[Federal Register Volume 60, Number 232 (Monday, December 4, 1995)]
[Notices]
[Pages 62124-62126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29386]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 21542; 812-9010]
Allied Capital Lending 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 its directors who are not officers
or employees of the Company.
FILING DATE: The application was filed on May 20, 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. The Company is a small business lending company (``SBLC'')
approved by the U.S. Small Business Administration (the ``SBA''). The
Company participates in the SBA's section 7(a) guaranteed loan program,
under which the SBA will guarantee up to 90% of certain qualifying
loans to small business concerns. The Company, through a subsidiary,
also provides first mortgage commercial loans in conjunction with the
SBA 504 loan program and as companion loans to section 7(a) guaranteed
loans.
2. The Company lends to privately-owned small businesses directly.
It provides loans to qualifying small businesses to acquire or
refinance real estate, machinery or equipment, or to provide working
capital. Loans made by the Company are secured by a mortgage or other
lien on the assets of the borrower and, frequently, of its principals.
The Company's loans are diversified in different industries and
geographic regions of the United States. At December 31, 1994, the
Company had in its portfolio or was servicing loans to, among others,
hotels and motels, restaurants, manufacturers, retail shops, food
stores, professional service providers, laundries and cleaners, home
furnishings concerns, gasoline stations, business services firms,
recreational services providers, automobile exhaust repair shops,
personal services providers and automotive repair concerns. The Company
makes available significant managerial assistance to companies in its
portfolio.
3. As permitted by SBA regulations, the Company systematically
sells to investors, without recourse, the guaranteed portions of its
loans. Such loan sales generally take place approximately three months
after the closing of the loan. The Company continues to service those
loans for a servicing fee. At December 31, 1994, the Company was
servicing over $116 million aggregate principal amount of loans, of
which approximately 72% had been sold to investors.
4. 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, as determined from time to time, 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.
5. The Company's stock option plan (the ``Option Plan'') was
adopted and approved in 1993. In February 1994, the Company's board of
directors adopted 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 and is not an officer or employee of the Company or an
employee of its
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investment adviser (each, a ``non-officer director''). The grant will
consist of giving each non-officer director an option to purchase
10,000 shares of the Company's common stock.
6. The Option Plan provides for an automatic, one-time option grant
to each non-officer director on the date on which the issuance of
options is (i) authorized by the stockholders of the Company of (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 or
$15.00 per share (the Company's initial public offering price),
whichever is greater. 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) 69 days after the optionee ceases to serve as a director
of the company for any other 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.
7. The Company currently has six non-officer directors. Upon the
SEC's issuance of an order approving the option grants, those persons
will receive options covering an aggregate of 60,000 shares. The 10,000
shares covered by each grant to a non-officer director would represent
0.23%, and the 60,000 shares covered by the grants to the six current
non-officer directors would represent 1.37%, of the Company's 4,377,334
shares outstanding as of June 30, 1995. As of June 30, 1995, there was
an aggregate of 433,290 shares subject to then-outstanding options
granted to officers of the Company under the Option Plan, and 11,570
shares available for future grants under the Option Plan (not including
such 60,000 shares underlying the options proposed to be issued to the
current non-officer directors). The shares subject to such then-
outstanding options represent 9.90% of the Company's common stock
outstanding on June 30, 1995; if those shares are increased by the
60,000 shares underlying the options proposed to be granted to current
non-officer directors, they represent 11.27% of the company's shares
outstanding on that date; if those shares are increased by the shares
remaining available for future grants under the Option Plan, they
represent 11.53% of the Company's shares outstanding on that date. The
Company has no other outstanding options, warrants or rights.
8. Non-officer directors are actively involved in managing the
Company and in reviewing the operation of its portfolio companies. Non-
officer directors also generally serve on at least one committee of the
Company's Board. Due to their experience and expertise, the non-officer
directors make material, substantive contributions in managing the
business of the company and the operation of its portfolio companies.
9. The Company recruits persons to serve as non-officer directors
who possess specialized knowledge and expertise in business
development, small business financing techniques or the industries in
which the company focuses its investments. Their experience and
expertise permits the Company's non-officer directors to provide unique
analysis and advice to the Company regarding prospective loans and
management of portfolio companies.
10. The Company's directors establish, review and revise, when
necessary, a strict set of criteria for many of the loans that are made
by the Company. The Company's directors also review those proposed
lending transactions that do not fit within that set of criteria. Each
director is provided, well in advance of each Board meeting, a detailed
underwriting or credit report regarding each lending transaction under
consideration. The Company's directors analyze the reports and
materials provided, discuss questions and issues with the Company's
management, its responsible officer, and with each other and make and
approve recommendations with respect to each such lending decision.
11. 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 and funds available for
future lending for the purpose of evaluating and making these resource
allocations. At least once each calendar quarter, directors of the
Company review portfolio loans that are non-performing or performing
inadequately and evaluate the best course of action for the Company to
take under the circumstances. On a calendar quarter basis, the
directors of the Company also undertake a good faith valuation of the
Company's loans in privately-held portfolio companies, which constitute
substantially all of the Company's investments, as independent market
valuations rarely are available.
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.
\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 company's
stockholders 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 loan portfolio and operations, and often have specific
experience with commercial lending or with respect to industries in
which the Company makes a significant number of loans. 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
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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 loan portfolio. 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
Company's stockholders 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 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. 95-29386 Filed 12-1-95; 8:45 am]
BILLING CODE 8010-01-M