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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22832
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as specified in its Charter)
MARYLAND 52-1081052
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
1666 K STREET, NW, NINTH FLOOR
WASHINGTON, D.C. 20006
(Address of Principal Executive (Zip Code)
Office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 19, 1998 was approximately
$1,259,935,369 based upon the average bid and asked prices for the registrant's
common stock on that date. As of March 20, 1998 there were 52,072,606 shares of
the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1997 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 14, 1998 are incorporated by reference
into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF THE COMPANY
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, as well as other subsidiaries. ACC is traded on the
Nasdaq Stock Market under the symbol "ALLC."
THE 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"), (each an "Acquired
Company" and collectively the "Acquired Companies") merged with and into Allied
Capital Lending Corporation ("Allied Lending") 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"). The five parties to the
Merger are sometimes referred to herein, either singularly or collectively, as
the "Predecessor Company" or "Predecessor Companies." Immediately following the
Merger, Allied Lending changed its name to Allied Capital Corporation ("ACC" or
the "Company").
The Merger, which was approved by shareholders of each Predecessor Company at a
Special Meeting of Stockholders on November 26, 1997, was effected through a
conversion of each share of Acquired 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.
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 shares to
100,000,000 shares; and (b) a change in Allied Lending's name to "Allied Capital
Corporation."
THE COMPANY
The merged company is in substance a new entity, and together with its
subsidiaries is an amalgamation of the Predecessor Companies and their
respective subsidiaries, with an investment objective and investment policies
that encompass substantially similar objectives and/or policies of Allied
Lending and each Acquired Company. In short, the range of investment
opportunities and advisory services previously offered by the Predecessor
Companies has been distilled into ACC. Portions of the narrative below that
discuss ACC's historical operations actually reflect the historical operations
of the relevant Predecessor Company or Predecessor Companies.
The investment objective of ACC is to achieve current income and capital gains.
ACC seeks to achieve its investment objective by investing primarily in private,
growing businesses in a variety of industries and in diverse geographic
locations (primarily in the United States). ACC operates its portfolio in four
parts: mezzanine finance, commercial real estate finance, 7(a) lending and
investment advisory services. 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 December 31, 1997, ACC's investment portfolio
totaled $697 million representing 819 borrower relationships.
MEZZANINE FINANCE
As successor to the businesses and portfolios of Allied I and Allied II, ACC and
several of its wholly owned subsidiaries provide debt, mezzanine, and equity
financing in private transactions for small and medium-sized, primarily private,
growth companies. Investments of this type (made by Allied I and Allied II) have
historically ranged in size between $2 million and $10 million for the purposes
of growth or acquisition capital. ACC will continue to originate investments of
this size, however, additional asset growth is
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anticipated from seeking larger sized transactions ranging from $10 million to
$20 million. Because of an improved capital structure resulting from the Merger,
ACC has been able to lower its pricing, which should increase loan originations.
ACC provides financing for growth, leveraged buyouts of small companies, note
purchases, loan restructurings, acquisitions, recapitalizations, and bridge
financings for small businesses. At December 31, 1997, ACC's mezzanine loan
portfolio totaled $168 million; equity interests at December 31, 1997 were
valued at $40 million.
ACC generally invests in small, private companies and may, from time to
time, invest in small, thinly traded public companies that lack access to
capital and whose securities are generally not marginable. In general, such
companies would have been in business for at least one year, have a
commercially proven product or service, and seek capital to finance expansion
or ownership changes. ACC generally requires that its portfolio companies
demonstrate sales growth, positive cash flow, and profitability. In choosing
investment opportunities, ACC emphasizes the quality of management and seeks
experienced entrepreneurs with a management track record and relevant industry
experience (see "--Underwriting Procedures"). Upon consummation of the Merger,
ACC succeeded to the existing mezzanine loan portfolios of Allied I and Allied
II, which included investments in, among other industries, manufacturing,
broadcasting, retail and service companies. ACC's mezzanine portfolio is not
concentrated in any particular geographical area or region, and is diverse in
terms of the specific industries represented. The following tables show the
industry and geographic composition of ACC's mezzanine portfolio.
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ACC'S MEZZANINE PORTFOLIO BY INDUSTRY AND GEOGRAPHIC REGION at DECEMBER 31, 1997
INDUSTRY GEOGRAPHIC REGION
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Industrial/Manufacturing 43% Mid-Atlantic 29%
Broadcasting/Communications 26% Southeast 27%
Retail/Wholesale 15% Midwest 17%
Services 12% West 13%
Other 4% Northeast 8%
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100% International 6%
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100%
================================================================================
ACC's mezzanine investments are generally structured as debt securities 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 a portfolio company's common equity at a nominal price. Such an
investment generally carries a fixed interest rate, typically having a maturity
of seven years, with interest-only payments in the early years and payments of
both principal and interest in the later years, although loan maturities and
principal amortization schedules vary. ACC makes senior loans without equity
features, and such loans generally bear interest at a fixed rate. At December
31, 1997, 98% of the mezzanine portfolio had fixed rates of interest.
