[Federal Register Volume 60, Number 232 (Monday, December 4, 1995)]
[Notices]
[Pages 62122-62124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29384]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21544; 812-8986]


Allied Capital Corporation II; Notice of Application

November 27, 1995.
AGENCY: Securities and Exchange Commission (the ``SEC'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'').

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APPLICANT: Allied Capital Corporation II (the ``Company'').

RELEVANT ACT SECTIONS: Order requested under section 61(a)(3)(B)(i)(II) 
of the Act.

SUMMARY OF APPLICATION: The Company requests an order approving a 
proposal to issue stock options to directors who are not officers or 
employees of the Company.

FILING DATE: The application was filed on May 12, 1994 and amended on 
June 24, 1994, July 31, 1995, and November 22, 1995.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on December 22, 
1995, and should be accompanied by proof of service on the applicants, 
in the form of an affidavit or, for lawyers, a certificate of service. 
Hearing requests should state the nature of the writer's interest, the 
reasons for the request, and the issues contested. Persons who wish to 
be notified of a hearing may request such notification by writing to 
the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C. 
20549. Applicant, 1666 K Street, N.W., Ninth Floor, Washington, D.C. 
20006.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Special Counsel, at 
(202) 942-0582, or Robert A. Robertson, Branch Chief, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee from 
the SEC's Public Reference Branch.

Applicant's Representations

    1. The Company is a closed-end management investment company that 
has elected to be regulated as a business development company under the 
1940 Act. It has two wholly-owned subsidiaries: Allied Investment 
Corporation II (``Allied Investment II'') and Allied Financial 
Corporation II (``Allied Financial II''), which are registered under 
the Act as closed-end investment companies. Allied Investment II is 
licensed by the U.S. Small Business Administration (the ``SBA'') as a 
small business investment company (``SBIC''). Allied Financial II has 
applied to the SBA to be licensed as a specialized small business 
investment company (``SSBIC''), and makes certain investments pending 
issuance of its license as a SSBIC.
    2. The Company invests in and lends to privately-owned small 
businesses directly and through its subsidiaries. It provides debt, 
mezzanine and equity financing for small growth companies, for 
leveraged buyouts of such companies, for note purchases and loan 
restructurings and for special situations, such as acquisitions, 
buyouts, recapitalizations and bridge financings of such companies. The 
Company also provides financing to private and small public companies 
through its purchase of convertible debentures. The Company's 
investments generally take the form of loans with equity features, such 
as warrants or conversion privileges. The Company also makes senior 
loans without equity features. The Company's emphasis is on low- to 
medium-technology businesses, such as broadcasting, manufacturing, 
wholesale distribution and commodities storage, software and service 
providers and wholesale and retail operations. The Company makes 
available significant managerial assistance to its portfolio companies, 
as do the Company's subsidiaries.
    3. The Company and its investment adviser have entered into an 
investment advisory agreement that provides that the fees paid and 
payable to the investment adviser are based on the value of the 
Company's assets and do not depend in any respect upon any capital 
gains of the Company or the capital appreciation of any of its funds. 
The Company does not have a profit-sharing plan described in Section 
57(n) of the Act.
    4. The Company's stock option plan (the ``Option Plan'') was 
adopted and approved in 1990, and has been amended on several 
occasions. In February 1994, the Company's Board of Directors adopted 
further amendments to the Option Plan, which were approved by the 
Company's stockholders in May 1994. Those amendments increased the 
number of shares reserved for issuance under the Option Plan and 
provided for the automatic, one-time grant to each person who serves as 
a director of the Company and is not an officer or employee of the 
Company or an employee of its investment adviser (each, a ``non-officer 
director'') of an option to purchase 10,000 shares of the Company's 
common stock.
    5. The Option Plan provides for an automatic, one-time option grant 
to each person serving as a non-officer director on the date on which 
the issuance of options to non-officer directors is (i) authorized by 
the stockholders of the Company or (ii) approved by SEC order, 
whichever is later. The Option Plan also provides for an automatic, 
one-time option grant to each person who thereafter is elected 
initially as a non-officer director. Any automatic, one-time grant to a 
non-officer director will entitle the recipient to acquire 10,000 
shares of the Company's common stock at an exercise price that is not 
less than the fair market value of a share of the Company's common 
stock at the date of issuance of the option. Each option 

