Allied Capital Corporation

Notice of Annual Meeting of Stockholders

 

To the Stockholders:

 

The 2009 Annual Meeting of Stockholders of Allied Capital Corporation (the Company) will be held at the Fairfax at Embassy Row Hotel (formerly the Westin Embassy Row Hotel), 2100 Massachusetts Avenue, NW, Washington, DC on May 13, 2009, at 10 a.m. (Eastern Time) for the following purposes:

 

1. To elect four directors of the Company who will serve for three years, or until their successors are elected and qualified;

 

 

3. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

 

You have the right to receive notice of and to vote at the meeting if you were a stockholder of record at the close of business on March 2, 2009. Whether or not you expect to be present in person at the Meeting, please sign the enclosed proxy and return it promptly in the envelope provided, or register your vote by telephone or through the Internet. Instructions are shown on the proxy card. In the event there are not sufficient votes for a quorum or to approve or ratify any of the foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit further solicitation of the proxies by the Company.

 

By order of the Board of Directors,

 

 

Miriam G. Krieger

Executive Vice President

and Corporate Secretary

 

 

Washington, DC

March 27, 2009

 

 

 

 

Allied Capital Corporation

1919 Pennsylvania Avenue, NW

Washington, DC 20006

 

PROXY STATEMENT

 

General

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Allied Capital Corporation (the Company or Allied Capital) for use at the Company’s 2009 Annual Meeting of Stockholders (the Meeting) to be held on May 13, 2009, at 10 a.m. (Eastern Time) at the Fairfax at Embassy Row (formerly the Westin Embassy Row Hotel), 2100 Massachusetts Avenue, NW, Washington, DC and at any adjournments or postponements thereof. This proxy statement, the accompanying proxy card, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, are first being sent to stockholders on or about March 27, 2009.

 

We encourage you to vote your shares, either by voting in person at the Meeting or by granting a proxy (i.e., authorizing someone to vote your shares). If you properly sign and date the accompanying proxy card or otherwise provide voting instructions, either via the Internet or the telephone, and the Company receives it in time for the Meeting, the persons named as proxies will vote the shares registered directly in your name in the manner that you specified. If you give no instructions on the proxy card, the shares covered by the proxy card will be voted FOR the election of the nominees as directors and FOR the other matters listed in the accompanying Notice of Annual Meeting of Stockholders.

 

If you are a “stockholder of record” (i.e., you hold shares directly in your name), you may revoke a proxy at any time before it is exercised by notifying the proxy tabulator, Broadridge Financial Solutions, Inc., in writing. Please send your notification to Allied Capital Corporation, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717, or submit a properly executed, later-dated proxy or vote in person at the Meeting. Any stockholder of record attending the Meeting may vote in person whether or not he or she has previously voted his or her shares. If your shares are held for your account by a broker, bank, or other institution or nominee (Broker Shares), you may vote such shares at the Meeting only if you obtain proper written authority from your institution or nominee and present it at the Meeting.

 

Stockholders of record may also vote either via the Internet or by telephone. Specific instructions to be followed by stockholders of record interested in voting via the Internet or the telephone are shown on the enclosed proxy card. The Internet and telephone voting procedures are designed to authenticate the stockholder’s identity and to allow stockholders to vote their shares and confirm that their instructions have been properly recorded.

 

Availability of Proxy and Annual Meeting Materials

 

This proxy statement and the accompanying Annual Report on Form 10-K and proxy card are also available at www.alliedcapital.com. Among other things, the proxy contains:

 

 

Electronic Delivery of Allied Capital Stockholder Communications

 

We are pleased to offer to our stockholders the benefits and convenience of electronic delivery of annual meeting materials, including:

 

 

If you would like to sign up for electronic delivery for future stockholder mailings, please visit www.icsdelivery.com/ald/index.html to enroll. Your electronic delivery enrollment will be effective until you choose to cancel it. If you have questions about electronic delivery, please call Allied Capital Investor Relations toll-free at (888) 818-5298 or send an email to ir@alliedcapital.com.

 

Annual Meeting Admission

 

If you plan to attend the Meeting, an admission ticket and photo identification will be required for admission to the Meeting. If you are a stockholder of record, your ticket is attached to your proxy card. If your shares are held in the name of a broker or other nominee and you do not have an admission ticket, please bring with you a legal proxy or letter from the broker, trustee, bank, or nominee confirming your beneficial ownership of the shares as of the record date, March 2, 2009, along with your photo identification.

 

Purpose of Meeting

 

At the Meeting, you will be asked to vote on the following proposals:

 

1. To elect four directors of the Company who will serve for three years, or until their successors are elected and qualified;

 

 

3. To transact such other business as may properly come before the Meeting and any adjournments or postponements thereof.

 

Voting Securities

 

You may vote your shares at the Meeting only if you were a stockholder of record at the close of business on March 2, 2009, the record date. On March 2, 2009, there were 178,691,875 shares of the Company’s common stock outstanding. Each share of common stock is entitled to one vote.

 

The Company’s 401(k) Plan owns a total of 388,775 shares, representing less than 1% of the Company’s total outstanding shares. The Administrator of the 401(k) Plan will vote the shares on behalf of the participants pursuant to their instructions.

 

Quorum Required

 

A quorum must be present at the Meeting for any business to be conducted. The presence at the Meeting, in person or by proxy, of the holders of a majority of the shares of common stock outstanding on the record date will constitute a quorum.

Abstentions will be treated as shares present for quorum purposes. Broker Shares for which the nominee has not received voting instructions from the beneficial holder and does not have discretionary authority to vote the shares on certain proposals (which are considered “broker non-votes” with respect to such proposals) will be treated as shares present for quorum purposes.

 

If a quorum is not present at the Meeting, the stockholders who are represented may adjourn the Meeting until a quorum is present. The persons named as proxies will vote those proxies for such adjournment, unless marked to be voted against any proposal for which an adjournment is sought, to permit the further solicitation of proxies.

 

Vote Required

 

     Election of Nominee Directors.  The affirmative vote of a majority of the votes cast at the Meeting in person or by proxy is required to elect each of the four nominees as directors. Votes withheld on the matter will not be included in determining the number of votes cast and, as a result, will have no effect on this proposal.

