later of (i) the Release Date and (ii) the first date on which the requisite certifications as to non-U.S. ownership are provided to the Indenture Trustee, beneficial interests in any Regulation S Temporary Global Bond shall be exchangeable for beneficial interests in the Regulation S Permanent Global Bond for such Class. Beneficial interests in any Regulation S Temporary Global Bond may be held only through Euroclear or CEDEL and, except as provided in the immediately preceding sentence and pursuant to Section 2.10(f), may not be exchanged for a beneficial interest in any other Bond. The Regulation S Permanent Global Bonds shall be deposited with the DTC Custodian and registered in the name of Cede. Each Bond Owner of a Regulation S Temporary Global Bond shall deliver a Regulation S Certification to Euroclear or CEDEL, as applicable, on or prior to the Release Date (or, if such Bond Owner holds its beneficial interest in such Regulation S Temporary Global Bond on or prior to a given Distribution Date occurring prior to the Release Date, then it shall deliver a Regulation S Certification to Euroclear or CEDEL, as applicable, on or prior to such Distribution Date); provided, however, that no such Bond Owner shall be required to deliver more than one such Regulation S Certification with respect to its interest in such Regulation S Temporary Global Bond unless such Regulation S Certification becomes inaccurate, in which event such Bond Owner must promptly deliver a corrected Regulation S Certification to Euroclear or CEDEL, as applicable. Euroclear or CEDEL shall be required to promptly deliver to the Indenture Trustee a certificate to the effect that Euroclear or CEDEL, as applicable, has received the requisite Regulation S Certification for the Class of Bond represented by such Regulation S Temporary Global Bond, and no Bond Owner (or transferee from any such Bond Owner) shall be entitled to receive any payment or principal or interest with respect to its interest in such Regulation S Temporary Global Bond, or an interest in the Regulation S Permanent Global Bond for such Class, prior to the Indenture Trustee's receipt of such certificate from Euroclear or CEDEL with respect to the portion of such Regulation S Temporary Global Bond beneficially owned by such Bond Owner (and, with respect to an interest in the related Regulation S Permanent Global Bond, prior to the Release Date). After the Release Date, distributions due with respect to any beneficial interest in a Regulation S Temporary Global Bond shall not be made to the holders of such beneficial interests unless exchange for a beneficial interest in the related Regulation S Permanent Global Bond is improperly withheld or refused. 21 27 (e) Except in the limited circumstances described below in Section 2.12, owners of beneficial interests in Global Bonds shall not be entitled to receive physical delivery of Definitive Bonds. The Bonds are not issuable in bearer form. Upon the issuance of each Global Bond, the Depository or its custodian shall credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global Bond to the accounts of persons who have accounts with such depository. Such accounts initially shall be designated by or on behalf of the Initial Purchasers. Ownership of beneficial interests in a Global Bond shall be limited to Participants or Persons who hold interests directly or indirectly through Participants. Ownership of beneficial interests in the Global Bonds shall be shown on, and the transfer of that ownership shall be effected only through, records maintained by the Depository or its nominee (with respect to interests of Participants) and the records of Participants (with respect to interests of Persons other than Participants). So long as the Depository, or its nominee, is the registered holder of a Global Bond, the Depository or such nominee, as the case may be, shall be considered the sole owner and holder of the Bonds represented by such Global Bond for all purposes under this Indenture and the Bonds, including, without limitation, obtaining consents and waivers thereunder, and the Indenture Trustee shall not be affected by any notice to the contrary. Except under the circumstance described in Section 2.12, owners of beneficial interests in a Global Bond will not be entitled to have any portions of such Global Bond registered in their names, will not receive or be entitled to receive physical delivery of Definitive Bonds in certificated form and shall not be considered the owners or holders of the Global Bond (or any Bonds represented thereby) under this Indenture or the Bonds. In addition, no Bond Owner of an interest in a Global Bond shall be able to transfer that interest except in accordance with the Depository's applicable procedures (in addition to those under this Indenture and, if applicable, those of Euroclear and CEDEL). (f) Any holder of an interest in a Regulation S Global Bond for any Class shall have the right, following delivery to the Indenture Trustee, Euroclear or CEDEL, as applicable, and the Depository, of a certification in the form of Exhibit E hereto (an "Exchange Certification"), to exchange all or a portion of such interest (in authorized denominations as set forth in Section 2.02) for an equivalent interest in the Rule 144A-IAI Global Bond for such Class in connection with a transfer of its interest therein to a transferee that is eligible to hold an interest in such Rule 144A-IAI Global Bond as provided herein; provided, however, that no Exchange Certification shall be required if any such exchange occurs after the Release Date. Any holder of an interest in the Rule 144A Global Bond or IAI Global Bond for any Class shall have the right, following delivery to the Indenture Trustee, the Depository, and Euroclear or CEDEL, as applicable, of an Exchange Certification, to exchange all or a portion of such interest (in authorized denominations as set forth in Section 2.02) for an equivalent 22 28 interest in the Regulation S Global Bond for such Class in connection with a transfer of its interest therein to a transferee that is eligible to hold an interest in such Regulation S Global Bond as provided herein; provided, however, that if such exchange occurs prior to the Release Date, the transferee shall acquire an interest in a Regulation S Temporary Global Bond only and shall be subject to all of the restrictions associated therewith, as provided in Section 2.10(d). Following receipt of any Exchange Certification or request for transfer, as applicable, by the Indenture Trustee: (i) the Indenture Trustee shall endorse the schedule to any Global Bond representing the Bond or Bonds being exchanged to reduce the stated principal amount of such Global Bond by the denominations of the Bond or Bonds for which such exchange is to be made and (ii) the Indenture Trustee shall endorse the schedule to any Global Bond representing the Bond or Bonds for which such exchange is to be made to increase the stated principal amount of such Global Bond by the denominations of the Bond or Bonds being exchanged therefor. The form of the Exchange Certification shall be available from the Indenture Trustee. SECTION 2.11. Notices to Clearing Agency. Whenever a notice or other communication to the Bondholders is required under this Indenture, unless and until Definitive Bonds shall have been issued to such Bond Owners pursuant to Section 2.12, the Indenture Trustee shall give all such notices and communications specified herein to be given to Holders of the Bonds to the Clearing Agency, and shall have no obligation to such Bond Owners. SECTION 2.12. Definitive Bonds. If, but only if, (i) the Clearing Agency notifies the Issuer and the Indenture Trustee in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to Book-Entry Bonds of any Class and a qualifying successor depositary is not appointed by the Issuer within 90 days thereof, (ii) the Indenture Trustee has instituted or caused to be instituted or has been directed to institute any judicial proceeding in a court to enforce the rights of the Bondholders under this Indenture and under such Book-Entry Bonds and the Indenture Trustee has been advised by counsel that in connection with such proceeding it is necessary or advisable for the Indenture Trustee to obtain possession of the related Global Bond or (iii) after the occurrence of an Event of Default under this Indenture, beneficial owners representing not less than 51% of the then outstanding Bond Class Balance of such Book-Entry Bonds advise the Clearing Agency through the Clearing Agency Participants in writing (and the Clearing Agency so notifies the Issuer, the Indenture Trustee and the Servicer in writing) that the continuation in global form of the Book-Entry Bonds being evidenced by such Global Bond is no longer in their best interests, then the Indenture Trustee shall use all reasonable efforts to notify all Bond Owners of such Class of Bonds of the occurrence of any such event and of the availability of Definitive Bonds to Bond Owners requesting the same; provided, that under no circumstances will Definitive Bonds be issued to Bond Owners of the Regulation S Temporary Global Bond. Upon surrender to the Indenture Trustee of 23 29 the typewritten Bonds representing the Book-Entry Bonds by the Clearing Agency, accompanied by registration instructions, the Issuer shall execute and, upon Issuer Order, the Indenture Trustee shall authenticate the Definitive Bonds in accordance with the written instructions of the Clearing Agency. None of the Issuer, the Bond Registrar or the Indenture Trustee shall be liable for any delay in delivery of such instructions, and each of them may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Bonds, the Indenture Trustee shall recognize the Holders of the Definitive Bonds as Bondholders. SECTION 2.13. Tax Treatment. The Issuer has entered into this Indenture, and the Bonds will be issued, with the intention that, for federal, state and local income, single business and franchise tax purposes, the Bonds will qualify as indebtedness secured by the Trust Estate. The Issuer, by entering into this Indenture, and each Bondholder, by its acceptance of a Bond (and each Bond Owner by its acceptance of an interest in the applicable Book-Entry Bond), agree to treat the Bonds for federal, state and local income and franchise tax purposes as indebtedness. ARTICLE III Covenants SECTION 3.01. Payment of Principal and Interest. The Issuer will duly and punctually pay the principal, if any, of and the interest, if any, on the Bonds in accordance with the terms of the Bonds and this Indenture. Without limiting the foregoing, subject to Section 8.02(c), on each Distribution Date the Issuer will cause to be distributed all amounts deposited pursuant to the Sale and Servicing Agreement into the Bond Distribution Account, (i) for the benefit of the Class A Bonds, to the Class A Bondholders, (ii) for the benefit of the Class B Bonds, to the Class B Bondholders and (iii) for the benefit of the Class C Bonds, to the Class C Bondholders. Amounts properly withheld under the Code by any Person from a payment to any Bondholder of interest and/or principal shall be considered as having been paid by the Issuer to such Bondholder for all purposes of this Indenture. SECTION 3.02. Maintenance of Office or Agency. The Issuer will maintain in the Borough of Manhattan, the City of New York, an office or agency where Bonds may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Issuer in respect of the Bonds and this Indenture may be served. Such office will initially be located at IBJ Schroder Bank & Trust Company, One State Street Plaza, New York, New York 10004. The Issuer will give prompt written notice to the Indenture Trustee of the location, and of any change in the location, of any such office or agency. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such surrenders, notices and demands may 24 30 be made or served at the Corporate Trust Office, and the Issuer hereby appoints the Indenture Trustee as its agent to receive all such surrenders, notices and demands. SECTION 3.03. Money for Payments To Be Held in Trust. All payments of amounts due and payable with respect to any Bonds that are to be made from amounts withdrawn from the Bond Distribution Account pursuant to Section 8.02(c) shall be made on behalf of the Issuer by the Indenture Trustee or by another Paying Agent, and no amounts so withdrawn from the Bond Distribution Account for payments of Bonds shall be paid over to the Issuer except as provided in this Section. On or before the Remittance Date preceding each Distribution Date and the Redemption Date, the Issuer shall deposit or cause to be deposited in the Bond Distribution Account an aggregate sum sufficient to pay the amounts then becoming due under the Bonds, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless the Paying Agent is the Indenture Trustee) shall promptly notify the Indenture Trustee in writing of its action or failure so to act. The Issuer will cause each Paying Agent other than the Indenture Trustee to execute and deliver to the Indenture Trustee an instrument in which such Paying Agent shall agree with the Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it hereby so agrees), subject to the provisions of this Section, that such Paying Agent will: (i) hold all sums held by it for the payment of amounts due with respect to the Bonds in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided and pay such sums to such Persons as herein provided; (ii) give the Indenture Trustee notice of any default by the Issuer (or any other obligor upon the Bonds) of which it has actual knowledge in the making of any payment required to be made with respect to the Bonds; (iii) at any time during the continuance of any such default, upon the written request of the Indenture Trustee, forthwith pay to the Indenture Trustee all sums so held in trust by such Paying Agent; (iv) immediately resign as a Paying Agent and forthwith pay to the Indenture Trustee all sums held by it in trust for the payment of Bonds if at any time it ceases to meet the standards required to be met by a Paying Agent at the time of its appointment; and (v) comply with all requirements of the Code with respect to the withholding from any payments made by it on any Bonds of any applicable withholding taxes imposed thereon and 25 31 with respect to any applicable reporting requirements in connection therewith. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, by Issuer Order direct any Paying Agent to pay to the Indenture Trustee all sums held in trust by such Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts as those upon which the sums were held by such Paying Agent; and upon such payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be released from all further liability with respect to such money. Subject to applicable laws with respect to escheat of funds, any money held by the Indenture Trustee or any Paying Agent in trust for the payment of any amount due with respect to any Bond and remaining unclaimed for two years after such amount has become due and payable shall be discharged from such trust and be paid upon Issuer Request; and the Holder of such Bond shall thereafter, as an unsecured general creditor, look only to the Issuer for payment thereof (but only to the extent of the amounts so paid to the Issuer), and all liability of the Indenture Trustee or such Paying Agent with respect to such trust money shall thereupon cease; provided, however, that the Indenture Trustee or such Paying Agent, before being required to make any such repayment, shall at the expense and direction of the Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. The Indenture Trustee shall also adopt and employ, at the expense and direction of the Issuer, any other reasonable means of notification of such repayment (including, but not limited to, mailing notice of such repayment to Holders whose Bonds have been called but have not been surrendered for redemption or whose right to or interest in moneys due and payable but not claimed is determinable from the records of the Indenture Trustee or of any Paying Agent, at the last address of record for each such Holder). SECTION 3.04. Existence. The Issuer will keep in full effect its existence, rights and franchises as a business trust under the laws of the State of Delaware (unless it becomes, or any successor Issuer hereunder is or becomes, organized under the laws of any other State or of the United States of America, in which case the Issuer will keep in full effect its existence, rights and franchises under the laws of such other jurisdiction) and will obtain and preserve its qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of this Indenture, the Bonds, the Collateral and each other instrument or agreement included in the Trust Estate. 26 32 SECTION 3.05. Protection of Trust Estate. The Issuer will from time to time execute and deliver all such supplements and amendments hereto and all such financing statements, continuation statements, instruments of further assurance and other instruments, and will take such other action necessary or advisable to: (i) maintain or preserve the lien and security interest (and the priority thereof) of this Indenture or carry out more effectively the purposes hereof; (ii) perfect, publish notice of or protect the validity of any Grant made or to be made by this Indenture; (iii) enforce any of the Collateral; or (iv) preserve and defend title to the Trust Estate and the rights of the Indenture Trustee and the Bondholders in such Trust Estate against the claims of all persons and parties. The Issuer hereby designates the Indenture Trustee its agent and attorney-in-fact to execute any financing statement, continuation statement or other instrument required to be executed pursuant to this Section 3.05. SECTION 3.06. Opinions as to Trust Estate. (a) On the Closing Date, the Issuer shall furnish to the Indenture Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording and filing of this Indenture, any indentures supplemental hereto, and any other requisite documents, and with respect to the execution and filing of any financing statements and continuation statements, as are necessary to perfect and make effective the lien and security interest of this Indenture and reciting the details of such action, or stating that, in the opinion of such counsel, no such action is necessary to make such lien and security interest effective. (b) On or before March 31, in each calendar year, beginning in 1999, the Issuer shall furnish to the Indenture Trustee an Opinion of Counsel either stating that, in the opinion of such counsel, such action has been taken with respect to the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and with respect to the execution and filing of any financing statements and continuation statements as is necessary to maintain the lien and security interest created by this Indenture and reciting the details of such action, or stating that in the opinion of such counsel no such action is necessary to maintain such lien and security interest. Such Opinion of Counsel shall also describe the recording, filing, re-recording and refiling of this Indenture, any indentures supplemental hereto and any other requisite documents and the execution and filing of any financing statements and continuation statements that will, in the opinion of such counsel, be required to maintain the lien and security interest of this Indenture until March 31 in the following calendar year. 27 33 SECTION 3.07. Performance of Obligations; Servicing of Mortgage Loans and Funding Note. (a) The Issuer will not take any action and will use its best efforts not to permit any action to be taken by others that would release any Person from any of such Person's material covenants or obligations under any instrument or agreement included in the Trust Estate or that would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any such instrument or agreement, except as expressly provided in this Indenture, the Sale and Servicing Agreement or such other instrument or agreement. (b) The Issuer may contract with other Persons acceptable to the Indenture Trustee to assist it in performing its duties under this Indenture, and any performance of such duties by a Person identified to the Indenture Trustee in an Officer's Certificate of the Issuer shall be deemed to be action taken by the Issuer. Initially, the Issuer has contracted with the Servicer and the Administrator to assist the Issuer in performing its duties under this Indenture. (c) The Issuer will punctually perform and observe all of its obligations and agreements contained in this Indenture, the other Basic Documents and in the instruments and agreements included in the Trust Estate, including but not limited to filing or causing to be filed all UCC financing statements and continuation statements required to be filed by the terms of this Indenture and the Sale and Servicing Agreement in accordance with and within the time periods provided for herein and therein. Except as otherwise expressly provided therein, the Issuer shall not waive, amend, modify, supplement or terminate this Indenture in a manner other than as provided for herein or any other Basic Document or any provision thereof without the consent of the Indenture Trustee or the Holders of at least 51% of the then outstanding Bond Balance. (d) If the Issuer shall have knowledge of the occurrence of a Servicer Termination Event under the Sale and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee and the Rating Agencies thereof, and shall specify in such notice the action, if any, the Issuer is taking with respect to such default. If a Servicer Termination Event shall arise from the failure of the Servicer to perform any of its duties or obligations under the Sale and Servicing Agreement with respect to the Mortgage Loans, the Issuer shall take all reasonable steps available to it to remedy such failure. (e) As promptly as possible after the giving of notice of termination to the Servicer of the Servicer's rights and powers pursuant to Section 8.01 or Section 8.02 of the Sale and Servicing Agreement, the Indenture Trustee without further action shall automatically be appointed by the Issuer as the successor servicer (the "Successor Servicer"). The Indenture Trustee may resign as the Successor Servicer by giving written notice of such resignation to the Issuer and in such event will be released from such duties and obligations, such release not to be effective until the date a new servicer enters into a servicing agreement with the Issuer, as 28 34 provided below. Upon delivery of any such notice to the Issuer, the Issuer shall obtain a new servicer as the Successor Servicer under the Sale and Servicing Agreement. Any Successor Servicer other than the Indenture Trustee shall be an Eligible Servicer and enter into a servicing agreement with the Issuer having substantially the same provisions as the provisions of the Sale and Servicing Agreement applicable to the Servicer. If within 30 days after the delivery of the notice referred to above, the Issuer shall not have obtained such a new servicer, the Indenture Trustee may appoint, or may petition a court of competent jurisdiction to appoint, a Successor Servicer. In connection with any such appointment, the Indenture Trustee may make such arrangements for the compensation of such successor as it and such successor shall agree on, subject to the limitations set forth below and in the Sale and Servicing Agreement, and in accordance with Section 8.02 of the Sale and Servicing Agreement, the Issuer shall enter into an agreement with such successor for the servicing of the Mortgage Loans (such agreement to be in form and substance satisfactory to the Indenture Trustee). If the Indenture Trustee shall succeed to the Servicer's duties as servicer of the Mortgage Loans as provided herein, it shall do so in its individual capacity and not in its capacity as Indenture Trustee and, accordingly, the provisions of Article VI hereof shall be inapplicable to the Indenture Trustee in its duties as the successor to the Servicer and the servicing of the Mortgage Loans. In case the Indenture Trustee shall become successor to the Servicer under the Sale and Servicing Agreement, the Indenture Trustee shall be entitled to appoint as Servicer any one of its Affiliates, provided that it shall be fully liable for the actions and omissions of such Affiliate in such capacity as Successor Servicer. (f) Upon any termination of the Servicer's rights and powers pursuant to the Sale and Servicing Agreement, the Issuer shall promptly notify the Indenture Trustee and the Rating Agencies. As soon as a Successor Servicer is appointed, the Issuer shall notify the Indenture Trustee and the Rating Agencies in writing of such appointment, specifying in such notice the name and address of such Successor Servicer. (g) Without derogating from the absolute nature of the assignment granted to the Indenture Trustee under this Indenture or the rights of the Indenture Trustee hereunder, the Issuer agrees (i) that it will not, without the prior written consent of either the Indenture Trustee or the Holders of at least 51% of the then outstanding Bond Balance, amend, modify, waive, supplement, terminate or surrender, or agree to any amendment, modification, supplement, termination, waiver or surrender of, the terms of any Collateral (except to the extent otherwise provided in the Sale and Servicing Agreement) or the Basic Documents, or waive timely performance or observance by the Servicer or the Seller under the Sale and Servicing Agreement; and (ii) that any such amendment shall not (A) increase or reduce in any manner the amount of, or accelerate or delay the timing of, distributions that are required to be made for the benefit of the Bondholders or (B) reduce the aforesaid percentage of the Bonds that is required to consent to any 29 35 such amendment, without the consent of the Holders of all the Outstanding Bonds. If the Indenture Trustee or such Holders, as applicable, agree to any such amendment, modification, supplement or waiver, the Issuer agrees, promptly following a request by the Indenture Trustee to do so, to execute and deliver, in its own name and at its own expense, such agreements, instruments, consents and other documents as the Indenture Trustee may deem necessary or appropriate in the circumstances. SECTION 3.08. Negative Covenants. So long as any Bonds are Outstanding, the Issuer shall not: (i) except as expressly permitted by this Indenture, the Funding Note Purchase and Security Agreement, the Mortgage Loan Purchase Agreements or the Sale and Servicing Agreement, sell, transfer, exchange or otherwise dispose of any of the properties or assets of the Issuer, including those included in the Trust Estate, unless directed to do so by the Indenture Trustee; (ii) claim any credit on, or make any deduction from the principal or interest payable in respect of, the Bonds (other than amounts properly withheld from such payments under the Code) or assert any claim against any present or former Bondholder by reason of the payment of the taxes levied or assessed upon any part of the Trust Estate; or (iii) (A) permit the validity or effectiveness of this Indenture to be impaired, or permit the lien of this Indenture to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations with respect to the Bonds under this Indenture except as may be expressly permitted hereby, (B) permit any lien, charge, excise, claim, security interest, mortgage or other encumbrance (other than the lien of this Indenture) to be created on or extend to or otherwise arise upon or burden the Trust Estate or any part thereof or any interest therein or the proceeds thereof (other than tax liens, mechanics' liens and other liens that arise by operation of law, in each case on any of the Mortgaged Properties and arising solely as a result of an action or omission of the related Mortgagor) or (C) permit the lien of this Indenture not to constitute a valid first priority (other than with respect to any such tax, mechanics' or other lien) security interest in the Trust Estate. 30 36 SECTION 3.09. Annual Statement as to Compliance. The Issuer shall deliver to the Indenture Trustee and each Rating Agency, within 120 days after the end of each fiscal year of the Issuer (commencing with the fiscal year 1998), an Officer's Certificate stating, as to the Authorized Officer signing such Officer's Certificate, that: (i) a review of the activities of the Issuer during such year and of its performance under this Indenture has been made under such Authorized Officer's supervision; and (ii) to the best of such Authorized Officer's knowledge, based on such review, the Issuer has complied with all conditions and covenants under this Indenture throughout such year or, if there has been a default in its compliance with any such condition or covenant, specifying each such default known to such Authorized Officer and the nature and status thereof. SECTION 3.10. Issuer May Consolidate, etc., Only on Certain Terms. (a) The Issuer shall not consolidate or merge with or into any other Person, unless: (i) the Person (if other than the Issuer) formed by or surviving such consolidation or merger shall be a Person organized and existing under the laws of the United States of America or any State and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Indenture Trustee, in form satisfactory to the Indenture Trustee, the due and punctual payment of the principal of and interest on all Bonds and the performance or observance of every agreement and covenant of this Indenture on the part of the Issuer to be performed or observed, all as provided herein; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Indenture Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Issuer, any Bondholder or any Certificateholder; (v) any action that is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such consolidation or merger and such supplemental 31 37 indenture comply with this Article III and that all conditions precedent herein provided for relating to such transaction have been complied with (including any filing required by the Exchange Act). (b) The Issuer shall not convey or transfer any of its properties or assets, including those included in the Trust Estate, to any Person, unless: (i) the Person that acquires by conveyance or transfer the properties and assets of the Issuer the conveyance or transfer of which is hereby restricted (A) shall be a United States citizen or a Person organized and existing under the laws of the United States of America or any State, (B) expressly assumes, by an indenture supplemental hereto, executed and delivered to the Indenture Trustee, in form satisfactory to the Indenture Trustee, the due and punctual payment of the principal of and interest on all Bonds and the performance or observance of every agreement and covenant of this Indenture on the part of the Issuer to be performed or observed, all as provided herein, (C) expressly agrees by means of such supplemental indenture that all right, title and interest so conveyed or transferred shall be subject and subordinate to the rights of Holders of the Bonds, (D) unless otherwise provided in such supplemental indenture, expressly agrees to indemnify, defend and hold harmless the Issuer against and from any loss, liability or expense arising under or related to this Indenture and the Bonds and (E) expressly agrees by means of such supplemental indenture that such Person (or if a group of Persons, then one specified Person) shall make all filings with the Commission (and any other appropriate Person) required by the Exchange Act in connection with the Bonds; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) the Rating Agency Condition shall have been satisfied with respect to such transaction; (iv) the Issuer shall have received an Opinion of Counsel (and shall have delivered copies thereof to the Indenture Trustee) to the effect that such transaction will not have any material adverse tax consequence to the Issuer, any Bondholder or any Certificateholder; (v) any action that is necessary to maintain the lien and security interest created by this Indenture shall have been taken; and (vi) the Issuer shall have delivered to the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such conveyance or transfer and such supplemental indenture comply with this Article III and that all conditions 32 38 precedent herein provided for relating to such transaction have been complied with (including any filing required by the Exchange Act). SECTION 3.11. Successor or Transferee. (a) Upon any consolidation or merger of the Issuer in accordance with Section 3.10(a), the Person formed by or surviving such consolidation or merger (if other than the Issuer) shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under this Indenture with the same effect as if such Person had been named as the Issuer herein. (b) Upon a conveyance or transfer of all the assets and properties of the Issuer pursuant to Section 3.10(b), Allied Capital Commercial Mortgage Trust 1998-1 will be released from every covenant and agreement of this Indenture to be observed or performed on the part of the Issuer with respect to the Bonds immediately upon the delivery of written notice by the Issuer to the Indenture Trustee stating that Allied Capital Commercial Mortgage Trust 1998-1 is to be so released. SECTION 3.12. No Other Business. The Issuer shall not engage in any business other than financing, purchasing, owning, selling and managing the Mortgage Loans and the Funding Note in the manner contemplated by this Indenture and the Basic Documents and activities incidental thereto. SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume, guarantee or otherwise become liable, directly or indirectly, for any indebtedness except for the Bonds. SECTION 3.14. Servicer's and Special Servicer's Obligations. The Issuer shall cause the Servicer to comply with Sections 4.09, 4.10 and 4.11 and Article IX, and shall cause the Special Servicer to comply with Sections 4.10 and 4.11, of the Sale and Servicing Agreement. SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities. Except as contemplated by the Trust Agreement, Sale and Servicing Agreement or this Indenture, the Issuer shall not make any loan or advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing or otherwise), endorse or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stocks or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations, assets or securities of, or any other interest in, or make any capital contribution to, any Person. SECTION 3.16. Capital Expenditures. The Issuer shall not make any expenditure (by long-term or operating lease or otherwise) for capital assets (either realty or personalty). 33 39 SECTION 3.17. Removal of Administrator. So long as any Bonds are Outstanding, the Issuer shall not remove the Administrator without cause unless the Rating Agency Condition shall have been satisfied in connection with such removal. SECTION 3.18. Restricted Payments. Except with respect to the proceeds from issuance of the Bonds, the Issuer shall not, directly or indirectly, (i) pay any dividend or make any distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, to the Owner Trustee or any owner of a beneficial interest in the Issuer or otherwise with respect to any ownership or equity interest or security in or of the Issuer or to the Servicer, (ii) redeem, purchase, retire or otherwise acquire for value any such ownership or equity interest or security or (iii) set aside or otherwise segregate any amounts for any such purpose; provided, however, that the Issuer may make, or cause to be made, (x) distributions as contemplated by, and to the extent funds are available for such purpose under, the Sale and Servicing Agreement or the Trust Agreement and (y) payments to the Indenture Trustee pursuant to Section 1(a)(ii) of the Administration Agreement. The Issuer will not, directly or indirectly, make payments to or distributions from the Collection Account except in accordance with this Indenture and the Basic Documents. SECTION 3.19. Notice of Events of Default. The Issuer shall give the Indenture Trustee and the Rating Agencies prompt written notice of each Event of Default hereunder, and of each default on the part of the Servicer or the Seller of its obligations under the Sale and Servicing Agreement. SECTION 3.20. Further Instruments and Acts. Upon request of the Indenture Trustee, the Issuer will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. 34 40 ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect with respect to the Bonds except as to (i) rights of registration of transfer and exchange, (ii) substitution of mutilated, destroyed, lost or stolen Bonds, (iii) rights of Bondholders to receive payments of principal thereof and interest thereon, (iv) Sections 3.03, 3.04, 3.05, 3.08, 3.10, 3.12 and 3.13, (v) the rights, obligations and immunities of the Indenture Trustee hereunder (including the rights of the Indenture Trustee under Section 6.07 and the obligations of the Indenture Trustee under Section 4.02) and (vi) the rights of Bondholders as beneficiaries hereof with respect to the property so deposited with the Indenture Trustee payable to all or any of them, and the Indenture Trustee, on demand of and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to the Bonds, when (A) either (1) all Bonds theretofore authenticated and delivered (other than (i) Bonds that have been destroyed, lost or stolen and that have been replaced or paid as provided in Section 2.06 and (ii) Bonds for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 3.03) have been delivered to the Indenture Trustee for cancellation; or (2) all Bonds not theretofore delivered to the Indenture Trustee for cancellation a. have become due and payable, b. will become due and payable at the Final Rated Distribution Date within one year, or c. are to be called for redemption within one year under arrangements satisfactory to the Indenture Trustee for the giving of notice of redemption by the Indenture Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of a., b. or c. above, has irrevocably deposited or caused to be irrevocably deposited with the Indenture Trustee cash or direct obligations of or obligations guaranteed by the United States of America (which will mature prior to the date such amounts are payable), in trust for such purpose, in an amount sufficient to pay and discharge the entire indebtedness on such Bonds not theretofore delivered to the Indenture Trustee for cancellation when due to 35 41 the applicable final scheduled Distribution Date or Redemption Date (if Bonds shall have been called for redemption pursuant to Section 10.01), as the case may be; (B) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and (C) the Issuer has delivered to the Indenture Trustee an Officer's Certificate and, an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. SECTION 4.02. Application of Trust Money. All moneys deposited with the Indenture Trustee pursuant to Section 4.01 hereof shall be held in trust and applied by it, in accordance with the provisions of the Bonds and this Indenture, to the payment, either directly or through any Paying Agent, as the Indenture Trustee may determine, to the Holders of the particular Bonds for the payment or redemption of which such moneys have been deposited with the Indenture Trustee, of all sums due and to become due thereon for principal and interest; but such moneys need not be segregated from other funds except to the extent required herein or in the Sale and Servicing Agreement or required by law. SECTION 4.03. Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to the Bonds, all moneys then held by any Paying Agent other than the Indenture Trustee under the provisions of this Indenture with respect to such Bonds shall, upon demand of the Issuer, be paid to the Indenture Trustee to be held and applied according to Section 3.03 and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. SECTION 4.04. Release of Collateral. Subject to Section 11.01 and the terms of the Basic Documents, the Indenture Trustee shall release property from the lien of this Indenture only upon receipt of an Issuer Request accompanied by an Officer's Certificate and an Opinion of Counsel. ARTICLE V Remedies SECTION 5.01. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in the payment of interest due on any Bond on any Distribution Date; or 36 42 (ii) default in the payment of the amount of principal of any Bond due on any Distribution Date; or (iii) default in the payment of the then outstanding Bond Balance in full by the Final Rated Distribution Date; or (iv) default in the observance or performance of any covenant or agreement of the Issuer made in this Indenture (other than a covenant or agreement, a default in the observance or performance of which is elsewhere in this Section specifically dealt with), or the breach of any representation or warranty of the Issuer made in this Indenture or in any certificate or other writing delivered pursuant hereto or in connection herewith proving to have been incorrect in any material respect as of the time when the same shall have been made, and such default shall continue or not be cured, or the circumstance or condition in respect of which such misrepresentation or warranty was incorrect shall not have been eliminated or otherwise cured, for a period of 30 days after there shall have been given, by registered or certified mail, to the Issuer by the Indenture Trustee or to the Issuer and the Indenture Trustee by the Holders of at least 25% of the Bond Balance, a written notice specifying such default or incorrect representation or warranty and requiring it to be remedied and stating that such notice is a notice of Default hereunder; or (v) the filing of a decree or order for relief by a court having jurisdiction in the premises in respect of the Issuer or any substantial part of the Owner Trust Estate in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or for any substantial part of the Owner Trust Estate, or ordering the winding-up or liquidation of the Issuer's affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (vi) the commencement by the Issuer of a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by the Issuer to the entry of an order for relief in an involuntary case under any such law, or the consent by the Issuer to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or for any substantial part of the Owner Trust Estate, or the making by the Issuer of any general assignment for the benefit of creditors, or the failure by the Issuer generally to pay its debts as such debts become due, or the taking of any action by the Issuer in furtherance of any of the foregoing. The Issuer shall deliver to the Indenture Trustee, within five days after the occurrence thereof, written notice in the form of an 37 43 Officer's Certificate of any event which with the giving of notice and the lapse of time would become an Event of Default under clause (iii), its status and what action the Issuer is taking or proposes to take with respect thereto. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. (a) If an Event of Default should occur and be continuing, then and in every such case the Indenture Trustee or the Holders of Bonds representing not less than 51% of the then outstanding Bond Balance may declare all the Bonds to be immediately due and payable, by a notice in writing to the Issuer (and to the Indenture Trustee if given by Bondholders), and upon any such declaration the unpaid principal amount of such Bonds, together with accrued and unpaid interest thereon through the date of acceleration, shall become immediately due and payable. (b) Reserved. (c) If an Event of Default specified in clause (v) or (vi) of Section 5.01 shall have occurred and be continuing, then, without any action on the part of the Trustee or the Bondholders, the Bonds shall become immediately due and payable at par, together with accrued interest thereon. (d) At any time after such declaration of acceleration of maturity has been made and before a judgment or decree for payment of the money due has been obtained by the Indenture Trustee as provided hereinafter in this Article V, the Holders of Bonds representing 51% of the then outstanding Bond Balance, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to pay: (A) all payments of principal of and interest on all Bonds and all other amounts that would then be due hereunder or upon such Bonds if the Event of Default giving rise to such acceleration had not occurred; and (B) all sums paid or advanced by the Indenture Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and its agents and counsel; and (ii) all Events of Default, other than the nonpayment of the principal of the Bonds that has become due solely by such acceleration, have been cured or waived as provided in Section 5.12. No such rescission shall affect any subsequent default or impair any right consequent thereto. SECTION 5.03. Collection of Indebtedness and Suits for 38 44 Enforcement by Indenture Trustee; Authority of the Indenture Trustee. (a) The Issuer covenants that if (i) default is made in the payment of interest due on any Bond on any Distribution Date, or (ii) default is made in the payment of the amount of principal of any Bond due on any Distribution Date, the Issuer will, upon demand of the Indenture Trustee, pay to it, for the benefit of the Holders of the Bonds, the whole amount then due and payable on such Bonds for principal and interest, with interest on the overdue principal and, to the extent payment at such rate of interest shall be legally enforceable, on overdue installments of interest at the rate borne by the Bonds and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances (and interest on Advances) of the Servicer, the Special Servicer, the Indenture Trustee and the Fiscal Agent, and their agents and counsel. (b) In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Indenture Trustee, in its own name and as trustee of an express trust, may institute a Proceeding for the collection of the sums so due and unpaid, and may prosecute such Proceeding to judgment or final decree, and may enforce the same against the Issuer or other obligor upon such Bonds and collect in the manner provided by law out of the property of the Issuer or other obligor upon such Bonds, wherever situated, the moneys adjudged or decreed to be payable. (c) If an Event of Default occurs and is continuing, the Indenture Trustee may, as more particularly provided in Section 5.04, in its discretion, proceed to protect and enforce its rights and the rights of the Bondholders, by such appropriate Proceedings as the Indenture Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy or legal or equitable right vested in the Indenture Trustee by this Indenture or by law. (d) In case there shall be pending, relative to the Issuer or any other obligor upon the Bonds or any Person having or claiming an ownership interest in the Trust Estate, Proceedings under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, or liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor or Person, or in case of any other comparable judicial Proceedings relative to the Issuer or other obligor upon the Bonds, or to the creditors or property of the Issuer or such other obligor, the Indenture Trustee, irrespective of whether the principal of any Bonds shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Indenture Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in 39 45 such Proceedings or otherwise: (i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Bonds and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee (including any claim for reasonable compensation to the Indenture Trustee and each predecessor Indenture Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor Indenture Trustee, except as a result of negligence or bad faith) and of the Bondholders allowed in such Proceedings; (ii) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of Bonds in any election of a trustee, a standby trustee or Person performing similar functions in any such Proceedings; (iii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute all amounts received with respect to the claims of the Bondholders and of the Indenture Trustee on their behalf; and (iv) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee or the Holders of Bonds allowed in any Proceedings relative to the Issuer, its creditors and its property; and any trustee, receiver, liquidator, custodian or other similar official in any such Proceeding is hereby authorized by each of such Bondholders to make payments to the Indenture Trustee and, in the event that the Indenture Trustee shall consent to the making of payments directly to such Bondholders, to pay to the Indenture Trustee such amounts as shall be sufficient to cover reasonable compensation to the Indenture Trustee, each predecessor Indenture Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Indenture Trustee and each predecessor Indenture Trustee except as a result of negligence or bad faith. (e) Nothing herein contained shall be deemed to authorize the Indenture Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment or composition affecting the Bonds or the rights of any Holder thereof or to authorize the Indenture Trustee to vote in respect of the claim of any Bondholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar Person. (f) All rights of action and of asserting claims under this 40 46 Indenture, or under any of the Bonds, may be enforced by the Indenture Trustee without the possession of any of the Bonds or the production thereof in any Proceedings relative thereto, and any such Proceedings instituted by the Indenture Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Indenture Trustee, each predecessor Indenture Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Bonds. (g) In any Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all the Holders of the Bonds, and it shall not be necessary to make any Bondholder a party to any such Proceedings. SECTION 5.04. Remedies; Priorities. (a) If an Event of Default shall have occurred and be continuing, the Indenture Trustee may do one or more of the following (subject to Section 5.05): (i) institute Proceedings in its own name and as trustee of an express trust for the collection of all amounts then payable on the Bonds or under this Indenture with respect thereto, whether by declaration or otherwise, enforce any judgment obtained and collect from the Issuer and any other obligor upon such Bonds moneys adjudged due; (ii) institute Proceedings from time to time for the complete or partial foreclosure of this Indenture with respect to the Trust Estate; (iii) exercise any remedies of a secured party under the UCC and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee and the Holders of the Bonds; and (iv) sell the Trust Estate or any portion thereof or rights or interest therein, at one or more public or private sales called and conducted in any manner permitted by law; provided, however, that the Indenture Trustee may not sell or otherwise liquidate the Trust Estate following an Event of Default, other than an Event of Default described in Section 5.01(i), (ii) or (iii), unless (A) the proceeds of such sale or liquidation distributable to the Bondholders are sufficient to discharge in full all amounts then due and unpaid upon such Bonds for principal and interest or (B) the Indenture Trustee determines that the Trust Estate will not continue to provide sufficient funds for the payment of principal of and interest on the Bonds as they would have become due if the Bonds had not been declared due and payable, and the Indenture Trustee obtains the consent of Holders of a majority of the Bond Balance. In determining such sufficiency or insufficiency with respect to clause (A) and (B), the Indenture Trustee may at the 41 47 expense of the Issuer, but need not, obtain and conclusively rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Trust Estate for such purpose. Irrespective of whether the conditions set forth in clauses (A) and (B) of the proviso to the second preceding sentence have been satisfied, the Indenture Trustee shall sell the Trust Estate pursuant to Section 5.04(a)(iv) if directed by the Holders of at least 66b% of the then outstanding Bond Balance. (b) If the Indenture Trustee collects any money or property pursuant to this Article V, it shall distribute the net proceeds thereof as specified in Section 8.02(c). The Indenture Trustee may fix a record date and special distribution date for any payment to Bondholders pursuant to this Section. At least 15 days before such record date, the Indenture Trustee shall mail to each Bondholder and the Issuer a notice that states the record date, the payment date and the amount to be paid. SECTION 5.05. Optional Preservation of the Trust Estate. If the Bonds have been declared to be due and payable under Section 5.02 following an Event of Default and such declaration and its consequences have not been rescinded and annulled, the Indenture Trustee may, but need not, elect to maintain possession of the Trust Estate. It is the desire of the parties hereto and the Bondholders that there be at all times sufficient funds for the payment of principal of and interest on the Bonds, and the Indenture Trustee shall take such desire into account when determining whether or not to maintain possession of the Trust Estate. In determining whether to maintain possession of the Trust Estate, the Indenture Trustee may, but need not, obtain and conclusively rely upon an opinion of an Independent investment banking or accounting firm of national reputation as to the feasibility of such proposed action and as to the sufficiency of the Trust Estate for such purpose. SECTION 5.06. Limitation of Suits. No Holder of any Bond shall have any right to institute any Proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (i) such Holder has previously given written notice to the Indenture Trustee of a continuing Event of Default; (ii) the Holders of not less than 25% of the then outstanding Bond Balance have made written request to the Indenture Trustee to institute such Proceeding in respect of such Event of Default in its own name as Indenture Trustee hereunder; (iii) such Holder or Holders have offered to the Indenture Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in complying with such request; 42 48 (iv) the Indenture Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute such Proceedings; and (v) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the Holders of 51% or more of the then outstanding Bond Balance. It is understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Bonds or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided. In the event the Indenture Trustee shall receive conflicting or inconsistent requests and indemnity from two or more groups of Holders of Bonds, each representing less than 51% of the then outstanding Bond Balance, the Indenture Trustee in its sole discretion may determine what action, if any, shall be taken, notwithstanding any other provisions of this Indenture. SECTION 5.07. Unconditional Rights of Bondholders To Receive Principal and Interest. Notwithstanding any other provisions in this Indenture, the Holder of any Bond shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Bond on or after the respective due dates thereof expressed in such Bond or in this Indenture (or, in the case of redemption, on or after the Redemption Date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. SECTION 5.08. Restoration of Rights and Remedies. If the Indenture Trustee or any Bondholder has instituted any Proceeding to enforce any right or remedy under this Indenture and such Proceeding has been discontinued or abandoned for any reason or has been determined adversely to the Indenture Trustee or to such Bondholder, then and in every such case the Issuer, the Indenture Trustee and the Bondholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee and the Bondholders shall continue as though no such Proceeding had been instituted. SECTION 5.09. Rights and Remedies Cumulative. No right or remedy herein conferred upon or reserved to the Indenture Trustee or to the Bondholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion 43 49 or employment of any other appropriate right or remedy. SECTION 5.10. Delay or Omission Not a Waiver. No delay or omission of the Indenture Trustee, or any Holder of any Bond to exercise any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Indenture Trustee, to the Bondholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee or the Bondholders, as the case may be. SECTION 5.11. Control by Bondholders. The Holders of not less than 51% of the than outstanding Bond Balance shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee with respect to the Bonds or exercising any trust or power conferred on the Indenture Trustee; provided that: (i) such direction shall not be in conflict with any rule of law or with this Indenture; (ii) subject to the express terms of Section 5.04, any direction to the Indenture Trustee to sell or liquidate the Trust Estate shall be by Holders of Bonds representing not less than 66b% of the then outstanding Bond Balance; (iii) if the conditions set forth in Section 5.05 have been satisfied and the Indenture Trustee elects to retain the Trust Estate pursuant to such Section, then any written direction to the Indenture Trustee by Holders of Bonds representing less than 66b% of the then outstanding Bond Balance to sell or liquidate the Trust Estate shall be of no force and effect; and (iv) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee that is not inconsistent with such direction. Notwithstanding the rights of Bondholders set forth in this Section, subject to Section 6.01, the Indenture Trustee need not take any action that it determines, in its sole discretion, might involve it in liability or might materially adversely affect the rights of any Bondholders not consenting to such action. SECTION 5.12. Waiver of Past Defaults. Prior to the declaration of the acceleration of the maturity of the Bonds as provided in Section 5.02, the Holders of Bonds of not less than 51% of the then outstanding Bond Balance may waive any past Default or Event of Default and its consequences except a Default (a) in payment of principal of or interest on any of the Bonds or (b) in respect of a covenant or provision hereof which cannot be modified or amended without the waiver or consent of the Holder of each Bond affected thereby. In the case of any such waiver, the Issuer, the 44 50 Indenture Trustee and the Holders of the Bonds shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereto. Upon any such waiver, such Default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured and not to have occurred, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 5.13. Undertaking for Costs. All parties to this Indenture agree, and each Holder of a Bond by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to (a) any suit instituted by the Indenture Trustee, (b) any suit instituted by any Bondholder, or group of Bondholders, in each case holding in the aggregate more than 10% of the then outstanding Bond Balance or (c) any suit instituted by any Bondholder for the enforcement of the payment of principal of or interest on any Bond on or after the respective due dates expressed in such Bond and in this Indenture (or, in the case of redemption, on or after the Redemption Date). SECTION 5.14. Waiver of Stay or Extension Laws. The Issuer covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.15. Action on Bonds. The Indenture Trustee's right to seek and recover judgment on the Bonds or under this Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to this Indenture. Neither the lien of this Indenture nor any rights or remedies of the Indenture Trustee or the Bondholders shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion 45 51 of the Trust Estate or upon any of the assets of the Issuer. Any money or property collected by the Indenture Trustee shall be applied in accordance with Section 5.04(b). SECTION 5.16. Performance and Enforcement of Certain Obligations. (a) Promptly following a request from the Indenture Trustee to do so and at the Administrator's expense, the Issuer shall take all such lawful action as the Indenture Trustee may request to compel or secure the performance and observance by the Seller or the Servicer, as applicable, of each of their obligations to the Issuer under or in connection with the Sale and Servicing Agreement, Funding Note Purchase and Security Agreement or the Mortgage Loan Purchase Agreements, as applicable, and to exercise any and all rights, remedies, powers and privileges lawfully available to the Issuer under or in connection with the Sale and Servicing Agreement, Funding Note Purchase and Security Agreement or the Mortgage Loan Purchase Agreements to the extent and in the manner directed by the Indenture Trustee, including the transmission of notices of default on the part of the Seller or the Servicer thereunder and the institution of legal or administrative actions or proceedings to compel or secure performance by the Seller or the Servicer of each of their obligations under the Sale and Servicing Agreement, Funding Note Purchase and Security Agreement or the Mortgage Loan Purchase Agreements. (b) If an Event of Default has occurred and is continuing at any time, the Indenture Trustee may, and at the direction (which direction shall be in writing or by telephone (confirmed in writing promptly thereafter)) of the Holders of not less than 51% of the then outstanding Bond Balance shall, exercise all rights, remedies, powers, privileges and claims of the Issuer against the Seller or the Servicer under or in connection with the Sale and Servicing Agreement, Funding Note Purchase and Security Agreement and the Mortgage Loan Purchase Agreements including the right or power to take any action to compel or secure performance or observance by the Seller or the Servicer, as the case may be, of each of their obligations to the Issuer thereunder and to give any consent, request, notice, direction, approval, extension or waiver under the Sale and Servicing Agreement, Funding Note Purchase and Security Agreement and the Mortgage Loan Purchase Agreements, as the case may be, and any right of the Issuer to take such action shall be suspended. 46 52 ARTICLE VI The Indenture Trustee SECTION 6.01. Duties of Indenture Trustee. (a) If an Event of Default has occurred and is continuing of which a Responsible Officer of the Indenture Trustee has actual knowledge, the Indenture Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Indenture Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Indenture Trustee; and (ii) in the absence of bad faith on its part, the Indenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of this Indenture; however, the Indenture Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Indenture Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer unless it is proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; and (iii) the Indenture Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 5.11. (d) Every provision of this Indenture that in any way relates to the Indenture Trustee is subject to paragraphs (a), (b), (c) and (g) of this Section. (e) The Indenture Trustee shall not be liable for interest on any money received by it except as the Indenture Trustee may agree in writing with the Issuer. 47 53 (f) Money held in trust by the Indenture Trustee need not be segregated from other funds except to the extent required by law or the terms of this Indenture or the Sale and Servicing Agreement. (g) No provision of this Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (h) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Indenture Trustee shall be subject to the provisions of this Section. (i) In no event shall the Indenture Trustee be required to perform, or be responsible for the manner of performance of, any of the obligations of the Servicer or any other party under the Sale and Servicing Agreement, except that LaSalle National Bank, solely in its capacity as Successor Servicer, shall perform and be responsible for such obligations during such time, if any, as the Successor Servicer shall be the successor to, and be vested with the rights, powers, duties and privileges of, the Servicer in accordance with the terms of the Sale and Servicing Agreement. For purposes of this Section 6.01 and Section 8.03(c), the Indenture Trustee, or a Responsible Officer thereof, shall be charged with actual knowledge of an Event of Default if the Indenture Trustee receives written notice of such Event of Default from the Issuer, the Servicer or Bondholders owning Bonds aggregating not less than 10% of the then outstanding Bond Balance. SECTION 6.02. Rights of Indenture Trustee. (a) The Indenture Trustee may conclusively rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Indenture Trustee need not investigate any fact or matter stated in any such document. (b) Before the Indenture Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel reasonably satisfactory in form and substance to the Indenture Trustee. The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on any such Officer's Certificate or Opinion of Counsel. (c) The Indenture Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Indenture Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. 48 54 SECTION 6.03. Individual Rights of Indenture Trustee. The Indenture Trustee in its individual or any other capacity may become the owner or pledgee of Bonds and may otherwise deal with the Issuer or its Affiliates with the same rights it would have if it were not Indenture Trustee. Any Paying Agent, Bond Registrar, co-registrar or co-paying agent may do the same with like rights. However, the Indenture Trustee must comply with Section 6.11. SECTION 6.04. Indenture Trustee's Disclaimer. The Indenture Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Bonds, it shall not be accountable for the Issuer's use of the proceeds from the Bonds, and it shall not be responsible for any statement of the Issuer in the Indenture or in any document issued in connection with the sale of the Bonds or in the Bonds other than the Indenture Trustee's certificate of authentication. SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to a Responsible Officer of the Indenture Trustee, the Indenture Trustee shall mail to each Bondholder and each Rating Agency notice of the Default within 30 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Bond (including payments pursuant to the mandatory redemption provisions of such Bond), the Indenture Trustee may withhold the notice to Bondholders if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Bondholders. SECTION 6.06. Reports by Indenture Trustee to Holders. (a) The Indenture Trustee shall deliver to each Bondholder such information as may be required to enable such Holder to prepare its federal and state income tax returns. (b) The Indenture Trustee shall mail to all Bondholders, on or before March 31, in each calendar year, beginning in 1999, a brief report relating to its eligibility and qualifications to continue as the Indenture Trustee under the Indenture, any amounts advanced by it under the Indenture, the property and funds physically held by the Indenture Trustee as such, any lease or substitution of property subject to the lien of the Indenture which has not been previously reported and any action taken by the Indenture Trustee which materially affects the Bonds and which has not been previously reported. SECTION 6.07. Compensation and Indemnity. The Issuer shall, or shall cause the Servicer to, pay to the Indenture Trustee from time to time reasonable compensation for its services. The Indenture Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Issuer shall, or shall cause the Servicer to, reimburse the Indenture Trustee for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances (and interest on advances) 49 55 of the Indenture Trustee's agents, counsel, accountants and experts and advances (and interest on advances) of the Fiscal Agent; provided, however, that the Indenture Trustee shall pay the compensation of the Fiscal Agent. The Issuer shall, or shall cause the Servicer to, indemnify the Indenture Trustee against any and all loss, liability or expense (including attorneys' fees and expenses) incurred by it in connection with the administration of this trust and the performance of its duties hereunder or under the Sale and Servicing Agreement. The Indenture Trustee shall notify the Issuer and the Servicer promptly of any claim for which it may seek indemnity. Failure by the Indenture Trustee to so notify the Issuer and the Servicer shall not relieve the Issuer or the Servicer of its obligations hereunder. The Issuer shall, or shall cause the Servicer to, defend any such claim, and the Indenture Trustee may have separate counsel and the Issuer shall, or shall cause the Administrator to, pay the fees and expenses of such counsel. Neither the Issuer nor the Servicer need reimburse any expense or indemnify against any loss, liability or expense incurred by the Indenture Trustee through the Indenture Trustee's own willful misconduct, negligence or bad faith. The Issuer's payment obligations to the Indenture Trustee and the Administrator's indemnities to the Indenture Trustee pursuant to this Section shall survive the discharge of this Indenture or the earlier resignation or removal of the Indenture Trustee. When the Indenture Trustee incurs expenses after the occurrence of a Default specified in Section 5.01(v) or (vi) with respect to the Issuer, the expenses are intended to constitute expenses of administration under Title 11 of the United States Code or any other applicable federal or state bankruptcy, insolvency or similar law. SECTION 6.08. Replacement of Indenture Trustee. No resignation or removal of the Indenture Trustee and no appointment of a successor Indenture Trustee shall become effective until the acceptance of appointment by the successor Indenture Trustee pursuant to this Section 6.08; provided that such successor Indenture Trustee must be qualified and eligible under Section 6.11. The Indenture Trustee may resign at any time by so notifying the Issuer. The Holders of 51% of the then outstanding Bond Balance may remove the Indenture Trustee by so notifying the Indenture Trustee and may appoint a successor Indenture Trustee. The Issuer shall remove the Indenture Trustee if: (i) the Indenture Trustee fails to comply with Section 6.11; (ii) the Indenture Trustee is adjudged a bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Indenture Trustee or its property; or (iv) the Indenture Trustee otherwise becomes incapable of acting. 50 56 If the Indenture Trustee resigns or is removed or if a vacancy exists in the office of Indenture Trustee for any reason (the Indenture Trustee in such event being referred to herein as the retiring Indenture Trustee), the Issuer shall promptly appoint a successor Indenture Trustee and shall notify each Rating Agency of such appointment. A successor Indenture Trustee shall deliver a written acceptance of its appointment to the retiring Indenture Trustee and to the Issuer. Thereupon the resignation or removal of the retiring Indenture Trustee shall become effective, and the successor Indenture Trustee shall have all the rights, powers and duties of the Indenture Trustee under this Indenture. The retiring Indenture Trustee shall be paid all amounts owed to it upon its resignation or removal. The successor Indenture Trustee shall mail a notice of its succession to Bondholders. The retiring Indenture Trustee shall promptly transfer all property held by it as Indenture Trustee to the successor Indenture Trustee. The retiring Indenture Trustee shall not be liable for the acts or omissions of any Successor Indenture Trustee. If a successor Indenture Trustee does not take office within 60 days after the retiring Indenture Trustee resigns or is removed, the retiring Indenture Trustee, the Issuer or the Holders of 51% of the 51% of the then outstanding Bond Balance may petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee. If the Indenture Trustee fails to comply with Section 6.11, any Bondholder may petition any court of competent jurisdiction for the removal of the Indenture Trustee and the appointment of a successor Indenture Trustee. Notwithstanding the replacement of the Indenture Trustee pursuant to this Section, the Issuer's and the Administrator's obligations under Section 6.07 shall continue for the benefit of the retiring Indenture Trustee. SECTION 6.09. Successor Indenture Trustee by Merger. If the Indenture Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Indenture Trustee; provided, that such corporation or banking association shall be otherwise qualified and eligible under Section 6.11. The Indenture Trustee shall provide the Rating Agencies prior written notice of any such transaction. In case at the time such successor or successors by merger, conversion or consolidation to the Indenture Trustee shall succeed to the trusts created by this Indenture any of the Bonds shall have been authenticated but not delivered, any such successor to the Indenture Trustee may adopt the certificate of authentication of any predecessor trustee and deliver such Bonds so authenticated; and in 51 57 case at that time any of the Bonds shall not have been authenticated, any successor to the Indenture Trustee may authenticate such Bonds either in the name of any predecessor hereunder or in the name of the successor to the Indenture Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Bonds or in this Indenture provided that the certificate of the Indenture Trustee shall have. SECTION 6.10. Appointment of Co-Indenture Trustee or Separate Indenture Trustee. (a) Notwithstanding any other provisions of this Indenture, at any time, for the purpose of meeting any legal requirement of any jurisdiction in which any part of the Trust Estate may at the time be located, the Indenture Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as a co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Bondholders, such title to the Trust Estate, or any part thereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Indenture Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 6.11 and no notice to Bondholders of the appointment of any co-trustee or separate trustee shall be required under Section 6.08 hereof. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Indenture Trustee shall be conferred or imposed upon and exercised or performed by the Indenture Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Indenture Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed the Indenture Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Trust Estate or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Indenture Trustee; (ii) no trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Indenture Trustee may at any time accept the resignation of or remove any separate trustee or co- trustee. (c) Any notice, request or other writing given to the Indenture 52 58 Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Indenture and the conditions of this Article VI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Indenture Trustee or separately, as may be provided therein, subject to all the provisions of this Indenture, specifically including every provision of this Indenture relating to the conduct of, affecting the liability of, or affording protection to, the Indenture Trustee. Every such instrument shall be filed with the Indenture Trustee. (d) Any separate trustee or co-trustee may at any time constitute the Indenture Trustee, its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Indenture on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Indenture Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. SECTION 6.11. Eligibility; Disqualification. The Indenture Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition, and the short-term obligations of the Indenture Trustee shall be rated at least A-1 by Standard & Poor's and F-1+ by Fitch. ARTICLE VII Bondholders' Lists and Reports SECTION 7.01. Issuer To Furnish Indenture Trustee Names and Addresses of Bondholders. The Issuer will furnish or cause to be furnished to the Indenture Trustee not more than five days after each Record Date, a list, in such form as the Indenture Trustee may reasonably require, of the names and addresses of the Holders of Bonds as of such Record Date, and (b) at such other times as the Indenture Trustee may request in writing, within 30 days after receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 10 days prior to the time such list is furnished; provided, however, that so long as the Indenture Trustee is the Bond Registrar, no such list shall be required to be furnished. SECTION 7.02. Preservation of Information; Communications to Bondholders. (a) The Indenture Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of the Holders of Bonds contained in the most recent list furnished to the Indenture Trustee as provided in Section 7.01 and the names 53 59 and addresses of Holders of Bonds received by the Indenture Trustee in its capacity as Bond Registrar. The Indenture Trustee may destroy any list furnished to it as provided in such Section 7.01 upon receipt of a new list so furnished. The Indenture Trustee shall make such list available to the Bondholders upon written request of three or more Bondholders or one or more Holders of Bonds evidencing not less than 25% of the then outstanding Bond Balance. (b) Bondholders shall have the right to communicate equivalent to that found in TIA ' 312(b) with other Bondholders with respect to their rights under this Indenture or under the Bonds. (c) The Issuer (and the Owner Trustee and Administrator on its behalf), the Indenture Trustee and the Bond Registrar shall have the protection equivalent to that found in TIA ' 312(c). SECTION 7.03. Fiscal Year of Issuer. Unless the Issuer otherwise determines, the fiscal year of the Issuer shall end on December 31 of each year. ARTICLE VIII Accounts, Disbursements and Releases SECTION 8.01. Collection of Money. Except as otherwise expressly provided herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Indenture Trustee pursuant to this Indenture. The Indenture Trustee shall apply all such money received by it as provided in this Indenture. Except as otherwise expressly provided in this Indenture, if any default occurs in the making of any payment or performance under any agreement or instrument that is part of the Trust Estate, the Indenture Trustee may take such action as may be appropriate to enforce such payment or performance, including the institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default under this Indenture and any right to proceed thereafter as provided in Article V. SECTION 8.02. Trust Accounts. (a) On or prior to the Closing Date, the Indenture Trustee shall establish the Bond Distribution Account. (b) On or before each Remittance Date, all amounts required to be deposited in the Bond Distribution Account with respect to the preceding Collection Period pursuant to Section 5.06 of the Sale and Servicing Agreement will be transferred from the Collection Account to the Bond Distribution Account by the Servicer. (c) On each Distribution Date and on the Redemption Date, the Indenture Trustee shall distribute all amounts on deposit in the 54 60 Bond Distribution Account, to the extent of Available Funds, to Bondholders in respect of the Bonds, in the following amounts and in the following order of priority: (i) to Holders of the Class A Bonds, the Interest Distribution Amount for such Class of Bonds for such date; (ii) to Holders of the Class B Bonds, the Interest Distribution Amount for such Class of Bonds for such date; (iii) to Holders of the Class C Bonds, the Interest Distribution Amount for such Class of Bonds for such date; and (iv) (A) with respect to any Distribution Date (other than any Distribution Date that coincides with the Redemption Date), an amount equal to the Principal Distribution Amount for such Distribution Date, together with any unpaid Principal Distribution Amounts in respect of prior Distribution Dates sequentially, first, to Holders of the Class A Bonds until the Bond Class Balance of the Class A Bonds has been reduced to zero, second, to the Holders of the Class B Bonds until the Bond Class Balance of the Class B Bonds has been reduced to zero, and third, to the Holders of the Class C Bonds until the Bond Class Balance of the Class C Bonds has been reduced to zero; and (B) with respect to the Redemption Date, first, to the Holders of the Class A Bonds, the then outstanding related Bond Class Balance; second, to the Holders of the Class B Bonds, the then outstanding related Bond Class Balance; and third, to the Holders of the Class C Bonds, the then outstanding related Bond Class Balance. (d) On each Distribution Date, the Indenture Trustee shall distribute to the Holders of the respective Classes of Bonds entitled to receive distributions of principal on such Distribution Date, the amount deposited to the Bond Distribution Account pursuant to Section 5.06(c)(1) of the Sale and Servicing Agreement. If there is more than one Class of Bonds entitled to distributions of principal on such Distribution Date, the aggregate amount described in the preceding sentence shall be allocated among such Classes on a pro rata basis in accordance with the relative amounts of such distributions of principal. SECTION 8.03. [RESERVED]. SECTION 8.04. Release of Trust Estate. (a) Subject to the payment of its fees and expenses pursuant to Section 6.07, the Indenture Trustee may, and when required by the provisions of this Indenture shall, execute instruments to release property from the lien of this Indenture, or convey the Indenture Trustee's interest in the same, in a manner and under circumstances that are not inconsistent with the provisions of this Indenture. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article VIII shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any 55 61 conditions precedent or see to the application of any moneys. (b) The Indenture Trustee shall, at such time as there are no Bonds Outstanding and all sums due the Indenture Trustee pursuant to Section 6.07 have been paid, release any remaining portion of the Trust Estate that secured the Bonds from the lien of this Indenture and release to the Issuer or any other Person entitled thereto any funds then on deposit in the Trust Accounts. The Indenture Trustee shall release property from the lien of this Indenture pursuant to this Section 8.04(b) only upon receipt of an Issuer Request accompanied by an Officer's Certificate and an Opinion of Counsel. The Issuer agrees, upon request by the Seller or the successor Servicer, as applicable, and representation by the Seller or the successor Servicer, as applicable, that it has complied with the procedure in Section 9.01 of the Sale and Servicing Agreement, to render the Issuer Request to the Indenture Trustee in accordance with Section 4.04, and take such other actions as are required in that Section. SECTION 8.05. Opinion of Counsel. The Indenture Trustee shall receive at least seven days prior written notice when requested by the Issuer to take any action pursuant to Section 8.04(a), accompanied by copies of any instruments involved, and the Indenture Trustee shall also require, as a condition to such action, an Opinion of Counsel, in form and substance satisfactory to the Indenture Trustee, stating the legal effect of any such action, outlining the steps required to complete the same, and concluding that all conditions precedent to the taking of such action have been complied with and such action will not materially and adversely impair the security for the Bonds or the rights of the Bondholders in contravention of the provisions of this Indenture; provided, however, that such Opinion of Counsel shall not be required to express an opinion as to the fair value of the Trust Estate. Counsel rendering any such opinion may rely, without independent investigation, on the accuracy and validity of any certificate or other instrument delivered to the Indenture Trustee in connection with any such action. 56 62 ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Bondholders. Without the consent of any Bondholders and with prior notice to the Rating Agencies, the Indenture Trustee and the Issuer may execute a supplemental indenture to cure any ambiguity or to correct or supplement any provision or add provisions to, or change in any manner or eliminate any provisions of, this Indenture or to modify in any manner the rights of the Bondholders under this Indenture; provided, however, that such action shall not, as evidenced by an opinion of counsel, adversely affect in any material respect the interest of any Bondholder; provided that any supplemental indenture will be deemed not to adversely affect the interests of the Bondholders if it does not result in a downgrade, withdrawal or qualification of the then current rating on any Class of Bonds as confirmed in writing by each Rating Agency. The Indenture Trustee is hereby authorized to join in the execution of any such supplemental indenture and to make any further appropriate agreements and stipulations that may be therein contained. SECTION 9.02. Supplemental Indentures with Consent of Bondholders. (a) The Issuer and the Indenture Trustee, with prior notice to the Rating Agencies and with the consent of the holders of Bonds evidencing not less than 51% of the Bond Balance, may enter into supplemental indentures for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Agreement or of modifying in any manner the rights of the Bondholders under this Indenture; provided, however, that no such supplemental indenture shall, without (i) the consent of the Holder of each outstanding Bond affected thereby and (ii) receipt of an affirmation from each Rating Agency that such supplemental indenture shall not result in a downgrade, withdrawal or qualification of the ratings then assigned by such Rating Agency to such Class of Bonds: (A) change the date of payment of the principal of, or interest on, any Bond or reduce the principal amount thereof, the interest rate specified thereon, the redemption price with respect thereto, change the provisions of this Indenture relating to the application of collections on, or the proceeds of the sale of, the Trust Estate to payment of principal of or interest on the Bonds, or change any place of payment where, or the coin or currency in which, any Bond or any interest thereon is payable, or impair the right to institute suit for the enforcement of the provisions of this Indenture requiring the application of funds available therefor, as provided in Article V, to the payment of any such amount due on the Bonds on or after the respective due dates thereof (or, in the case of redemption, on or after the Redemption Date); (B) reduce the percentage of the Bond Balance, the consent of the Holders of which is required for any such supplemental indenture, or the consent of the Holders of which is required for the waiver of compliance with certain provisions of this Indenture 57 63 or the waiver of past Defaults or Events of Default and their consequences; (C) modify or alter the provisions of the proviso to the definition of the term "Outstanding"; (D) reduce the percentage of the then outstanding Bond Balance required to direct the Indenture Trustee to direct the Issuer to sell or liquidate the Trust Estate pursuant to Section 5.04; (E) modify any provision of this Section except to increase any percentage specified herein or to provide that certain additional provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Bond affected thereby; (F) modify any of the provisions of this Indenture in such manner as to affect the calculation of the amount of any payment of interest or principal due on any Bond on any Distribution Date (including the calculation of any of the individual components of such calculation) or to affect the rights of the Bondholders to the benefit of any provisions for the mandatory redemption of the Bonds contained herein; or (G) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture with respect to any part of the Trust Estate or, except as otherwise permitted or contemplated herein, terminate the lien of this Indenture on any property at any time subject thereto or deprive the Holder of any Bond of the security provided by the lien of this Indenture, provided, further, that no such supplemental indenture shall, without the consent of all Bondholders, modify the provisions of this Indenture described in this Section 9.02(a). (b) It shall not be necessary for any Act of Bondholders under this Section that such Bondholders approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Bondholders approve the substance thereof. (c) Promptly after the execution by the Issuer and the Indenture Trustee of any supplemental indenture pursuant to this Section 9.02, the Indenture Trustee shall mail to the Holders of the Bonds to which such amendment or supplemental indenture relates a notice setting forth in general terms the substance of such supplemental indenture. Any failure of the Indenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. Execution of Supplemental Indentures. In executing, or permitting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modification thereby of the trusts created by this Indenture, the Indenture Trustee shall be entitled to receive, and subject to Sections 6.01 and 6.02, shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties, liabilities or immunities under this Indenture or otherwise. Before entering into any supplemental indenture, the Indenture Trustee may require delivery of a tax opinion with respect to treatment of the Bonds as debt and the treatment of the Trust 58 64 Estate as (i) an entity whose existence separate from Allied REIT (or another corporation qualifying as a real estate investment trust) will be disregarded for federal income tax purposes (such as a qualified REIT subsidiary) or (ii) as an entity not subject to federal income tax. SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and shall be deemed to be modified and amended in accordance therewith with respect to the Bonds affected thereby, and the respective rights, limitations of rights, obligations, duties, liabilities and immunities under this Indenture of the Indenture Trustee, the Issuer and the Holders of the Bonds shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.05. Reference in Bonds to Supplemental Indentures. Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer or the Indenture Trustee shall so determine, new Bonds so modified as to conform, in the opinion of the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Bonds. 59 65 ARTICLE X Redemption of Bonds SECTION 10.01. Redemption. At (i) the option of the Seller on any Distribution Date on or after the Distribution Date on which the Bond Balance is less than 10% of the initial Bond Balance and (ii) in the event that ACC is no longer the Servicer, at the option of the Successor Servicer on any Distribution Date on or after the Distribution Date on which the Bond Balance is less than 10% of the initial Bond Balance, the Seller or the Successor Servicer, as applicable, shall be entitled to redeem the Bonds in full, but not in part. To exercise such option, the Seller or the Successor Servicer, as applicable, shall deposit to the Collection Account on the Determination Date preceding the Redemption Date, pursuant to Section 5.04 of the Sale and Servicing Agreement, an amount equal to the Redemption Price and shall succeed to all interests in and to the Funding Note and Allied Interests. The Seller or the Successor Servicer, as applicable, shall furnish the Rating Agencies notice of such redemption. If the Bonds are to be redeemed pursuant to this Section 10.01, the Seller or the Successor Servicer shall furnish notice of such election to the Indenture Trustee not later than 20 days prior to the Redemption Date and the Seller or the Successor Servicer, as applicable, shall deposit the Redemption Price by 10:00 A.M. New York City time on the Remittance Date preceding the Redemption Date with the Indenture Trustee in the Bond Distribution Account, whereupon all then outstanding Bonds shall be due and payable on the Redemption Date upon the furnishing of a notice complying with Section 10.02 to each Holder of the Bonds. SECTION 10.02. Form of Redemption Notice. (a) Notice of redemption under Section 10.01 shall be given by the Indenture Trustee by first-class mail, postage prepaid, or by facsimile mailed or transmitted not later than 10 days prior to the applicable Redemption Date to each person that was a Holder of Bonds as of the close of business on the Record Date preceding the applicable Redemption Date, at such Holder's address or facsimile number appearing in the Bond Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; and (iii) the place where such Bonds are to be surrendered for payment of the Redemption Price (which shall be the office or agency of the Issuer to be maintained as provided in Section 3.02). Notice of redemption of the Bonds shall be given by the Indenture Trustee in the name and at the expense of the Issuer. Failure to give notice of redemption, or any defect therein, to any Holder of 60 66 any Bond shall not impair or affect the validity of the redemption of any other Bond. SECTION 10.03. Bonds Payable on Redemption Date. The Bonds shall, following notice of redemption as required by Section 10.02, on the Redemption Date become due and payable at the Redemption Price and (unless the Seller or a Successor Servicer, as applicable, shall default in the payment of the Redemption Price) no interest shall accrue on the Redemption Price for any period after the date to which accrued interest is calculated for purposes of calculating the Redemption Price. ARTICLE XI Miscellaneous SECTION 11.01. Compliance Certificates and Opinions, etc. (a) Upon any application or request by the Issuer to the Indenture Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Indenture Trustee (i) an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and (ii) an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each signatory of such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such signatory, such signatory has made such examination or investigation as is necessary to enable such signatory to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such signatory, such condition or covenant has been complied with. In providing any such certificate, an Authorized Officer of the Owner Trustee may, without conducting any independent investigation, rely solely on a back-up certificate, opinion or letter of the Administrator, Servicer or any Certificateholder, and may state such reliance in satisfaction of the foregoing statements. 61 67 (b) (i) Prior to the deposit of any Collateral or other property or securities with the Indenture Trustee that is to be made the basis for the release of any property or securities subject to the lien of this Indenture, the Issuer shall, in addition to any obligation imposed in Section 11.01(a) or elsewhere in this Indenture, furnish to the Indenture Trustee an Officer's Certificate certifying or stating the opinion of each person signing such certificate as to the fair value (within 90 days of such deposit) to the Issuer of the Collateral or other property or securities to be so deposited. (ii) Whenever the Issuer is required to furnish to the Indenture Trustee an Officer's Certificate certifying or stating the opinion of any signer thereof as to the matters described in clause (i) above, the Issuer shall also deliver to the Indenture Trustee an Independent Certificate as to the same matters, if the fair value to the Issuer of the securities to be so deposited and of all other such securities made the basis of any such withdrawal or release since the commencement of the then-current fiscal year of the Issuer, as set forth in the certificates delivered pursuant to clause (i) above and this clause (ii), is 10% or more of the Bond Balance, but such a certificate need not be furnished with respect to any securities so deposited, if the fair value thereof to the Issuer as set forth in the related Officer's Certificate is less than $25,000 or less than one percent of the then outstanding Bond Balance. (iii) Whenever any property or securities are to be released from the lien of this Indenture, the Issuer shall also furnish to the Indenture Trustee an Officer's Certificate certifying or stating the opinion of each person signing such certificate as to the fair value (within 90 days of such release) of the property or securities proposed to be released and stating that in the opinion of such person the proposed release will not impair the security under this Indenture in contravention of the provisions hereof. (iv) Whenever the Issuer is required to furnish to the Indenture Trustee an Officer's Certificate certifying or stating the opinion of any signer thereof as to the matters described in clause (iii) above, the Issuer shall also furnish to the Indenture Trustee an Independent Certificate as to the same matters if the fair value of the property or securities and of all other property, other than property as contemplated by clause (v) below or securities released from the lien of this Indenture since the commencement of the then-current calendar year, as set forth in the certificates required by clause (iii) above and this clause (iv), equals 10% or more of the then outstanding Bond Balance, but such certificate need not be furnished in the case of any release of property or securities if the fair value thereof as set forth in the related Officer's Certificate is less than $25,000 or less than one percent of the then outstanding Bond Balance. 62 68 (v) Notwithstanding Section 4.04 or any other provision of this Section, the Issuer may, without compliance with the requirements of the other provisions of this Section, (A) collect, liquidate, sell or otherwise dispose of Mortgage Loans, the Mortgaged Properties and the Funding Note as and to the extent permitted or required by the Basic Documents and (B) make cash payments out of the Trust Accounts as and to the extent permitted or required by the Basic Documents, so long as the Issuer shall deliver to the Indenture Trustee every six months, commencing six months from the first Distribution Date, an Officer's Certificate of the Issuer stating that all the dispositions of Collateral described in clauses (A) or (B) above that occurred during the six calendar months preceding the delivery of such Officer's Certificate were in the ordinary course of the Issuer's business and that the proceeds thereof were applied in accordance with the Basic Documents. SECTION 11.02. Form of Documents Delivered to Indenture Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Authorized Officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which such officer's certificate or opinion is based are erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Servicer, the Special Servicer, the Seller, the Issuer or the Administrator, stating that the information with respect to such factual matters is in the possession of the Servicer, the Special Servicer, the Seller, the Issuer or the Administrator, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. Whenever in this Indenture, in connection with any application or certificate or report to the Indenture Trustee, it is provided that the Issuer shall deliver any document as a condition of the granting of such application, or as evidence of the Issuer's 63 69 compliance with any term hereof, it is intended that the truth and accuracy, at the time of the granting of such application or at the effective date of such certificate or report (as the case may be), of the facts and opinions stated in such document shall in such case be conditions precedent to the right of the Issuer to have such application granted or to the sufficiency of such certificate or report. The foregoing shall not, however, be construed to affect the Indenture Trustee's right to rely upon the truth and accuracy of any statement or opinion contained in any such document as provided in Article VI. SECTION 11.03. Acts of Bondholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Bondholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Bondholders in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Bondholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Indenture Trustee deems sufficient. (c) The ownership of Bonds shall be proved by the Bond Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Bonds shall bind the Holder of every Bond issued upon the registration thereof or in exchange therefor or in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Bond. 64 70 SECTION 11.04. Notices, etc., to Indenture Trustee, Issuer and Rating Agencies. Any request, demand, authorization, direction, notice, consent, waiver or Act of Bondholders or other documents provided or permitted by this Indenture shall be in writing and, if such request, demand, authorization, direction, notice, consent, waiver or act of Bondholders is to be made upon, given or furnished to or filed with: (i) the Indenture Trustee by any Bondholder or by the Issuer, shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Indenture Trustee at its Corporate Trust Office; or (ii) the Issuer by the Indenture Trustee or by any Bondholder, shall be sufficient for every purpose hereunder if in writing and mailed first-class, postage prepaid to the Issuer addressed to: Allied Capital Commercial Mortgage Trust 1998-1, in care of Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trustee Administration Department, or at any other address previously furnished in writing to the Indenture Trustee by the Issuer or the Administrator. The Issuer shall promptly transmit any notice received by it from the Bondholders to the Indenture Trustee. Notices required to be given to the Rating Agencies by the Issuer, the Indenture Trustee or the Owner Trustee shall be in writing, personally delivered or mailed by certified mail, return receipt requested, to (i) in the case of Fitch, at the following address: Fitch IBCA, Inc., One State Street Plaza, New York, New York 10004, Attention: Commercial Mortgage Surveillance and (ii) in the case of Standard & Poor's, at the following address: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., 25 Broadway (15th Floor), New York, New York 10004, Attention: Asset Backed Surveillance Department; or as to each of the foregoing, at such other address as shall be designated by written notice to the other parties. SECTION 11.05. Notices to Bondholders; Waiver. Where this Indenture provides for notice to Bondholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class, postage prepaid to each Bondholder affected by such event, at such Holder's address as it appears on the Bond Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Bondholders is given by mail, neither the failure to mail such notice nor any defect in any notice so mailed to any particular Bondholder shall affect the sufficiency of such notice with respect to other Bondholders, and any notice that is mailed in the manner herein provided shall conclusively be presumed to have been duly given. Where this Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive 65 71 such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Bondholders shall be filed with the Indenture Trustee but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such a waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event to Bondholders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. Where this Indenture provides for notice to the Rating Agencies, failure to give such notice shall not affect any other rights or obligations created hereunder, and shall not under any circumstance constitute a Default or Event of Default. SECTION 11.06. Alternate Payment and Notice Provisions. Notwithstanding any provision of this Indenture or any of the Bonds to the contrary, the Issuer may enter into any agreement with any Holder of a Bond providing for a method of payment, or notice by the Indenture Trustee or any Paying Agent to such Holder, that is different from the methods provided for in this Indenture for such payments or notices. The Issuer will furnish to the Indenture Trustee a copy of each such agreement and the Indenture Trustee will cause payments to be made and notices to be given in accordance with such agreements. SECTION 11.07. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 11.08. Successors and Assigns. All covenants and agreements in this Indenture and the Bonds by the Issuer shall bind its successors and assigns, whether so expressed or not. All agreements of the Indenture Trustee in this Indenture shall bind its successors, co-trustees and agents. SECTION 11.09. Separability. In case any provision in this Indenture or in the Bonds shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.10. Benefits of Indenture. Nothing in this Indenture or in the Bonds, express or implied, shall give to any Person, other than the parties hereto, and their successors hereunder, and the Bondholders, and any other party secured hereunder, and any other Person with an ownership interest in any part of the Trust Estate, any benefit or any legal or equitable right, remedy or claim under this Indenture. 66 72 SECTION 11.11. Legal Holidays. In any case where the date on which any payment is due shall not be a Business Day, then (notwithstanding any other provision of the Bonds or this Indenture) payment need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date on which nominally due, and no interest shall accrue for the period from and after any such nominal date. SECTION 11.12. GOVERNING LAW. THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. SECTION 11.13. Counterparts. This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.14. Recording of Indenture. If this Indenture is subject to recording in any appropriate public recording offices, such recording is to be effected by the Issuer and at its expense accompanied by an Opinion of Counsel (which may be counsel to the Indenture Trustee or any other counsel reasonably acceptable to the Indenture Trustee) to the effect that such recording is necessary either for the protection of the Bondholders or any other Person secured hereunder or for the enforcement of any right or remedy granted to the Indenture Trustee under this Indenture. SECTION 11.15. Trust Obligation. No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Bonds or under this Indenture or any certificate or other writing delivered in connection herewith or therewith, against (i) the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer, including the Seller, or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Indenture Trustee or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such partner, owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. For all purposes of this Indenture, in the performance of any duties or obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and entitled to the benefits of, the terms and provisions of Article VI, VII and VIII of the Trust Agreement. SECTION 11.16. No Petition. The Indenture Trustee, by entering 67 73 into this Indenture, and each Bondholder, by accepting a Bond, hereby covenant and agree that they will not at any time, prior to the date that is one year and one day after the termination of the Indenture, institute against the Seller or the Issuer, or join in any institution against the Seller or the Issuer of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Bonds, this Indenture or any of the Basic Documents. SECTION 11.17. Inspection. The Issuer agrees that, on reasonable prior notice, it will permit any representative of the Indenture Trustee or any Rating Agency, during the Issuer's normal business hours, to examine all the books of account, records, reports and other papers of the Issuer, to make copies and extracts therefrom, to cause such books to be audited by Independent certified public accountants, and to discuss the Issuer's affairs, finances and accounts with the Issuer's officers, employees and Independent certified public accountants, all at such reasonable times and as often as may be reasonably requested. The Indenture Trustee shall, and shall cause its representatives to, hold in confidence all such information except to the extent disclosure may be required by law (and all reasonable applications for confidential treatment are unavailing) and except to the extent that the Indenture Trustee may reasonably determine that such disclosure is consistent with its obligations hereunder. Section 11.18. Limitation on Liability of Owner Trustee. This Indenture, and any Bonds issued in connection herewith, have been or will be executed on behalf of the Issuer, a Delaware business trust, by Wilmington Trust Company solely in its capacity as Owner Trustee under the Trust Agreement, and not in its individual capacity. In no case shall Wilmington Trust Company (or any entity acting as successor or additional trustee) be personally liable for or on account of any of the statements, representations, warranties, covenants or obligations of the Issuer hereunder. * * * * * 68 74 IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have caused this Indenture to be duly executed by their respective officers, thereunto duly authorized and duly attested, all as of the day and year first above written. ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee by: /s/ W. CHRIS SPONENBERG ---------------------------------- Name: W. Chris Sponenberg Title: Senior Financial Services Officer LASALLE NATIONAL BANK, not in its individual capacity but solely as Indenture Trustee By: /s/ MICHAEL B. EVANS ------------------------------ Name: Michael B. Evans Title: First Vice President 75 STATE OF NEW YORK } } ss.: COUNTY OF NEW YORK } BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day personally appeared Chris Sponenberg, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said Allied Capital Commercial Mortgage Trust 1998-1, a Delaware business trust, and that s/he executed the same as the act of said business trust for the purpose and consideration therein expressed, and in the capacities therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 30th day of January, 1998. /s/ RYAN M. O'CONNOR ----------------------------------------------- Notary Public in and for the State of New York. My commission expires: 11/10/99 - ----------------------------------------------- 76 STATE OF NEW YORK } } ss.: COUNTY OF NEW YORK } BEFORE ME, the undersigned authority, a Notary Public in and for said county and state, on this day personally appeared Michael Evans, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of LaSalle National Bank, a national banking association, and that s/he executed the same as the act of said national banking association for the purpose and consideration therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 31 day of January, 1998. /s/ RYAN M. O'CONNOR ---------------------------------------------- Notary Public in and for the State of New York. My commission expires: 11/10/99 - ------------------------------------------------ 77 SCHEDULE A 78 EXHIBIT A [FORM OF RULE 144A-IAI BOND] [FORM OF REGULATION S PERMANENT GLOBAL BOND] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE INDENTURE TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE BONDS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A BUYER THAT THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (4) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a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o. CUSIP NO.:__________ ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 COMMERCIAL MORTGAGE COLLATERALIZED BONDS, CLASS [A][B][C] Allied Capital Commercial Mortgage Trust 1998-1, a business trust organized and existing under the laws of the State of Delaware (herein referred to as the "Issuer"), for value received, hereby promises to pay to ____________, or registered assigns, the principal sum of [ ] DOLLARS, payable on each Distribution Date in an amount equal to the result obtained by multiplying (i) a fraction the numerator of which is $ [INSERT INITIAL PRINCIPAL AMOUNT OF THIS BOND] and the denominator of which is $[PRINCIPAL AMOUNT OF CLASS] by (ii) the aggregate amount, if any, payable from the Bond Distribution Account in respect of principal on the Class [A][B][C] Bonds pursuant to Section 8.02 of the Indenture dated as of January 1, 1998 (the "Indenture"), between the Issuer and LaSalle National Bank, a national banking association, as Indenture Trustee (the "Indenture Trustee"); provided, however, that the entire unpaid principal amount of this Bond shall be due and payable on the earlier of January 25, 2028 (the "Final Rated Distribution Date") and the Redemption Date, if any, pursuant to Section 10.01 of the Indenture. Capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture. On each Distribution Date, until the outstanding principal amount of this Bond is paid or made available for payment, this Bond will accrue interest, payable on each Distribution Date, through the last day of the preceding calendar month on the outstanding principal amount of this Bond as of the preceding Distribution Date (after giving effect to payments made on such preceding Distribution Date) at a rate equal to [6.31][6.60][6.71]% per annum, based on a 360-day year consisting of twelve 30-day months. "Distribution Date" means the 25th day of each month, or, if any such day is not a Business Day, the immediately following Business Day, commencing in February 1998. The Issuer will pay interest and principal on this Bond on each Distribution Date as further specified in Section 8.02 of the Indenture. The principal of and interest on this Bond are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Issuer with respect to this Bond shall be applied first to interest due and payable on this Bond as provided A-3 81 above and then to the unpaid principal of this Bond. Reference is made to the further provisions of this Bond set forth on the reverse hereof, which shall have the same effect as though fully set forth on the face of this Bond. Unless the certificate of authentication hereon has been executed by the Indenture Trustee whose name appears below by manual signature, this Bond shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. A-4 82 IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in facsimile, by its Authorized Officer, as of the date set forth below. Date:_____________________ ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By:____________________________________ Authorized Officer INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Bonds designated above and referred to in the within-mentioned Indenture. Date:_____________________ LASALLE NATIONAL BANK, not in its individual capacity but solely as Indenture Trustee By:____________________________ Authorized Signatory A-5 83 REVERSE OF BOND This Bond is one of a duly authorized issue of Bonds of the Issuer, issued under the Indenture, to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights and obligations thereunder of the Issuer, the Indenture Trustee and the Holders of the Bonds. The Bonds are subject to all terms of the Indenture. The Bonds will be secured by the Collateral pledged as security therefor as provided in the Indenture. The entire unpaid principal amount of this Bond shall be due and payable on the earlier of the Final Rated Distribution Date and the Redemption Date, if any, pursuant to Section 10.01 of the Indenture. Section 10.01 of the Indenture provides that on any Distribution Date on or after the Distribution Date on which the Bond Balance is less than 10% of the initial Bond Balance the Bonds may be redeemed in full, but not in part, (i) at the option of the Seller or (ii) in the event that Allied Capital Corporation is no longer the Servicer, at the option of the Successor Servicer. Notwithstanding the foregoing, the entire unpaid principal amount of the Bonds may be declared immediately due and payable, if not previously paid, in the manner provided in Section 5.02 of the Indenture on the date on which an Event of Default shall have occurred and be continuing by the Indenture Trustee or Holders of Bonds representing not less than 51% of the then outstanding Bond Balance. The principal of each Bond shall be payable monthly on each Distribution Date. All principal payments on each Class of Bonds shall be made pro rata to the Bondholders of each Class entitled thereto. Any installment of interest or principal payable on a Bond that is punctually paid or duly provided for by the Issuer on the applicable Distribution Date, other than the final Distribution Date, shall be paid to the Person in whose name such Bond is registered on the Record Date by check mailed first-class postage prepaid to such Person's address as it appears on the Bond Register on such Record Date, except that, (i) unless Definitive Bonds have been issued, with respect to Bonds registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payment will be made by wire transfer in immediately available funds to the account designated by such nominee and (ii) if Definitive Bonds have been issued pursuant to Section 2.12 of the Indenture, payment thereon shall be made by wire transfer in immediately available funds to the account designated by the Holder of such Bonds if such Bondholder (a) is the registered Holder of such Bonds and (b) has provided the Indenture Trustee with wiring instructions in writing five Business Days prior to the related Distribution Date or has provided the Indenture Trustee with A-6 84 such instructions for any previous Distribution Date. Any reduction in the principal amount of this Bond effected by any payments made on any Distribution Date shall be binding upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not noted hereon. If funds are expected to be available, as provided in the Indenture, for payment in full of the then remaining unpaid principal amount of this Bond on a Distribution Date, then the Indenture Trustee, in the name of and on behalf of the Issuer, will notify the Person who was the Registered Holder hereof as of the Record Date preceding such Distribution Date by notice mailed or transmitted by facsimile prior to such Distribution Date, and the amount then due and payable shall be payable only upon presentation and surrender of this Bond at the Indenture Trustee's principal Corporate Trust Office. The Indenture Trustee shall notify the Person in whose name a Bond is registered at the close of business on the Record Date preceding the Distribution Date on which the Issuer expects the final installment of principal of and interest on such Bond to be paid. Such notice shall be mailed no later than five days prior to such final Distribution Date and shall specify that such final installment will be payable only upon presentation and surrender of such Bond and shall specify the place where such Bond may be presented and surrendered for payment of such installment. Notices in connection with redemptions of Bonds shall be mailed to Bondholders as provided in Section 10.02 of the Indenture. The Issuer covenants that if (i) default is made in the payment of interest due on any Bond on any Distribution Date, or (ii) default is made in the payment of the amount of principal of any Bond due on any Distribution Date, the Issuer will, upon demand of the Indenture Trustee, pay to it, for the benefit of the Holders of the Bonds, the whole amount then due and payable on such Bonds for principal and interest, with interest on the overdue principal and, to the extent payment at such rate of interest shall be legally enforceable, on overdue installments of interest at the rate borne by the Bonds and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances (and interest on Advances) of the Servicer, the Special Servicer, the Indenture Trustee and the Fiscal Agent, and their agents and counsel. The Issuer shall cause to be kept the Bond Register in which, subject to such reasonable regulations as it may prescribe and the restrictions on transfers of the Bonds set forth herein, the Issuer shall provide for the registration of Bonds and the registration of transfers of Bonds. The Indenture Trustee initially shall be the A-7 85 Bond Registrar for the purpose of registering Bonds and transfers of Bonds as herein provided. The Issuer shall not be required to make and the Bond Registrar need not register transfers or exchanges of Bonds selected for redemption or of any Bond for a period of 15 days preceding the due date for any payment with respect to the Bond. Subject to the restrictions and limitations set forth in the Indenture and on the face hereof, upon surrender for exchange or registration of transfer of any Bond at the office or agency of the Issuer to be maintained as provided in Section 3.02 of the Indenture, the Issuer shall execute, and the Indenture Trustee shall authenticate and the Bondholder shall obtain from the Indenture Trustee, as applicable, (i) the Bonds which the Bondholder making the exchange is entitled to receive or (ii) in the name of the designated transferee or transferees, one or more new Bonds of the same Class in any authorized denominations, of a like aggregate principal amount. All Bonds issued upon any registration of transfer or exchange of Bonds shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under the Indenture, as the Bonds surrendered upon such registration of transfer or exchange. Every Bond presented or surrendered for registration of transfer or exchange shall