[[Page 62123]]
vests in three annual installments, with the first installment vesting 
on the date of issuance of the option and the other two installments 
vesting on the first and second anniversaries of the date of the 
issuance of the option. Each option expires on the earliest of (a) the 
tenth anniversary of its date of issuance, (b) 60 days after the 
optionee ceases to serve as a director of the Company for any reason 
other than death or permanent and total disability, (c) one year after 
the date on which the optionee dies or becomes permanently and totally 
disabled, or (d) the date on which the option is fully exercised. The 
Option Plan provides that all such options are non-transferable, except 
for disposition by will or intestacy, and are exercisable during the 
life of the optionee only by him or her.
    6. The Company currently has five non-officer directors. Upon the 
Commission's issuance of an order approving the option grants under the 
Option Plan to non-officer directors, those persons will receive 
options covering an aggregate of 50,000 shares. The 10,000 shares 
covered by each grant to a non-officer director would represent 0.14%, 
and the 50,000 shares covered by the grants to the five current non-
officer directors would represent 0.72%, of the 6,938,191 shares of the 
Company's common stock outstanding as of June 30, 1995. As of June 30, 
1995, there was an aggregate of 719,600 shares subject to then-
outstanding options granted to officers of the Company under the Option 
Plan, and 317,744 shares available for future grants under the Option 
Plan (not including the 50,000 shares underlying the options proposed 
to be issued to the current non-officer directors). The shares subject 
to such then-outstanding options represent 10.37% of the Company's 
common stock outstanding on June 30, 1995; if those shares are 
increased by the 50,000 shares underlying the options proposed to be 
granted to current non-officer directors, they represent 11.09% of the 
Company's shares then outstanding. The Company has no other outstanding 
options, warrants or rights.
    7. Non-officer directors are actively involved in managing the 
Company and in monitoring of the operation of its portfolio companies. 
Each non-officer director serves on at least one committee of the 
Company's Board, and serves as a director of at least one of the 
Company's subsidiaries. In addition, many of the non-officer directors 
have experience in the industries in which the Company regularly 
invests, and provide analysis and advice to the Company regarding 
prospective investments and in managing the portfolio companies in 
which the Company has invested.
    8. Every investment transaction by the Company requires prior 
express approval by its board of directors. Each director is provided, 
well in advance of each board meeting, a detailed narrative outlining 
the format of each proposed investment, restructuring and follow-on 
financing transaction under consideration. Whether in the context of a 
new investment or restructuring, follow-on financing, or disposition of 
an existing investment, the Company's directors analyze the reports and 
materials provided, discuss questions and issues with the responsible 
investment officer and with each other and make and approve 
recommendations with respect to each such investment decision.
    9. The Company also relies upon its directors to review and 
consider the best use of the Company's resources. The directors review 
and evaluate reports of outstanding commitments, required reserves for 
follow-on financing and funds available for future investment for the 
purpose of evaluating and making these resource allocations. At least 
once each calendar quarter, directors of the Company review portfolio 
investments that are non-performing or performing inadequately and 
evaluate the best course of action for the Company to take under the 
circumstances. In addition, on a calendar quarter basis, the directors 
of the Company undertake a good faith valuation of the Company's 
investments for which no independent market valuations are available, 
which constitute substantially all of the Company's investments.
    10. Non-officer directors frequently advise the investment officers 
serving the Company in the due diligence process regarding any proposed 
investment in companies operating in industries of which they have 
knowledge and expertise. Non-officer directors with industry or other 
relevant expertise also participate in the analysis or portfolio 
companies that are performing below expectations or are in a work-out 
situation.
    11. Non-officer directors participate in the analysis of portfolio 
companies that are performing at or above expectations, and advise the 
investment officers serving the Company in efforts to monitor 
performance of such portfolio companies, improve banking or other 
commercial relationships and consider or prepare for public offerings, 
acquisitions or the like.
    12. For these services, the Company pays its non-officer directors 
(as well as its officer-directors) $1,000 for each meeting of its Board 
or any committee thereof \1\ attended. Allied Investment II and Allied 
Financial II each also pays its directors $1,000 for each meeting of 
its board of directors that the director attends, although a director 
is not paid for attending such meetings of the Allied Investment II or 
Allied Financial II Boards on the same day as a meeting of the 
Company's Board.