 

     Ratification of Independent Registered Public Accounting Firm.  The affirmative vote of a majority of the votes cast at the Meeting in person or by proxy is required to ratify the appointment of KPMG LLP to serve as the Company’s independent registered public accounting firm. Abstentions will not be included in determining the number of votes cast and, as a result, will not have any effect on the result of the vote.

 

     Additional Solicitation.  If there are not enough votes to approve any proposals at the Meeting, the stockholders who are represented may adjourn the Meeting to permit the further solicitation of proxies. The persons named as proxies will vote those proxies for such adjournment, unless marked to be voted against any proposal for which an adjournment is sought, to permit the further solicitation of proxies. Those proxies voted against any proposal for which an adjournment is sought will be voted against such adjournment. Abstentions and broker non-votes will not be voted and thus will not have any effect on the result of the vote for adjournment.

 

Also, a stockholder vote may be taken on one or more of the proposals in this Proxy Statement prior to any such adjournment if there are sufficient votes for approval of such proposal(s).

 

Information Regarding This Solicitation

 

The Company will bear the expense of the solicitation of proxies for the Meeting, including the cost of preparing, printing, and mailing this proxy statement, the accompanying Notice of Annual Meeting of Stockholders, and the proxy card. The Company has requested that brokers, nominees, fiduciaries, and other persons holding shares in their names, or in the name of their nominees, which are beneficially owned by others, forward the proxy materials to, and obtain proxies from, such beneficial owners. The Company will reimburse such persons for their reasonable expenses in so doing.

 

In addition to the solicitation of proxies by mail, proxies may be solicited in person and by telephone, facsimile transmission, or telegram by directors, officers, or regular employees of the Company (without special compensation therefor). Any proxy given pursuant to this solicitation may be revoked by notice from the person

giving the proxy at any time before it is exercised. Any such notice of revocation should be provided in writing and signed by the stockholder in the same manner as the proxy being revoked and delivered to the Company’s proxy tabulator.

 

Security Ownership of Management and Certain Beneficial Owners

 

The following table sets forth, as of March 20, 2009, each stockholder who owned more than 5% of the Company’s outstanding shares of common stock, each current director, each nominee for director, each named executive officer of the Company listed in the Summary Compensation Table, and directors and executive officers as a group. Unless otherwise indicated, the Company believes that each beneficial owner set forth in the table has sole voting and investment power. Certain shares beneficially owned by the Company’s directors and executive officers may be held in accounts with third-party brokerage firms, where such shares may from time to time be subject to a security interest for margin credit provided in accordance with such brokerage firm’s policies.

 

The Company’s directors are divided into two groups — interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19)of the 1940 Act.

  *  Less than 1%

 

PROPOSAL 1.

ELECTION OF DIRECTORS

 

Pursuant to the Company’s bylaws, the Board of Directors may modify the number of members of the Board provided that the number of directors will not be fewer than three or greater than fifteen, unless otherwise permitted by law. Directors are elected in three classes for a staggered term of three years for each class, with the term of office of only one of the three classes of directors expiring each year. Directors serve until their successors are elected and qualified. Messrs. Harper, Leahy and Steuart have announced their intention to retire from the Board of Directors at the expiration of their current term. The Board of Directors has determined that the size of the Board will be thirteen following the Meeting.

 

The Class II directors, Ms. Bates and Messrs. Mathias and Pollock have been nominated for election by the Board of Directors for a three-year term expiring in 2012. In addition, John M. Scheurer, the Company’s Chief Executive Officer and President, has been nominated for election as a Class II director by the Board of Directors for a three-year term expiring in 2012. Each Class II director and nominee has agreed to serve as a director if elected and has consented to be named as a nominee. No person being nominated as a director is being proposed for election pursuant to any agreement or understanding between any such person and the Company.

 

A stockholder can vote for or withhold his or her vote from any or all of the nominees. In the absence of instructions to the contrary, it is the intention of the persons named as proxies to vote such proxy FOR the election of all the nominees named below. If any of the nominees should decline or be unable to serve as a director, it is intended that the proxy will be voted for the election of such person or persons as are nominated as replacements. The Board of Directors has no reason to believe that any of the persons named will be unable or unwilling to serve.

 

The Board of Directors of the Company Recommends that
Stockholders Vote for the Election of the Nominees Named in this Proxy Statement.

 

Information about the Directors

 

Certain information, as of March 20, 2009, with respect to each of the four nominees for election at the Meeting, as well as each of the current directors, is set forth below, including their names, ages, a brief description of their recent business experience, including present occupations and employment, certain directorships that each nominee holds, and the year in which each nominee became a director of the Company or any of its predecessor companies.

 

The Board of Directors of each consolidated subsidiary will be composed of all of the Company’s directors. The business address of each nominee and director listed below is 1919 Pennsylvania Avenue, NW, Washington, DC 20006.

 

Nominees for Class II Directors – Term Expiring 2012

 

Ms. Bates and Messrs. Mathias and Pollock are independent directors for purposes of the 1940 Act. Mr. Scheurer is an interested person, as defined in the 1940 Act, due to his position as an officer of the Company.

 

Ann Torre Bates

Age 50. Ms. Bates has been a strategic and financial consultant since 1997. From 1995 to 1997, Ms. Bates served as Executive Vice President, CFO and Treasurer of NHP, Inc., a national real estate services firm. From 1991 to 1995, Ms. Bates was Vice President and Treasurer of US Airways. She currently serves on the boards of Franklin Mutual Series Funds, the Franklin Mutual Recovery Fund, the Franklin Templeton Funds, and SLM Corporation (Sallie Mae). She has served as a director of the Company since 2003.

 

Edward J. Mathias

Age 67. Mr. Mathias has served as a Managing Director of The Carlyle Group, a global private equity firm, since 1994. From 1971 to 1993, Mr. Mathias served as Managing Director and Board Member of T. Rowe Price Associates, Inc., an investment management firm. Mr. Mathias presently serves as a Trustee of the University of Pennsylvania and as a member of the Penn Investment Board that oversees the University’s endowment. He serves on the Howard Hughes Medical Institute’s Investment Advisory Committee. Mr. Mathias is also a director of NexCen Brands, Inc., Victory Acquisition Corp., and Triple Crown Acquisition Corp. He has served as a director of the Company since 2008.

 

Alex J. Pollock

Age 66. Mr. Pollock has been a Resident Fellow at the American Enterprise Institute since 2004. He was President and Chief Executive Officer of the Federal Home Loan Bank of Chicago from 1991 to 2004. He currently serves as a director of the CME Group, Great Lakes Higher Education Corporation, the Great Books Foundation and the International Union for Housing Finance. He has served as a director of the Company since 2003.