be duly endorsed by, or be accompanied by a written instrument of transfer in form reasonably satisfactory to the Indenture Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing, with such signature guaranteed by an "eligible guarantor institution" meeting the requirements of the Bond Registrar, which requirements include membership or participation in the Securities Transfer Agent's Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Bond Registrar in addition to, or in substitution for, STAMP, all in accordance with the Exchange Act. No service charge shall be made to a Holder for any registration of transfer or exchange of Bonds, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Bonds. No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on the Bonds or under the Indenture or any certificate or other writing delivered in connection herewith or therewith, against (i) the Indenture Trustee or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer, including the Seller, or (iii) any partner, owner, beneficiary, agent, officer, director, employee or agent of the Indenture Trustee A-8 86 or the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer, the Owner Trustee or the Indenture Trustee or of any successor or assign of the Indenture Trustee or the Owner Trustee in its individual capacity, except as any such Person may have expressly agreed (it being understood that the Indenture Trustee and the Owner Trustee have no such obligations in their individual capacity) and except that any such partner, owner or beneficiary shall be fully liable, to the extent provided by applicable law, for any unpaid consideration for stock, unpaid capital contribution or failure to pay any installment or call owing to such entity. The Issuer has entered into the Indenture, and the Bonds will be issued, with the intention that, for federal, state and local income, single business and franchise tax purposes, the Bonds will qualify as indebtedness secured by the Trust Estate. Each Bondholder, by its acceptance of a Bond (and each Bond Owner by its acceptance of an interest in the applicable Book-Entry Bond), agrees to treat the Bonds for federal, state and local income and franchise tax purposes as indebtedness. Prior to due presentation for registration of transfer of any Bond, the Issuer, the Indenture Trustee and any agent of the Issuer and the Indenture Trustee may treat the Person in whose name any Bond is registered (as of the day of determination) as the owner of such Bond for the purpose of receiving payments of principal of and interest, if any, on such Bond and for all other purposes whatsoever, whether or not such Bond be overdue, and none of the Issuer, the Indenture Trustee or any agent of the Issuer and the Indenture Trustee shall be affected by notice to the contrary. Without the consent of any Bondholders and with prior notice to the Rating Agencies, the Indenture Trustee and the Issuer may execute a supplemental indenture to cure any ambiguity or to correct or supplement any provision or add provisions to, or change in any manner or eliminate any provisions of, the Indenture or to modify in any manner the rights of the Bondholders under the Indenture; provided, however, that such action shall not, as evidenced by an opinion of counsel, adversely affect in any material respect the interest of any Bondholder. In addition, subject to Section 9.02 of the Indenture, the Issuer and the Indenture Trustee, with prior notice to the Rating Agencies and with the consent of the holders of Bonds evidencing not less than 51% of the Bond Balance, may enter into supplemental indentures for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Agreement or of modifying in any manner the rights of the Bondholders under the Indenture. Upon the execution of any supplemental indenture, the Indenture shall be and shall be deemed to be modified and amended in accordance therewith with respect to the Bonds affected thereby, and the respective rights, A-9 87 limitations of rights, obligations, duties, liabilities and immunities under the Indenture of the Indenture Trustee, the Issuer and the Holders of the Bonds shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of the Indenture for any and all purposes. The term "Issuer" as used in this Bond includes any successor to the Issuer under the Indenture. The Bonds are issuable only in registered form in denominations as provided in the Indenture, subject to certain limitations therein set forth. This Bond and the Indenture shall be construed in accordance with the laws of the State of New York, without reference to its conflict of law provisions, and the obligations, rights and remedies of the parties hereunder and thereunder shall be determined in accordance with such laws. Notwithstanding any other provisions in the Indenture, the Holder of any Bond shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Bond on or after the respective due dates thereof expressed in such Bond or in the Indenture (or, in the case of redemption, on or after the Redemption Date) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. A-10 88 ASSIGNMENT Social Security or taxpayer I.D. or other identifying number of assignee: ________________________________________________________________________________ FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto: ________________________________________________________________________________ (name and address of assignee) the within Bond and all rights thereunder, and hereby irrevocably constitutes and appoints ________________________________________, attorney, to transfer said Bond on the books kept for registration thereof, with full power of substitution in the premises. Dated:_________________________________________________________________*/ Signature Guaranteed: __________________________________________*/ ________________________ */ NOTICE: The signature to this assignment must correspond with the name of the registered owner as it appears on the face of the within Bond in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Bond Registrar, which requirements include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Bond Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-11 89 CERTIFICATION In connection with any transfer of any of the Bonds evidenced by this certificate occurring prior to the date that is two years (or such shorter period as may then be applicable under the Securities Act) after the later of the date of original issuance of such Bonds and the last date, if any, on which such Bonds were owned by the Seller or any Affiliate of the Seller, the undersigned confirms that such Bonds are being transferred: CHECK ONE BOX BELOW (1) G to the Seller; or (2) G pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or (3) G pursuant to and in compliance with Regulation S under the Securities Act of 1933; or (4) G to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933 that has furnished to the Indenture Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Indenture Trustee): or (5) G pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Indenture Trustee will refuse to register any of the Bonds evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (3), (4) or (5) is checked, the Indenture Trustee may require, prior to registering any such transfer of the Bonds such legal opinions, certifications and other information as the Administrator has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. _________________________________________ Signature Signature Guarantee:* ________________________________________________________________________________ TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Bond for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges ___________ * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. A-12 90 that it has received such information regarding the Seller and the Issuer as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ______________________________________ Signature NOTICE: To be executed by an executive officer. A-13 91 [TO BE ATTACHED TO GLOBAL BONDS] SCHEDULE A The initial principal amount at maturity of this Global Bond shall be $ . -------------- The following increases or decreases in the initial Bond Class Balance of this Global Bond have been made: ================================================================================ Date Amount of Amount of Initial Signature Made increase in decrease in Bond Class of Initial Bond Initial Balance of authorized Class Bond Class this Global officer of Balance of Balance of Bond Indenture this Global this Global following Trustee or Bond Bond such DTC decrease or Custodian increase ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ A-14 92 EXHIBIT B [FORM OF REGULATION S TEMPORARY GLOBAL BOND] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE INDENTURE TRUSTEE OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE BONDS EVIDENCED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A BUYER THAT THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), OR (4) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a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o. R- CUSIP NO.:_____________ ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 COMMERCIAL MORTGAGE COLLATERALIZED BONDS, CLASS [A][B][C] Allied Capital Commercial Mortgage Trust 1998-1, a business trust organized and existing under the laws of the State of Delaware (herein referred to as the "Issuer"), for value received, hereby promises to pay to ____________, or registered assigns, the principal sum of [ ] DOLLARS, payable on each Distribution Date in an amount equal to the result obtained by multiplying (i) a fraction the numerator of which is $ [INSERT INITIAL PRINCIPAL AMOUNT OF THIS BOND] and the denominator of which is $[PRINCIPAL AMOUNT OF CLASS] by (ii) the aggregate amount, if any, payable from the Bond Distribution Account in respect of principal on the Class [A][B][C] Bonds pursuant to Section 8.02 of the Indenture dated as of January 1, 1998 (the "Indenture"), between the Issuer and LaSalle National Bank, a national banking association, as Indenture Trustee (the "Indenture Trustee"); provided, however, that the entire unpaid principal amount of this Bond shall be due and payable on the earlier of January 25, 2028 (the "Final Rated Distribution Date") and the Redemption Date, if any, pursuant to Section 10.01 of the Indenture. Capitalized terms used and not defined herein shall have the meanings assigned to them in the Indenture. On each Distribution Date, until the outstanding principal amount of this Bond is paid or made available for payment, this Bond will accrue interest, payable on each Distribution Date, through the last day of the preceding calendar month on the outstanding principal amount of this Bond as of the preceding Distribution Date (after giving effect to payments made on such preceding Distribution Date) at a rate equal to [6.31][6.60][6.71]% per annum, based on a 360-day year consisting of twelve 30-day months. "Distribution Date" means the 25th day of each month, or, if any such day is not a Business Day, the immediately following Business Day, commencing in February 1998. The Issuer will pay interest and principal on this Bond on each Distribution Date as further specified in Section 8.02 of the Indenture. The principal of and interest on this Bond are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments made by the Issuer with respect to this Bond shall be applied first to interest due and payable on this Bond as provided _________ * Denominations of $100,000 and integral multiples of $1 in excess thereof. B-3 95 above and then to the unpaid principal of this Bond. Reference is made to the further provisions of this Bond set forth on the reverse hereof, which shall have the same effect as though fully set forth on the face of this Bond. Unless the certificate of authentication hereon has been executed by the Indenture Trustee whose name appears below by manual signature, this Bond shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. B-4 96 IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in facsimile, by its Authorized Officer, as of the date set forth below. Date:_____________________ ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1, By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By:___________________________________ Authorized Officer INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Bonds designated above and referred to in the within-mentioned Indenture. Date:_____________________ LASALLE NATIONAL BANK, not in its individual capacity but solely as Indenture Trustee By:___________________________________ Authorized Signatory B-5 97 REVERSE OF REGULATION S TEMPORARY GLOBAL BOND This Bond is one of a duly authorized issue of Bonds of the Issuer, all issued under the Indenture, to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights and obligations thereunder of the Issuer, the Indenture Trustee and the Holders of the Bonds. The Bonds are subject to all terms of the Indenture. The Bonds are and will be secured by the Collateral pledged as security therefor as provided in the Indenture. The provisions of the form of Regulation S Permanent Global Bonds attached as an exhibit to the Indenture are hereby incorporated by reference herein, mutatis mutandis, and, except as otherwise provided herein, shall be binding on the Issuer and the Holder hereof as if fully set forth herein. Except as otherwise provided herein, the Issuer shall make all payments hereunder as and when provided in the form of Regulation S Permanent Global Bonds and shall be bound by all its covenants set forth therein. Until exchanged in full for Regulation S Permanent Global Bonds, the Bond Owners of this Regulation S Temporary Global Bond shall in all respects be entitled to the same benefits under the Indenture as the Bond Owner of duly authenticated and delivered Regulation S Permanent Global Bonds, provided that the Bond Owners of this Regulation S Temporary Global Bond shall not be entitled to receive payment of principal or interest hereon except as set forth in the next succeeding paragraph. Each Bond Owner of a Regulation S Temporary Global Bond shall deliver a Regulation S Certification to the Euroclear System ("Euroclear") or Cedel Bank, societe anonyme ("CEDEL"), as applicable, on or prior to the Release Date (or, if such Bond Owner holds its interest in such Regulation S Temporary Global Bond on or prior to a given Distribution Date occurring prior to the Release Date, then it shall deliver a Regulation S Certification to Euroclear or CEDEL, as applicable, on or prior to such Distribution Date); provided, however, that no such Bond Owner shall be required to deliver more than one such Regulation S Certification with respect to its beneficial interest in such Regulation S Temporary Global Bond unless such Regulation S Certification becomes inaccurate, in which event such Bond Owner must promptly deliver a corrected Regulation S Certification to Euroclear or CEDEL, as applicable. Euroclear or CEDEL shall be required to promptly deliver to the Indenture Trustee a certificate to the effect that Euroclear or CEDEL, as applicable, has received the requisite Regulation S Certification for the Class of Bonds represented by such Regulation S Temporary Global Bond, and no Bond Owner (or transferee from any such Bond Owner) shall be entitled to receive any payment of principal or interest with respect to its beneficial interest in such Regulation S Temporary Global Bond, or an interest in the Regulation S Permanent Global Bond for such Class, prior to the Indenture Trustee's receipt of such certificate from Euroclear or CEDEL with respect to the portion of such Regulation S Temporary Global Bond beneficially owned by such Bond Owner (and, with respect to an interest in the related Regulation S Permanent Global Bond, B-6 98 prior to the Release Date). After the Release Date, distributions due with respect to any beneficial interest in a Regulation S Temporary Global Bond shall not be made to the holders of such beneficial interests unless exchange for a beneficial interest in the related Regulation S Permanent Global Bond is improperly withheld or refused. The Bonds of each Class initially sold in offshore transactions in reliance on Regulation S shall be represented by the Regulation S Temporary Global Bond for such Class, which shall be deposited with the DTC Custodian and registered in the name of Cede & Co. Upon the later of (i) the Release Date and (ii) the first date on which the requisite certifications as to non-U.S. ownership are provided to the Indenture Trustee, beneficial interests in any Regulation S Temporary Global Bond shall be exchangeable for beneficial interests in the Regulation S Permanent Global Bond for such Class. Beneficial interests in any Regulation S Temporary Global Bond may be held only through Euroclear or CEDEL and, except as provided in the immediately preceding sentence and pursuant to Section 2.10(f), may not be exchanged for a beneficial interest in any other Bond. The Regulation S Permanent Global Bonds shall be deposited with the DTC Custodian and registered in the name of Cede & Co. The "Release Date" is the date 40 days after the later of (i) the commencement of the offering of the Bonds and (ii) January 30, 1998. B-7 99 EXHIBIT C FORM OF REGULATION S CERTIFICATION ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 COMMERCIAL MORTGAGE COLLATERALIZED BONDS, CLASS_(THE "BONDS") TO: Morgan Guaranty Trust Company of New York, Brussels Office Euroclear Operation Center or CEDEL, S.A. This is to certify that as of the date hereof, and except as set forth below, the above-captioned Bonds held by you or on your behalf for our account are beneficially owned by (a) non U.S. person(s) or (b) U.S. person(s) who purchased the Bonds in transactions which did not require registration under the United States Securities Act of 1933, as amended (the "Securities Act"). As used in this paragraph, the term "U.S. person" has the meaning given to it by Regulation S under the Securities Act. To the extent that we hold an interest in any of the Bonds on behalf of person(s) other than ourselves, we have received certifications from such person(s) substantially identical to the certifications set forth herein. We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the Bonds held by you or on your behalf for our account in accordance with your operating procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. This certification excepts and does not relate to $_________ of such beneficial interest in the above Bonds in respect of which we are not able to certify and as to which we understand the exercise of any rights to payments thereon and the exchange for definitive Bonds or for an interest in definitive Bonds in global form cannot be made until we do so certify. C-1 100 We understand that this certification is required in connection with certain securities laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certification is or would be relevant, we irrevocably authorize you to procedure this certification to any interested party in such proceedings. Dated:__________, 199__ By:________________________________ As, or as agent for, the beneficial owner(s) of the Bonds to which this certificate relates C-2 101 EXHIBIT D FORM OF PURCHASER'S LETTER [DATE] LaSalle National Bank, as Indenture Trustee 135 South LaSalle Street Suite 1625 Chicago, Illinois 60674-4107 Attention: Asset Backed Securities Trust Services Group - Allied Capital 1998-1 Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Merrill Lynch & Co. Merrill Lynch World Headquarters World Financial Center, North Tower New York, New York 10281 Dear Sirs: In connection with our proposed purchase of $ principal amount of Commercial Mortgage Collateralized Bonds, Class ___ (the "Bonds"), of Allied Capital Commercial Mortgage Trust 1998-1 (the "Issuer"), we confirm that: a. We have received a copy of the Private Placement Memorandum dated January 28, 1998 relating to the Bonds (the "Memorandum"), and we understand that the Memorandum speaks only as of its date and that the information contained therein may not be correct or complete as of any time subsequent to such date. We further understand that the Bonds have not been, and will not be, registered under the Securities Act of 1933, as amended (the "1933 Act"), and may not be sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Bonds within two years of the later of the date of original issuance of the Bonds or the last day on which such Bonds are owned by the Issuer or any affiliate of the Issuer we will do so only (A) to the Issuer, (B) to "qualified institutional buyers" (within the meaning of Rule 144A under the 1933 Act) in accordance with Rule 144A under the 1933 Act ("QIBs"), (C) pursuant to an exemption from registration in accordance with Rule 903 or 904 of Regulation S under the 1933 Act, (D) pursuant to the exemption from registration provided by Rule 144 under the 1933 Act (if available), or (E) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the 1933 Act that is not a QIB (an "Institutional Accredited Investor") which, prior to such sale, delivers to the Indenture Trustee under the Indenture described D-1 102 in the Memorandum, a signed letter substantially in the form of this letter; and we further agree, in the capacities stated above, to provide to any person purchasing any of the Bonds from us a notice advising such purchaser that resales of the Bonds are restricted as stated herein. b. We understand that, in connection with any proposed resale of any Bonds to an Institutional Accredited Investor, we and such Institutional Accredited Investor will be required to furnish to the Indenture Trustee and the Issuer such certifications, legal opinions and other information as either of them may reasonably require to confirm that the proposed sale is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the 1933 Act. We further understand that the Bonds purchased by us will bear a legend to the foregoing effect. c. We or, if we are purchasing the Bonds on behalf of one or more accounts, each of such accounts are either / / an Institutional Accredited Investor or / / a QIB [please check the appropriate box]. If not a QIB or, if we are purchasing the Bonds on behalf of one or more accounts, each of such accounts, (i) are purchasing the Bonds for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the 1933 Act, (ii) have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of investment in the Bonds, and (iii) are able to bear the economic risk of such investment. d. If we are purchasing the Bonds on behalf of one or more accounts (each of which is either an Institutional Accredited Investor or a QIB as indicated above), as to each of such accounts we exercise sole investment discretion and are authorized to make the representations and enter into the agreements contained herein. e. We have received such information as we deem necessary in order to make our investment decision. f. We understand that, in accordance with the prohibited transaction rules of ERISA and Section 4975 of the Code and the terms of the Exemption as described herein under "ERISA Considerations," no Plan as to which the Initial Purchasers, the Depositor, the Servicer, the Fiscal Agent, or the Indenture Trustee is a party in interest or disqualified person, and no buyer acting on behalf of or with "plan assets" of any such Plan, may acquire such Bonds unless pursuant to a statutory exemption or any of the administrative exemptions issued by the U.S. Department of Labor, such that the acquisition and holding of Bonds by, on behalf of or with "plan assets" of such Plan would not constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code by reason of the application of one or more of the statutory or administrative exemptions from the prohibited transaction rules described in the Memorandum. D-2 103 Terms used in this letter which are not otherwise defined herein have the respective meanings assigned thereto in the Memorandum. You and the Issuer are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By:___________________________________ Name: Title: Bonds to be purchased: $ original Bond Class Balance of Class ____________ Bonds. D-3 104 EXHIBIT E FORM OF EXCHANGE CERTIFICATION ____________, 199__ TO: The Depository Trust Company CEDEL BANK, S.A. or Morgan Guaranty Trust Company of New York, Brussels Office Euroclear Operation Center LaSalle National Bank, as Indenture Trustee Attn: Asset-Backed Securities Trust Services Group Allied Capital 1998-1 This is to notify you as to the transfer of the beneficial interest in Allied Capital Commercial Mortgage Trust 1998-1 Commercial Mortgage Collateralized Bonds, Class __ (the "Bonds"), in the initial principal amount of $___________. The undersigned is the owner of a beneficial interest in the Class ___ [Rule 144A-IAI Global Bond] [Regulation S Global Bond] and requests that on [INSERT DATE], (i) [Euroclear] [CEDEL] [DTC] debt account #___________, with respect to $__________ principal denomination of the Class __ [Rule 144A-IAI Global Bond] [Regulation S Global Bond] and (ii) [DTC] [Euroclear] [CEDEL] credit the beneficial interest of the below-named purchaser, account #_________, in the Class __ [Rule 144A-IAI Global Bond] [Regulation S Global Bond] in the same principal denomination as follows: Name: Address: Taxpayer ID. No.: The undersigned hereby represents that this transfer is being made in accordance with an exemption from the provisions of Section 5 of the United States Securities Act of 1933, as amended (the "Securities Act"), which representation is based upon the reasonable belief that the purchaser is [not a U.S. Person as defined in Regulation S under the Securities Act] [a "qualified institutional buyer," as defined in Rule 144A under the Securities Act (a "QIB"), and that such purchaser has acquired the Bonds in a transaction effected in accordance with the exemption from the registration requirements of the Securities Act provided by Rule 144A and, if the purchaser has purchased the Bonds for one or more accounts for which it is acting as fiduciary or agent, each such account is a QIB or an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act E-1 105 ("Regulation D")] [an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D and in accordance with any applicable securities laws of any state of the United States and, if the purchaser has purchased the Bonds for one or more accounts for which it is acting as fiduciary or agent, each such account is a QIB or an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D and that the purchaser is acquiring beneficial interests in the applicable Bond for its own account or for one or more institutional accounts for which it is acting as fiduciary or agent in a minimum amount equivalent to not less than U.S. $100,000 and integral multiples of U.S. $1 in excess thereof for each such account. Very truly yours, [NAME OF HOLDER OF BOND] By:_______________________________ [Name], [Chief Financial or other Executive Officer] ___________________ [NOTE: INFORMATION PROVIDED ABOVE WITH RESPECT TO THE PURCHASER AND THE FOREGOING REPRESENTATION MUST BE PROVIDED TO THE INDENTURE TRUSTEE UPON ANY TRANSFER OF BONDS IF THE BONDS ARE NO LONGER HELD IN GLOBAL FORM.] E-2 EX-99.2F.7.C 6 AMENDED AND RESTATED TRUST AGREEMENT 1 EXHIBIT F.7.c EXECUTION COPY AMENDED AND RESTATED TRUST AGREEMENT between ALLIED CAPITAL CMT, INC. as Depositor, WILMINGTON TRUST COMPANY, as Owner Trustee and LASALLE NATIONAL BANK, as Paying Agent Dated as of January 1, 1998 2
TABLE OF CONTENTS Page ARTICLE I Definitions SECTION 1.01...............................................Capitalized Terms 1 SECTION 1.02...................................Other Definitional Provisions 3 ARTICLE II Organization SECTION 2.01............................................................Name 4 SECTION 2.02..........................................................Office 4 SECTION 2.03.................................Purposes, Powers and Procedures 4 SECTION 2.04....................................Appointment of Owner Trustee 6 SECTION 2.05.Initial Capital Contribution of Owner Trust Estate............................................... 6 SECTION 2.06............................................Declaration of Trust 6 SECTION 2.07.........................................Liability of the Owners 7 SECTION 2.08.........................................Title to Trust Property 7 SECTION 2.09..................................................Situs of Trust 8 SECTION 2.10.Representations and Warranties of the Depositor.................................................. 8 ARTICLE III Trust Certificates and Transfer of Interests SECTION 3.01...............................................Initial Ownership 9 SECTION 3.02...........................................The Trust Certificate 9 SECTION 3.03...........................Authentication of Trust Certificates 10 SECTION 3.04.Registration of Exchange of Trust Certificates; Trust Certificates Non -Transferable.............................................. 10 SECTION 3.05.Mutilated, Destroyed, Lost or Stolen Trust Certificates......................................... 10 SECTION 3.06...........................................Persons Deemed Owners 11 SECTION 3.07......................................................[Reserved] 11 SECTION 3.08.................................Maintenance of Office or Agency 11 SECTION 3.09.....................................Appointment of Paying Agent 11 ARTICLE IV Actions by Owner Trustee SECTION 4.01.Prior Notice with Respect to Certain Matters.................................................... 12 SECTION 4.02.Action by Owners with Respect to Certain Matters.................................................... 13 SECTION 4.03.Action by Owners with Respect to Bankruptcy................................................. 13
1 3 SECTION 4.04...................................Restrictions on Owners' Power 13 SECTION 4.05................................................Majority Control 13 ARTICLE V Application of Trust Funds; Certain Duties SECTION 5.01.Establishment of Certificate Distribution Account....................................... 13 SECTION 5.02......................................Application of Trust Funds 14 SECTION 5.03...............................................Method of Payment 14 SECTION 5.04..........................No Segregation of Moneys; No Interest. 15 SECTION 5.05.Accounting and Reports to the Bondholders, Owner, the Internal Revenue Service and Others......................................... 15 ARTICLE VI Authority and Duties of Owner Trustee SECTION 6.01...............................................General Authority 16 SECTION 6.02..................................................General Duties 16 SECTION 6.03.........................................Action upon Instruction 16 SECTION 6.04.No Duties Except as Specified in this Agreement or in Instructions............................... 17 SECTION 6.05.No Action Except Under Specified Documents or Instructions.................................. 18 SECTION 6.06....................................................Restrictions 18 ARTICLE VII Concerning the Owner Trustee SECTION 7.01.................................Acceptance of Trusts and Duties 18 SECTION 7.02.........................................Furnishing of Documents 20 SECTION 7.03..................................Representations and Warranties 20 SECTION 7.04.....................................Reliance; Advice of Counsel 22 SECTION 7.05...............................Not Acting in Individual Capacity 22 SECTION 7.06.Owner Trustee Not Liable for Trust Certificates or for Allied Interests or the Funding Note............................................... 22 SECTION 7.07.Owner Trustee May Own Trust Certificates and Bonds.................................................. 23 ARTICLE VIII Compensation of Owner Trustee SECTION 8.01...............................Owner Trustee's Fees and Expenses 23 SECTION 8.02.................................................Indemnification 24 SECTION 8.03...................................Payments to the Owner Trustee 24
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ARTICLE IX Termination of Trust Agreement SECTION 9.01..................................Termination of Trust Agreement 24 ARTICLE X Successor Owner Trustees and Additional Owner Trustees SECTION 10.01. Eligibility Requirements for Owner Trustee.................................................... 26 SECTION 10.02. Resignation or Removal of Owner Trustee.................................................... 26 SECTION 10.03. Successor Owner Trustee...................................... 27 SECTION 10.04. Merger or Consolidation of Owner Trustee.................................................... 27 SECTION 10.05. Appointment of Co-Trustee or Separate Trustee........................................... 27 ARTICLE XI Miscellaneous SECTION 11.01. Supplements and Amendments.................................. 29 SECTION 11.02. No Legal Title to Owner Trust Estate in Owners........................................... 30 SECTION 11.03. Limitations on Rights of Others............................. 30 SECTION 11.04. Notices..................................................... 30 SECTION 11.05. Severability................................................ 31 SECTION 11.06. Separate Counterparts....................................... 31 SECTION 11.07. Successors and Assigns...................................... 32 SECTION 11.08. Covenants of the Depositor.................................. 32 SECTION 11.09. No Petition................................................. 32 SECTION 11.10. No Recourse................................................. 32 SECTION 11.11. Headings.................................................... 32 SECTION 11.12. GOVERNING LAW............................................... 32 Exhibit A Form of Trust Certificate Exhibit B Form of Certificate of Trust
3 5 AMENDED AND RESTATED TRUST AGREEMENT dated as of January 1, 1998, between ALLIED CAPITAL CMT, INC., a Delaware corporation, as depositor (the "Depositor"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as owner trustee (the "Owner Trustee") and LaSalle National Bank, a national banking association, as paying agent (the "Paying Agent"). WHEREAS, the Depositor and the Owner Trustee entered into a Trust Agreement dated as of January 1, 1998 (the "Trust Agreement"); WHEREAS, the Trust Agreement is being hereby amended and restated as of January 1, 1998; NOW, THEREFORE, the Depositor, the Owner Trustee and the Paying Agent hereby agree as follows: ARTICLE I Definitions SECTION 1.01. Capitalized Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "Administration Agreement" shall mean the Administration Agreement dated as of January 1, 1998, among the Trust, the Indenture Trustee and Allied Capital Corporation, as Administrator. "Agreement" shall mean this Amended and Restated Trust Agreement, as the same may be amended and supplemented from time to time. "Bond" shall have the meaning in the Sale and Servicing Agreement. "Business Trust Statute" shall mean Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code ' 3801 et seq., as the same may be amended from time to time. "Certificate Distribution Account" shall have the meaning assigned to such term in Section 5.01. "Certificate of Trust" shall mean the Certificate of Trust in substantially the form of Exhibit B filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "Certificate Register" and "Certificate Registrar" shall mean the register mentioned in and the registrar appointed pursuant to Section 3.04, which registrar initially is the Owner Trustee. "Certificateholder" or "Holder" shall mean a Person in whose 1 6 name a Trust Certificate is registered. "Clearing Agency" shall mean an organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. "Co-Paying Agent" shall have the meaning set forth in Section 3.09. "Corporate Trust Office" shall mean, with respect to the Owner Trustee, the principal corporate trust office of the Owner Trustee located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration, or at such other address in the State of Delaware as the Owner Trustee may designate by notice to the Owners and the Depositor, or the principal corporate trust office of any successor Owner Trustee at the address in the State of Delaware designated by such successor Owner Trustee by notice to the Owners and the Depositor. "Depositor" shall mean Allied Capital CMT, Inc. in its capacity as depositor hereunder and any successor entity. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall have the meaning assigned to such term in Section 8.02. "Indemnified Parties" shall have the meaning assigned to such term in Section 8.02. "Indenture" shall mean the Indenture dated as of January 1, 1998 between the Trust and LaSalle National Bank, as Indenture Trustee. "Owner" shall mean each Holder of a Trust Certificate. "Owner Trust Estate" shall mean all right, title and interest of the Trust in and to the property and rights assigned to the Trust pursuant to Article II of the Sale and Servicing Agreement, all funds on deposit from time to time in the Trust Accounts and the Certificate Distribution Account and all other rights and property of the Trust from time to time, including any rights of the Owner Trustee and the Trust pursuant to the ACC Guaranty, the Sale and Servicing Agreement and the Administration Agreement. "Owner Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, which, when acting on behalf of the 2 7 Trust, shall be deemed to be acting not in its individual capacity but solely as owner trustee under this Agreement, and any successor Owner Trustee hereunder. "Paying Agent" shall mean any paying agent or co-paying agent appointed pursuant to Section 3.09 and shall initially be the Indenture Trustee. "Percentage Interest" with respect to a Trust Certificate, the percentage portion of the beneficial interest in the Trust represented by such Trust Certificate, as stated on the face thereof. "Person" shall mean any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust (including any beneficiary thereof), unincorporated organization, or government or any agency or political subdivision thereof. "Qualified REIT Subsidiary" means any direct or indirect subsidiary of Allied Capital REIT, Inc. which satisfies the requirements of Section 856(i)(2) of the Code. "Record Date" shall mean, with respect to any Distribution Date, the last day of the month preceding such Distribution Date. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of January 1, 1998, among the Trust, as issuer, the Depositor, as seller, Allied Capital Corporation, as servicer and special servicer, ABN AMRO Bank N.V., as fiscal agent, and LaSalle National Bank, as indenture trustee and custodian as the same may be amended or supplemented from time to time. "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Treasury Regulations" shall mean regulations, including proposed or temporary Regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. "Trust" shall mean Allied Capital Commercial Trust 1988-1, the Delaware business trust established and governed by this Agreement. "Trust Certificate" shall mean a certificate evidencing the beneficial interest of an Owner in the Trust, substantially in the form attached hereto as Exhibit A. SECTION 1.02. Other Definitional Provisions. (a) Capitalized terms used and not otherwise defined herein 3 8 have the meanings assigned to them in the Sale and Servicing Agreement or, if not defined therein, in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "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; Section and Exhibit references contained in this Agreement are references to Sections and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular and plural forms of such terms and to the masculine, feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. ARTICLE II Organization SECTION 2.01. Name. The Trust created hereby shall be known as "Allied Capital Commercial Mortgage Trust 1998-1," in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. 