ACC's current income from its mezzanine portfolio is derived primarily from
interest earned on its debt securities. Historically, ACC has structured its
mezzanine investments so that approximately one-half of ACC's potential return
was earned in the form of current interest payments, and the balance was derived
from capital gains that arise from the sale of ACC's equity interest in the
portfolio company. During 1997, and it is anticipated for future years, ACC
began originating larger mezzanine transactions where the majority of the
investment return is expected from current interest with a lesser amount of the
return expected from capital gains.
Generally, long-term growth in net asset value and realized capital gains, if
any, are achieved through the equity portion of its mezzanine investments. The
Company's equity investments consist primarily of
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securities issued by privately owned companies, and may be subject to
restrictions on their resale or are otherwise illiquid. Equity securities
generally do not produce a current return, but are held for investment
appreciation and ultimate gain on sale.
Historically, all of the investments of the Company have been made in
domestic small businesses. In 1995, Allied I established a $20 million credit
facility with the Overseas Private Investment Corporation ("OPIC"), pursuant to
which Allied I began making investments in businesses that engage, in whole or
in part, in overseas operations, usually in countries representing the world's
emerging markets. OPIC's purpose is to promote economic growth in developing
countries by encouraging U.S. private investment in those nations. Under OPIC
regulations, investments generally may be made only in companies that have some
affiliation with a U.S.-based business entity. ACC is not actively pursuing
OPIC-qualifying investments. At December 31, 1997, ACC had OPIC-qualifying
investments at value equal to $10 million.
SBIC SUBSIDIARY. ACC has a wholly owned subsidiary, Allied Investment
Corporation ("Allied Investment") which is licensed by the U.S. Small Business
Administration ("SBA") as a small business investment company ("SBIC") under
Section 301(c) of the Small Business Investment Act of 1958, as amended (the
"1958 Act"), and has also elected to be regulated as a BDC. Allied Investment's
portfolio was formed as a result of the merger between Allied Investment and
Allied Investment Corporation II ("Investment II"), which, prior to the Merger,
were subsidiaries of Allied I and Allied II, respectively. The investment
objective of Allied Investment is to achieve both long-term growth in the value
of its net assets and current income by providing debt, mezzanine, and equity
financing for small, privately owned growth companies. Allied Investment's
investments are substantially similar in form to those made by Allied I and
Allied II.
As an SBIC, Allied Investment provides capital to privately owned small
businesses primarily through subordinated debt investments with equity
features. Equity features include loan conversion privileges, warrants or
options to purchase a portion of a portfolio company's common equity at a
nominal price. Wherever possible, Allied Investment seeks collateral for its
respective loans, but its security interests in such loans are usually
subordinated to the security interests of other institutional lenders.
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.
SSBIC SUBSIDIARY. ACC also has a wholly owned subsidiary, Allied
Capital Financial Corporation ("Allied Financial"), which is licensed as a
specialized small business investment company under Section 301(d) of the 1958
Act ("SSBIC"), and has also elected to be regulated as a BDC. Allied
Financial's portfolio was formed as a result of the merger between Allied
Financial and Allied Financial Corporation II ("Financial II"), which, prior to
the Merger, were subsidiaries of Allied I and Allied II, respectively. The
investment objective of Allied Financial is to achieve both long-term growth in
the value of its net assets and current income by providing debt, mezzanine and
equity financing for small, privately owned growth companies that are at least
50% owned, controlled, and managed by a socially or economically disadvantaged
person, as defined by the SBA. ACC has determined that, given certain
regulatory requirements of the SSBIC program, it is no longer economical to
operate Allied Financial as an SSBIC. As a result, ACC is currently working
with the SBA to restructure its SBIC and SSBIC licenses.
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SBA FINANCING. 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 calculated
by a formula which applies a multiple to its private capital, but not in excess
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
$54.3 million of subordinated debentures and $7 million of preferred stock
investments from the SBA as of December 31, 1997; 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%.
COMMERCIAL REAL ESTATE FINANCE
As successor to the business and portfolio of Allied Commercial, ACC invests in
commercial loans to small businesses secured by liens or mortgages on real
estate ("commercial mortgage loans"). Such loans are purchased or originated by
ACC in accordance with certain underwriting criteria discussed below. ACC
focuses on "enterprise value" commercial real estate lending, meaning that the
value of the investment is based on the ongoing value of the commercial
enterprise to which a loan is made, and not just on the underlying real estate
collateral. The Company believes that it competes successfully in the commercial
mortgage finance market due to the creativity and flexibility of its loan terms
and because it specializes in mortgage loan financing for entrepreneurs whose
business is a source of revenue in addition to the real estate collateral
itself. As of December 31, 1997, the commercial real estate portfolio totaled
approximately $446 million.
ACC derives income from interest on its commercial mortgage loans and
from discounts on its portfolio of purchased commercial mortgage loans.