 

John M. Scheurer

Age 56. Mr. Scheurer, Chief Executive Officer and President, has been employed by Allied Capital since 1991. During his tenure with Allied Capital, Mr. Scheurer has held several leadership positions, most recently as a Managing Director and Head of Commercial Real Estate Finance. Mr. Scheurer also served as President of Allied Capital Commercial Corporation, a predecessor to Allied Capital, from 1993 until 1997.

 

Class III Directors — Term Expiring 2010

 

Messrs. Walton and Long and Ms. Sweeney are interested persons, as defined in the 1940 Act, in the cases of Mr. Walton and Ms. Sweeney, due to their positions as officers of the Company and in the case of Mr. Long, as the father of an officer of the Company. Mr. Browne is an independent director for purposes of the 1940 Act.

 

William L. Walton

Age 59. Mr. Walton is the Chairman of the Board and an executive officer of the Company. From 1997 until March 2009, Mr. Walton served as the Company’s Chairman, President and Chief Executive Officer. He has served as a director of the Company or one of its predecessors since 1986. Mr. Walton’s previous experience includes serving as a Managing Director of Butler Capital Corporation, as personal investment advisor to William S. Paley, founder of CBS, and as Senior Vice President in Lehman Brothers Kuhn Loeb’s Merger and Acquisition Group. He also founded two education service companies – Language Odyssey and Success Lab. Mr. Walton currently serves on the boards of directors of the American Enterprise Institute, the U.S. Chamber of Commerce, and the Financial Services Roundtable. He is also a member of the Trustees’ Council of the National Gallery of Art.

 

Joan M. Sweeney

Age 49. Ms. Sweeney is the Chief Operating Officer of the Company and has been employed by the Company since 1993. Ms. Sweeney oversees the Company’s daily operations. Prior to joining Allied Capital, Ms. Sweeney was employed by Ernst & Young, Coopers & Lybrand, and the Division of Enforcement of the Securities and Exchange Commission. She has served as a director of the Company since 2004.

 

Brooks H. Browne

Age 59. Mr. Browne has been a private investor since 2002. Mr. Browne was the President of Environmental Enterprises Assistance Fund from 1993 to 2002 and served as a director from 1991 to 2005. He currently serves as Chairman of the Board for Winrock International, a non-profit organization. He has served as a director of the Company or one of its predecessors since 1990.

 

Robert E. Long

Age 77. Mr. Long has been the Chief Executive Officer and a director of GLB Group, Inc., an investment management firm, since 1997 and President of Ariba GLB Asset Management, Inc., the parent company of GLB Group, Inc., since 2005. He has been the Chairman of Emerald City Radio Partners, LLC since 1997. Mr. Long was the President of Business News Network, Inc. from 1995 to 1998, the Chairman and Chief Executive Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995, and a director and the President of Potomac Asset Management, Inc. from 1983 to 1991. Mr. Long is a director of AmBase Corporation, CSC Scientific, Inc., and Advanced Solutions International, Inc. He has served as a director of the Company or one of its predecessors since 1972. Mr. Long is the father of Robert D. Long, an officer of the Company.

 

Class I Directors — Term Expiring 2011

 

All five Class I directors are independent directors for purposes of the 1940 Act.

 

John D. Firestone

Age 65. Mr. Firestone has been a Partner of Secor Group, a venture capital firm since 1978. Mr. Firestone has also served as a director of Security Storage Company of Washington, DC, since 1978. He is currently a director of Cuisine Solutions, Inc., and several non-profit organizations. He has served as a director of the Company or one of its predecessors since 1993.

 

Anthony T. Garcia

Age 52. Mr. Garcia has been a faculty member at a private school since March 2008. Previously, Mr. Garcia was a private investor from March 2007 and Vice President of Finance of Kirusa, a developer of mobile services, from January to March 2007. Mr. Garcia was a private investor from 2003 through 2006. Mr. Garcia was Vice President of Finance of Formity Systems, Inc., a developer of software products for business management of data networks, from 2002 through 2003. Mr. Garcia was a private investor from 2000 to 2001, the General Manager of Breen Capital Group, an investor in tax liens, from 1997 to 2000, and a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996. He has served as a director of the Company or one of its predecessors since 1991.

 

Lawrence I. Hebert

Age 62. Mr. Hebert is Chairman of Dominion Advisory Group, LLC and served as Senior Advisor at PNC Bank from 2005 to 2007. He served as a director and President and Chief Executive Officer of Riggs Bank N.A., a subsidiary of Riggs National Corporation, from 2001 to 2005. Mr. Hebert also served as Chief Executive Officer of Riggs National Corporation during 2005 and served as a director of Riggs National Corporation from 1988 to 2005. Mr. Hebert served as a director of Riggs Investment Advisors and Riggs Bank Europe Limited (both indirect subsidiaries of Riggs National Corporation). Mr. Hebert previously served as Vice Chairman from 1983 to 1998, President from 1984 to 1998, and Chairman and Chief Executive Officer from 1998 to 2001 of Allbritton Communications Company. He has served as a director of the Company or one of its predecessors since 1989.

 

Marc F. Racicot

Age 60. Mr. Racicot is an attorney and served as President and Chief Executive Officer of the American Insurance Association from August 2005 until February 2009. Prior to that, he was an attorney at the law firm of Bracewell & Giuliani, LLP from 2001 to 2005. He is a former Governor (1993 to 2001) and Attorney General (1989 to 1993) of the State of Montana. Mr. Racicot was appointed by President Bush to serve as the Chairman of the Republican National Committee from 2002 to 2003 and he served as Chairman of the Bush/Cheney Re-election Committee from 2003 to 2004. He presently serves on the Board of Directors for Burlington Northern Santa Fe Corporation, Massachusetts Mutual Life Insurance Company, and the Board of Visitors for the University of Montana School of Law. He has served as a director of the Company since 2005.

 

Laura W. van Roijen

Age 56. Ms. van Roijen has been a private investor since 1992. Ms. van Roijen was a Vice President at Citicorp from 1980 to 1990. She has served as a director of the Company or one of its predecessors since 1992.

Director Compensation

 

The following table sets forth compensation that the Company paid during the year ended December 31, 2008, to its directors. The Company’s directors are divided into two groups — interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.