4 9 SECTION 2.02. Office. The office of the Trust shall be in care of the Owner Trustee at its Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Owners and the Depositor. SECTION 2.03. Purposes, Powers and Procedures. (a) The Trust and the parties to this Agreement shall be subject to the following provisions regarding the purposes, powers and procedures of the Trust: (i)(1) the purpose of the Trust is to issue the Bonds pursuant to the Indenture and the Trust Certificates pursuant to this Agreement and to sell the Bonds and the Trust Certificates; (2) with the proceeds of the sale of the Bonds and the Trust Certificates, to purchase the Allied Interests and the Funding Note and to pay the organizational, start-up and transactional expenses of the Trust; (3) to assign, grant, transfer, pledge, mortgage and convey the Trust Estate pursuant to the Indenture and to hold, manage and distribute to the Owners pursuant to the terms of the Sale and Servicing Agreement any portion of the Trust Estate released from the lien of, and remitted to the Trust pursuant to, the Indenture; (4) to enter into and perform its obligations under the Basic Documents to which it is to be a party; (5) to engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; (6) subject to compliance with the Basic Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of distributions to the Owners and the Bondholders. (ii) Except as expressly required by the Basic Documents: (1) the Trust shall maintain its books and records separate from any other person or entity; (2) the Owner Trustee, on behalf of the Trust, shall maintain the Trust's accounts separate from any other person or entity; (3) the Owner Trustee, on behalf of the Trust, shall not commingle the assets of the Trust with those of any other person or entity; (4) the Owner Trustee, on behalf of the Trust, shall conduct the business of the Trust in the name of the Trust; (5) the Owner Trustee, on behalf of the Trust, shall maintain the Trust's financial statements separate from any other person or entity; 5 10 (6) the Owner Trustee, on the Trust's behalf, shall pay the liabilities of the Trust solely out of the Trust Estate; (7) the Trust shall observe all trust formalities to the extent required by the Business Trust Statute; (8) the Trust shall maintain an arm's-length relationship with its affiliates; (9) the Trust shall pay the salaries of its employees, if any, and maintain a sufficient number of employees in light of its contemplated business operations; (10) the Trust shall not guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others; (11) the Trust shall not acquire obligations or securities of its affiliates; (12) the Trust shall allocate fairly and reasonably any overhead for shared office space; (13) the Trust shall use separate stationery, invoices and checks; (14) the Trust shall not pledge its assets for the benefit of any other entity or make any loans or advances to any entity except as contemplated by the Basic Documents; (15) the Trust shall hold itself out as a separate entity and shall correct any known misunderstanding regarding its separate identity; and (16) the Trust shall maintain adequate capitalization in light of its contemplated business operations. The Trust is hereby authorized to engage in the foregoing activities. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Basic Documents. SECTION 2.04. Appointment of Owner Trustee. The Depositor hereby appoints the Owner Trustee as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein, and authorizes and directs the Owner Trustee to file the Certificate of Trust with the Secretary of State. SECTION 2.05. Initial Capital Contribution of Owner Trust Estate. The Depositor hereby sells, assigns, transfers, 6 11 conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deemed to be deposited in the Certificate Distribution Account on the date hereof. The Depositor shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the Owner Trustee. SECTION 2.06. Declaration of Trust. The Owner Trustee hereby declares that it will hold the Owner Trust Estate in trust upon and subject to the conditions set forth herein for the use and benefit of the Owners, subject to the obligations of the Trust under the Basic Documents. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute and that this Agreement constitute the governing instrument of such business trust. It is the intention of the parties hereto that, solely for income and franchise tax purposes, the Trust shall be treated as a taxable mortgage pool treated as a qualified REIT subsidiary for federal income tax purposes and a security arrangement for other income and franchise tax purposes, with the assets of the Trust being the Allied Interests, the Funding Note and other assets held by the Trust, the owner of the Allied Interests and the Funding Note being the sole Owner and the Bonds being non-recourse debt of the sole Owner and the provisions of this Agreement shall be interpreted to further this intent. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust will file or cause to be filed annual or other necessary returns, reports and other forms consistent with the characterization of the Trust provided in the preceding sentence for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have the duties set forth herein, and all rights, powers and authorities set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. SECTION 2.07. Liability of the Owners. (a) The Depositor shall be liable directly to and will indemnify any injured party for all losses, claims, damages, liabilities and expenses of the Trust (including Expenses, to the extent not paid out of the Owner Trust Estate) to the extent that the Depositor would be liable if the Trust were a partnership under the Delaware Revised Uniform Limited Partnership Act in which the Depositor were a general partner; provided, however, that the Depositor shall not be liable for any losses incurred by a Certificateholder in the capacity of an investor in the Trust Certificates, or by a Bondholder in the capacity of an investor in the Bonds. In addition, any third party creditors of the Trust (other than in connection with the obligations described in the preceding sentence for which the Depositor shall not be liable) shall be deemed third party beneficiaries of this paragraph. (b) Other than to the extent set forth in paragraph (a), no 7 12 Owner, solely by virtue of its being the Holder of a Trust Certificate, shall have any personal liability for any liability or obligation of the Trust. SECTION 2.08. Title to Trust Property. (a) Legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, a co-trustee and/or a separate trustee, as the case may be. (b) No creditor of any Owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, any property of the Trust. An Owner's beneficial interest in the Trust shall be personal property notwithstanding the nature of any property of the Trust. An Owner shall have no interest in specific Trust property. SECTION 2.09. Situs of Trust. The Trust will be located and administered in the State of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware or the State of New York. The Trust shall not have any employees in any state other than Delaware; provided, however, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. Payments will be received by the Trust only in the State of Delaware or the State of New York, and payments will be made by the Trust only from the State of Delaware or the State of New York. The only office of the Trust will be at the Corporate Trust Office in the State of Delaware. SECTION 2.10. Representations and Warranties of the Depositor. The Depositor hereby represents and warrants to the Owner Trustee that: (a) The Depositor is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (b) The Depositor is duly qualified to do business as a foreign corporation in good standing and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of its property or the conduct of its business shall require such qualifications. (c) The Depositor has the power and authority to execute and deliver this Agreement and to carry out its terms; the Depositor has full power and authority to sell and assign the property to be sold and assigned to and deposited with the Trust and the Depositor has duly authorized such sale and assignment and 8 13 deposit to the Trust by all necessary corporate action; and the execution, delivery and performance of this Agreement have been duly authorized by the Depositor by all necessary corporate action. (d) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Depositor, or any indenture, agreement or other instrument to which the Depositor is a party or by which it is bound; nor result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Basic Documents); nor violate any law or, to the best of the Depositor's knowledge, any order, rule or regulation applicable to the Depositor of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties. (e) This Agreement has been duly executed and delivered by the Depositor and is enforceable against the Depositor. (f) There are no proceedings or investigations pending or threatened before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Depositor or its properties: (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (C) seeking any determination or ruling that might materially and adversely affect the performance by the Depositor of its obligations under, or the validity or enforceability of, this Agreement. (g) The Depositor is not required to obtain the consent of any other party or any consent, license, approval, registration, authorization, or declaration of or with any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity, or enforceability of this Agreement or any other Basic Document to which it is a party that has not already been obtained. (h) The Depositor has been a "qualified REIT subsidiary" as defined in Section 856(i) of the Code throughout its existence. 9 14 ARTICLE III Trust Certificate and Transfer of Interests SECTION 3.01. Initial Ownership. Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.05 and until the issuance of the Trust Certificates, the Depositor shall be the sole beneficiary of the Trust. SECTION 3.02. The Trust Certificate. The Trust shall issue no securities other than the Certificates pursuant to this Agreement and the Bonds pursuant to the Indenture. On the Closing Date, a single Trust Certificate shall be issued with a Percentage Interest of 100%. Any Trust Certificate shall be executed on behalf of the Trust by manual or facsimile signature of an authorized officer of the Owner Trustee. Any Trust Certificate bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued and entitled to the benefit of this Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Trust Certificate or did not hold such offices at the date of authentication and delivery of such Trust Certificate. The initial Holder of the Trust Certificate shall be the Depositor. The Trust Certificate may not be transferred. SECTION 3.03. Authentication of Trust Certificate. On the Closing Date, the Owner Trustee shall cause the Trust Certificate in an aggregate percentage amount equal to 100% to be executed on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president, any vice president, secretary or any assistant treasurer, without further corporate action by the Depositor, in authorized Percentage Interests. No Trust Certificate shall entitle its Holder to any benefit under this Agreement or be valid for any purpose unless there shall appear on such Trust Certificate a certificate of authentication substantially in the form set forth in Exhibit A, executed by the Owner Trustee, by manual signature; such authentication shall constitute conclusive evidence that such Trust Certificate shall have been duly authenticated and delivered hereunder. A Trust Certificate shall be dated the date of its authentication. SECTION 3.04. Registration of Exchange of Trust Certificates; Trust Certificates Non-Transferable. The Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.08, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Trust Certificates and of exchanges of Trust Certificates to the extent herein provided. The Owner Trustee shall be the initial Certificate Registrar. The Depositor 10 15 may not transfer all or any portion of its initial beneficial interest in the Trust. Any attempted transfer in violation of this Agreement shall be void. Each Trust Certificate shall bear a legend setting forth prohibitions on transferability substantially as follows: "THE BENEFICIAL INTEREST IN THE TRUST REPRESENTED BY THIS TRUST CERTIFICATE IS NOT TRANSFERABLE." SECTION 3.05. Mutilated, Destroyed, Lost or Stolen Trust Certificates. If (a) any mutilated Trust Certificate shall be surrendered to the Certificate Registrar, or if the Certificate Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Certificate and (b) there shall be delivered to the Certificate Registrar and the Owner Trustee such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Certificate has been acquired by a protected purchaser (as such term is used in Section 8-405(a)(1) of the UCC as in effect in the State of Delaware (1994 Rev)), the Owner Trustee on behalf of the Trust shall execute and the Owner Trustee, shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Certificate, a new Trust Certificate of like tenor and Percentage Interest. In connection with the issuance of any new Trust Certificate under this Section, the Owner Trustee or the Certificate Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Certificate issued pursuant to this Section shall constitute conclusive evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Certificate shall be found at any time. SECTION 3.06. Persons Deemed Owners. The Owner Trustee, the Certificate Registrar or any Paying Agent shall at all times treat the Depositor as the owner of the Trust Certificate issued on the Closing Date for the purpose of receiving distributions pursuant to Section 5.02 and for all other purposes whatsoever, and none of the Owner Trustee, the Certificate Registrar or any Paying Agent shall be bound by any notice to the contrary. SECTION 3.07. [Reserved] SECTION 3.08. Maintenance of Office or Agency. The Owner Trustee shall maintain an office or offices or agency or agencies where Trust Certificates shall be registered and may be surrendered for registration of exchange to the extent provided herein, and where notices and demands to or upon the Owner Trustee in respect of the Trust Certificate and the Basic Documents may be served. The Owner Trustee initially designates its Corporate Trust Office as its office for such purpose. The Owner Trustee shall give prompt written notice to the Depositor and to the 11 16 Certificateholders of any change in the location of the Certificate Register or any such office or agency. SECTION 3.09. Appointment of Paying Agent. LaSalle National Bank is hereby appointed as Paying Agent hereunder, and hereby accepts such appointment. The Paying Agent shall make distributions to Certificateholders from the Certificate Distribution Account pursuant to Section 5.02 and shall report the amounts of such distributions to the Owner Trustee. The Paying Agent shall have the revocable power to withdraw funds from the Certificate Distribution Account for the purpose of making the distributions referred to above. The Owner Trustee may revoke such power and remove the Paying Agent if the Owner Trustee determines in its sole discretion that the Paying Agent shall have failed to perform its obligations under this Agreement in any material respect. The Owner Trustee may appoint a successor to act as Paying Agent (which shall be a bank or trust company). The Owner Trustee shall cause such successor Paying Agent or any co-paying agent appointed by the Owner Trustee (a "Co-Paying Agent") to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent or Co-Paying Agent shall agree with the Owner Trustee that, as Paying Agent, such Co-Paying Agent or additional Paying Agent shall assume all obligations of the Paying Agent hereunder and shall hold all sums, if any, held by it for payment to the Certificateholders in trust for the benefit of the Certificateholders entitled thereto until such sums shall be paid to such Certificateholders. The Paying Agent shall return all unclaimed funds to the Owner Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 7.01, 7.03, 7.04 and 8.01 shall apply to the Owner Trustee also in its role as Paying Agent, if and for so long as the Owner Trustee shall act as Paying Agent and, to the extent applicable, to any other Paying Agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any Co-Paying Agent appointed by the Owner Trustee unless the context requires otherwise. 12 17 ARTICLE IV Actions by Owner Trustee SECTION 4.01. Prior Notice with Respect to Certain Matters. Unless otherwise required by the provisions of any of the Basic Documents, with respect to the following matters, the Owner Trustee shall not take action unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Owners in writing of the proposed action and the Owners shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Owners have withheld consent or provided alternative direction: (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of the Allied Interests or the Funding Note) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of the Allied Interests or the Funding Note); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Bondholder is required; (d) the amendment of the Indenture by a supplemental indenture in circumstances where the consent of any Bondholder is not required and such amendment would materially adversely affect the interests of the Owners; (e) the amendment, change or modification of the Administration Agreement, except to cure any ambiguity or to amend or supplement any provision in a manner or add any provision that would not materially adversely affect the interests of the Owners; or (f) the appointment pursuant to the Indenture of a successor Bond Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of a successor Certificate Registrar, or the consent to the assignment by the Bond Registrar, Paying Agent, Indenture Trustee or Certificate Registrar of its obligations under the Indenture or this Agreement, as applicable. SECTION 4.02. Action by Owners with Respect to Certain Matters. The Owner Trustee shall not have the power, except upon the written direction of the Owners, to (a) remove the Administrator under the Administration Agreement pursuant to Section 8 thereof, (b) appoint a successor Administrator pursuant to Section 8 of the Administration Agreement, (c) remove the 13 18 Servicer or the Special Servicer under the Sale and Servicing Agreement pursuant to Section 8.02 thereof, (d) amend the Sale and Servicing Agreement pursuant to Section 10.01(b) of such document, or (e) except as expressly provided in the Basic Documents, sell the Allied Interests or the Funding Note after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Owners. SECTION 4.03. Action by Owners with Respect to Bankruptcy. The Owner Trustee shall not have the power or authority to commence a voluntary proceeding in bankruptcy relating to the Trust without the unanimous prior approval of all Owners and the delivery to the Owner Trustee by each such Owner of an Officer's Certificate certifying that such Owner reasonably believes that the Trust is insolvent. SECTION 4.04. Restrictions on Owners' Power. The Owners shall not direct the Owner Trustee to take or to refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Basic Documents or would be contrary to Section 2.03; nor shall the Owner Trustee be obligated to follow any such direction, if given. SECTION 4.05. Majority Control. Except as expressly provided herein, any action that may be taken by the Owners under this Agreement may be taken by the Holders of Trust Certificates evidencing at least 51% Percentage Interest. Except as expressly provided herein, any written notice of the Owners delivered pursuant to this Agreement shall be effective if signed by Holders of Trust Certificates evidencing at least 51% Percentage Interest at the time of the delivery of such notice, and such action shall be binding upon all Owners. ARTICLE V Application of Trust Funds; Certain Duties SECTION 5.01. Establishment of Certificate Distribution Account. The Paying Agent, for the benefit of the Certificateholders and the Owner Trustee, shall establish and maintain in the name of the Trust an Eligible Account (the "Certificate Distribution Account"), with an Eligible Institution bearing a designation clearly indicating that the funds deposited therein are held for the benefit of the Certificateholders. The Trust shall possess all right, title and interest in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof. Except as otherwise expressly provided herein, the Certificate Distribution Account shall be under the sole dominion and control of the Owner Trustee for the benefit of the Certificateholders. If, at any time, the 14 19 Certificate Distribution Account ceases to be an Eligible Account, the Owner Trustee (or the Depositor on behalf of the Owner Trustee, if the Certificate Distribution Account is not then held by the Owner Trustee or an affiliate thereof) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) establish a new Certificate Distribution Account as an Eligible Account and shall transfer any cash and/or any investments to such new Certificate Distribution Account. SECTION 5.02. Application of Trust Funds. (a) On each Distribution Date, the Paying Agent will distribute to Certificateholders, on a pro rata basis, amounts deposited in the Certificate Distribution Account pursuant to Section 5.06 of the Sale and Servicing Agreement with respect to such Distribution Date. (b) On each Distribution Date, the Paying Agent shall send to each Certificateholder the statement or statements provided to the Owner Trustee and Paying Agent by the Servicer pursuant to Section 5.12 of the Sale and Servicing Agreement with respect to such Distribution Date. (c) In the event that any withholding tax is imposed on the Trust's payment (or allocations of income) to an Owner, such tax shall reduce the amount otherwise distributable to the Owner in accordance with this Section. The Paying Agent is hereby authorized and directed to retain from amounts otherwise distributable to the Owners sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Paying Agent from contesting any such tax in appropriate proceedings and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to an Owner shall be treated as cash distributed to such Owner at the time it is withheld by the Trust and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Owner), the Paying Agent may in its sole discretion withhold such amounts in accordance with this paragraph (c). SECTION 5.03. Method of Payment. Subject to Section 9.01(c), distributions required to be made to Certificateholders on any Distribution Date shall be made to each Certificateholder of record on the related Record Date either by wire transfer, in immediately available funds, to the account of such Certificateholder at a bank or other entity having appropriate facilities therefor, if such Certificateholder shall have provided to the Certificate Registrar appropriate written instructions at least five Business Days prior to such Distribution Date, or, if not, by check mailed to such Certificateholder at the address of such Certificateholder appearing in the Certificate Register. 15 20 SECTION 5.04. No Segregation of Moneys; No Interest. Subject to Sections 5.01 and 5.02, moneys received by the Owner Trustee hereunder need not be segregated in any manner except to the extent required by law or the Sale and Servicing Agreement and may be deposited under such general conditions as may be prescribed by law, and the Owner Trustee shall not be liable for any interest thereon. Eligible Investments shall include, with respect to any funds to be invested by the Owner Trustee, the "Rodney Square Government Fund" or the Wilmington Trust Money Market Special Account," and any successor funds. SECTION 5.05. Accounting and Reports to the Bondholders, the Owner, the Internal Revenue Service and Others. The Owner Trustee shall deliver to the Owner such information, reports or statements as may be required by the Code and applicable Treasury Regulations and as may be required to enable the Owner to prepare its federal and state income tax returns. Consistent with the Trust's characterization for tax purposes as a taxable mortgage pool treated as a qualified REIT subsidiary for federal income tax purposes or a security arrangement for other income and franchise tax purposes for the issuance of non-recourse debt, no federal income tax return shall be filed on behalf of the Trust unless either (i) the Owner Trustee shall receive an Opinion of Counsel that, based on a change in applicable law or other circumstance occurring after the date hereof, the Code requires such a filing or (ii) the Internal Revenue Service shall determine that the Trust is required to file such a return. In the event that the Trust is required to file tax returns, the Owner Trustee shall prepare or shall cause to be prepared any tax returns required to be filed by the Trust and shall remit such returns to the Depositor, as Owner (or if the Depositor no longer owns any Trust Certificates, the Owner designated for such purpose by the Depositor to the Owner Trustee in writing), at least five (5) days before such returns are due to be filed. The Depositor, as Owner (or such designee Owner, as applicable) shall promptly sign such returns and deliver such returns after signature to the Owner Trustee and such returns shall be filed or caused to be filed by the Owner Trustee with the appropriate tax authorities. In no event shall the Owner Trustee or the Depositor, as Owner (or such designee Owner, as applicable) be liable for any liabilities, costs or expenses of the Trust or the Bondholders arising out of the application of any tax law, including federal, state, foreign or local income or excise taxes or any other tax imposed on or measured by income (or any interest, penalty or addition with respect thereto or arising from a failure to comply therewith) except only to the extent any such liability, cost or expense is attributable to any act or omission by the Owner Trustee or by the Depositor or such designee Owner, as applicable, constituting gross negligence or willful misconduct, as the case may be, constituting a breach of its obligations under this Agreement. 16 21 ARTICLE VI Authority and Duties of Owner Trustee SECTION 6.01. General Authority. The Owner Trustee is hereby authorized and directed to execute and deliver on behalf of the Trust the Basic Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Basic Documents to which the Trust is to be a party and any amendment or other agreement or instrument, in each case, in such form as the Depositor shall approve, as evidenced conclusively by the Owner Trustee's execution thereof. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to cause the Trust to take all actions required of the Trust pursuant to the Basic Documents. The Owner Trustee is further authorized from time to time to take such action as the Administrator recommends with respect to the Basic Documents. The execution by the Owner Trustee of any documents at a closing in the presence of the Depositor or its counsel shall be conclusive evidence of its authorization and direction to execute and deliver such documents hereunder. SECTION 6.02. General Duties. It shall be the duty of the Owner Trustee to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Agreement and the Basic Documents to which the Trust is a party and to administer the Trust in the interest of the Owners, subject to the Basic Documents and in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Basic Documents to the extent the Administrator has agreed in the Administration Agreement to perform any act or to discharge any duty of the Owner Trustee hereunder or under any Basic Document, and the Owner Trustee shall not be held liable for the default or failure of the Administrator to carry out its obligations under the Administration Agreement. The Owner Trustee shall not be responsible for taking any action required of the Trust or with respect to the Indenture or any other of the Basic Documents unless a Trust Officer of the Owner Trustee has actual knowledge of the facts which require such action or has received written notice of the need to take such action; the Owner Trustee shall not be responsible for any matter regarding the Investment Company Act of 1940, as amended (or any successor statute) or the rules or regulations thereunder. SECTION 6.03. Action upon Instruction. (a) Subject to Article IV and in accordance with the terms of the Basic Documents, the Owners may by written instruction direct the Owner Trustee in the management of the Trust. Such direction may be exercised at any time by written instruction of the Owners pursuant to Article IV. (b) The Owner Trustee shall not be required to take any action hereunder or under any Basic Document if the Owner Trustee 17 22 shall have determined in good faith, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Basic Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or under any Basic Document, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Owners received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Agreement or the Basic Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. (d) In the event that the Owner Trustee is unsure as to the application of any provision of this Agreement or any Basic Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction and, to the extent that the Owner Trustee acts or refrains from acting in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable, on account of such action or inaction, to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Agreement or the Basic Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. SECTION 6.04. No Duties Except as Specified in this Agreement or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Trust or Owner Trustee is a party, except as expressly provided by the terms of this Agreement or in any 18 23 document or written instruction received by the Owner Trustee pursuant to Section 6.03; and no implied duties or obligations shall be read into this Agreement or any Basic Document against the Owner Trustee. The Owner Trustee shall have no responsibility for filing any financing or continuation statement in any public office at any time or to otherwise perfect or maintain the perfection of any security interest or lien granted to it hereunder or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Basic Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Owner Trust Estate that result from actions by, or claims against, the Owner Trustee that are not related to the ownership or the administration of the Owner Trust Estate. SECTION 6.05. No Action Except Under Specified Documents or Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise deal with any part of the Owner Trust Estate except (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Agreement, (ii) in accordance with the Basic Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 6.03. SECTION 6.06. Restrictions. The Owner Trustee shall not take any action (a) that is inconsistent with the purposes of the Trust set forth in Section 2.03 or (b) that, to the actual knowledge of the Trust Officers of the Owner Trustee, would result in the Trust's becoming taxable as a corporation for federal or Illinois (or other state where the Servicer is located) income tax purposes. The Owners shall not direct the Owner Trustee to take action that would violate the provisions of this Section. 19 24 ARTICLE VII Concerning the Owner Trustee SECTION 7.01. Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts, but only upon the express terms of this Agreement. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Owner Trust Estate upon the express terms of the Basic Documents and this Agreement. Wilmington Trust Company, in its individual capacity, shall not be answerable or accountable hereunder or under any Basic Document under any circumstances, except (i) for its own willful misconduct or gross negligence (or simple negligence in the case of the receipt, handling, transfer or disbursement of funds or holding of investments) or (ii) in the case of the inaccuracy of any representation or warranty contained in Section 7.03 expressly made by the Owner Trustee. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) The Owner Trustee shall not be personally liable for any error of judgment made in good faith by a Trust Officer of the Owner Trustee; (b) The Owner Trustee shall not be personally liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Administrator or any Owner; (c) No provision of this Agreement or any Basic Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Basic Document if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) Under no circumstances shall the Owner Trustee be personally liable for indebtedness evidenced by or arising under any of the Basic Documents, including the principal of and interest on the Bonds; (e) The Owner Trustee shall not be responsible for or in respect of the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate, or for or in respect of the validity or sufficiency of the Basic Documents, other than the certificate of authentication on the Trust Certificates, and the Owner Trustee shall in no event assume or incur any liability, duty or obligation to any Bondholder or to any Owner, other than as expressly provided for herein or expressly agreed to in the Basic Documents; 20 25 (f) The Owner Trustee shall not be liable for the default or misconduct of the Administrator, any Paying Agent, the Depositor, any Owner, the Servicer, the Special Servicer or the Indenture Trustee under any of the Basic Documents or otherwise, and the Owner Trustee shall have no obligation or liability to perform the obligations of the Trust under this Agreement or the Basic Documents that are required to be performed by the Administrator under the Administration Agreement, the Indenture Trustee under the Indenture or the Depositor, the Paying Agent or any Owner hereunder, or the Servicer or the Special Servicer under the Sale and Servicing Agreement; and (g) The Owner Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement, or to institute, conduct or defend any litigation under this Agreement or otherwise or in relation to this Agreement or any Basic Document, at the request, order or direction of any of the Owners, unless such Owners have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Basic Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its gross negligence or willful misconduct in the performance of any such act. (h) Notwithstanding anything herein or in any other document to the contrary, to the maximum extent provided in the Business Trust Statute, the Owner Trustee, when acting in such capacity, shall not be personally liable to any Person other than the Trust, the Owners, the Bondholders, the Custodian, the Indenture Trustee or the other parties hereto for any act, omission or obligation of the Trust or any trustee thereof. SECTION 7.02. Furnishing of Documents. The Owner Trustee shall furnish to the Owners, promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Basic Documents. SECTION 7.03. Representations and Warranties. (a) The Owner Trustee hereby represents and warrants to the Depositor, for the benefit of the Owners, that: (i) It is a banking corporation duly organized and validly existing in good standing under the laws of the State of Delaware. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, the Administration Agreement and any Basic Document for which it signs on behalf of the Issuer and each such agreement has been executed 21 26 and delivered by one of its officers who is duly authorized to execute and deliver this Agreement. (iii) Neither the execution or the delivery by it of this Agreement, the Administration Agreement and any Basic Document for which it signs on behalf of the Issuer, nor the consummation by it of the transactions contemplated hereby, nor compliance by it with any of the terms or provisions hereof will contravene any federal or Delaware law, governmental rule or regulation governing the banking or trust powers of the Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or bylaws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. (iv) It is a banking corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate trust powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authorities; and having (or having a parent that has) short term obligations that are rated at least A-1 by Standard & Poor's and P-1 by Moody's. (v) No consent, approval, authorization or order of or filing with or notice to any court or governmental agency or body of the State of Delaware governing its banking or trust powers is required for the execution, delivery or performance by it of this Agreement, the Administration Agreement and any Basic Document for which it signs on behalf of the Issuer. (vi) There is no action, suit or proceeding pending against it in its individual capacity or in its capacity as Owner Trustee hereunder, in any court or by or before any other governmental agency or instrumentality which, to its knowledge, would materially and adversely affect its ability in its individual capacity or as Owner Trustee, to carry out its obligations under this Agreement. (a) The Paying Agent hereby represents and warrants to the Depositor and the Owner Trustee, for the benefit of the Owners, that: (i) It is a national banking association duly organized and validly existing in good standing under the laws of the United States of America. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement and this Agreement has been executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement. 22 27 (iii) Neither the execution or the delivery by it of this Agreement, nor the consummation by it of the transactions contemplated hereby , nor compliance by it with any of the terms or provisions hereof will contravene any federal or state law, governmental rule or regulation governing its banking or trust powers or any judgement or order binding on it, or constitute any default under its charter documents or bylaws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. (iv) It is a national bank authorized to exercise corporate trust powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authorities; and having (or having a parent that has) time deposits that are rated at least A-1 by Standard & Poor's and P-1 by Moody's. (v) No consent, approval, authorization or order of or filing with or notice to any court or governmental agency or body of the United States of America governing its banking or trust powers is required for the execution, delivery or performance by it of this Agreement. (vi) There is no action, suit or proceeding pending against it in its individual capacity or in its capacity as Paying Agent hereunder, in any court or by or before any other governmental agency or instrumentality which, to its knowledge, would materially and adversely affect its ability to carry out its obligations under this Agreement. SECTION 7.04. Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond, or other document or paper which any Trust Officer of the Owner Trustee in good faith believes to be genuine and signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Basic Documents, the Owner Trustee (i) may act directly or through its agents or attorneys pursuant to agreements entered into with any of them; and the Owner Trustee 23 28 shall not be liable for the conduct or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care, and (ii) may consult with counsel, accountants and other skilled Persons to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written opinion or advice of any such counsel, accountants or other such Persons and not contrary to this Agreement or any Basic Document. SECTION 7.05. Not Acting in Individual Capacity. Except as provided in this Article VII, in accepting the trusts hereby created, Wilmington Trust Company acts solely as Owner Trustee hereunder and not in its individual capacity, and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Basic Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. SECTION 7.06. Owner Trustee Not Liable for Trust Certificates or for Allied Interests or the Funding Note. The recitals contained herein and in the Trust Certificates (other than the signature and countersignature of the Owner Trustee on the Trust Certificates) shall be taken as the statements of the Depositor, and the Owner Trustee assumes no responsibility for the correctness thereof. Except as set forth in Section 7.03, the Owner Trustee makes no representations or warranties hereunder, including any representations or warranties as to the validity or sufficiency of this Agreement, of any Basic Document or of the Trust Certificates (other than the genuineness of signature and countersignature of the Owner Trustee on the Trust Certificates) or the Bonds, or of any Allied Interest, the Funding Note or related documents. The Owner Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Allied Interest or the Funding Note or the perfection and priority of any security interest created by any Mortgage Loan on any Mortgaged Property or by the Funding Note on the underlying Participation Mortgage Loans or the maintenance of any such perfection and priority, or with respect to the sufficiency of the Owner Trust Estate or the ability of the Owner Trust Estate to generate the payments to be distributed to Certificateholders under this Agreement or the Bondholders under the Indenture, including, without limitation: the existence, condition and ownership of any Mortgaged Property; the existence and enforceability of any insurance thereon; the existence and contents of any Mortgage Loan on any computer or other record thereof; the validity of the assignment of any Allied Interest or the Funding Note to the Trust or of any intervening assignment; the completeness of any Allied Interest or the Funding Note; the performance or enforcement of any Allied Interest or the Funding Note; the compliance by the Depositor or any Owner, the Servicer or the Special Servicer with any warranty or representation made under any Basic Document or in any related document or the accuracy of any such warranty or representation, or any action of 24 29 the Administrator, the Indenture Trustee, the Paying Agent, the Servicer, the Special Servicer or any subservicer taken in the name of the Owner Trustee. SECTION 7.07. Owner Trustee May Own Trust Certificates and Bonds. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Trust Certificates or Bonds and may deal with the Depositor, the Administrator, the Indenture Trustee, the Servicer and the Special Servicer in banking transactions with the same rights as it would have if it were not Owner Trustee. ARTICLE VIII Compensation of Owner Trustee SECTION 8.01. Owner Trustee's Fees and Expenses. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof among the Depositor, the Servicer and the Owner Trustee, and pursuant to such agreement the Owner Trustee shall be reimbursed for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. SECTION 8.02. Indemnification. The Owners shall be liable for, and shall defend and indemnify the Owner Trustee and its successors, assigns, agents and servants (collectively, the "Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any Indemnified Party in any way relating to or arising out of this Agreement, the Basic Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action or inaction of the Owner Trustee hereunder, except only that the Owners shall not be liable for or required to indemnify an Indemnified Party from and against Expenses to the extent indemnification is provided therefor by the Servicer under Section 7.03(d) of the Sale and Servicing Agreement, or otherwise to the extent arising or resulting from any of the matters described in the third sentence of Section 7.01. The indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's choice of legal counsel shall be subject to the approval of the indemnifying party, which approval shall not be unreasonably withheld. 25 30 SECTION 8.03. Payments to the Owner Trustee. Any amounts paid to the Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. ARTICLE IX Termination of Trust Agreement SECTION 9.01. Termination of Trust Agreement. (a) This Agreement (other than Article VIII) and the Trust shall terminate and be of no further force or effect upon the final distribution by the Owner Trustee of all moneys or other property or proceeds of the Owner Trust Estate in accordance with the terms of the Indenture, the Sale and Servicing Agreement and Article V. The bankruptcy, liquidation, dissolution, death or incapacity of any Owner shall not (x) operate to terminate this Agreement or the Trust or (y) entitle such Owner's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or Owner Trust Estate or (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) Neither the Depositor nor any Owner shall be entitled to revoke or terminate the Trust prior to its termination pursuant to Section 9.01. (c) Notice of any termination of the Trust, specifying the Distribution Date upon which Certificateholders shall surrender their Trust Certificates to the Paying Agent for payment of the final distribution and cancellation, shall be given by the Owner Trustee by letter to Certificateholders mailed within five Business Days of receipt of notice of such termination from the Servicer given pursuant to Section 9.01(c) of the Sale and Servicing Agreement, stating (i) the Distribution Date upon or with respect to which final payment of the Trust Certificates shall be made upon presentation and surrender of the Trust Certificates at the office of the Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Trust Certificates at the office of the Paying Agent therein specified. The Owner Trustee shall give such notice to the Certificate Registrar (if other than the Owner Trustee) and the Paying Agent at the time such notice is given to Certificateholders. Upon presentation and surrender of the Trust Certificates, the Paying Agent shall cause to be distributed to Certificateholders amounts distributable on such Distribution Date pursuant to Section 5.02. In the event that all of the Certificateholders shall not surrender their Trust Certificates for cancellation within six months after the date specified in the above mentioned written 26 31 notice, the Owner Trustee shall give a second written notice to the remaining Certificateholders to surrender their Trust Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Trust Certificates shall not have been surrendered for cancellation, the Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Trust Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Any funds remaining in the Trust after exhaustion of such remedies shall be distributed by the Owner Trustee to the Depositor, subject to applicable escheat laws. (d) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be cancelled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3810 of the Business Trust Statute. ARTICLE X Successor Owner Trustees and Additional Owner Trustees SECTION 10.01. Eligibility Requirements for Owner Trustee. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate trust powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by federal or state authorities; and having (or having a parent that has) short-term obligations that are rated at least A-1 by Standard & Poor's and P-1 by Moody's. If such corporation shall publish reports of condition at least annually pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 10.02. SECTION 10.02. Resignation or Removal of Owner Trustee. The Owner Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Depositor and to each Rating Agency. Upon receiving such notice of resignation, the Depositor shall promptly appoint a successor Owner Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Owner Trustee and one copy to the successor Owner Trustee. If no successor Owner Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of 27 32 resignation, the resigning Owner Trustee may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee. If at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of Section 10.01 and shall fail to resign after written request therefor by the Depositor, or if at any time the Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Owner Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Depositor may remove the Owner Trustee. If the Depositor shall remove the Owner Trustee under the authority of the immediately preceding sentence, the Depositor shall promptly appoint a successor Owner Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the outgoing Owner Trustee so removed and one copy to the successor Owner Trustee, and shall pay all fees owed to the outgoing Owner Trustee. Any resignation or removal of the Owner Trustee and appointment of a successor Owner Trustee pursuant to any of the provisions of this Section shall not become effective until acceptance of appointment by the successor Owner Trustee pursuant to Section 10.03 and payment of all fees and expenses owed to the outgoing Owner Trustee. The Depositor shall provide notice of such resignation or removal of the Owner Trustee to each Rating Agency. SECTION 10.03. Successor Owner Trustee. Any successor Owner Trustee appointed pursuant to Section 10.01 or 10.02 shall execute, acknowledge and deliver to the Depositor, the Administrator and to its predecessor Owner Trustee an instrument accepting such appointment under this Agreement, and thereupon the resignation or removal of the predecessor Owner Trustee shall become effective, and such successor Owner Trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and obligations of its predecessor under this Agreement, with like effect as if originally named as Owner Trustee. The predecessor Owner Trustee shall, upon payment of its fees and expenses, deliver to the successor Owner Trustee all documents and statements and monies held by it under this Agreement; and the Administrator and the predecessor Owner Trustee shall execute and deliver such instruments and do such other things as may reasonably be required for fully and certainly vesting and confirming in the successor Owner Trustee all such rights, powers, duties and obligations. No successor Owner Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Owner Trustee shall be eligible pursuant to Section 10.01. 28 33 Upon acceptance of appointment by a successor Owner Trustee pursuant to this Section, the Administrator shall mail notice thereof to all Certificateholders, the Indenture Trustee, the Bondholders and the Rating Agencies. If the Administrator shall fail to mail such notice within 10 days after acceptance of such appointment by the successor Owner Trustee, the successor Owner Trustee shall cause such notice to be mailed at the expense of the Administrator. SECTION 10.04. Merger or Consolidation of Owner Trustee. Any entity into which the Owner Trustee may be merged or converted or with which it may be consolidated, or any entity resulting from any merger, conversion or consolidation to which the Owner Trustee shall be a party, or any entity succeeding to all or substantially all of the corporate trust business of the Owner Trustee, shall be the successor of the Owner Trustee hereunder, without the execution or filing of any instrument or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided, that such entity shall be eligible pursuant to Section 10.01 and, provided, further, that the Owner Trustee shall mail notice of such merger or consolidation to each Rating Agency. SECTION 10.05. Appointment of Co-Trustee or Separate Trustee. Notwithstanding any other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Owner Trust Estate or any Mortgaged Property may at the time be located, the Administrator and the Owner Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Administrator and Owner Trustee to act as co-trustee, jointly with the Owner Trustee, or as separate trustee or separate trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust or any part thereof and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Administrator and the Owner Trustee may consider necessary or desirable. If the Administrator shall not have joined in such appointment within 15 days after the receipt by it of a request so to do, the Owner Trustee alone shall have the power to make such appointment. No co-trustee or separate trustee under this Agreement shall be required to meet the terms of eligibility as a successor Owner Trustee pursuant to Section 10.01 and no notice of the appointment of any co-trustee or separate trustee shall be required pursuant to Section 10.03. 29 34 Each separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (a) All rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the holding of title to the Owner Trust Estate or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Owner Trustee; (b) No trustee under this Agreement shall be personally liable by reason of any act or omission of any other trustee under this Agreement; and (c) The Administrator and the Owner Trustee acting jointly may at any time accept the resignation of or remove any separate trustee or co-trustee. Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Owner Trustee or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically including every provision of this Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Administrator. Any separate trustee or co-trustee may at any time appoint the Owner Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect of this Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Owner Trustee, to the extent permitted by law, without the appointment of a new or successor co-trustee or separate trustee. 30 35 ARTICLE XI Miscellaneous SECTION 11.01. Supplements and Amendments. This Agreement may be amended by the Depositor, the Owner Trustee and the Paying Agent, with the prior written notice to each Rating Agency, without the consent of any of the Bondholders or the Certificateholders, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Bondholders or the Certificateholders; provided, however, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect the interests of any Bondholder or Certificateholder; provided that any amendment will be deemed not to adversely affect the interests of any Bondholder or Certificateholder if, as stated in writing by each Rating Agency to the Indenture Trustee, it does not result in a reduction, withdrawal or suspension of the then current rating on any Bond or Trust Certificate. This Agreement may also be amended from time to time by the Depositor, the Owner Trustee and the Paying Agent, with prior written notice to each Rating Agency, with the consent of the Holders (as defined in the Indenture) of Bonds evidencing not less than a majority of the Outstanding Amount of the Bonds and the consent of the Holders of Trust Certificates evidencing at least 51% Percentage Interest, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement or of modifying in any manner the rights of the Bondholders or the Certificateholders; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on Mortgage Loans or distributions that shall be required to be made for the benefit of the Bondholders or the Certificateholders or (b) reduce the aforesaid percentage of the Outstanding Amount of the Bonds and the Percentage Interest required to consent to any such amendment, without the consent of Holders of all the outstanding Bonds and Trust Certificates. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee and each Rating Agency. It shall not be necessary for the consent of Certificateholders or Bondholders pursuant to this Section to approve the particular form of any proposed amendment or consent, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consents (and any other consents of Certificateholders provided for in this Agreement or in any other Basic Document) and of evidencing the authorization of the execution thereof by Certificateholders shall 31 36 be subject to such reasonable requirements as the Owner Trustee may prescribe. Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State. Prior to the execution of any amendment to this Agreement or the Certificate of Trust, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by this Agreement. The Owner Trustee may, but shall not be obligated to, enter into any such amendment that affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. In connection with the execution of any amendment to this Trust Agreement or any amendment of any other agreement to which the Issuer is a party, the Owner Trustee shall be entitled to receive and conclusively rely upon an Opinion of Counsel to the effect that such amendment is authorized or permitted by the Basic Documents and that all conditions precedent in the Basic Documents for the execution and delivery thereof by the Issuer or the Owner Trustee, as the case may be, have been satisfied. SECTION 11.02. No Legal Title to Owner Trust Estate in Owners. Neither the Depositor nor the Owners shall have legal title to any part of the Owner Trust Estate. The Owners shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with Articles V and IX. No transfer, by operation of law or otherwise, of any right, title or interest of the Owners to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. SECTION 11.03. Limitations on Rights of Others. Except for Section 2.07, the provisions of this Agreement are solely for the benefit of the Owner Trustee, the Depositor, the Owners, the Administrator, and, to the extent expressly provided herein, the Indenture Trustee and the Bondholders, and nothing in this Agreement (other than Section 2.07 hereof), whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. SECTION 11.04. Notices. (a) Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and shall be deemed given if (1) personally delivered, (2) upon receipt by the intended recipient or three Business Days after mailing if mailed by certified mail, postage prepaid (except that notice to the Owner Trustee shall be deemed given only upon actual receipt by the Owner Trustee), (3) sent by express courier 32 37 delivery service and received by the intended recipient or (4) transmitted by telex or facsimile transmission (or any other type of electronic transmission agreed upon by the parties and confirmed by a writing delivered by any of the means described in (1), (2) or (3), at the following addresses: if to the Owner Trustee, addressed to the Corporate Trust Office; if to the Depositor, addressed to Allied Capital CMT, Inc., 1666 K Street, N.W., Washington, DC 20006, Attention: Joan M. Sweeney; if to the Paying Agent, addressed to LaSalle National Bank, 135 S. LaSalle Street, Suite 1625, Chicago, Illinois 60674-4017, Attention: Asset Backed Securities Trust Services Group C Allied Capital 1998-1; or, as to each party, at such other address as shall be designated by such party in a written notice to each other party. (b) Any notice required or permitted to be given to a Certificateholder shall be given by first-class mail, postage prepaid, at the address of such Certificateholder as shown in the Certificate Register. Any notice so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not the Certificateholder receives such notice. SECTION 11.05. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 11.06. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 11.07. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, each of the Depositor and its permitted assignees, the Owner Trustee and its successors and each Owner and its successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Owner shall bind the successors and assigns of such Owner. SECTION 11.08. Covenants of the Depositor. The Depositor will not at any time institute against the Trust any bankruptcy proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Bonds, the Trust Agreement or any of the Basic Documents. SECTION 11.09. No Petition. The Owner Trustee, by entering into this Agreement, each Certificateholder, by accepting 33 38 a Trust Certificate, and the Indenture Trustee and each Bondholder, by accepting the benefits of this Agreement, hereby covenant and agree that they will not, prior to the date which is one year and one day after the termination of this Agreement institute against the Depositor or the Trust, or join in any institution against the Depositor or the Trust of, any bankruptcy proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Bonds, this Agreement or any of the Basic Documents. SECTION 11.10. No Recourse. Each Certificateholder by accepting a Trust Certificate acknowledges that such Trust Certificate represents a beneficial interest in the Trust only and does not represent an interest in or an obligation of the Depositor, the Servicer, the Special Servicer, the Administrator, the Owner Trustee, the Indenture Trustee or any Affiliate thereof and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated in this Agreement, the Trust Certificates or the Basic Documents. SECTION 11.11. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 11.12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. 34 39 IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. ALLIED CAPITAL CMT, INC., as Depositor by: /s/ JOAN M. SWEENEY ------------------------------- Name: Joan M. Sweeney Title: Managing Director WILMINGTON TRUST COMPANY, as Owner Trustee by: /s/ W. CHRIS SPONENBERG ------------------------------- Name: W. Chris Sponenberg Title: Senior Financial Services Officer The Paying Agent hereby acknowledges it appointment as Paying Agent hereunder and agrees to act in such capacity as described herein. LASALLE NATIONAL BANK, as Paying Agent by: /s/ MICHAEL B. EVANS ------------------------------- Name: Michael B. Evans Title: First Vice President 40 EXHIBIT A FORM OF TRUST CERTIFICATE THIS TRUST CERTIFICATE IS SUBORDINATE TO THE BONDS, AS SET FORTH IN THE SALE AND SERVICING AGREEMENT. THIS TRUST CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE IN THE UNITED STATES OR ANY FOREIGN SECURITIES LAWS. EACH SECURITYHOLDER, BY ITS ACCEPTANCE OF THIS SECURITY, COVENANTS AND AGREES THAT SUCH SECURITYHOLDER, SHALL NOT, AT ANY TIME PRIOR TO THE DATE THAT IS ONE YEAR AND ONE DAY AFTER THE TERMINATION OF THE TRUST AGREEMENT, ACQUIESCE, PETITION OR OTHERWISE INVOKE OR CAUSE THE TRUST OR THE DEPOSITOR TO INVOKE THE PROCESS OF ANY COURT OR GOVERNMENTAL AUTHORITY FOR THE PURPOSE OF COMMENCING OR SUSTAINING A CASE AGAINST THE TRUST OR THE DEPOSITOR UNDER ANY FEDERAL OR STATE BANKRUPTCY, INSOLVENCY, REORGANIZATION OR SIMILAR LAW, OR APPOINTING A RECEIVER, LIQUIDATOR, ASSIGNEE, TRUSTEE, CUSTODIAN, SEQUESTRATOR OR OTHER SIMILAR OFFICIAL OF THE TRUST OR THE DEPOSITOR OR ANY SUBSTANTIAL PART OF ITS PROPERTY, OR ORDERING THE WINDING UP OR LIQUIDATION OF THE AFFAIRS OF THE TRUST OR THE DEPOSITOR. THE BENEFICIAL INTEREST IN THE TRUST REPRESENTED BY THIS TRUST CERTIFICATE IS NOT TRANSFERABLE. A-1 41 NUMBER 100% Percentage Interest R-001 ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 TRUST CERTIFICATE evidencing a fractional undivided interest in the Trust, as defined below, the property of which consists primarily of the Allied Interests and a Funding Note. THIS TRUST CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR AN OBLIGATION OF WILMINGTON TRUST COMPANY OR ALLIED CAPITAL CMT, INC. OR ANY OF THEIR RESPECTIVE AFFILIATES. THIS CERTIFIES THAT ________________ is the registered owner of the Percentage Interest (indicated above) in the fractional undivided beneficial interest in Allied Capital Commercial Mortgage Trust 1998-1 (the "Trust"), formed by Allied Capital CMT, Inc., a Delaware corporation (the "Depositor"). The Trust was created pursuant to a Trust Agreement dated as of January 1, 1998, as amended and restated by an Amended and Restated Trust Agreement dated as of January 1, 1998 (as so amended and restated and further amended or supplemented from time to time, the "Trust Agreement"), between the Depositor, Wilmington Trust Company, as owner trustee (the "Owner Trustee") and LaSalle National Bank, as paying agent (the "Paying Agent"), a summary of certain of the pertinent provisions of which is set forth below. To the extent not otherwise defined herein, the capitalized terms used herein have the meanings assigned to them in the Trust Agreement or the Sale and Servicing Agreement dated as of January 1, 1998 (as amended and supplemented from time to time, the "Sale and Servicing Agreement"), among the Trust, the Depositor, as seller, Allied Capital Corporation, as servicer (the "Servicer") and special servicer (the "Special Servicer"), ABN AMRO Bank N.V., as fiscal agent, and LaSalle National Bank, as indenture trustee and custodian (in such capacities, the "Indenture Trustee and the "Custodian"), as applicable. This Trust Certificate is one of the duly authorized Trust Certificates. Pursuant to an Indenture dated as of January 1, 1998 (the "Indenture"), between the Trust and LaSalle National Bank, as indenture trustee, the Trust also issued three classes of Bonds designated as the Commercial Mortgage Collateralized Bonds, Class A, Class B and Class C (collectively, the "Bonds"). This Trust Certificate is issued under and is subject to the terms, provisions and conditions of the Trust Agreement, to which Trust Agreement the Holder of this Trust Certificate by virtue of its acceptance hereof assents and by which such Certificateholder is bound. The rights of the Certificateholders are subordinate to the rights of the Bondholders, as set forth in the Sale and Servicing Agreement and the Indenture. A-2 42 Under the Trust Agreement and Sale and Servicing Agreement, there will be distributed on the 25th day of each month or, if such day is not a Business Day, the next Business Day (each, a "Distribution Date"), commencing in February 1998, to the Person in whose name this Trust Certificate is registered at the close of business on the last day of the immediately preceding month (the "Record Date"), such Certificateholder's Percentage Interest in the amount to be distributed to Certificateholders on such Distribution Date. The Holder of this Trust Certificate acknowledges and agrees that its rights to receive distributions in respect of this Trust Certificate are subordinate to the rights of the Bondholders as described in the Sale and Servicing Agreement and the Indenture. Each Certificateholder, by its acceptance of a Trust Certificate, covenants and agrees that such Certificateholder will not at any time institute against the Depositor or the Trust, or join in any institution against the Depositor or the Trust of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Bonds, the Trust Agreement or any of the Basic Documents. Distributions on this Trust Certificate will be made as provided in the Trust Agreement by the Paying Agent by wire transfer or check mailed to the Certificateholder of record in the Certificate Register without the presentation or surrender of this Trust Certificate or the making of any notation hereon. Except as otherwise provided in the Trust Agreement and notwithstanding the above, the final distribution on this Trust Certificate will be made after due notice by the Owner Trustee of the pendency of such distribution and only upon presentation and surrender of this Trust Certificate at the office or agency maintained for that purpose by the Paying Agent. Reference is hereby made to the further provisions of this Trust Certificate set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon shall have been executed by an authorized officer of the Owner Trustee, by manual signature, this Trust Certificate shall not entitle the Holder hereof to any benefit under the Trust Agreement or the Sale and Servicing Agreement or be valid for any purpose. THIS TRUST CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. A-3 43 IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Trust Certificate to be duly executed. ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 By: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee Dated: By: ___________________________________ ___________________________ Authorized Signatory OWNER TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Trust Certificates referred to in the within-mentioned Trust Agreement. WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee By:__________________________________________ Authorized Signatory 44 [REVERSE OF TRUST CERTIFICATE] The Trust Certificates do not represent an obligation of, or an interest in, the Depositor, the Servicer, the Special Servicer, the Owner Trustee or any affiliates of any of them and no recourse may be had against such parties or their assets, except as expressly set forth or contemplated herein or in the Trust Agreement or the Basic Documents. In addition, this Trust Certificate is not guaranteed by any governmental agency or instrumentality and is limited in right of payment to certain collections and recoveries with respect to the Allied Interests and the Funding Note (and certain other amounts), all as more specifically set forth herein and in the Sale and Servicing Agreement. A copy of each of the Sale and Servicing Agreement and the Trust Agreement may be examined by any Certificateholder upon written request during normal business hours at the principal office of the Depositor and at such other places, if any, designated by the Depositor. The Trust Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Depositor and the rights of the Certificateholders under the Trust Agreement at any time by the Depositor and the Owner Trustee with the consent of the Holders of the Trust Certificates and the Bonds, each voting as a class, evidencing at least 51% Percentage Interest and more than a majority of the outstanding principal balance of the Bonds of each class. Any such consent by the Holder of this Trust Certificate shall be conclusive and binding on such Holder and on all future Holders of this Trust Certificate and of any Trust Certificate issued upon the transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent is made upon this Trust Certificate. The Trust Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the Holders of any of the Trust Certificates. A-5 45 The Certificate Registrar shall keep or cause to be kept, at the Corporate Trust Office of the Owner Trustee, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Trust Certificates and of exchanges of Trust Certificates as herein provided. The Owner Trustee shall be the initial Certificate Registrar. The initial Holder of the Trust Certificates shall be the Depositor. The Depositor may not transfer all or any portion of its initial beneficial interest in the Trust. Except as provided in the Trust Agreement, the Trust Certificates are issuable only as a single registered Trust Certificate without coupons with a Percentage Interest of 100%. As provided in the Trust Agreement and subject to certain limitations therein set forth, lost, stolen, mutilated or destroyed Trust Certificates are exchangeable for new Trust Certificates of authorized Percentage Interests evidencing the same aggregate Percentage interest, as requested by the Certificateholder surrendering the same. No service charge will be made for any such registration of exchange, but the Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The Owner Trustee, the Certificate Registrar and any agent of the Owner Trustee or the Certificate Registrar may treat the Person in whose name this Trust Certificate is registered as the owner hereof for all purposes, and none of the Owner Trustee, the Certificate Registrar or any such agent shall be affected by any notice to the contrary. The obligations and responsibilities created by the Trust Agreement and the Trust created thereby shall terminate upon the payment to Certificateholders of all amounts required to be paid to them pursuant to the Trust Agreement and the Sale and Servicing Agreement and the disposition of all property held as part of the Owner Trust Estate. The Depositor and, if ACC is no longer the Servicer, the successor Servicer may at their option, redeem the Bonds or purchase the Owner Trust Estate, respectively, as specified in the Indenture and the Sale and Servicing Agreement, effecting the early retirement of the Trust Certificates. A-6 46 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ (Please print or type name and address, including postal zip code, of assignee) the within Trust Certificate, and all rights thereunder, and hereby irrevocably constitutes and appoints ________________________, attorney, to transfer said Trust Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated: ______________________________*/ Signature Guaranteed: _______________________________*/ _________________ */ NOTICE: The signature to this assignment must correspond with the name of the registered owner as it appears on the face of the within Trust Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Certificate Registrar, which requirements include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Certificate Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-7 47 EXHIBIT B 48 Form of Certificate of Trust of Allied Capital Commercial Mortgage Trust 1998-1 THIS Certificate of Trust (the "Certificate of Trust") of Allied Capital Commercial Mortgage Trust 1998-1 (the "Trust") is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as Owner Trustee, to form a business trust under the Delaware Business Trust Act (12 Del. C.' 3801 et seq.). 1. Name. The name of the business trust formed hereby is Allied Capital Commercial Mortgage Trust 1998-1. 2. Delaware Trustee. The name and business address of the Owner Trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. 3. Effective Date. This Certificate of Trust shall be effective upon filing. IN WITNESS WHEREOF, the undersigned, being the Owner Trustee of the Trust, has executed this Certificate of Trust as of the date first above written. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: _______________________________ Name: Title: EX-99.2F.7.D 7 GUARANTY 1 EXHIBIT F.7(d) EXECUTION COPY GUARANTY GUARANTY (hereinafter, this "Guaranty"), dated as of January 1, 1998 made by Allied Capital Corporation, a Maryland corporation (the "Guarantor"), in favor of Allied Capital Commercial Mortgage Trust 1998-1, a Delaware business trust (the "Issuer"). PRELIMINARY STATEMENTS: 1. Allied Capital REIT, Inc. (the "Seller") and Allied Capital CMT, Inc. (the "Purchaser") have entered into a Mortgage Loan Purchase Agreement, dated as of January 1, 1998 (the "Mortgage Loan Purchase Agreement"), relating to the sale by the Seller to the Purchaser of certain commercial mortgage loans (the "Allied Mortgage Loans") and participation interests (the "Allied Participations" and, together with the Allied Mortgage Loans, the "Allied Interests") in commercial loans (the "Participation Mortgage Loans" and, together with the Allied Mortgage Loans, the "Mortgage Loans"). 2. The Purchaser and the Issuer have entered into a Sale and Servicing Agreement, dated as of January 1, 1998 (the "Sale and Servicing Agreement"), among the Guarantor, as servicer and special servicer, the Purchaser, as seller, the Issuer, as issuer, LaSalle National Bank, as indenture trustee (the "Indenture Trustee") and custodian, and ABN AMRO Bank N.V., as fiscal agent, relating to the conveyance by the Purchaser to the Issuer of the Allied Interests, all rights of the Purchaser under the Mortgage Loan Purchase Agreement and certain other property. Capitalized terms used herein but not otherwise defined herein, unless the context otherwise requires, shall have the meanings assigned to them in the Sale and Servicing Agreement. 3. The Issuer intends to assign all of its rights under this Guaranty to the Indenture Trustee for the benefit of the Bondholders pursuant to an Indenture dated as of January 1, 1998 (the "Indenture") between the Issuer and the Indenture Trustee. 4. The Guarantor desires to execute and deliver this Guaranty to the Issuer. NOW, THEREFORE, in consideration of the premises and in order to induce the Issuer to enter into the Sale and Servicing Agreement, the Guarantor hereby agrees with the Issuer as follows: SECTION 1. The Guaranty. The Guarantor hereby absolutely, irrevocably and unconditionally guarantees to the Issuer the obligation of the Seller to repurchase any defective Allied Mortgage Loan or Allied Participation pursuant to Section 4 of the 2 Mortgage Loan Purchase Agreement and the repurchase obligations of the Seller set forth in Article III of the Sale and Servicing Agreement (the "Obligations"). All payments to be made by the Guarantor hereunder shall be made when due, without set-off or counterclaim, to the Collection Account pursuant to Section 5.04 of the Sale and Servicing Agreement in United States dollars and in immediately available funds. The obligations of the Guarantor hereunder shall not be discharged, impaired or otherwise affected by (a) the failure of the Issuer to assert any claim or demand or to enforce any right or remedy against the Seller under the provisions of the Mortgage Loan Purchase Agreement, the Sale and Servicing Agreement or any document related thereto or otherwise; (b) any extension or renewal of any part of the Obligations; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of the Mortgage Loan Purchase Agreement, the Sale and Servicing Agreement or of any document related thereto; (d) the bankruptcy, insolvency or reorganization of the Seller; (e) the invalidity or unenforceability of any of the Obligations or (f) any other event which under law would discharge the obligations of a surety. The Guarantor acknowledges that the Issuer and the Indenture Trustee have been induced to enter into the Sale and Servicing Agreement in reliance on this Guaranty. This Guaranty shall be construed as a continuing, absolute and unconditional guarantee of payment, and not of collection. GUARANTOR HEREBY SPECIFICALLY AGREES THAT GUARANTOR SHALL NOT BE RELEASED FROM LIABILITY HEREUNDER BY ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY THE ISSUER OR ANY OF ITS RESPECTIVE AFFILIATES, EMPLOYEES, AGENTS OR REPRESENTATIVES, INCLUDING, WITHOUT LIMITATION, A NON-JUDICIAL SALE OF COLLATERAL UNDER ANY SECURITY AGREEMENT, MORTGAGE OR DEED OF TRUST THAT WOULD AFFORD THE SELLER OR THE GUARANTOR A DEFENSE BASED UPON THE LAWS (INCLUDING THE ANTI-DEFICIENCY LAWS) OF ANY STATE. GUARANTOR EXPRESSLY WAIVES (I) ANY DEFENSE TO THE RECOVERY OF A DEFICIENCY AGAINST THE SELLER OR THE GUARANTOR HEREUNDER AFTER SUCH NON-JUDICIAL SALE, NOTWITHSTANDING THAT SUCH SALE MAY RESULT IN A LOSS BY THE GUARANTOR OF THE RIGHT TO RECOVER FROM THE SELLER OF ANY SUCH DEFICIENCY AND (II) ALL SURETYSHIP DEFENSES THAT IT WOULD OTHERWISE HAVE UNDER THE LAWS OF ANY JURISDICTION. WITHOUT LIMITING THE FOREGOING, GUARANTOR UNDERSTANDS THAT IN THE ABSENCE OF THE WAIVERS MADE HEREIN, INCLUDING THOSE MADE IN THIS PARAGRAPH, THE GUARANTOR MIGHT HAVE A DEFENSE AGAINST AN ACTION BY THE ISSUER TO RECOVER A DEFICIENCY FROM THE GUARANTOR HEREUNDER FOLLOWING A NON-JUDICIAL FORECLOSURE SALE OF REAL PROPERTY OR OTHER COLLATERAL SECURING THE OBLIGATIONS, AND THE GUARANTOR IS SPECIFICALLY WAIVING THESE DEFENSES AND ALL OTHER DEFENSES. The Guarantor expressly agrees that the Guarantor shall be and remain liable for any deficiency remaining after foreclosure of any security interest, whether or not the liability of the Seller for such deficiency is discharged pursuant to statute or judicial decision. 2 3 The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment and all other notices of any kind to or upon the Guarantor with respect to the Obligations. Section 2. Covenants of the Issuer. The Issuer agrees to comply with the terms of the Sale and Servicing Agreement and will not amend the Mortgage Loan Purchase Agreement or the Sale and Servicing Agreement without the prior written consent of the other parties thereto in accordance with the provisions thereof. Section 3. Representations and Warranties of Guarantor. Guarantor represents and warrants to the Issuer as follows: (a) It has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted. (b) It is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its businesses shall require such qualifications, licenses, or approvals, except where the failure to obtain such qualifications, licenses or approvals would not reasonably be expected to have a material adverse effect on the financial condition, operations, business or prospects of Guarantor. (c) It has the corporate power and authority to execute and deliver this Guaranty and to carry out its terms. (d) The consummation of the transactions contemplated by this Guaranty and the fulfillment of the terms hereof shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or by-laws of the Guarantor, or any indenture, agreement, or other instrument to which it is a party or by which it shall be bound; or result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement, or other instrument, or violate any law or any order, rule, or regulation applicable to it of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over it or its properties. (e) There are no proceedings or investigations pending, or, to the knowledge of the Guarantor, threatened, before any court, regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over it or its properties: (i) asserting the invalidity of this Guaranty; (ii) seeking to 3 4 prevent the consummation of any of the transactions contemplated by this Guaranty; or (iii) seeking any determination or ruling that would reasonably be expected to have a material adverse effect on the business, results of operations, financial condition or prospects of the Guarantor, or the performance by the Guarantor of its obligations under, or the validity or enforceability of, this Guaranty. (f) All approvals, authorizations, consents, orders or other actions or registrations with any person or any governmental body or official required to be obtained on or prior to the date hereof in connection with the execution and delivery of this Guaranty, the performance of the transactions contemplated by this Guaranty and the fulfillment of the terms hereof have been obtained. Section 4. Subrogation. Upon payment by the Guarantor of any amounts under this Guaranty, the Guarantor shall be subrogated to all rights of the Issuer against the Seller under the Mortgage Loan Purchase Agreement and the Sale and Servicing Agreement. Section 5. Amendments, etc. No amendment or waiver of any provision of this Guaranty or consent to any departure herefrom by the Guarantor shall in any event be effective unless the same shall be in writing and signed by the Issuer (and, in the case of an amendment, by the Guarantor), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 6. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including facsimile communication) and mailed or transmitted or delivered at the following addresses: if to the Guarantor: Allied Capital Corporation 1666 K Street, N.W. Washington, DC 20006 Attention: Joan M. Sweeney if to the Issuer: Allied Capital Commercial Mortgage Trust 1998-1 c/o Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Attention: Corporate Trust Administration Any party may change its respective address in a written notice to the other parties hereto complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, be effective when deposited in the mails, and, when 4 5 transmitted by telex or facsimile, when sent, addressed as aforesaid. Section 7. Successors and Assigns. (a) This Guaranty shall (i) be binding upon the Guarantor, its successors and assigns, and (ii) inure to the benefit of the Issuer and its successors and assigns under the Mortgage Loan Purchase Agreement and the Sale and Servicing Agreement; provided that none of the parties hereto may delegate its obligations or assign its rights hereunder, as the case may be, without consent of the other parties hereto except as provided in paragraph (b). (b) The Guarantor consents to the transfer and assignment by the Issuer of all of its rights hereunder to the Indenture Trustee for the benefit of the Bondholders pursuant to the Indenture. Section 8. Miscellaneous. The headings in this Guaranty are for purposes of reference only and shall not limit or define the meaning hereof. This Guaranty may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. In the event that any provision of this Guaranty shall provide to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Guaranty which shall remain binding on all parties hereto. Section 9. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed in such State. 5 6 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed on its behalf as of the date first written above. ALLIED CAPITAL CORPORATION By: /s/ JOAN M. SWEENEY --------------------------- Name: Joan M. Sweeney Title: Managing Director Attest: By: /s/ KRISTINE M. LANSING ----------------------------------------- Name: Title: Asst. Sect. Accepted and confirmed as of the date first written above: ALLIED CAPITAL COMMERCIAL MORTGAGE TRUST 1998-1 BY: WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee By: /s/ W. CHRIS SPONENBERG ----------------------------------------- Name: W. Chris Sponenberg Title: Senior Financial Services Officer EX-99.2J.1 8 FORM OF CUSTODY AGREEMENT WITH RIGGS BANK N.A. 1 EXHIBIT J.1 02164201 ALLIED CAPITAL LENDING CORPORATION CUSTODY AGREEMENT This agreement is between the UNDERSIGNED as Principal and RIGGS BANK N.A. ("Riggs") 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. Temporary and reserve investments may be made by Riggs in money market mutual funds to which Riggs or an affiliate provides investment advisory and other services. 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 the 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 use agents and depositories and 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 therefor. (7) COMPENSATION. The compensation of Riggs shall be in accordance with its established fee schedules in effect from time to time. In addition, to the extent that assets are invested in mutual funds to which Riggs or an affiliate provides investment advisory and other services, Riggs or an affiliate may receive fees from the mutual funds for such services. (8) WITHDRAWAL OF PROPERTY AND TERMINATION OF AGREEMENT. Principal may withdraw any and all property held by agent 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) DEATH OF PRINCIPAL. Upon the death of the Principal, this agreement terminates and Riggs shall distribute all property then held less its charges and expenses to the legally qualified personal representative of the Principal. (10) LAW GOVERNING. The laws of (check one) the District of Columbia ( ), the State of Maryland (X), the State of Virginia ( ) shall govern the interpretation of this agreement. This agreement shall bind the heirs, distributees, legal representatives, and assigns of the Principal and shall bind the successors and assigns of Riggs. Principal and Riggs have executed this agreement in duplicate on July 30, 1997. WITNESS: 02164201 ALLIED CAPITAL LENDING CORPORATION /s/ PENNI ROLL /s/ JON A. DELUCA - ------------------------------ ------------------------------------------- PRINCIPAL ATTEST: RIGGS BANK N.A. /s/ BARBARA J. LUKE By: /s/ [SIG] - ------------------------------ ---------------------------------------- Trust Officer Vice President & Trust Officer EX-99.2J.2 9 FORM OF CUSTODY AGREEMENT W/ LASALLE NATIONAL BANK 1 Exhibit j.2* CUSTODIAL AGREEMENT (this "Custodial Agreement") dated as of November 7, 1997, made by and among: (i) ALLIED CAPITAL COMMERCIAL CORPORATION, a Maryland corporation, as a Borrower and BUSINESS MORTGAGE INVESTORS, INC., a Maryland corporation, as a Borrower (each a "Borrower", collectively, the "Borrowers"); (ii) LASALLE NATIONAL BANK, as custodian for the Lender pursuant to the Loan Agreement referred to below (in such capacity, the "Custodian"); and (iii) MERRILL LYNCH MORTGAGE CAPITAL INC. (the "Lender"). RECITALS The Borrowers and the Lender are parties to the Master Repurchase Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified and in effect from time to time, the "Master Repurchase Agreement"), pursuant to which the Lender has agreed, subject to the terms and conditions of the Master Repurchase Agreement, to make revolving credit loans to the Borrowers to finance Eligible Mortgage Loans (as defined therein) owned by the Borrowers. It is a condition precedent to the effectiveness of the Loan Agreement that the parties hereto execute and deliver this Custodial Agreement to provide for the appointment of the Custodian as custodian hereunder. Accordingly, the parties hereto agree as follows: Section 1. Definitions. Unless otherwise defined herein, capitalized terms when used herein shall have their respective assigned meanings as set forth in the Loan Agreement, and the following terms shall have the following meanings: "Affiliate" shall mean with respect to any Person, any "affiliate" of such Person as such term is defined in the United States Bankruptcy Code in effect from time to time. "Authorized Representative" shall have the meaning specified in Section 18 hereof. "Collateral Agent" shall mean the Person indicated in writing by the Lender pursuant to delivery by the Lender to the Custodian of a Notice of Collateral Agent in the form of Annex 13 hereto, or its successor in interest. "Collateral Agent Termination" shall have the meaning specified in Section 26 hereof. "Custodial Delivery Failure" shall have the meaning specified in Section 13 hereof. "Custodial Identification Certificate" shall mean the certificate executed by each Borrower in connection with the pledge of Eligible Mortgage Loans to the Lender to be held by the Custodian pursuant to this Custodial Agreement, a form of which is attached as Annex 3 hereto. 2 "Exception" shall mean, with respect to any Mortgage Loan, any of the following: (i) the variances from the requirements of Section 2 hereof with respect to the Mortgage Files (giving effect to the Borrower's right to deliver certified copies in lieu of original documents in certain circumstances), (ii) a Mortgage Loan which has been pledged to the Lender under the Loan Agreement in excess of 365 calendar days, (iii) a Mortgage Loan that has been released to the Borrower pursuant to Section 5(a) hereof in excess of 14 calendar days, (iv) an Eligible Mortgage Loan that has been released under any Transmittal Letter in the form of Annex 11 and 12 hereto in excess of the time period stated in such Transmittal Letter for release, and (v) any Mortgage Loan with respect to which the Custodian receives written notice or has actual knowledge of a lien subject or security interest in favor of a Person other than the Lender with respect to such Mortgage Loan. "MBS" shall have the meaning specified in Section 5(b)(ii) hereof. "Mortgage File" shall mean, as to each Mortgage Loan, those documents listed in Section 2 of this Custodial Agreement that are delivered to the Custodian or which at any time come into the possession of the Custodian. "Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan, the documents comprising the Mortgage File for such Mortgage Loan. "Mortgage Loan Schedule" shall mean a list of Eligible Mortgage Loans to be pledged pursuant to the Loan Agreement, attached to a Custodial Identification Certificate, setting forth, as to each Eligible Mortgage Loan, the applicable information specified on Annex 1 to this Custodial Agreement. "Mortgage Loan Schedule and Exception Report" means a list of Eligible Mortgage Loans delivered by the Custodian to the Lender on each Business Day, reflecting the Mortgage Loans held by the Custodian for the benefit of the Lender as of the close of business on the Business Day prior to the date of delivery, which includes codes indicating any Exceptions with respect to each Mortgage Loan listed thereon. Each Mortgage Loan Schedule and Exception Report shall set forth (a) shall be in a form acceptable to Merrill Lynch, (b) the Mortgage Loans being pledged to the Lender on any applicable Funding Date as well as the Mortgage Loans previously pledged to the Lender and held by the Custodian hereunder, and (c) all Exceptions with respect thereto, with any updates thereto from the time last delivered. "Notice of Collateral Agent" shall mean the written notice of the security interest of a Collateral Agent in the form of Annex 13 hereto. "Officer's Certificate" shall mean a certificate signed by a Responsible Officer of the Person delivering such certificate and delivered as required by this Custodial Agreement. "Opinion of Counsel" shall mean a written opinion letter of counsel in form and substance reasonably acceptable to the party receiving such opinion letter. "Pledgee" shall have the meaning specified in Section 25 hereof. "Proceeds" shall mean whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. -2- 3 "Responsible Officer" shall mean, as to any Person, the chief executive officer or, the Managing Member with respect to financial matters, the chief financial officer of such person, and as to the Borrower, those authorized Persons listed on Schedule 3 attached to the Loan Agreement as such schedule may be modified from time to time. "Review Procedures" shall have the meaning specified in Section 3(c) hereof. "Trust Receipt" shall mean a Trust Receipt in the form annexed hereto as Annex 2 delivered to the Lender by the Custodian covering all of the Mortgage Loans subject to this Agreement from time to time, as reflected on the Schedule and Exception Report attached thereto in accordance with Section 3(e). Section 2. Appointment of Custodian: Delivery of Asset File. (a) By executing and delivering this Agreement, the Lender has appointed the Custodian to act as agent and custodian for the exclusive benefit of the Lender with respect to the Collateral. The Custodian hereby accepts such appointment and agrees to maintain and hold all Collateral at any time delivered to it as bailee and custodian for the exclusive benefit of the Lender and will review all collateral files as outlined in Annex 4. The Custodian acknowledges and agrees that the Custodian is acting and will act with respect to the Collateral for the exclusive benefit of the Lender and is not, and shall not at any time in the future be, subject with respect to the Collateral, in any manner or to any extent, to the direction or control of the Borrower except as expressly permitted hereby. The Custodian agrees to act in accordance with this Agreement and in accordance with any written instructions from the Lender delivered pursuant hereto consistent herewith. Under no circumstances shall the Custodian deliver possession of Collateral to the Borrower or any Person other than the Lender except in accordance with the express terms of this Agreement or otherwise upon the written instruction of the Lender. (b) No later than 12:00 p.m., New York City time, two (2) Business Days prior to any Funding Date, the Borrower shall release to the Custodian the following original documents pertaining to each Eligible Mortgage Loan to be pledged to the Lender and included in the Borrowing Base on such Funding Date, each of which Mortgage Loans shall be identified in a Mortgage Loan Schedule delivered therewith, with a copy of such Mortgage Loan Schedule delivered to the Lender (or, if another time is specified below for such release or delivery, at such other time): (I) With respect to each Eligible Mortgage Loan: (a) The original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of _________ without recourse" and signed in the name of the last endorsee (the "Last Endorsee") by an authorized Person (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated by the Last Endorsee while doing business under another name, the signature must be in the following form: "[Last Endorsee], formerly known as [previous name]"). (b) The original of the guarantee executed in connection with the Mortgage Note (if any). -3- 4 (c) The original Mortgage with evidence of recording thereon, or a copy thereof together with an Officer's Certificate of the title company or recording office certifying that such represents a true and correct copy of the original and that such original has been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (d) The originals of all assumption, modification, consolidation or extension agreements relating to the Mortgage with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the title company or recording office certifying that such represent true and correct copies of the originals and that such originals have each been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (e) The original Assignment of Mortgage in blank for each Mortgage Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[Last Endorsee], formerly known as [previous name]"). (f) The originals of all intervening assignments of mortgage with evidence of recording thereon, or copies thereof together with an Officer's Certificate of the title company or recording office certifying that such represent true and correct copies of the originals and that such originals have each been submitted or promptly after closing will be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (g) The (i) original attorney's opinion of title and abstract of title or (ii) the original mortgagee title insurance policy, or (iii) if the original mortgagee title insurance policy has not been issued, the irrevocable commitment to issue the same. (h) The original of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage Loan. (i) The original assignment of leases and rents, if any, with evidence of recording thereon, or a copy thereof together with an Officer's Certificate of the title company or recording office certifying that such copy represents a true and correct copy of the original that has been or will, on the Funding Date be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (j) The original assignment of assignment of leases and rents, if any, from the Borrower in blank, in form and substance acceptable for recording. -4- 5 (k) A copy of the UCC-1 Financing Statements, certified as true and correct by the Borrower, and all necessary UCC-3 Continuation Statements with evidence of filing thereon or copies thereof certified by the Borrower to have been sent or promptly after closing will be sent for filing, and UCC-3 Assignments executed by the Borrower in blank, which UCC-3 Assignments shall be in form and substance acceptable for filing. (l) An environmental indemnity agreement (if any). (m) An omnibus assignment in blank (if any). (n) A disbursement letter from the Mortgagor to the original mortgagee (if any). (o) Mortgagor's certificate or title affidavit (if any). (p) A survey of the Mortgaged Property (if any). (q) A copy of the Mortgagor's Opinion of Counsel (if any). (II) With Respect to all Asset Files: From time to time, the Borrower shall forward to the Custodian additional original documents or additional documents evidencing any assumption, modification (subject to Merrill Lynch approval), consolidation or extension of a Mortgage Loan approved by the Borrower, in accordance with the terms of the Loan Agreement, and upon receipt of any such other documents, the Custodian shall hold such other documents as the Lender shall request from time to time. With respect to any documents which have been delivered or are being delivered to recording offices for recording and have not been returned to the Borrower in time to permit their delivery hereunder at the time required, in lieu of delivering such original documents, title company or recording office shall deliver to Lender a true copy thereof with an Officer's Certificate certifying that such copy is a true, correct and complete copy of the original, which has been transmitted for recordation. The Borrower shall deliver such original documents to the Custodian promptly when they are received. Section 3. Custodial Identification Certificate; Mortgage Loan Schedule and Exception Report; Trust Receipt. (a) With respect to Eligible Mortgage Loans, no later than 10:00 a.m., New York City time, two (2) Business Days prior to each Funding Date, the Borrower shall provide the Custodian with a Custodial Identification Certificate and a related Mortgage Loan Schedule (such information contained on the Mortgage Loan Schedule shall be delivered to the Custodian in computer-readable form) with respect to the Eligible Mortgage Loans to be pledged to the Lender on such Funding Date. If the Custodian has received such Custodial Identification Certificate by the time set forth above, and has received a Mortgage File for a Mortgage Loan identified on the Mortgage Loan Schedule attached thereto by 12:00 p.m., -5- 6 New York City time two (2) Business Days prior to a Funding Date, then on such Funding Date, the Custodian will deliver, via facsimile and by modem, no later than 12:00 p.m., New York City time, to the Lender a Mortgage Loan Schedule and Exception Report for each Mortgage Loan pledged hereunder on such date, with Exceptions identified by the Custodian as current as of the date and time of delivery of such Mortgage Loan Schedule and Exception Report. (b) Notwithstanding and in addition to the foregoing, on each Business Day, the Custodian shall deliver to the Borrower and the Lender, via facsimile or modem, a Mortgage Loan Schedule and Exception Report, in each case no later than 2:00 p.m., New York City time, which shall reflect the Exceptions identified by the Custodian as of the close of business on the Business Day prior to the date of delivery of the applicable Mortgage Loan Schedule and Exception Report. (c) Each Mortgage Loan Schedule and Exception Report shall list all Exceptions using such codes as shall be in form and substance agreed to by the Custodian and the Lender. The delivery of each Mortgage Loan Schedule and Exception Report to the Lender shall be the Custodian's representation that, other than the Exceptions listed as part of the Exception Report: (i) all documents required to be delivered in respect of such Mortgage Loan pursuant to Section 2 of this Custodial Agreement have been delivered and are in the possession of the Custodian as part of the Mortgage File for such Mortgage Loan, (ii) all such documents have been reviewed by the Custodian in accordance with the review procedures attached hereto as Annex 4 (the "Review Procedures") and appear on their face to be regular and to relate to such Mortgage Loan and to satisfy the requirements set forth in Section 2 of this Custodial Agreement, (iii) the amount of the Mortgage Note is the same as the amount specified on the related Mortgage, and based upon a review of the Mortgage Note, items (a), (b), (c), (d), (f), and (g) of Annex 1 as set forth in the Mortgage Loan Schedule delivered by the Borrower to the Custodian are the same as shown in the Mortgage Note and (iv) each Mortgage Loan identified on such Mortgage Loan Schedule and Exception Report is being held by the Custodian as the bailee for the Lender and/or its designees pursuant to this Agreement. (d) In connection with a Mortgage Loan Schedule and Exception Report delivered hereunder by the Custodian, the Custodian shall make no representations as to and shall not be responsible to verify (i) the validity, legality, enforceability, due authorization, recordability, sufficiency, or genuineness of any of the documents contained in each Mortgage File or (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan. Subject to the following sentence, the Borrower and the Lender hereby give the Custodian notice that from and after the Funding Date, the Lender shall have a security interest in each Mortgage Loan identified on a Mortgage Loan Schedule and Exception Report until such time that the Custodian receives written notice from the Lender that the Lender no longer has a security interest in such Mortgage Loan (pursuant to Section 26 or otherwise). In the event that the Lender does not make a Loan to the Borrower prior to 3:00 p.m., New York City time, on such Funding Date, upon notice thereof from the Borrower, acknowledged by the Lender, the Custodian shall hold or release to the Borrower, pursuant to the Borrower's written instructions, the Mortgage Loans in respect of the Mortgage Loan Schedule and Exception Report delivered by the Custodian on such Funding Date. Each Mortgage Loan Schedule and Exception Report delivered to the Lender by the Custodian, via facsimile or by modem, shall be deemed superseded and canceled upon the delivery of a subsequent Mortgage Loan Schedule and Exception Report. (e) In addition to the foregoing, on the initial Funding Date, the Custodian shall deliver to the Lender a Trust Receipt with a Mortgage Loan Schedule and Exception Report attached thereto. Each Mortgage Loan Schedule and Exception Report delivered by the Custodian to the Lender shall supersede and cancel the Mortgage Loan Schedule and Exception Report previously delivered by the Custodian to the Lender hereunder, and shall replace the then existing Mortgage Loan Schedule and -6- 7 Exception Report to be attached to the Trust Receipt. Notwithstanding anything to the contrary set forth herein, in the event that the Mortgage Loan Schedule and Exception Report attached to the Trust Receipt is different from the most recently delivered Mortgage Loan Schedule and Exception Report, then the most recently delivered Mortgage Loan Schedule and Exception Report shall control and be binding upon the parties hereto. Section 4. Obligations of the Custodian. (a) The Custodian shall maintain continuous custody of all items constituting the Mortgage Files in secure facilities in accordance with customary standards for such custody and shall reflect in its records the interest of the Lender therein. Each Mortgage Note (and Assignment of Mortgage) shall be maintained in fireproof facilities. (b) With respect to the documents constituting each Mortgage File, the Custodian shall (i) act exclusively as the bailee of, and custodian for, the Lender, (ii) hold all documents constituting such Mortgage File received by it for the exclusive use and benefit of the Lender, and (iii) make disposition thereof only in accordance with the terms of this Custodial Agreement or with written instructions furnished by the Lender; provided, however, that in the event of a conflict between the terms of this Custodial Agreement and the written instructions of the Lender, the Lender's written instructions shall control. (c) In the event that (i) the Lender, the Borrower or the Custodian shall be served by a third party with any type of levy, attachment, writ or court order with respect to any Mortgage File or any document included within a Mortgage File or (ii) a third party shall institute any court proceeding by which any Mortgage File or a document included within a Mortgage File shall be required to be delivered otherwise than in accordance with the provisions of this Custodial Agreement, the party receiving such service shall promptly deliver or cause to be delivered to the other parties to this Custodial Agreement copies of all court papers, orders, documents and other materials concerning such proceedings. The Custodian shall, to the extent permitted by law, continue to hold and maintain all the Mortgage Files that are the subject of such proceedings pending a final, nonappealable order of a court of competent jurisdiction permitting or directing disposition thereof. Upon final determination of such court, the Custodian shall dispose of such Mortgage File or any document included within such Mortgage File as directed by such court. Expenses of the Custodian incurred as a result of such proceedings shall be borne by the Borrower. (d) The Lender hereby acknowledges that the Custodian shall not be responsible for the validity and perfection of the Lender's security interest in the Collateral hereunder, other than the Custodian's obligation to take possession of Collateral as set forth in Section 2 hereof. Section 5. Release of Collateral. (a) From time to time until the Custodian is otherwise notified by the Lender, which notice shall be given by the Lender only following the occurrence of an Event of Default, the Custodian is hereby authorized upon receipt of written request of the Borrower to release documentation relating to Mortgage Loans in the possession of the Custodian to the Borrower, or its designee, for the purpose of correcting documentary deficiencies relating thereto against a Request for Release and Receipt executed by the Borrower and consented to by the Lender, (not to exceed the lesser of 10 files or 2% of the outstanding borrowings, subject to Merrill Lynch approval for amounts that exceed the threshold) in the form of Annex 5-A hereto. The Borrower or its designee shall return -7- 8 to the Custodian each document previously released from the Custodian's Mortgage File within 14 calendar days of receipt thereof. The Borrower hereby further represents and warrants to the Lender that any such request by the Borrower for release of Collateral shall be solely for the purposes of correcting clerical or other non-substantial documentation problems in preparation for returning such Collateral to the Custodian for ultimate sale or exchange and that the Borrower has requested such release in compliance with all terms and conditions of such release set forth in the Loan Agreement. The Lender hereby acknowledges that the Custodian's obligations with respect to any documents so released to the Borrower or its designee pursuant to this Section 5(a) shall be limited to recording the Custodian's receipt thereof upon the return of such documents to the Custodian by the Borrower or its designee. (b) (i) From time to time until otherwise notified by the Lender, which notice shall be given by the Lender only following the occurrence of an Event of Default, the Custodian is hereby authorized upon receipt of written request of the Borrower and consent thereto by the Lender to release Mortgage Files in the possession of the Custodian to a third-party purchaser or such third party purchaser's custodian for the purpose of resale thereof against a Request for Release executed by the Borrower in the form of Annex 5-B hereto. On such Request for Release, the Borrower shall indicate the Mortgage Loans to be sold, the amount of sale proceeds anticipated to be received, the date of such anticipated sale, the name and address of the Person to whom the Mortgage Files are to be delivered, and the preferred method of delivery. (ii) Any transmittal of documentation for Mortgage Loans in the possession of the Custodian in connection with the sale thereof to a third-party purchaser will be under cover of a transmittal letter substantially in the form attached hereto as Annex 11 duly completed by the Custodian and executed by the Custodian. Any transmittal of documentation for Mortgage Loans in the possession of the Custodian in connection with the shipment to a custodian or trustee in connection with the formation of a mortgage pool supporting a mortgage-backed security (an "MBS") will be under cover of a transmittal letter substantially in the form attached hereto as Annex 11. It is acknowledged and agreed by the parties hereto that the Custodian shall have no obligation to obtain written acknowledgment of receipt from the addressee of any transmittal or other letter sent by the Custodian hereunder. Promptly upon (x) the remittance by such third-party purchaser of the full purchase price of the Mortgage Loan or (y) the issuance of such MBS, the Lender shall notify the Custodian thereof. (c) With the prior written consent of the Lender, in each case, the Borrower may substitute for one or more Eligible Mortgage Loans constituting the Collateral one or more substitute Eligible Mortgage Loans or obtain the release of one or more Mortgage Loans constituting Collateral hereunder; provided that, after giving effect to such substitution or release, the Secured Obligations then outstanding shall not exceed the permitted amount, which determination shall be made solely by the Lender. In connection with any such requested substitution or release, the Borrower will provide notice to the Custodian and the Lender no later than 3:00 p.m., New York City time, on the date of such request, specifying the Mortgage Loans to be substituted for or released and the substitute Mortgage Loans to be pledged hereunder in substitution therefor, if any, and shall deliver with such notice a Custodial Identification Certificate and a revised Mortgage Loan Schedule indicating any substitute Mortgage Loans. The Custodian will effect the requested substitution or release no later than 5:00 p.m., New York City time, one Business Day following the day on which such request was made after the Custodian has certified to the Lender on such Business Day that the matters set forth in clauses (i) and (ii) of Section 3(c) hereof with respect to any substitute Mortgage Loans are true and correct. Each such substitution or release shall be deemed to be a representation and warranty by the Borrower that any substitute Mortgage Loans are Eligible Mortgage Loans and that after giving effect -8- 9 to such substitution or release, the Secured Obligations then outstanding shall not exceed the Borrowing Base. (d) So long as no Event of Default has occurred and is continuing and margin requirements are satisfied, the Custodian and the Lender shall take such steps as they may reasonably be directed from time to time by the Borrower in writing, which the Borrower deems necessary and appropriate, to transfer promptly and deliver to the Borrower any Mortgage File in the possession of the Custodian relating to any Mortgage Loan previously included in the Borrowing Base as an Eligible Mortgage Loan but which the Borrower, with the written consent of the Lender, has notified the Custodian has ceased to be an Eligible Mortgage Loan. (e) Following notification by the Lender (which may be by facsimile) to the Custodian that an Event of Default has occurred and is continuing, the Custodian shall not release, or incur any liability to the Borrower or any other Person for refusing to release, any item of Collateral to the Borrower or any other Person without the express prior written consent and at the direction of the Lender. Section 6. Fees and Expenses of Custodian. The Custodian shall charge such fees for its services under this Custodial Agreement as are set forth in a separate agreement between the Custodian and the Borrower, the payment of which fees, together with the Custodian's expenses in connection herewith, shall be solely the obligation of the Borrower. Section 7. Removal or Resignation of Custodian. (a) The Custodian may at any time resign and terminate its obligations under this Custodial Agreement upon at least 60 days' prior written notice to the Borrower and the Lender. Promptly after receipt of notice of the Custodian's resignation, the Lender shall appoint, by written instrument, a successor custodian, subject to written approval by the Borrower (which approval shall not be unreasonably withheld). One original counterpart of such instrument of appointment shall be delivered to each of the Borrower, the Custodian and the successor custodian. (b) The Lender, with the consent of the Borrower, upon at least 60 days' prior written notice to the Custodian and the Lender, may remove and discharge the Custodian (or any successor custodian thereafter appointed) from the performance of its obligations under this Custodial Agreement. Promptly after the giving of notice of removal of the Custodian, the Lender shall appoint, by written instrument, a successor custodian, subject to written approval by the Borrower (which approval shall not be unreasonably withheld). One original counterpart of such instrument of appointment shall be delivered to each of the Lender, the Borrower, the Custodian and the successor custodian. (c) In the event of any such resignation or removal, the Custodian shall promptly transfer to the successor custodian, as directed in writing, all the Mortgage Files being administered under this Custodial Agreement and, if the endorsements on the Mortgage Notes and the Assignments of Mortgage have been completed in the name of the Custodian, assign the Mortgages and endorse without recourse the Mortgage Notes to the successor Custodian or as otherwise directed by the Lender. The cost of the shipment of Mortgage Files arising out of the resignation of the Custodian shall be at the expense of the Custodian; and any cost of shipment arising out of the removal of the -9- 10 Custodian shall be at the expense of the Lender. The Borrower shall be responsible for the fees and expenses of the successor custodian and the fees and expenses for endorsing the Mortgage Notes and assigning the Mortgages to the successor custodian if required pursuant to this paragraph. Section 8. Examination of Mortgage Files. Upon reasonable prior notice to the Custodian and at the Borrower's expense, the Lender, the Borrower and each of their respective agents, accountants, attorneys and auditors will be permitted during normal business hours to examine the Mortgage Files, documents, records and other papers in the possession of or under the control of the Custodian relating to any or all of the Mortgage Loans. Section 9. Insurance of Custodian. At its own expense, the Custodian shall maintain at all times during the existence of this Custodial Agreement and keep in full force and effect fidelity insurance, theft of documents insurance, forgery insurance and errors and omissions insurance. All such insurance shall be in amounts, with standard coverage and subject to deductibles, all as is customary for insurance typically maintained by banks which act as custodian of collateral substantially similar to the Collateral. Upon request, the Lender shall be entitled to receive a certificate of the respective insurer that such insurance is in full force and effect. Section 10. Representations and Warranties. The Custodian represents and warrants to the Lender that: (i) the Custodian has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Custodial Agreement, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Custodial Agreement; (ii) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder or creditor of the Custodian) is required in connection with the execution, delivery, performance, validity or enforceability of this Custodial Agreement; (iii) this Custodial Agreement has been duly executed and delivered on behalf of the Custodian and constitutes a legal, valid and binding obligation of the Custodian enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether enforcement is sought in a proceeding in equity or at law); and (iv) the Custodian is not an Affiliate of the Borrower. Section 11. Statements. Promptly following the request from time to time of the Lender or the Borrower, the Custodian shall provide the Lender or the Borrower, as applicable, with a list of all the Mortgage Loans for which the Custodian holds a Mortgage File pursuant to this Custodial Agreement. Such list -10- 11 shall be in the form of a Mortgage Schedule and Exception Report. Upon the reasonable prior written request of the Borrower or the Lender, the Custodian shall make copies (at the expense of the Borrower) of any documents relating to the Mortgage Loans pledged under the Loan Agreement for such requesting party. Section 12. No Adverse Interest of Custodian. By execution of this Custodial Agreement, the Custodian represents and warrants that it currently holds, and during the existence of this Custodial Agreement shall hold, no adverse interest, by way of security or otherwise, in any Mortgage Loan, and hereby waives and releases any such interest which it may have in any Mortgage Loan as of the date hereof. The Mortgage Loans shall not be subject to any security interest, lien or right to set-off by Custodian or any third party claiming through Custodian, and Custodian shall not pledge, encumber, hypothecate, transfer, dispose of, or otherwise grant any third party interest in, the Mortgage Loans. Section 13. Indemnification of Custodian. (a) The Borrower agrees to indemnify and hold the Custodian and its directors, officers, agents and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of this Custodial Agreement or any action taken or not taken by it or them hereunder unless such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (other than special, indirect, punitive or consequential damages, which shall in no event be paid by the Custodian) were imposed on, incurred by or asserted against the Custodian relating to or arising out of a Custodial Delivery Failure or the Custodian's negligence, lack of good faith or willful misconduct or breach of its obligations hereunder. The foregoing indemnification shall survive any resignation or removal of the Custodian or the termination or assignment of this Custodial Agreement. (b) In the event that the Custodian fails to produce a Mortgage Note, Assignment of Mortgage or any other document related to a Mortgage Loan that was in its possession pursuant to Section 2 within two (2) Business Days after required or requested by the Borrower or Lender (a "Custodial Delivery Failure"), and provided that (i) Custodian previously delivered to the Lender a Mortgage Loan Schedule and Exception Report which did not list such document as an Exception on the related Funding Date; (ii) such document is not outstanding pursuant to a Request for Release and Receipt in the form annexed hereto as Annex 5-A; and (iii) such document was held by the Custodian on behalf of the Borrower or Lender, as applicable, then the Custodian shall at its sole cost and expense (a) with respect to any missing Mortgage Note, promptly deliver to the Lender or Borrower upon request, a Lost Note Affidavit in the form of Annex 9 hereto and (b) with respect to any missing document related to such Mortgage Loan, including but not limited to a missing Mortgage Note, (1) indemnify the Borrower or Lender in accordance with Section 13 (c) below and, (2) at the Lender's option, at any time the long term obligations of the Custodian are rated below the second highest rating category of Moody's Investors Service, Inc. or Standard and Poor's Ratings Group, a division of The McGraw-Hill, Inc., obtain and maintain an insurance bond in the name of the Lender, and its successors in interest and assigns, insuring against any losses associated with the loss of such document, in an amount equal to the then outstanding principal balance of the related Mortgage Loan or such lesser amount requested by the Lender in the Lender's sole discretion. -11- 12 (c) The Custodian agrees to indemnify and hold the Lender and Borrower, and their respective designees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (other than special, indirect, punitive or consequential damages, which shall in no event be paid by the Custodian as incurred) including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of a Custodial Delivery Failure or the Custodian's negligence, lack of good faith or willful misconduct or breach of its obligations hereunder. The foregoing indemnification shall survive any termination or assignment of this Custodial Agreement. Section 14. Reliance of Custodian. In the absence of bad faith on the part of the Custodian, the Custodian may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any request, instruction, certificate, opinion or other document furnished to the Custodian, reasonably believed by the Custodian to be genuine and to have been signed or presented by the proper party or parties and conforming to the requirements of this Custodial Agreement; but in the case of any Mortgage Loan Document or other request, instruction, document or certificate which by any provision hereof is specifically required to be furnished to the Custodian, the Custodian shall be under a duty to examine the same in accordance with the requirements of this Custodial Agreement. Section 15. Term of Custodial Agreement. Promptly after written notice from the Lender of the termination of the Loan Agreement and payment in full of all amounts owing to the Lender thereunder and under the Note, the Custodian shall deliver all documents remaining in the Mortgage Files to the Borrower, and this Custodial Agreement shall thereupon terminate. Section 16. Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given when received by the recipient party at the address shown on its signature page hereto, or at such other addresses as may hereafter be furnished to each of the other parties by like notice. The Custodian's office is located at the address set forth on its signature page hereto, and the Custodian shall notify the Lender and the Borrower if such address should change. Section 17. Governing Law. This agreement shall be governed and construed in accordance with the laws of the State of New York without giving effect to the conflict of laws principles, thereof. Each party hereto agrees that (I) any dispute or controversy arising out of or relating to this Agreement shall be submitted to arbitration before the American Arbitration Association, (II) the arbitration proceedings shall be conducted in New York, New York and (III) the decision of the arbitrators shall be final and judgment may be entered on the award. In the event that such arbitration is unavailable, each party hereto hereby (a) submits to the jurisdiction of the United States Federal and New York State courts situated in the City, County and State of New York, (b) agrees that any litigation arising out of or relating to this Agreement shall be brought in such courts and (c) waives trial by jury. -12- 13 Section 18. Authorized Representatives. Each individual designated as an authorized representative of the Lender or its successors or assigns, the Borrower and the Custodian, respectively (an "Authorized Representative"), is authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Custodial Agreement on behalf of the Lender, the Borrower and the Custodian, as the case may be, and the specimen signature for each such Authorized Representative, initially authorized hereunder, is set forth on Annexes 6, 7 and 8 hereof, respectively. From time to time, the Lender, the Borrower and the Custodian or their respective successors or permitted assigns may, by delivering to the others a revised annex, change the information previously given pursuant to this Section 18, but each of the parties hereto shall be entitled to rely conclusively on the then current annex until receipt of a superseding annex. Section 19. Amendment. This Custodial Agreement may be amended from time to time by written agreement signed by the Borrower, the Lender and the Custodian. Section 20. Cumulative Rights. The rights, powers and remedies of the Custodian and the Lender under this Custodial Agreement shall be in addition to all rights, powers and remedies given to the Custodian and the Lender by virtue of any statute or rule of law, the Loan Agreement or any other agreement, all of which rights, powers and remedies shall be cumulative and may be exercised successively or concurrently without impairing the Lender's security interest in the Collateral. Section 21. Binding Upon Successors. All rights and obligations of the Custodian and the Lender under this Custodial Agreement shall inure to the benefit of and bind the Custodian and the Lender and their successors and permitted assigns, and all rights and obligations of the Borrower shall inure to the benefit of and bind its successors and assigns. Section 22. Entire Agreement; Severability. This Custodial Agreement and the other Loan Documents contain the entire agreement with respect to the Collateral among the Custodian, the Lender and the Borrower. If any of the provisions of this Custodial Agreement shall be held invalid or unenforceable, this Custodial Agreement shall be construed as if not containing such provisions, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. Section 23. Execution In Counterparts. This Custodial Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. -13- 14 Section 24. Tax Reports. The Custodian shall not be responsible for the preparation or filing of any reports or returns relating to federal, state or local income taxes with respect to this Custodial Agreement, other than in respect of the Custodian's compensation or for reimbursement of expenses. Section 25. Hypothecating of the Mortgage Loans by the Lender. Nothing in this Custodial Agreement shall preclude the lender from engaging in repurchase transactions with the Mortgage Loans or otherwise selling, transferring, pledging or hypothecating the Mortgage Loans (any such repurchase transaction, sale, transfer, pledge or hypothecation being herein referred to as an "Hypothecation"), but no such Hypothecation shall relieve the Lender of its obligations to the related Borrower hereunder. Section 26. Notice and Designation of Collateral Agent. Notwithstanding anything to the contrary contained in this Agreement, a Collateral Agent may be designated hereunder for the Mortgage Loans from time to time subject to this Agreement by delivery to the Custodian of a Notice of Collateral Agent. From and after the receipt by the Custodian of a Notice of Collateral Agent as provided hereunder until a Collateral Agent Termination, (a) this Section shall supersede Section 25, and (b) the Custodian shall promptly mark its books and records to reflect that the Mortgage Loans are being held for the benefit of the Collateral Agent as representative secured party of the persons or entities to whom the obligations secured by such Mortgage Loans are owed. Upon the designation of a Collateral Agent, the Custodian shall promptly deliver to the Collateral Agent a Trust Receipt and a Mortgage Loan Schedule and Exception Report indicating that the Custodian is holding the related Mortgage Loans for the benefit of the Collateral Agent as representative secured party for Lender and the persons or entities to whom Lender owes the obligations secured by such Mortgage Loans. The delivery of such Trust Receipt and Mortgage Loan Schedule and Exception Report shall satisfy the requirements of delivery thereof to the Lender hereunder so long as no Collateral Agent Termination has occurred. Any amendments or modifications to such Trust Receipt and Mortgage Loan Schedule and Exception Report shall be delivered to the Collateral Agent. The Custodian is hereby notified of the security interest in the Mortgage Loans of the Collateral Agent as representative secured party for Lender and the persons or entities to whom Lender owes the obligations secured by such Mortgage Loans. The Custodian and the Borrower shall each treat the Collateral Agent as the Lender under this Agreement in accordance with the provisions of this Section. Without limiting the generality of the foregoing, upon receipt of Notice of Collateral Agent from the then Lender and the Collateral Agent and until receipt by the Custodian of Collateral Agent Termination, the Custodian and the Borrower shall each report to and correspond and communicate with the Collateral Agent and in all other regards treat the Collateral Agent as the Lender hereunder with respect to the Mortgage Loans. Upon such Notice of Collateral Agent, the Collateral Agent shall have all rights of the Lender to enforce the covenants and conditions set forth in this Agreement with respect to the Mortgage Loans, and the Custodian and the Borrower, respectively, shall each follow the instructions of the Collateral Agent under this Agreement. The Collateral Agent shall have the right to give any waivers or consents required or allowed under this Agreement, and such waivers and consents shall be binding upon the Lender and any party for whom the Collateral Agent acts as representative secured party as if the -14- 15 Lender or such party had given the same. All amounts due the Lender under this Agreement shall be remitted to the Collateral Agent in accordance with the Collateral Agent's instructions. The Custodian shall send all reports and like communications required to be delivered to the Lender under this Agreement to the Collateral Agent. In addition to all other obligations of the Custodian hereunder, upon the Notice of Collateral Agent, the Custodian shall deliver to the Collateral Agent by bulletin board, electronic mail or such other medium acceptable to the Collateral Agent in its discretion, in a computer-readable format acceptable to the Collateral Agent, (a) by 11:00 a.m., New York time on each Funding Date, the Trust Receipt with respect to each Mortgage Loan with Exceptions identified by the Custodian as of the Business Day prior to the date and time of delivery of such Mortgage Loan Schedule and Exception Report and (b) by 12:00 noon, New York time on each Business Day the Mortgage Loan Schedule and Exception Report with respect to each Mortgage Loan with Exceptions identified by the Custodian as of the Business Day prior to the date and time of delivery of such Mortgage Loan Schedule and Exception Report. Unless the Collateral Agent otherwise requests in writing, the information described herein shall be delivered in lieu of the identical information required to be delivered to the Lender pursuant to this Agreement. The Custodian and the Borrower shall continue to deal with the Collateral Agent and hold Mortgage Loans for the Collateral Agent in accordance with the provisions of this Section unless and until the Custodian and the Borrower each receives written notice from the Collateral Agent appointed hereunder and the then current Lender under this Agreement (as evidenced by delivery to the Custodian of executed Assignment and Assumption Agreements showing a complete chain of assignment of this Agreement from the initial Lender hereunder to the then current Lender) that the then current Lender has terminated the Collateral Agent (such notice, the "Collateral Agent Termination") Upon receipt of the Collateral Agent Termination, the Custodian shall no longer remit reports to the Collateral Agent or hold Mortgage Loans for the benefit of the Collateral Agent, but shall instead hold Mortgage Loans for the benefit of the Lender. Upon the Collateral Agent Termination, a new Collateral Agent may be designated in accordance with the provisions set forth herein. The Lender agrees to indemnify and hold the Custodian and each of its directors, officers, agents and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements, including reasonable attorney's fees, that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of any action taken or not taken by it or them in accordance with the instructions of the Collateral Agent hereunder, unless (a) such instructions from the Collateral Agent are inconsistent with the terms of this Agreement or (b) such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (other than special, indirect, punitive or consequential damages, which shall in no event be paid by the Custodian) were imposed on, incurred by or asserted against the Custodian because of the breach by the Custodian of its obligations hereunder, which breach was caused by negligence, lack of good faith or willful misconduct on the part of the Custodian or any of its directors, officers, agents or employees. Section 27. Joint and Several Liability. Borrower hereby acknowledges and agrees that it shall be jointly and severally liable for all representations, warranties, covenants, obligations and indemnities of the Borrowers hereunder. Business Mortgage Investors, Inc. hereby acknowledges and agrees that it shall be liable for all representations, warranties, covenants, obligations and indemnities of the Borrowers hereunder only to the extent of its pro rata portion of the Secured Obligations. [SIGNATURE PAGE FOLLOWS] -15- 16 IN WITNESS WHEREOF, this Custodial Agreement was duly executed by the parties hereto as of the day and year first above written. ALLIED CAPITAL COMMERCIAL CORPORATION By: /s/ JOHN M. SCHEURER ----------------------------- Name: John M. Scheurer Title: Managing Director Address for Notices: 1666 K Street, N.W. 9th Floor Washington, D.C. 20006 Attention: Mr. John M. Scheurer Telecopier No.: (202) 659-2053 Telephone No: (202) 973-6332 BUSINESS MORTGAGE INVESTORS, INC. By: /s/ JOHN M. SCHEURER ----------------------------- Name: John M. Scheurer Title: Managing Director Address for Notices: 1666 K Street, N.W. 9th Floor Washington, D.C. 20006 Attention: Mr. John M. Scheurer Telecopier No.: (202) 659-2053 Telephone No: (202) 973-6332 17 LASALLE NATIONAL BANK By: /s/ MICHAEL FERRARA ----------------------------- Name: Michael Ferrara Title: Address for Notices: LaSalle National Bank 25 Northwest Point Blvd. Suite 800 Elk Grove Village, Illinois 60007 Attention: Mr. Michael Ferrara Telephone No.: 847-427-6421 Telecopier No.: 847-427- 18 MERRILL LYNCH MORTGAGE CAPITAL INC. By: /s/ SCOTT CROLAND ----------------------------- Name: Scott Croland Title: Address for Notices: Mr. Scott Croland 101 Hudson Street Jersey City, New Jersey 07302 Telephone No: 201-557-1369 Telecopier No: 201-557-2516 Additional Notices: World Financial Center North Tower, 8th floor, New York, New York 10281 Attention: Mr. Timothy Loughlin Telephone No.: 212-449-5939 Telecopier No.: 212-449-6673 19 Annex 1 to Custodial Agreement Information to be provided with respect to Eligible Mortgage Loans For each Mortgage Loan, the Borrower shall provide the following information: (a) the mortgage loan identifying number; (b) the mortgagor's name; (c) the mortgaged property's street address, city, state and zip code; (d) the original balance; (e) the current principal balance; (f) the original mortgage interest rate; (g) the original term; (h) the remaining term; (i) the date of the last payment made and the due date of such payment; and (j) the Collateral Value of such Mortgage Loan. 20 Annex 2 to Custodial Agreement TRUST RECEIPT Merrill Lynch Mortgage Capital Inc. 101 Hudson Street Jersey City, New Jersey 07302 Attention: Mr. Robert Eckerstrom ____________, 199_ Re: Custodial Agreement, dated as of August [___], 1997 (the "Custodial Agreement"), among Allied Capital Commercial Corporation, as a Borrower and Business Mortgage Investors, Inc., as a Borrower (each a "Borrower", collectively, the "Borrowers"), LaSalle National Bank, as Custodian, and Merrill Lynch Mortgage Capital Inc., as Lender. Ladies and Gentlemen: In accordance with the provisions of Section [3(e)] [26] of the above-referenced Custodial Agreement (capitalized terms not otherwise defined herein having the meanings ascribed to them in the Custodial Agreement), the undersigned, as the Custodian, hereby certifies as to each Mortgage Loan described in the attached Mortgage Loan Schedule and Exception Report all matters (subject to the Exceptions listed therein) set forth in Section 3(c) of the Custodial Agreement. The delivery of the attached Mortgage Loan Schedule and Exception Report evidences that (i) the Custodian has reviewed all documents required to be delivered in respect of each Mortgage Loan listed herein pursuant to Section 2 and Annex 4 of the Custodial Agreement, and such documents other than the Exceptions listed herein are in the possession of the Custodian as part of the Mortgage File for such Mortgage Loan, (ii) the Custodian is holding each Mortgage Loan identified on the Mortgage Loan Schedule and Exception Report, pursuant to the Custodial Agreement, as the bailee of and custodian for [the Lender] [_______________ [Name of Collateral Agent] as representative secured party for the benefit of the Lender and the persons or entities to whom Lender owes the obligations secured by such Mortgage Loans] and (iii) such documents have been reviewed by the Custodian and appear on their face to be regular and to relate to such Mortgage Loan and satisfy the requirements set forth in Section 2 of the Custodial Agreement and the Review Requirements. The Custodian makes no representations as to, and shall not be responsible to verify, (i) the validity, legality, enforceability, due authorization, recordability, sufficiency, or genuineness of any of the documents contained in each Mortgage File or (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan. 21 This Trust Receipt shall be deemed superseded and canceled upon the issuance of a subsequent Trust Receipt to the Lender covering the Mortgage Loans identified herein and the Lender shall thereupon promptly return this Trust Receipt to the Custodian. LASALLE NATIONAL BANK, Custodian By: ----------------------------- Name: Title: -2- 22 Annex 3 to Custodial Agreement CUSTODIAL IDENTIFICATION CERTIFICATE On this _____ day of _____________ 199_, , under that certain Custodial Agreement, dated as of ______, 199__ (the "Custodial Agreement"), among ALLIED CAPITAL COMMERCIAL CORPORATION, as a Borrower and BUSINESS MORTGAGE INVESTORS, INC., as a Borrower (each a "Borrower", collectively, the "Borrowers"), LASALLE NATIONAL BANK, as Custodian, and MERRILL LYNCH MORTGAGE CAPITAL INC., as Lender, the Borrowers do hereby instruct the Custodian to hold, in its capacity as Custodian, the Mortgage Files with respect to the Mortgage Loans listed on Attachment A hereto, which Mortgage Loans shall be subject to the terms of the Custodial Agreement as of the date hereof. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Custodial Agreement. IN WITNESS WHEREOF, the Borrowers have caused this Custodial Identification Certificate to be executed and delivered by its duly authorized officer as of the day and year first above written. ALLIED CAPITAL COMMERCIAL CORPORATION By: ----------------------------- Name: Title: BUSINESS MORTGAGE INVESTORS, INC. By: ----------------------------- Name: Title: 23 Attachment A to Annex 3 to Custodial Agreement PLEDGED MORTGAGE LOANS [Attach appropriate Mortgage Loan Schedules] 24 Annex 4 to Custodial Agreement REVIEW PROCEDURES This Annex sets forth the Custodian's review procedures for each item listed below delivered by the Seller pursuant to the Custodial Agreement (the "Agreement") to which this Annex is attached. Capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Agreement. 1. the Mortgage Note and the Mortgage each appear to bear an original signature or signatures purporting to be the signature or signatures of the Person or Persons named as the maker and Mortgagor or grantor, or in the case of copies of the Mortgage permitted under Section 2 (I)(c) of the Agreement, that such copies bear a reproduction of such signature; 2. the amount of the Mortgage Note is the same as the amount specified on the related Mortgage; 3. the mortgagee is the same as the payee on the Mortgage Note 4. the Mortgage contains a legal description other than address, city and state on the first page; 5. the notary section (acknowledgment) is present and attached to the related Mortgage and is signed; 6. neither the original Mortgage Note, nor the copy of the Mortgage delivered pursuant to the Agreement, nor the original Assignment of Mortgage contain any notations on their face which appear in the good faith judgment of the Custodian to evidence any claims, liens, security interests, encumbrances or restrictions on transfer; 7. the Mortgage Note is endorsed in blank by the named holder or payee thereof; 8. each original Assignment of Mortgage and any intervening assignment of mortgage, if applicable, appears to bear the original signature of the named mortgagee or beneficiary including any subsequent assignors (and any other necessary party), as applicable, or in the case of copies permitted under Section 2 (I)(f) of the Agreement, that such copies appear to bear a reproduction of such signature of signatures and the Officer's Certificate of the Borrower accompanying such copies appears to bear an original signature or a reproduction of such signature, and the intervening assignments of mortgage evidence an uninterrupted chain of assignment and transfer of the related Mortgage from the originating Person to the borrower; 9. the date of each intervening assignment is on or after the date of the related Mortgage and/or the immediately preceding assignment, as the case may be; 10. the notary section (acknowledgment) is present and attached to each intervening assignment and is signed; and 25 11. based upon a review of the Mortgage Note, items (a), (b), (c), (d), (f), and (g) of Annex 1 as set forth in the Mortgage Loan Schedule delivered by the Borrower to the Custodian are the same as shown in the Mortgage Note. -2- 26 Annex 5-A to Custodial Agreement Request for Release and Receipt Date: __________, 19__ The undersigned, [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] (the "Borrower"), acknowledge receipt from LASALLE NATIONAL BANK, acting as bailee of, and custodian for, (in such capacity, the "Custodian") the exclusive benefit of MERRILL LYNCH MORTGAGE CAPITAL INC. (the "Lender") (capitalized terms not otherwise defined herein are defined in that certain Custodial Agreement, dated as of August [___], 1997 (the "Custodial Agreement"), among Allied Capital Commercial Corporation, as a Borrower, Business Mortgage Investors, Inc., as a Borrower, the Custodian, and the Lender, of the following described documentation for the identified Mortgage Loan, possession of which is entrusted to the Borrower solely for the purpose of correcting documentary defects relating thereto: Mortgagor Name Loan Number Note Amount Loan Document It is hereby acknowledged that a security interest pursuant to the Uniform Commercial Code in the Collateral hereinabove described and in the proceeds of said Collateral has been granted to the Lender pursuant to the Custodial Agreement. In consideration of the aforesaid delivery by the Custodian, the Borrower hereby agrees to hold said Collateral in trust for the Lender as provided under and in accordance with all provisions of the Custodial Agreement and to return said Collateral to the Custodian no later than the close of business on the fourteenth day following the date hereof or, if such day is not a Business Day, on the immediately preceding Business Day. [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] By: ----------------------------- Name: Title: Documents returned to Custodian: LASALLE NATIONAL BANK By: ------------------------------- Name: Title: Date: ------------------------------- 27 Annex 5-B to Custodial Agreement Request for Release Date: __________, 19__ The undersigned, [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] (The "Borrower"), requests release from LASALLE NATIONAL BANK, acting as agent, bailee and custodian (in such capacity "Custodian") for the exclusive benefit of the lender (as that term and other capitalized terms not otherwise defined herein are defined in that certain Master Loan and Security Agreement (the "Security Agreement"), dated as of August [__], 1997, among Allied Capital Commercial Corporation, as a Borrower, Business Mortgage Investors, Inc., As a Borrower, and Merrill Lynch Mortgage Capital Inc., As Lender, of the following described documentation for the identified Mortgage Loans, possession of which shall be delivered to ____________________ (the "Approved Purchaser") in connection with the sale thereof. The anticipated closing date for such sale is ______________ and the anticipated purchase proceeds [MBS] shall equal: $__________________. Mortgagor Name Loan Number Note Amount Loan Document Delivered Please send the referenced documentation to: [NAME OF APPROVED PURCHASER ] [ADDRESS] [TELEPHONE] [ATTENTION:] 28 Please deliver documents to the Approved Purchaser via __________________, accompanied by a transmittal letter in the form of Annex [11][12]. [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] By: -------------------------------------------------- Name: Title: -2- 29 Annex 6 to Custodial Agreement AUTHORIZED REPRESENTATIVES OF LENDER Name Specimen Signature ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- 30 Annex 7 to Custodial Agreement AUTHORIZED REPRESENTATIVES OF BORROWER Name Specimen Signature ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- 31 Annex 8 to Custodial Agreement AUTHORIZED REPRESENTATIVES OF CUSTODIAN Name Specimen Signature ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- 32 Annex 9 to Custodial Agreement FORM OF LOST NOTE AFFIDAVIT I, as ___________________________ (title) of _______________________ (the "Custodian"), am authorized to make this Affidavit on behalf of the Custodian. In connection with the administration of the Mortgage Loans held by the Custodian on behalf of Merrill Lynch Mortgage Capital Inc. (the "Lender"), _______________ (hereinafter called "Deponent"), being duly sworn, deposes and says that: 1. Custodian's address is: [CUSTODIAN'S Address] 2. Custodian previously delivered to the Lender an Asset Schedule and Exception Report with respect to the Mortgage Note, executed by ____________ in favor of _______________ in the amount of $____________________ which did not indicate such Mortgage Note is missing; 3. Such Mortgage Note and/or Assignment or Mortgage is not outstanding pursuant to a Request for Release of Documents; 4. Aforesaid Mortgage Note and/or Assignment of Mortgage (hereinafter called the "Original") has been lost; 5. Deponent has made or has caused to be made diligent search for the Original and has been unable to find or recover same; 6. The Custodian was the Custodian of the Original at the time of loss; and 7. Deponent agrees that, if said Original should ever come into Custodian's possession, custody or power, Custodian will immediately and without consideration surrender the Original to the Lender. 8. Attached hereto is a true and correct copy of (i) the Mortgage Note, endorsed in blank by the Mortgagee, as provided by [BORROWER] or its designee and (ii) the Mortgage which secures the Mortgage Note, which Mortgage is recorded at ___________________ 9. Deponent hereby agrees that the Custodian (a) shall indemnify and hold harmless the Lender, its successors, and assigns, against any loss, liability or damage, including reasonable attorney's fees, resulting from the unavailability of any Originals, including but not limited to any loss, liability or damage arising from (i) any false statement contained in this Affidavit, (ii) any claim of any party that it has already purchased a mortgage loan evidenced by the Originals or any interest in such mortgage loan, (iii) any claim of any borrower with respect to the existence of terms of a Mortgage Loan evidenced by the Originals, (iv) the issuance of new instrument in lieu thereof and (v) any claim whether or not based upon or arising from honoring or refusing to honor the Original when presented by anyone (items (i) through (iv) above are hereinafter referred to as the "Losses") and (b) if required by any rating agency in connection with placing such Originals into a structured and rated 33 transaction, shall obtain a surety bond from an insurer acceptable to the applicable rating agency in an amount acceptable to such rating agency to cover any Losses with respect to such Originals. 10. This Affidavit is intended to be relied on by the Lender, its successors, and assigns and _______________________ represents and warrants that it has the authority to perform its obligations under this Affidavit. EXECUTED THIS ____ day of _______, 199_, on behalf of the Custodian by: ----------------------------------- Signature ----------------------------------- Typed Name On this _________ day of _______________________, 199_, before me appeared ____________________________________________, to me personally know, who being duly sworn did say that she/he is the ______________________________ of ______________________, and that said Affidavit of Lost Note was signed and sealed on behalf of such corporation and said _____________________________ acknowledged this instrument to be the free act and deed of said corporation. - ------------------------------------- Notary Public in and for the State of ----------------------------. My Commission expires: ---------------. -2- 34 Annex 10 to Custodial Agreement NOTICE OF PLEDGE [TO BE PROVIDED BY MERRILL LYNCH] -3- 35 RIDER 14 A Nothing in this custodial agreement shall preclude the lender from engaging in repurchase transactions with the Mortgage Loans or otherwise selling, transferring, pledging or hypothecating the Mortgage Loans (any such repurchase transaction, sale, transfer, pledge or hypothecation being herein referred to as an "Hypothecation"), but no such Hypothecation shall relieve the Lender of its obligations to the related Borrower hereunder. -4- 36 Annex 11 to Custodial Agreement TRANSMITTAL LETTER [Custodian Letterhead] [Approved Purchaser] - -------------------------- - -------------------------- Re: ------------------------------ Ladies and Gentlemen: Attached please find those Mortgage Loans listed separately on the attached schedule, which Mortgage Loans are owned by [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] (the "Borrower") and are being delivered to you for purchase. The Mortgage Loans comprise a portion of the "Collateral" under (and as such term and capitalized terms not otherwise defined herein are defined in) that certain Master Loan and Security Agreement (the "Security Agreement"), dated as of August [__], 1997, among Allied Capital Commercial Corporation, as a Borrower, Business Mortgage Investors, Inc., as a Borrower, and Merrill Lynch Mortgage Capital Inc., as lender (the "Lender"). We are advised by Lender that each of the Mortgage Loans is subject to a security interest in favor of the Lender, which security interest shall be automatically released upon your remittance of the full amount of the purchase price of such Mortgage Loan (as set forth on the schedule attached hereto) by wire transfer to the following account of the Borrower maintained with the Lender: WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT: [to be provided by the Lender] We are advised by Lender that pending your purchase of each Mortgage Loan and until payment therefor is received, the aforesaid security interest therein will remain in full force and effect, and you shall hold possession of such Collateral and the documentation evidencing same as custodian, agent and bailee for and on behalf of the Lender. In the event that any Mortgage Loan is unacceptable for purchase, return the rejected item directly to the Custodian at its address set forth below. IN NO EVENT SHALL ANY MORTGAGE LOAN BE RETURNED TO, OR SALES PROCEEDS REMITTED TO, THE BORROWER. The Mortgage Loan must be so returned or sales proceeds remitted in full no later than ten (10) days from the date hereof. If you are unable to comply with the above instructions, please so advise the undersigned Custodian immediately. NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE LENDER ON THE TERMS DESCRIBED IN THIS LETTER. THE CUSTODIAN -5- 37 REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE CUSTODIAN; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT. Very truly yours, LASALLE NATIONAL BANK as Custodian By: -------------------------------- Name: Title: Address: ---------------------- ---------------------- RECEIPT ACKNOWLEDGED: [APPROVED PURCHASER] By ------------------------ Name: Title: Date: -------------------- -6- 38 Annex 12 to Custodial Agreement TRANSMITTAL LETTER [Custodian Letterhead] [Custodian/Trustee/Agency] - -------------------------- - -------------------------- Re: Shipment of Mortgage Loans for Pool Formation Ladies and Gentlemen: Attached please find those Mortgage Loans listed separately on the attached schedule, which are owned by [ALLIED CAPITAL COMMERCIAL CORPORATION] [BUSINESS MORTGAGE INVESTORS, INC.] (the "Borrower") and are being delivered to you, as custodian/trustee, for certification in connection with the formation of a mortgage pool supporting the issuance of a mortgage-backed security (the "MBS") described as follows: ----------------------------------. The Mortgage Loans comprise a portion of the "Collateral" under (and as such term and capitalized terms not otherwise defined herein are defined in) that certain Master Loan and Security Agreement (the "Security Agreement"), dated as of August [__] 1997, among Allied Capital Commercial Corporation, as a Borrower, Business Mortgage Investors, Inc., as a Borrower, and Merrill Lynch Mortgage Capital Inc., as lender (the "Lender"). We are advised that each of the Mortgage Loans is subject to a security interest in favor of the Lender, which security interest shall be automatically released upon the issuance and delivery of the MBS to the Lender. We are advised that pending issuance of the MBS, the aforesaid security interest therein will remain in full force and effect, and you shall hold possession of such Collateral and the documentation evidencing same as custodian, agent and bailee for and on behalf of the Lender. In the event that any Mortgage Loan is unacceptable for purchase, return the rejected item directly to the Custodian at its address set forth below. IN NO EVENT SHALL ANY MORTGAGE LOAN BE RETURNED TO, OR SALES PROCEEDS REMITTED TO, THE BORROWER. The Mortgage Loan must be so returned or sales proceeds remitted in full no later than [sixty (60)] days from the date hereof. If you are unable to comply with the above instructions, please so advise the undersigned Custodian immediately. NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE LENDER ON THE TERMS DESCRIBED IN THIS LETTER. THE CUSTODIAN REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE CUSTODIAN; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT. 39 Very truly yours, LASALLE NATIONAL BANK as Custodian By: -------------------------------- Name: Title: Address: ---------------------- ---------------------- RECEIPT ACKNOWLEDGED: [CUSTODIAN/TRUSTEE] By ------------------------ Name: Title: Date: --------------------- 40 Annex 13 to Custodial Agreement ____________, 199__ LaSalle National Bank 25 Northwest Point Blvd. Suite 800 Elk Grove Village, Illinois 60007 Attention: ------------------ Re: Notice of Collateral Agent under that certain Custodial Agreement (the "Agreement"), dated as of August [__], 1997, among Merrill Lynch Mortgage Capital Inc. ("MLMCI"), Allied Capital Commercial Corporation, as a Borrower and Business Mortgage Investors, Inc., as a Borrower (each a "Borrower", collectively, the "Borrowers") and LaSalle National Bank (the "Custodian") Gentlemen and Mesdames: In accordance with Section 26 of the Agreement, MLMCI hereby notifies the Custodian that the Collateral Agent is [NAME OF COLLATERAL AGENT, Street Address, City, State, ZIP Code, Facsimile number, Reference or Attention line] and that the Collateral Agent has security interests in the Mortgage Loans as representative secured party for the persons or entities to whom the obligations secured by the Mortgage Loans are owed. Accordingly, the Custodian is hereby instructed and authorized to mark its books and records that it holds such Mortgage Loans for the benefit of the Collateral Agent as the representative secured party for the benefit of such persons or entities, and for the Collateral Agent unless and until it receives a Collateral Agent Termination in accordance with Section 26 of the Agreement. Capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Agreement. Kindly acknowledge your receipt of this letter by signing and returning one original counterpart to each of MLMCI and the Collateral Agent. 41 Very truly yours, MERRILL LYNCH MORTGAGE CAPITAL INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- RECEIPT ACKNOWLEDGED: LASALLE NATIONAL BANK (Custodian) By: --------------------------- Name: ------------------------- Title: ------------------------ The Collateral Agent named below hereby acknowledges that it has received a copy of the Custodial Agreement and will assume all rights and duties of Lender under the Custodial Agreement [NAME OF COLLATERAL AGENT] (Collateral Agent) By: --------------------------- Name: ------------------------- Title: ------------------------ EX-99.2L 10 OPINION OF COUNSEL AND CONSENT OF ITS USE 1 EXHIBIT L [SUTHERLAND, ASBILL & BRENNAN LLP LETTERHEAD] May 5, 1998 Allied Capital Corporation 1666 K Street, N.W. 9th Floor 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 preparation of a registration statement on Form N-2 (the "Registration Statement") to be filed with the Securities and Exchange Commission on May 5, 1998, covering 5,750,000 shares of the Company's common stock, par value $0.0001 per share (the "Shares"), to be sold by the Company and 862,500 Shares to be sold to cover the over-allotment option granted to the underwriters represented by Morgan Stanley & Co., Incorporated, NationsBanc Montgomery Securities LLC, The Robinson-Humphrey Company, LLC and Scott & Stringfellow, Inc., (the "Underwriters") for the public distribution pursuant to the Underwriting Agreement between the Company and the Underwriters filed as an exhibit to 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 charter 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. The opinions expressed in this letter are based on our review of the General Corporate Law of Maryland. 2 Allied Capital Corporation May 5, 1998 Page 2 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 and existing 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 and to the reference to our firm in the "Legal Matters" section of the prospectus included in 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, SUTHERLAND, ASBILL & BRENNAN LLP By: /s/ Steven B. Boehm ------------------------------- Steven B. Boehm EX-99.2N.1 11 CONSENT OF ARTHUR ANDERSEN LLP 1 [ARTHUR ANDERSEN LLP LETTERHEAD] EXHIBIT N.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated February 20, 1998, and to all references to our Firm included in this registration statement. /s/ Arthur Andersen LLP Washington, DC May 5, 1998 EX-27 12 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS. CHANGES IN NET ASSETS AND CASH FLOW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN FORM 10-Q. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 562,006 564,455 0 32,164 56,091 652,710 0 99,243 123,219 222,462 5 452,723 52,114 52,047 10,381 0 0 0 2,025 423,248 0 19,501 17,396 11,977 24,920 6,421 724 32,065 0 18,280 0 0 0 663 66 3,188 0 0 2,679 0 537 4,598 11,977 421,654 8.39 0.48 0.13 0.35 0.00 0.00 8.23 0.92 274,953 5.34
EX-27 13 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOW. IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN FORM 10-K. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 690,720 697,021 0 29,226 81,528 807,775 0 308,821 71,894 380,715 5 451,044 52,047 48,238 0 (2,679) 0 0 1,301 420,060 0 86,882 10,523 51,339 46,066 10,704 7,209 61,304 0 39,576 15,172 31,150 3,289 31 551 17,926 5,858 0 0 0 0 26,952 51,339 411,097 8.34 0.94 0.36 1.41 0.17 0.13 8.07 2.5 311,330 5.98
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