[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
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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