 

 

 

Each non-officer director receives an annual retainer of $100,000. In addition, each member of each committee receives an annual retainer of $45,000 to attend the meetings of the committee, with a maximum of $90,000 to be paid to any one director for committee retainers. Each committee chair also receives an annual retainer of $5,000. Beginning in 2009, the chair of the Audit Committee will receive an annual retainer of $25,000. In addition, members who serve on special purpose committees receive $3,000 per meeting. We also reimburse directors for expenses related to meeting attendance. Directors who are employees receive no additional compensation for serving on our Board of Directors or its committees.

Non-officer directors are eligible for stock option awards under our Amended Stock Option Plan pursuant to an exemptive order from the Securities and Exchange Commission, or Commission, which was granted in September 1999. The terms of the order provided for a one-time grant of 10,000 options to each non-officer director on the date that the order was issued, or on the date that any new director is elected by stockholders to the Board of Directors. Thereafter, each non-officer director will receive 5,000 options each year on the date of the Annual Meeting of Stockholders at the fair market value on the date of grant. See “Amended Stock Option Plan.” The options granted to our directors vest immediately.

 

Corporate Governance

 

Director Independence

 

In accordance with rules of the New York Stock Exchange, or NYSE, the Board of Directors annually determines the independence of each director. No director is considered independent unless the Board of Directors has determined that he or she has no material relationship with the Company. The Company monitors the status of its directors and officers through the activities of the Company’s Corporate Governance / Nominating Committee and through a questionnaire to be completed by each director no less frequently than annually, with updates periodically if information provided in the most recent questionnaire has changed.

 

In order to evaluate the materiality of any such relationship, the Board of Directors uses the definition of director independence set forth in the NYSE Listed Company Manual. Section 303A.00 of the NYSE Listed Company Manual provides that business development companies, or BDCs, such as the Company, are required to comply with all of the provisions of Section 303A applicable to domestic issuers other than Sections 303A.02, the section that defines director independence. Section 303A.00 provides that a director of a BDC shall be considered to be independent if he or she is not an “interested person” of the Company, as defined in Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of the 1940 Act defines an “interested person” to include, among other things, any person who has, or within the last two years had, a material business or professional relationship with the Company.

 

The Board has determined that each of the directors and nominees is independent and has no relationship with the Company, except as a director and stockholder of the Company, with the exception of William L. Walton, John M. Scheurer, Joan M. Sweeney and Robert E. Long. Messrs. Walton and Scheurer and Ms. Sweeney are interested persons of the Company due to their positions as officers of the Company and Mr. Long is an interested person of the Company because he is the father of an officer of the Company. During its assessment of director independence, the Board also considered a donation of $25,000 by the Company to the American Enterprise Institute where Mr. Pollock serves as a Resident Fellow as well as Mr. Walton’s appointment to the board of directors of the American Enterprise Institute. The Board of Directors determined that neither the donation nor Mr. Walton’s position on the board of directors impairs Mr. Pollock’s status as an independent director. In addition, the Board considered the consulting relationship between the Company and Mr. Mathias, from June 2002 through June 2008, whereby Mr. Mathias was paid $5,000 per month by the Company. The Board of Directors determined that the prior consulting arrangement, which terminated prior to Mr.

Mathias’ appointment to the Board of Directors, did not impair Mr. Mathias’ status as an independent director.

 

Committees of the Board of Directors

 

The Board of Directors of the Company has established an Executive Committee, an Audit Committee, a Compensation Committee, a Corporate Governance/ Nominating Committee, and a Board Investment Review Committee. From time to time, the Board may establish special purpose committees to address particular matters on behalf of the Board. The Audit Committee, Compensation Committee, and Corporate Governance/ Nominating Committee each operate pursuant to a committee charter. The charter of each Committee is available on the Company’s web site at www.alliedcapital.com in the Investor Resources section and is also available in print to any stockholder or other interested party who requests a copy.

 

During 2008, the Board of Directors of the Company held 27 Board meetings and 63 committee meetings. All directors attended at least 75% of the aggregate number of meetings of the Board and of the respective committees on which they served. Each director makes a diligent effort to attend all Board and committee meetings, as well as the Annual Meeting of Stockholders. Each of the directors was present at the Company’s 2008 Annual Meeting of Stockholders.

 

The Company has designated the Chairman of the Corporate Governance/ Nominating Committee as the Presiding Director to preside at all executive sessions of non-management directors. In his absence, the Chairman of the Audit Committee has been designated to serve in such capacity. Executive sessions of non-management directors are held regularly.

 

The following table indicates the current members of the committees of the Board of Directors. All of the Company’s directors are independent directors, except for Messrs. Walton and Long, and Ms. Sweeney, who are “interested persons” as defined in Section 2(a)(19) of the 1940 Act.

 

 

 

The Board of Directors has appointed John M. Scheurer as a member of the Executive Committee and a permanent member of the Board Investment Review Committee for 2009, subject to his election to the Board.

 

The Executive Committee.  The Executive Committee has and may exercise those rights, powers, and authority that the Board of Directors from time to time grants to it, except where action by the Board is required by statute, an order of the Commission, or the Company’s charter or bylaws. The Executive Committee met four times during 2008.

 

The Board Investment Review Committee.  The Board Investment Review Committee reviews and approves certain types of investments made by the Company. The Board Investment Review Committee is composed of five permanent members, who have been appointed to serve for the year, and three additional members, each of whom will serve during at least one quarter during the year on a rotating schedule. The Board Investment Review Committee met 29 times during 2008.

 

The Audit Committee.  The Audit Committee operates pursuant to a charter approved by the Board of Directors and meets the requirements of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, or the Exchange Act. The charter sets forth the responsibilities of the Audit Committee. The primary function of the Audit Committee is to serve as an independent and objective party to assist the Board of Directors in fulfilling its responsibilities for overseeing and monitoring the quality and integrity of the Company’s financial statements, the adequacy of the Company’s system of internal controls, the review of the independence, qualifications and performance of the Company’s independent registered public accounting firm, and the performance of the Company’s internal audit function. The Audit Committee met 14 times during 2008. None of the members of the Audit Committee is an “interested person” of the Company as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules promulgated by the NYSE. In addition, the Company’s Board of Directors has determined that Ms. Bates and Messrs. Browne and Garcia are “audit committee financial experts” as defined under Item 407(d)(5) of Regulation S-K of the Exchange Act as each meets the requirements of Rule 10A-3 of the Exchange Act.