Commercial mortgage loans purchased or originated by ACC are not concentrated
in any particular geographical area or region, and are 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 ACC's commercial mortgage loan
portfolio by property type and geographic region:
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ACC'S COMMERCIAL MORTGAGE LOAN PORTFOLIO BY PROPERTY TYPE AND
GEOGRAPHIC REGION AT DECEMBER 31, 1997
INDUSTRY GEOGRAPHIC REGION
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Hospitality 33% Mid-Atlantic 38%
Office 31% Midwest 18%
Retail 14% West 18%
Industrial/Manufacturing 6% Souteast 14%
Other 16% Northeast 12%
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100% 100%
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ACC's existing portfolio contains loans that were purchased from the Resolution
Trust Corporation, the Federal Deposit Insurance Corporation, and other third
party sellers including life insurance companies and banks. These loans were
generally purchased at a discount from the face amount of the notes. In 1994,
the Predecessor Company shifted its focus to loan origination from loan
purchases in order to meet growing market demand and to supplement declining
loan purchase opportunities. ACC continues to originate and purchase mortgage
loans, with a primary focus on loan originations ranging in size from $1 million
to $20 million. Subsequent to the Merger, ACC also provides other long-term
financing to businesses, such as subordinated real estate loans and
sale-leaseback financing.
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At December 31, 1997, approximately 73% of the Company's portfolio of commercial
mortgage loans carried a fixed rate of interest and approximately 27% had
adjustable rates of interest tied to various indices. 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 December 31, 1997, the effective yield on ACC's
portfolio of commercial mortgage loans was approximately 11.4%, which reflects
amortization of discounts on loans over the expected life of the loan and the
stated interest rate. ACC generally prices its commercial mortgage loans at
interest rates ranging from 200 to 500 basis points over comparable term U.S.
Treasury rates.
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, 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. At
December 31, 1997, 53% of the commercial real estate portfolio required payment
of some premium upon early repayment, or prohibited repayment for a specified
period of time.
Certain of the loans to which ACC has succeeded were acquired or originated in
conjunction with Business Mortgage Investors, Inc. ("BMI"), a company privately
owned by institutional and other accredited investors. As the successor to
Advisers, ACC serves as investment adviser to BMI. From January 1993 until
January 1, 1997, Allied Commercial generally participated in all loan purchases
and originations with BMI on a pro rata basis according to each entity's total
equity. Allied Commercial's participation in each loan varied over this period,
ranging from 77% to 78%. Effective January 1, 1997, BMI discontinued purchasing
or originating mortgage loans, and by the terms of its formation, is currently
in liquidation.
ASSET SECURITIZATION. One of ACC's business strategies is to securitize a
portion of its commercial real estate portfolio. Through asset securitization,
ACC effectively sells senior tranches of its mortgage loans to investors while
retaining a subordinated interest in the loans sold. Securitization provides
increased investment leverage for ACC and enhances the returns on the Company's
invested equity capital. Mortgage loans originated for future securitization
must meet certain additional investment criteria.
On January 30, 1998, the Company, in conjunction with BMI, completed an
asset securitization transaction whereby $239 million in commercial
mortgage-backed bonds were issued by Allied Capital Commercial Mortgage Trust
1998-1. The bonds were sold in a private placement of three bond classes rated
"AAA," "AA" and "A" by Standard & Poor's Rating Services and Fitch IBCA, Inc.
The Company and BMI sold loans with an aggregate balance of $310 million to
secure the bonds. The Company contributed approximately 95%, or $295 million,
of the total loans sold. The Company retained a trust certificate representing
the difference between the assets sold and the bond proceeds received, or
approximately 23% of the assets sold. The mortgage loans sold had an
approximate weighted average stated interest rate of 9.6%. The three bond
classes have an aggregate weighted average interest rate of approximately
6.38%. The Company will continue to service 100% of the loans sold. The Company
will account for the sale in accordance with FASB 125.
ACC believes that asset securitization is an effective means of financing its
commercial real estate finance operations and increasing its returns on the
assets retained. ACC intends to continue the practice of asset securitization
for its commercial real estate loans.
7(a) LENDING
As successor to the business and portfolio of Allied Lending, ACC,
through a wholly owned subsidiary, Allied Capital SBLC Corporation ("Allied
SBLC"), participates in the SBA's Section 7(a) Guaranteed Loan Program as a
small business lending company ("SBLC") pursuant to Section 7(a) of the Small
Business Act (1958), as amended (the "Small Business Act"). As a Section 7(a)
lender, ACC makes loans that are partially guaranteed by the SBA to small
businesses. The SBA is no longer issuing SBLC licenses and there are only
fourteen non-bank SBLCs operating in the United States. Allied SBLC, previously
a subsidiary of Allied Lending, survived the Merger as a subsidiary of ACC and
continues to hold the SBLC license, and all of
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ACC's 7(a) loans are originated by Allied SBLC. As of December 31, 1997, the
7(a) loan portfolio totaled approximately $41 million.
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.
Allied Lending has historically charged, and ACC will continue to
charge, interest on 7(a) loans at a variable rate, typically 1.75% to 2.75% per
annum above the prime rate, as published in The Wall Street Journal or other
financial newspaper, adjusted monthly. Approximately 92% of the Company's 7(a)
loan portfolio had variable interest rates as of December 31, 1997. Generally
loans are payable in equal monthly installments of principal and interest on
the first day of the month following the month in which the loan is funded,
until maturity. ACC's new capital structure has afforded the Company the
opportunity to lower its 7(a) loan pricing so that it may compete more
effectively in the marketplace, increase deal flow, and improve the credit
quality of its assets. In addition, ACC intends to streamline its credit
approval process for 7(a) loans, and refine its network of Regional Associates,
who are the primary source for new 7(a) loan referrals. (See "--Loan
Sourcing.")
