[Federal Register Volume 60, Number 232 (Monday, December 4, 1995)]
[Notices]
[Pages 62120-62122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29385]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21543; 812-8972]


Allied Capital Corporation; 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 (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 5, 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 
Act. It has two active wholly-owned subsidiaries: Allied Investment 
Corporation (``Allied Investment'') and Allied Capital Financial 
Corporation (``Allied Financial''), which are registered under the Act 
as closed-end investment companies. Allied Investment is licensed by 
the U.S. Small Business Administration (the ``SBA'') as a small 
business investment company, and Allied Financial is licensed by the 
SBA as a specialized small business investment company.
    2. The Company invests in and lends to privately-owned small 
businesses directly and through its wholly-owned 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 typical 
maturity of such a loan made by the Company is seven years, although 
loan maturities vary. The Company also makes senior loans without 
equity features. The Company's emphasis is on low- to medium-technology 
businesses, such as broadcasting, packaging manufacturers, franchise 
operations, speciality manufacturing, environmental concerns, wholesale 
distribution and commodities storage 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 1983, 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\1\ of a share of the Company's common 
stock at the date of issuance of the option. Each option 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 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 

[[Page 62121]]
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.

    \1\ For purposes of the Option Plan, the fair market value of 
the shares is defined as the closing sale price as quoted on the 
National Association of Securities Dealers Automated Quotation 
System for the date of issuance of the option.
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    6. The Company currently has five non-officer directors. Upon the 
SEC's issuance of an order approving the option grants, 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 
0.16%, and the 50,000 shares covered by the grants to the five current 
non-officer directors would represent 0.81%, of the 6,174,047 shares of 
the Company's common stock outstanding as of June 30, 1995. As of June 
30, 1995, there was an aggregate of 866,572 shares subject to then-
outstanding options granted to officers of the Company under the Option 
Plan, and 84,951 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 14.03% 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 
grated to current non-officer directors, they represent 14.85% 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 monitoring 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 of 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 or 
improve performance by 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 \2\ attended. Allied Investment and Allied 
Financial 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 or Allied 
Financial Boards on the same day as a meeting of the Company's Board.

    \2\ 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 requirements, 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 requirements 
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 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 

[[Page 62122]]
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 believes 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. 95-29385 Filed 12-1-95; 8:45 am]
BILLING CODE 8010-01-M