 

The Compensation Committee.  The Compensation Committee approves the compensation of the Company’s executive officers, and reviews the amount of salary and bonus for each of the Company’s other officers and employees. In addition, the Compensation Committee approves stock option grants for the Company’s officers under the Company’s Amended Stock Option Plan, and determines other compensation arrangements for employees. None of the members of the Compensation Committee is an “interested person” of the Company as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules promulgated by the NYSE. The Compensation Committee met ten times during 2008. See “Executive Compensation — Compensation Discussion and Analysis — Establishing Compensation Levels” for additional information regarding the Compensation Committee.

 

The Corporate Governance/Nominating Committee.  The Corporate Governance/Nominating Committee recommends candidates for election as directors to the Board of Directors and makes recommendations to the Board as to the Company’s corporate governance policies. None of the members of the Corporate Governance/Nominating Committee is an “interested person” of the Company as defined in Section 2(a)(19) of the 1940 Act, pursuant to the requirements of the rules

promulgated by the NYSE. The Corporate Governance/Nominating Committee met six times during 2008.

 

The Corporate Governance/Nominating Committee will consider qualified director nominees recommended by stockholders when such recommendations are submitted to the care of the Corporate Secretary in accordance with the Company’s bylaws, Corporate Governance Policy, and any other applicable law, rule or regulation regarding director nominations. When submitting a nomination to the Company for consideration, a stockholder must provide certain information that would be required under applicable Commission rules, including the following minimum information for each director nominee: full name, age and address; principal occupation during the past five years; current directorships on publicly held companies and investment companies; number of shares of Company common stock owned, if any; and, a written consent of the individual to stand for election if nominated by the Board of Directors and to serve if elected by the stockholders.

 

In evaluating director nominees, the Corporate Governance/Nominating Committee considers the following factors:

 

 

The Corporate Governance/Nominating Committee’s goal is to assemble a Board of Directors that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience.

 

Other than the foregoing, there are no stated minimum criteria for director nominees, although the Corporate Governance/Nominating Committee may also consider such other factors as it may deem to be in the best interests of the Company and its stockholders. The Corporate Governance/Nominating Committee also believes it appropriate for certain key members of the Company’s management to participate as members of the Board.

 

The Corporate Governance/Nominating Committee identifies nominees by first evaluating the current members of the Board of Directors willing to continue in service. Current members of the Board with skills and experience that are relevant to the Company’s business and who are willing to continue in service are considered for

re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective. The Corporate Governance/Nominating Committee considers the age limit guideline included in the Company’s Corporate Governance Policy, which suggests that a director should not stand for re-nomination after age 72, but that the Board may, in its discretion, ask a director to stand for re-nomination if the Board believes that such director will continue to make significant contributions to the work of the Board.

 

Each of the Company’s Class II directors and nominees standing for election, including Messrs. Mathias and Scheurer, were recommended by the Corporate Governance/Nominating Committee and nominated by the Board of Directors. If any member of the Board does not wish to continue in service or if the Corporate Governance/Nominating Committee or the Board decides not to re-nominate a member for re-election, or if the Corporate Governance/Nominating Committee recommends to expand the size of the Board of Directors, the Corporate Governance/Nominating Committee identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Corporate Governance/Nominating Committee and the Board of Directors provide suggestions as to individuals meeting the criteria of the Corporate Governance/Nominating Committee. Consultants may also be engaged to assist in identifying qualified individuals.

 

Communication with the Board of Directors

 

Stockholders and other interested parties with questions about the Company are encouraged to contact Allied Capital’s Investor Relations department. However, if stockholders or other interested parties feel their questions have not been addressed, they may communicate with the Company’s Board of Directors, including the Presiding Director, by sending their communications to:

 

Allied Capital Corporation Board of Directors

c/o Corporate Secretary

1919 Pennsylvania Avenue, NW

Washington, DC 20006

 

All communications received by the Company’s Corporate Secretary in this manner will be delivered to one or more members of the Board of Directors as appropriate.

 

Code of Business Conduct

 

Each executive officer as well as every employee of the Company is subject to the Company’s Code of Business Conduct, which is available on the Company’s website at www.alliedcapital.com in the Investor Resources section and is also available in print to any stockholder or other interested party who requests a copy.

 

Corporate Governance Policy

 

The Company’s Corporate Governance Policy is available on the Company’s website at www.alliedcapital.com in the Investor Resources section and is available in print to any stockholder or other interested party who requests a copy.

Compensation Committee Interlocks and Insider Participation

 

All members of the Compensation Committee are independent directors and none of the members are present or past employees of the Company within the last ten years. No member of the Compensation Committee: (i) has had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K under the Exchange Act; or (ii) is an executive officer of another entity, at which one of our executive officers serves on the board of directors.

 

Information about Named Executive Officers and Executive Officers

 

The following information, as of March 20, 2009, pertains to the Company’s named executive officers and executive officers who are not directors of the Company.

 

Miriam G. Krieger

Age 32. Ms. Krieger, Chief Compliance Officer and Corporate Secretary, has been employed by the Company since March 2008. Prior to joining the Company, Ms. Krieger served as Senior Vice President and Chief Compliance Officer at MCG Capital Corporation from 2006 to 2008 and Vice President and Assistant General Counsel from 2004 to 2006. From 2001 to 2004, she was an associate in the Financial Services Group of the law firm of Sutherland Asbill & Brennan LLP.

 

Norma R. Kuntz

Age 32. Norma R. Kuntz, Chief Valuation Officer, has been employed by the Company since 2002 in the financial reporting and valuation functions, most recently as Senior Vice President.

 

Robert M. Monk

Age 42. Mr. Monk, Managing Director, has been employed by the Company since 1993. Prior to joining the Company, Mr. Monk worked in the leveraged finance group at First Union Securities (currently Wachovia Securities).

 

Penni F. Roll

Age 43. Ms. Roll, Chief Financial Officer, has been employed by the Company since 1995. Ms. Roll is responsible for the Company’s financial operations. Prior to joining the Company, Ms. Roll was employed by KPMG LLP in the firm’s audit practice.

 

Daniel L. Russell

Age 44. Mr. Russell, Managing Director, has been employed by the Company since 1998. Prior to joining the Company, Mr. Russell was employed by KPMG LLP in the firm’s financial services group.

