[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 

[[Page 62125]]
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