Section 7(a) loans may be made to qualifying small businesses for the purposes
of acquiring real estate, purchasing machinery or equipment or to provide
working capital. Such loans made to acquire real estate may have maturities of
up to 25 years; loans made for the purpose of purchasing machinery and equipment
may have maturities of up to 15 years; and loans made to provide working capital
may have maturities of up to seven years. These loans are secured by a mortgage
or other lien on the assets of the borrower and, frequently, of its principals.
ACC generally does not make unsecured working capital loans or equipment loans.
Generally, ACC's 7(a) loans are secured by real estate assets. In all
cases, the principals of the small businesses must personally guarantee the
payment of interest on and principal of the loans.
ACC has in its 7(a) portfolio, or is servicing loans to, among others, hotels
and motels, automotive shops and gas stations, broadcasting and communications
companies, restaurants, manufacturers, service providers, retail shops, and
other small businesses. The following tables shows ACC's 7(a) loan portfolio by
industry and geographic region.
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ACC'S 7(a) LENDING PORTFOLIO BY INDUSTRY AND GEOGRAPHIC REGION AT
DECEMBER 31, 1997
INDUSTRY GEOGRAPHIC REGION
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Hospitality 25% Midwest 36%
Automotive Services 21% Mid-Atlantic 29%
Broadcasting/Communications 10% Southeast 18%
Restaurant/Food Services 9% Northeast 10%
Industrial/Manufacturing 7% West 7%
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Services 6% 100%
Retail/Wholesale 6%
Other 16%
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100%
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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. Effective January 1, 1998, the
Company is no longer required to
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hold the guaranteed portion of its 7(a) loans for 90 days before selling, and
now sells the guaranteed portion shortly after funding the loan. This change has
lowered ACC's costs associated with the 7(a) loan origination program. The SBA
is entitled to a fee of 50% of any cash premium in excess of 10% received on
loan sales. The Company, through Allied SBLC, continues to service 100% of its
loans sold for a normal servicing fee of approximately 0.4% per annum of the
outstanding principal amount of such loans. To the extent that the Company
receives any higher servicing fee, the value of such additional servicing fee is
accrued as an excess servicing asset.
ACC 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, ACC
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, ACC 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 ACC's commerical
real estate finance portfolio.
The SBA designates certain participants in the Section 7(a) Loan Program as
"Preferred Lenders" in certain designated markets. This designation allows a
lender to make 7(a) loans in the designated region without SBA credit
approval, thus simplifying and expediting the process of loan approval and
disbursements. At December 31, 1997, Allied SBLC was identified as a Preferred
Lender in a number of regional markets.
As successor to all of Allied Lending's operations, ACC also participates in the
SBA Section 504 Loan Program; these loans are included in ACC's commercial real
estate finance portfolio.
INVESTMENT ADVISORY SERVICES
As successor to Advisers, ACC is internally managed and is registered with the
Securities and Exchange Commission (the "Commission") as an investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). ACC
also provides investment advisory and related services to other entities,
including certain entities previously managed by Advisers that were not parties
to the Merger. More particularly, these entities include BMI, and two small
investment partnerships, which, like BMI, are also in liquidation. Each of these
entities focuses primarily on investments in small growing entrepreneurial
companies, and specializes in providing financing through senior or subordinated
debt and combinations of debt and equity or, in the case of BMI, in commercial
mortgage loans collateralized by real estate. All entities managed by ACC
are privately held, primarily by large institutional investors or other
accredited investors.
As the investment adviser to these private funds, ACC is responsible for
sourcing, originating, monitoring, servicing and liquidating investments in
their portfolios. ACC is compensated for its services, generally in the form of
asset-based or commitment-based fees, and performance incentive fees.
ACC is able to participate as an investor in, as well as a manager to, private
funds, which should afford ACC an advantage in competing for future advisory
contracts. 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.
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. ACC will also
co-invest with the fund for an aggregate co-investment of DM 40 million.
OTHER INVESTMENTS
At December 31, 1997, the Company had $81.5 million in cash and government
securities. Pending investments in growing businesses, 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. See "Management's Discussion and Analysis" included in the Company's
1997 Annual Report as well as the Company's 1997 Consolidated Financial
Statements and the Notes thereto.
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LOAN SOURCING
To identify and pursue mezzanine investments, commercial mortgage loans and 7(a)
loans, ACC works with regional and boutique investment banks, mezzanine and
venture capital investors, and other intermediaries, including business and
mortgage brokers, national retail financial services companies, banks, law firms
and accountants for loan referrals. During 1997, ACC opened two regional offices
in Chicago and San Francisco to increase the scope of its loan sourcing
activity.
In addition, for its 7(a) lending operations, ACC has arrangements with
certain financial consultants, or "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 ACC in
monitoring any loans referred by them or otherwise made in their areas. At
December 31, 1997, ACC had eleven Regional Associates located throughout the
United States.
UNDERWRITING PROCEDURES
ACC historically has focused on the quality of assets in its portfolio, and it
continues to maintain a rigorous credit policy which is based upon:
- - - - - - - - - - - - - - The committee process. All credit approval is obtained through a committee
review process; no one individual has the ability to approve a credit.