 

John C. Wellons

Age 37. John C. Wellons, Chief Accounting Officer, has been employed by the Company since April 2008. Prior to joining the Company, Mr. Wellons was employed by MCG Capital Corporation, where he served as the Chief Accounting Officer from 2004 to April 2008, the Director of Financial Accounting from 2002 to 2004, and in other accounting roles from 2000 to 2002. Prior to this, Mr. Wellons was employed in the audit practice at Ernst & Young from 1996 to 2000.

 

Certain Relationships and Related Transactions

 

The Company has procedures in place for the review, approval and monitoring of transactions involving the Company and certain related persons of the Company.

As a BDC, the Company is prohibited by the 1940 Act from participating in transactions with any persons affiliated with the BDC, including, officers, directors, and employees of the BDC and any person controlling or under common control with the BDC (the Affiliates) absent a Commission exemptive order.

 

In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions. In order to ensure that the Company does not engage in any prohibited transactions with any persons affiliated with Company, the Company has implemented the following procedures:

 

 

No agreement shall be entered into unless and until a Screening Officer is satisfied that no affiliations prohibited by the 1940 Act exist or, if such affiliations exist, appropriate actions have been taken to seek Board review and approval or exemptive relief for such transaction. The Board of Directors reviews these procedures on an annual basis.

 

In addition, the Company’s Code of Business Conduct, which is annually reviewed and approved by the Board of Directors and acknowledged in writing by all employees, requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and the interests of the Company. Pursuant to the Code of Business Conduct, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to the Chief Compliance Officer. In the event that either of these officers is involved in the action or relationship giving rise to the conflict of interest, the individual is directed to disclose the conflict to another member of the Company’s senior management team. The Corporate Governance/ Nominating

Committee is charged with monitoring and making recommendations to the Board of Directors regarding policies and practices relating to corporate governance. Certain actions or relationships that might give rise to a conflict of interest are reviewed and approved by the Board of Directors.

 

The following table sets forth certain information, as of March 20, 2009, regarding indebtedness to the Company in excess of $120,000 of any person serving as a director or executive officer of the Company and of any nominee for election as a director at any time since January 1, 2008. All of such indebtedness results from loans made by the Company to enable the exercise of stock options. The loans are full recourse against the borrower and have varying terms not exceeding ten years. The interest rates charged generally reflect the applicable federal rate on the date of the loan.

 

As a BDC under the 1940 Act, the Company is entitled to provide and has provided loans to officers of the Company in connection with the exercise of stock options. However, as a result of provisions of the Sarbanes-Oxley Act of 2002, the Company has been prohibited from making new loans to its executive officers since July 30, 2002.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Pursuant to Section 16(a) of the Exchange Act, the Company’s directors and executive officers, and any persons holding 10% or more of its common stock, are required to report their beneficial ownership and any changes therein to the Commission and the Company. Specific due dates for those reports have been established, and the Company is required to report herein any failure to file such reports by those due dates. Based on the Company’s review of Forms 3, 4, and 5 filed by such persons, the Company believes that during and for 2008 all Section 16(a) filing requirements applicable to such persons were met in a timely manner with the exception of a Form 4 for Mr. Long, a Form 4 for Ms. Van Roijen, and a Form 5 for Ms. Bates, which were filed late due to administrative errors. In addition, in March 2009, a Form 4 was filed late for Ms. Bates due to administrative errors.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

Overview of the Compensation Program

 

Current Market Environment.  The United States and the global economies are in a state of severe economic recession, which has had a far-reaching impact on the financial services industry. The U.S. capital markets have been experiencing extreme volatility and a lack of liquidity. The Company experienced a significant reduction in its net worth during the second half of 2008, primarily resulting from net unrealized

depreciation on its portfolio, which reflects market conditions. As a result of current market conditions, the Company took steps during 2008 to reorganize its operations and reduce employee expense.

 

During the third quarter of 2008, the Company consolidated its investment execution activities to its Washington, DC headquarters and its office in New York in an effort to improve operating efficiencies. As the Company transitioned and consolidated its operations, it reduced headcount by approximately 30 employees in the third quarter of 2008. In January 2009, the Company reduced headcount by an additional 20 employees and further consolidated its operations. Although the Company incurred severance expense in connection with these terminations, the Company expects that future employee expense will be significantly reduced as a result of these headcount reductions.

 

In addition, during 2008, the Company substantially decreased its bonus pool from $40.1 million in 2007 to $1.0 million in 2008. The Company accrued $11.2 million in performance awards in 2008. In lieu of paying these amounts as a 2008 bonus, which the Company would typically pay in the first quarter of 2009, these amounts will be paid in installments ending on January 15, 2010. An employee must be employed on the payment dates in order to receive the installment payment.

 

The Company believes that the steps it has taken to reduce employee expense are appropriate in the current market environment. The Company also believes, however, that it is important to take steps to retain key officers, especially in times of economic uncertainty. As discussed more fully below, compensation for 2008 was determined with a focus on balancing reductions in employee expense with the importance of retaining employees that are critical to the success of the Company.

 

Compensation Philosophy.  Allied Capital’s compensation and benefits programs are designed with the goal of providing compensation that is fair, reasonable, competitive and appropriate for market conditions. The programs are intended to help the Company align the compensation paid to its executive officers with the achievement of certain corporate and executive performance objectives that have been established to achieve the long-term objectives of the Company. The Company also believes that its compensation programs should enable the Company to attract, motivate, and retain key officers who will contribute to the Company’s future success.

 

The design of the Company’s compensation programs is based on the following three guiding factors:

 

 

 

Components of Total Compensation.  The Compensation Committee determined that the compensation packages for 2008 for the NEOs, who are identified in the Summary Compensation Table, should generally consist of the following five key components:

 

 

Base Salary.  Base salary is designed to attract and retain experienced executives who can drive the achievement of the Company’s goals and objectives. While an executive’s initial base salary is determined by an assessment of competitive market levels, the factors used in determining changes to base salary include individual performance, changes in role and/or responsibility and changes in the competitive market environment.

 

The Company has entered into employment agreements with William L. Walton, the Company’s Chairman of the Board, Joan M. Sweeney, the Company’s Chief Operating Officer, and Penni F. Roll, the Company’s Chief Financial Officer, which

provides for the base salary of each of these executives. See “ — Employment Agreements” below for information regarding the material terms of these agreements.