    \1\ Non-officer directors are paid $500 for participation in any 
committee meeting held on the same day as a meeting of the Company's 
Board.
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Applicant's Legal Analysis

    1. Section 61(a)(3)(B)(i)(II) of the Act permits a business 
development company to issue options to purchase its voting securities 
to its non-officer, non-employee directors pursuant to an executive 
compensation plan subject to certain conditions, which include the 
proposal to issue such options being authorized by the stockholders of 
the company and approved by the SEC on the basis that the terms of the 
proposal are fair and reasonable and do not involve overreaching of 
such company or its stockholders.
    2. The Company believes that its proposal to issue options to its 
non-officer directors satisfies all of such statutory conditions other 
than SEC approval (including the requirement that if the amount of 
voting securities that would result from the exercise of outstanding 
options issued to the Company's directors, officers, and employees 
would exceed 15% of the Company's outstanding voting securities, then 
the total amount of voting securities that would result from the 
exercise of all outstanding options at the time of issuance may not 
exceed 20% of the outstanding voting securities of the Company) and 
that granting each non-officer director an option under the Option Plan 
is fair and reasonable. Non-officer directors provide to the Company 
skills and experience necessary for management and oversight of the 
Company's investments and operations, and often have specific 
experience with respect to industries in which the Company makes a 
significant number of investments. The Company believes that its 
ability to make an automatic option grant under the Option Plan to non-
officer directors provides a means of retaining the services of its 
current non-officer directors and of attracting qualified persons to 
serve as non-officer directors in the future. The Company also believes 
that such options are a necessary adjunct to its directors' fees to 
provide fair and reasonable compensation for the services and attention 
devoted by the non-officer 

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directors. Each current non-officer director makes a significant 
contribution to the management of the Company's business and to 
analysis and supervision of its portfolio investments. The Company 
believes that any non-officer directors who are elected initially after 
issuance of the SEC's order will provide similar services and devote 
similar time and attention to serving the Company.
    3. The projected compensatory value of an automatic, one-time grant 
to the Company's non-officer directors of a stock option to purchase 
10,000 shares at fair market value is well within the range of 
reasonable director compensation in consideration of the time 
commitment described above, especially given that realization of such 
compensation is contingent upon the Company's market performance. 
Automatic, one-time option grants to current and future non-officer 
directors permit the Company to devote its cash resources to additional 
investments and not to increases in directors' fees to retain qualified 
non-officer directors or to attract replacements. Most importantly, as 
a method of compensation which is contingent on the Company's stock 
performance, such stock option awards serve the best interest of the 
stockholders of the Company by reinforcing the alignment of the 
interests of non-officer directors and stockholders of the Company.
    4. For all of these reasons, the Company submits that providing for 
the automatic, one-time grant of stock options to purchase 10,000 
shares at fair market value to each of the Company's current and future 
non-officer directors is fair and reasonable and does not involve 
overreaching of the Company or its stockholders.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29384 Filed 12-1-95; 8:45 am]
BILLING CODE 8010-01-M