- - - - - - - - - - - - - - Due diligence. Investment opportunities are subjected to a rigorous due
diligence process, including research on the industry, competition,
pricing and market share positioning of the company and its products;
personal and professional references for members of management as well as
vendor and supplier references; business plan modeling and study of the
projected growth of the portfolio company; and for real estate financings,
appraisals and other third-party reports, as necessary, to assess risks
related to engineering, environmental, seismic, or structural issues.
- - - - - - - - - - - - - - Investment Committee. Upon the completion of due diligence, each
transaction is presented to the Investment Committee, which is comprised
of nine of the most senior investment professionals in the Company,
including William Walton (CEO), John M. Scheurer (Managing Director, Real
Estate and 7(a) lending), and Cabell Williams (Managing Director,
Mezzanine Finance). In certain instances where risk/return characteristics
warrant, the Executive Committee of the Board of Directors will also
approve such investment transactions.
The following table highlights general underwriting criteria for each product
type. The Company uses these criteria as general guidelines for investing only,
and the characteristics of individual investments may vary significantly
depending upon each unique investment opportunity.
MEZZANINE REAL ESTATE/
7(a) LENDING
- - - - - - - - - - - - - -----------------------------------------------------------------------
Industry/Property Manufacturing, Full service
type: service, media, hotels, office
telecommunications, buildings,
retail, services manufacturing
and other facilities,
businesses warehouses, retail
facilities,
healthcare
facilities,
convenience stores
and gas stations,
and other
"hard-to-finance"
properties
Investment stable, growing amortization, 100%
Criteria: companies, strong collateral coverage,
cash flow, 120% cash flow coverage
later-stage,
strong management
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Loan Size: $5 million to $20 million $0.2 million to $20 million
Term: 7 to 10 years 1 to 30 years
Collateral: second lien on first lien on real
assets, if estate, second lien
available, on real estate,
personal personal guarantees
guarantees
LOAN UNDERWRITING PROCEDURES AND CRITERIA--MEZZANINE FINANCING
The Company usually invests in privately held companies, and may, from
time to time, invest in small public companies that are thinly traded and
generally lack access to capital. These companies generally have been in
business for at least one year, have a commercially proven product or service,
and seek capital to finance expansion or ownership changes. The Company
generally requires that the companies in which it invests demonstrate strong
market position, sales growth, positive cash flow, and profitability, although
turnaround situations are occasionally considered. The Company generally
invests in businesses operating in a variety of different industries, such as
broadcasting, manufacturing, wholesale distribution, and retail operations. The
Company emphasizes the quality of management of the companies in which it
invests, and seeks experienced entrepreneurs with a management track record and
relevant industry experience.
LOAN UNDERWRITING PROCEDURES AND CRITERIA--COMMERCIAL REAL ESTATE
When the Company evaluates mortgage loans for origination or purchase it
generally receives an initial package of information that typically includes
underwriting information that was developed by the borrower or seller. Typical
underwriting information required from potential borrowers in order to conduct
appropriate due diligence includes financial statements of the borrower,
appraisals, rent rolls and lease information, environmental reports, structural
and engineering reports, and any other information deemed appropriate under the
circumstances. In the case of purchased loans the seller will generally provide
financial statements of the borrower, property appraisals and any other original
underwriting information. The seller also generally will provide loan documents
and payment histories. In connection with the origination or purchase of the
mortgage loans, ACC generally considers a variety of other factors, including
the borrower's estimated current cash flow coverage, the creditworthiness of the
borrower, net worth and financial strength of the borrower, the estimated
current liquidation value of the related mortgaged property and trends in the
borrower's industry and in real estate values in the borrower's geographic
region. The property is inspected by the loan officer during the
due diligence process, and the property is valued by the loan officer using
internally developed valuation analyses.
LOAN UNDERWRITING PROCEDURES AND CRITERIA--7(a) LENDING
Section 7(a) loans made to qualifying small businesses are generally secured by
a mortgage and other liens on the assets of the borrower and, frequently, of its
principals. The principals of the borrower must personally guarantee the
payment of interest and principal on the loans.
The SBA has established certain financial ratios and guidelines that generally
govern 7(a) loans. Factors to be considered include the debt service coverage
ratio, value of the collateral, and the net worth of the borrower.
COMPETITION
A large number of entities and individuals compete for the opportunity to make
the kinds of investments made by the Company. Many of these entities and
individuals have greater financial resources than the combined resources of the
Company. As a result of this competition, the Company may from time to time be
precluded from making otherwise attractive investments on terms considered to be
prudent in light of the risks to be assumed. 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 real estate
financing market is equally 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 lending arena include commercial
banks, and other SBLCs.
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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."
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REGULATED INVESTMENT COMPANY ("RIC")
In order to qualify as a RIC for federal income tax purposes, the Company must,
among other things: (i) derive 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; (ii) diversify its holdings so
that (a) at least 50% of the value of the Company's assets consists of cash,
cash items, government securities and other securities if such other securities
of any one issuer do not represent more than 5% of the Company's assets and 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 of two or more issuers that are
controlled by the Company and are engaged in the same or similar or related
trades or businesses; and (iii) distribute at least 90% of its "investment
company taxable income" each tax year.