 

Annual Cash Bonus.  The annual cash bonus is designed to reward those executives that have achieved certain corporate and individual performance objectives and have contributed to the achievement of certain long-term objectives of the Company. The amount of the annual cash bonus is determined by the Compensation Committee on a discretionary basis. During 2008, the Company substantially decreased its bonus pool from $40.1 million in 2007 to $1.0 million in 2008. The Company also accrued $11.2 million in performance awards in 2008. In lieu of paying these amounts as a 2008 bonus, which the Company would typically pay in the first quarter of 2009, these amounts will be paid in installments ending on January 15, 2010. An employee must be employed on the payment dates in order to receive the installment payment. The Company’s Chairman of the Board, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer received no bonus or performance award for 2008.

 

Stock Options.  The Company’s principal objective in awarding stock options to the officers and directors of the Company is to align each optionee’s interests with the success of the Company and the financial interests of its stockholders by linking a portion of such optionee’s compensation with the performance of the Company’s stock and the value delivered to stockholders. The Compensation Committee evaluates a number of criteria, including the past service of each such optionee to the Company, the present and potential contributions of such optionee to the performance of the Company, and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purposes of the Amended Stock Option Plan, including the recipient’s current stock holdings, years of service, position with the Company, and other factors. The Compensation Committee does not apply a formula assigning specific weights to any of these factors when making its determination. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance.

 

The Company believes that stock option awards are an important form of compensation, particularly in the current economic environment. Stock option awards provide the Company with a form of compensation that directly aligns employee interests with shareholder interests. In addition, stock option awards are granted as a form of long-term compensation designed to retain key personnel while also serving as a non-cash form of compensation to enable to Company to preserve cash. On March 3, 2009, options to purchase 10.6 million shares were granted to 38 officers with an exercise price of $0.73 per share. These options vest ratably on June 30, 2009, June 30, 2010 and June 30, 2011. Many of these options were granted in connection with the retention agreements entered into with several key employees of the Company as an incentive for those key employees to continue to contribute to the success of the Company.

 

IPA and IPB  The IPA and IPB are part of an incentive compensation program for certain officers and are generally determined annually at the beginning of each year but may be adjusted throughout the year. In 2008, IPAs were paid in cash in two equal installments during the year. The IPB was distributed in cash to award recipients throughout the year. An employee must be employed on the payment dates in order to receive IPA or IPB payments.

The Company currently has not established an IPA or IPB for 2009 as part of its efforts to reduce employee expense; however, depending upon the Company’s need to retain and motivate its employees, the Company may determine in conjunction with the Compensation Committee of the Board of Directors that some form of 2009 retention compensation or individual performance compensation may be in the best interests of the Company.

 

Employment Agreements and Severance Arrangements.  The Company entered into employment agreements in 2004 with Mr. Walton and Mmes. Sweeney and Roll. These agreements were reviewed in 2008 and amended to comply with regulatory changes in the Code and to address other tax related matters. In connection with the separation of the Chief Executive Officer and Chairman roles effective in March 2009, Mr. Walton entered into an amendment to his employment agreement with the Company. Under that amendment Mr. Walton agreed to serve as a full time Chairman of the Board of Directors with a reduced base salary of $1.1 million. In this capacity, Mr. Walton will be an executive officer of the Company responsible for the overall strategic direction of the Company. In addition, Mr. Walton waived any claims he may have had under his employment agreement to resign for “good reason” upon no longer serving as the Company’s Chief Executive Officer because the change to Mr. Walton’s position had been made at his request. Pursuant to each of these agreements, if the executive’s employment is terminated without cause during the term of the agreement, or within 24 months of a change of control, the executive shall be entitled to severance pay. See “Severance and Change of Control Arrangements Under Employment Agreements” for more detail.

 

The Company anticipates that it will enter into an employment agreement with John M. Scheurer in his role as Chief Executive Officer and President.

 

Retention Agreements.  On March 3, 2009, the Company entered into retention agreements with certain key officers who do not have employment agreements with the Company, including Mr. Russell and Mr. Monk. As discussed above, the Company believes that it is important to retain its key management team through this period of economic uncertainty. Pursuant to these agreements, in the event of a termination, other than for cause, or if the officer terminates his or her employment for good reason within 90 days prior to or 18 months following a change of control of the Company, the officer will receive a retention award to be paid in a lump sum six months following the officer’s separation from service. The officer would also receive one year of COBRA coverage following the separation from service.

 

401(k) Plan. The Company maintains a 401(k) Plan. All employees who are at least 21 years of age have the opportunity to contribute pre-tax or after-tax salary deferrals to the 401(k) Plan, up to $16,500 annually for the 2009 plan year, and to direct the investment of these contributions. Plan participants who are age 50 or older during the 2009 plan year are eligible to defer an additional $5,500 during 2009. The 401(k) Plan includes the Allied Capital Stock Fund, consisting of Allied Capital common stock and cash, among other investment options. Beginning in December 2008, the Allied Capital Stock Fund is no longer available for future contributions; however, participants may maintain any existing investment in the fund. On March 20, 2009, the 401(k) Plan held less than 1% of the outstanding shares of the Company.

The Company’s 401(k) Plan provides that the Company will match 100% of the first 4% of deferral contributions made by each participant up to the maximum eligible compensation limit, which is $245,000 for 2009.

 

Insurance.  The Company makes available to all employees health insurance, dental insurance, and group life and disability insurance. Prior to the Sarbanes-Oxley Act of 2002, the Company provided split dollar life insurance arrangements for certain senior officers. The Company has subsequently terminated its obligations to pay future premiums with respect to existing split-dollar life insurance arrangements.

 

Perquisites.  The Company provides only limited perquisites such as Company-paid parking to certain officers, including its NEOs. The Company has utilized corporate aircraft for business use in an effort to improve the efficiency of required business travel. Imputed income determined in accordance with the Internal Revenue Service requirements is reflected in an NEO’s aggregate compensation for income tax purposes for any business trip on which a non-employee family member or guest accompanies the NEO. In connection with its efforts to reduce expenses, the Company significantly reduced the use of its corporate aircraft in 2008, and has undertaken a process to sell its corporate aircraft. For compensation disclosure purposes, the value of such travel by non-employee family members or guests is calculated by allocating costs incurred. With respect to travel by non-employee family members or guests, this is computed by allocating direct and indirect expenses, other than depreciation, on a per hour basis. Direct and indirect expenses generally include crew compensation and expenses, fuel, oil, catering expenses, hangar, rent, insurance, landing and similar fees, and maintenance costs.