If a RIC, within the meaning of Subchapter M, Section 851 of the
Internal Revenue Code of 1986, as amended (the "Code") distributes to its
stockholders 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 "investment company taxable income" it
distributes to stockholders. 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.
SBA REGULATIONS
Allied Investment and Allied Financial are licensed to operate as an SBIC and an
SSBIC, respectively, and each are subject to regulation by the SBA. Both Allied
Investment and Allied Financial are subject to periodic examinations by the SBA
staff for purposes of determining compliance with SBA regulations. Furthermore,
both entities have received financial assistance from the SBA through the SBA's
purchase of certain debentures from Allied Investment and SBA's purchase of
preferred stock and/or debentures from Allied Financial. See "The Company -
Mezzanine Finance - SBIC Subsidiary, SSBIC Subsidiary and SBA Financing."
Allied SBLC is licensed to operate as an SBLC and is subject to regulation and
periodic examinations by the SBA staff for purposes of determing compliance with
SBA regulations, including its participation in the Preferred Lender Program.
See "The Company - 7(a) Lending."
EMPLOYEES
The Company currently employs 87 individuals including investment professionals,
operations professionals and administrative staff. All individuals are located
in the Washington, DC office, except for four individuals in the Chicago office,
and six in the San Francisco office.
FORWARD-LOOKING STATEMENTS
The information contained herein should be read in conjunction with the
Company's 1997 Consolidated Financial Statements and Notes thereto contained in
the Company's 1997 Annual Report to Shareholders. The 1997 Annual Report to
Shareholders and this Form 10-K contain certain forward-looking statements.
These statements include the plans and objectives of management for future
operations and financial objectives, loan portfolio growth and availability of
funds. These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions. Certain factors that
could cause actual results and conditions to differ materially from those
projected in these forward-looking statements are set forth below in the Risk
Factors section. Other factors that could cause actual results to differ
materially
12
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include the uncertainties of economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
included or incorporated by reference herein are reasonable, any of the
assumptions could be inaccurate and therefore, there can be no assurance that
the forward-looking statements included or incorporated by reference herein will
prove to be accurate. Therefore, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
RISK FACTORS
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.
LOSS OF PASS-THROUGH TAX TREATMENT. The Company would cease to qualify for
pass-through tax treatment under Subchapter M 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 Code. 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.
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. 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 senior funds 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 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. 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.
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 expected that generally mezzanine
loans will yield a current return from the time they are made, but also will
generally produce a realized gain from an accompanying equity feature after
approximately three to eight years. There can be no assurance that capital gains
will actually be achieved.
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ILLIQUIDITY OF INVESTMENTS. The Company acquires securities directly from
issuers in private transactions, and the major portion of such investments 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, equity securities generally cannot be sold to the public without
registration under the Securities Act of 1933, which involves delay, uncertainty
and expense.
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, REITs, SBICs,
SSBICs and 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.
ITEM 2. PROPERTIES
The Company's principal offices are located on the ninth floor of 1666 K Street,
NW, Washington, D.C., a modern office building in the heart of Washington's
business and financial district. The Company leases approximately 22,000 square
feet of office space at that location under a lease that currently expires in
1998. The office is equipped with a network of personal computers for word
processing, financial analysis and accounting. Effective August 1998, upon the
expiration of its current lease at 1666 K Street, the Company will relocate its
principal offices to 1919 Pennsylvania Avenue, N.W., Washington, D.C. The
Company also maintains smaller offices in Chicago, San Francisco and Frankfurt,
Germany.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain lawsuits arising in the normal course of 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 26, 1997, Allied Lending held a Special Meeting of Stockholders in
Bethesda, Maryland. Shareholders voted on two matters; the substance of these
matters and the results of the voting of such matters are described below.
1. Approval of Merger Agreement: Shareholders of the Company approved
the Agreement and Plan of Merger, dated as of August 14, 1997 and
amended and restated as of September 19, 1997, by and among the
Company, Allied I, Allied II, Allied Commercial and Allied Advisers.
Votes were cast as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
4,020,276 40,843 30,566 0
2. Approval of Stock Option Plan: Shareholders of the Company approved
the proposal to adopt a new Stock Option Plan.
Votes were cast as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
3,825,332 168,417 97,930 0
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ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the executive
officers of the Company as of March 20, 1998, as well as certain other
information with respect to those persons:
POSITIONS CURRENTLY
HELD WITH THE PRINCIPAL OCCUPATIONS
NAME AGE COMPANY DURING PAST FIVE YEARS(1)
- - - - - - - - - - - - - ---- --- ------- -----------------------
William L. Walton 49 President, Chairman Employed by the Company
and Chief Executive since 1997; Chairman of
Officer BMI; CEO of Success Lab,
Inc. (children's
educational services) from
1993 to 1996; CEO of
Language Odyssey
(educational publishing and
services) from 1992 to
1996; Managing Director of
Butler Capital Corporation
from 1987 to 1991.
Joan M. Sweeney 38 Managing Director Employed by the Company
since 1993; Managing
Director of BMI; Senior
Manager at Ernst & Young
from 1990 to 1993.
G. Cabell Williams III 43 Managing Director Employed by the Company
since 1981; Managing
Director of BMI.
John M. Scheurer 45 Managing Director Employed by the Company
since 1991; President of
BMI.
Jon A. DeLuca 35 Principal and Chief Employed by the Company
Financial Officer since 1994; Principal
and Chief Financial Officer
of BMI; Manager at Coopers
& Lybrand from 1986 to
1994.
- - - - - - - - - - - - - -------------------------------------------
(1) Periods of employment by the Company include periods of employment by
Advisers prior to the Merger.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to this Item is incorporated herein by
reference to the "Shareholder Information" and to the "Selected Consolidated
Financial Data" section of the Company's Annual Report to Shareholders for the
year ended December 31, 1997 (the "1997 Annual Report") as well at Note 15,
"Dividends and Distributions" from the Company's 1997 Notes to the Consolidated
Financial Statements. The quarterly stock prices quoted represent interdealer
quotations and do not include markups, markdowns, or commissions and may not
necessarily represent actual transactions. During the fourth quarter of 1997,
ACC issued a total of 61,738 shares pursuant to a dividend reinvestment plan.
This plan is not registered and relies on an exemption from registration in the
Securities Act of 1933.
15
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ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated herein by reference to the
table in the "Selected Consolidated Financial Data" section of the 1997 Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information in response to this Item is incorporated herein by reference to the
"Management's Discussion and Analysis" section of the 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to the
Consolidated Financial Statements, Notes thereto, and Report of Independent
Public Accountants thereon contained in the 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company disclosed its change of accountants on a Form 8-K filed with the
Commission on December 16, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to the
identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1998 Annual Meeting
of Shareholders, scheduled to be held on May 14, 1998 (the "1998 Proxy
Statement"), and from "Additional Item" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to the
subsections captioned "Compensation of Executive Officers and Directors" of the
1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to the
subsection captioned "Security Ownership of Management and Certain Beneficial
Owners" in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to the section
captioned "Certain Transactions" of the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
16
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(a) Documents filed as part of this Report:
1. A. The following Financial Statements of ACC are incorporated herein by
reference to the following indicated pages of the 1997 Annual Report and
are filed herewith: Page
----
Consolidated Balance Sheet as of December 31, 1997 and 1996. 25
Consolidated Statement of Operations for the years ended December 31,
1997, 1996 and 1995. 26
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1997, 1996 and 1995. 27
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995. 28
Consolidated Statement of Investments as of December 31, 1997 29
Notes to Consolidated Financial Statements. 33-43
B. There is filed herewith the Report of Independent Public Accountants
from Arthur Andersen LLP with respect to the financial statements listed
in A. above.
2. No financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.
3. The following exhibits are filed herewith or incorporated by reference
as set forth below:
Exhibit Number Description
- - - - - - - - - - - - - -------------- -----------
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation
3(ii)(2) Articles of Merger
3(iii)* By-laws
4.1 Instruments defining the rights of security holders. See
Exhibits 3(i); 3(ii) and 3(iii).
4.2(3) Form of debenture between certain subsidiaries of
ACC and the U.S. Small Business Administration.
10.1* Credit Agreement dated as of January 8, 1998 (the "1998 Credit
Agreement") between the Company 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.
10.2(4) 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.
10.3(9)* 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 filed herewith.
10.4* 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.
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18
10.5* Master Loan & Security Agreement dated August 21,
1997 among Allied Commercial, BMI and Morgan
Stanley Mortgage Capital, Inc.
10.6(5)* Investment Management Agreement among Allied 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 Allied Advisers to the Company
filed herewith.
10.7(5)* 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
Allied Advisers to the Company on December 31, 1997. Consent
to assign MH Agreement to the Company filed herewith.
10.8(6)* Lease Agreement between 1620 K Street Associates Limited
Partnership and Allied 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 Allied Advisers to the Company is filed herewith.
10.9* Employee Stock Ownership Plan, as amended on December 31,
1997.
10.10* Deferred Compensation Plan, as amended on January 1, 1998
10.11(7) Stock Option Plan
10.12* Dividend Reinvestment Plan.
10.13(8) Agreement and Plan of Merger, dated as of August 14, 1997
and amended and restated as of September 19, 1997.
10.14* Form of Regional Associate Agreement.
11 Statement regarding computation of per share earnings is
incorporated by reference to Note 9 to the Company's Notes to
the 1997 Consolidated Financial Statements filed herein as
part of Exhibit 13.
13* Excerpts from the 1997 Annual Report to Shareholders.
21 Subsidiaries of the Company and jurisdiction of incorporation/
organization:
Allied Capital SBLC Corporation Maryland
Allied Investment Corporation Maryland
Allied Capital Financial Corporation Maryland
Allied Capital Property LLC Delaware
Allied Capital Holdings LLC Delaware
Allied Capital Equity LLC Delaware
23* Consent of Arthur Andersen LLP, independent public
accountants.
27* Financial Data Schedule
- - - - - - - - - - - - - ---------------------
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* Filed herewith.
(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 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).
(4) 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).
(5) Incorporated by reference to the exhibit of the same name to Allied
Advisers' Report on Form 10-K for the year ended December 31, 1992 for
Agreements. Incorporated by reference to the exhibit of the same name to
Allied Advisers Report on Form 10-K for the year ended December 31, 1995 for
Assignments. (File No. 0-18826). Waiver and consent to assign to the Company
is filed herewith.
(6) 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).
(7) 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).
(8) Incorporated by reference from Appendix A 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).
(9) 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 filed
herewith.
(b) Reports on Form 8-K.
During the three months ended December 31, 1997, the Company filed a total
of two (2) Reports Pursuant to Section 13 or 15(d) of the Securities Act
of 1934 on Form 8-K ("Report on Form 8-K"). On October 1, 1997, the Company
filed a report on Form 8-K in order to incorporated by reference into the
Company's current report on Form 8-K certain documents that are set forth in
such Form. These documents were incorporated by reference into the Company's
registration statement on Form N-14 that was filed with the Commission on
September 26, 1997 in connection with the merger of Allied I, Allied II, Allied
Commercial and Advisers with and into Allied Lending.
On December 16, 1997, the Company filed a report on Form 8-K to report that on
December 12, 1997, the Company's board of directors accepted the resignation of
Matthews, Carter and Boyce, P.C. as the independent accountant to the Company
and its subsidiaries, subject to the consummation of the Merger. The Company
also reported that on December 12, 1997, the board of directors voted to engage
the firm of Arthur Andersen LLP as the independent accountant of the Company and
its subsidiaries for the year ending December 31, 1997, subject to the
consummation of the Merger.
In addition, on January 12, 1998, the Company filed a report on Form 8-K to
report that the Merger had been consummated and to report certain details of the
Merger, including the exchange ratios utilized in the Merger.
19
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 20, 1998.
ALLIED CAPITAL CORPORATION
By: /s/ William L. Walton
--------------------------
William L. Walton
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Title
Signature (Capacity) Date
- - - - - - - - - - - - - --------- ---------- ----
/s/ William L. Walton Chairman, President, and March 20, 1998
- - - - - - - - - - - - - ------------------------------- Chief Executive Officer
William L. Walton
/s/ Jon W. Barker Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Jon W. Barker
/s/ Eleanor Deane Bierbower Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Eleanor Deane Bierbower
/s/ Brooks H. Browne Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Brooks H. Browne
/s/ Joseph A. Clorety III Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Joseph A. Clorety III
/s/ Swep T. Davis Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Swep T. Davis
/s/ John D. Firestone Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
John D. Firestone
/s/ Robert V. Fleming II Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Robert V. Fleming II
/s/ Michael I. Gallie Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Michael I. Gallie
/s/ Anthony T. Garcia Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Anthony T. Garcia
/s/ Lawrence I. Hebert Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Lawrence I. Hebert
/s/ Arthur H. Keeney III Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Arthur H. Keeney III
20
21
/s/ John I. Leahy Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
John I. Leahy
/s/ Robert E. Long Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Robert E. Long
/s/ Robin B. Martin Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Robin B. Martin
/s/ Warren K. Montouri Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Warren K. Montouri
/s/John D. Reilly Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
John D. Reilly
/s/ Guy T. Steuart II Director March 20, 1998
- - - - - - - - - - - - - -------------------------------
Guy T. Steuart II
/s/ T. Murray Toomey Director March 20, 1998
- - - - - - - - - - - - - ------------------------------
T. Murray Toomey
/s/ Laura W. van Roijen Director March 20, 1998
- - - - - - - - - - - - - ------------------------------
Laura W. van Roijen
/s/ George C. Williams Director March 20, 1998
- - - - - - - - - - - - - -----------------------------
George C. Williams
/s/ Smith T. Wood Director March 20, 1998
- - - - - - - - - - - - - --------------------------------
Smith T. Wood
/s/ Jon A. DeLuca Principal and March 20, 1998
- - - - - - - - - - - - - ------------------------- Chief Financial
Jon A. DeLuca Officer (Principal
Financial and Accounting
Officer)
21
22
EXHIBIT INDEX
Exhibit
Number Description
- - - - - - - - - - - - - ------ -----------
3(iii) By-laws of the Company dated January 8, 1998
10.1 Credit Agreement between the Company and BankBoston, NA, First
Union National Bank, and Riggs Bank, N.A.
10.3 Letter evidencing assignment of the OPIC Note to the Company
10.4 Amended and Restated Master Repurchase Agreement among Allied
Commercial, BMI and Merrill Lynch Mortgage Capital, Inc., and
letter evidencing assignment of the Master Repurchase Agreement
to the Company
10.5 Master Loan & Security Agreement among Allied Commercial, BMI
and Morgan Stanley Mortgage Capital, Inc.
10.6 Waiver evidencing assignment of MH Management Agreement to the
Company
10.7 Consent to assign MH Agreement to the Company
10.8 Letter evidencing assignment of 1666 K Street lease to the
Company
10.9 Employee Stock Ownership Plan
10.10 Deferred Compensation Plan
10.12 Dividend Reinvestment Plan
10.14 Form of Regional Associate Agreement
13 Excerpts from the 1997 Annual Report to Shareholders.
23 Consent of Arthur Andersen LLP, independent public accountants.
27 Financial Data Schedule
22