 

Establishing Compensation Levels

 

Role of the Compensation Committee.  The Compensation Committee is comprised entirely of independent directors who are also non-employee directors as defined in Rule 16b-3 under the Exchange Act and independent directors as defined by NYSE rules.

 

The Compensation Committee operates pursuant to a charter that sets forth the mission of the Compensation Committee and its specific goals and responsibilities. The Compensation Committee’s mission is to evaluate and make recommendations to the Board regarding the compensation of the Chief Executive Officer and other executive officers of the Company, and their performance relative to their compensation, and to assure that they are compensated effectively in a manner consistent with the compensation philosophy discussed earlier, internal equity considerations, competitive practice, and the requirements of applicable law and the appropriate regulatory bodies. In addition, the Compensation Committee evaluates and makes recommendations to the Board regarding the compensation of the directors, including their compensation for service on Board committees.

 

The Compensation Committee’s charter reflects these goals and responsibilities, and the Compensation Committee annually reviews and revises its charter as necessary. To assist in carrying out its responsibilities, the Compensation Committee periodically receives reports and recommendations from management and from a third-party compensation consultant that it selects and retains. The Compensation Committee may also, from time to time, consult with legal, accounting or other advisors all in accordance with the authority granted to the Compensation Committee in its charter.

Role of Management.  The key members of management involved in the compensation process are the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer and the Director of Human Resources. Management proposes certain corporate and individual performance objectives for executive management that could be established to achieve long-term objectives of the Company and used to determine total compensation, and these proposals are presented to the Compensation Committee for review and approval. Management also participates in the discussion of peer companies to be used to benchmark NEO compensation, and recommends the overall funding level for the Company’s compensation programs. Management’s recommendations are presented to the Compensation Committee for review and approval.

 

Role of the Compensation Consultant.  The Compensation Committee annually retains a third-party compensation consultant to assess the competitiveness of the current and proposed compensation levels of the Company’s NEOs in light of competitive market practices. The Compensation Committee has engaged Ernst & Young LLP’s Performance and Reward Practice or its predecessor (the Compensation Consultant) for this purpose for more than five years.

 

The Compensation Consultant attends Compensation Committee meetings, meets with the Compensation Committee without management present and provides third-party data, advice and expertise on current and proposed executive and director compensation. At the direction of the Compensation Committee, the Compensation Consultant prepares an analysis of compensation matters including positioning of programs in the competitive market, including peer group review, and the design of plans consistent with the Compensation Committee’s compensation philosophy.

 

Ernst & Young, LLP provides consulting and other services to the Company, however, the Compensation Committee believes this does not compromise the Compensation Consultant’s ability to provide an independent perspective on executive compensation. During 2008, the Compensation Consultant was paid $133,376 for its services to the Compensation Committee.

 

Assessment of Market Data, Peer Comparisons and Benchmarking of Compensation. The Compensation Consultant assists the Compensation Committee with the assessment of the compensation practices of comparable companies. Given the Company’s structure as a publicly traded, internally managed BDC coupled with the fact that most of the Company’s direct competitors are privately held private equity partnerships, specific compensation information with respect to the Company’s direct competitors typically is not publicly available. There are a limited number of published survey sources that have a primary focus on the private equity industry and that provide annualized information on long-term incentive plans in the industry, which typically take the form of carried interest.

 

As a part of the annual assessment of compensation, the Compensation Committee and the Compensation Consultant analyze NEO compensation information relative to a peer group of publicly traded companies, as determined by the Compensation Committee, including internally managed BDCs, deemed similar to the Company in terms of industry segment, company size and competitive industry and geographic market for executive talent.

 

The Company’s peer group is substantially the same peer group used for its 2006 and 2007 analyses. For its 2008 analysis, the Company removed T. Rowe Price from its peer group due to its size relative to the Company and added Affiliated Managers

Group, Inc. based on its similar industry, employee population, market capitalization and asset size. For 2008, the peer group is composed of the following nine publicly traded companies in the financial services industry:

 

 

The Compensation Committee generally benchmarks the Company’s compensation for the CEO, CFO and COO to the median (50th percentile) through the 75th percentile of competitive market data. However, the Compensation Committee is unable to benchmark the compensation data of individuals from the externally managed companies because no individual compensation data is available.

 

In prior years, the Compensation Committee and the Compensation Consultant have also analyzed NEO compensation information relative to published survey data on similarly sized private equity firms and an estimation of aggregate compensation levels paid by externally managed publicly traded BDCs and similar pass-through structures, such as real estate investment trusts.

 

For 2008, the Compensation Committee and the Compensation Consultant did not review these additional sources given the changing dynamics of pay practices in these types of organizations. In addition, because survey data is only available with a one-year lag, there was a concern that the market data reflected in the survey sources would overstate current compensation levels, given the current economic conditions.

 

While comparisons to compensation levels at the Company’s peer group is helpful in assessing the overall competitiveness of its executive compensation program, the Company believes that its executive compensation program also must be internally consistent and equitable in order for the Company to achieve its investment objectives and to continue to attract and retain outstanding employees.

 

The Compensation Committee considers many factors, including each individual’s contribution to the Company that year to assess internal pay equity. As a result, the composition of the Company’s NEOs, excluding the Chief Executive Officer and the Chief Financial Officer, may change from year to year.

 

Review of Tally Sheets.  The Compensation Committee annually reviews tally sheets that illustrate all components of the compensation provided to the Company’s NEOs who have employment agreements with the Company, including base salary, performance awards, annual cash bonus, IPAs and IPBs, stock option awards, perquisites and benefits. Furthermore, the Compensation Committee annually reviews tally sheets prepared by the Compensation Consultant that illustrate the aggregate amounts that may be paid as the result of certain events of termination under employment agreements including a change of control for Mr. Walton and Mmes. Sweeney and Roll. The purpose of these tally sheets is to bring together, in one place, all of the elements of actual and potential future compensation for its executives who have employment agreements so that the Compensation Committee may analyze both the individual elements of compensation as well as the aggregate total amount of actual and projected compensation. The Compensation Committee also provides a full report of all compensation program components to the Board of Directors, including the review and discussion of the tally sheets.

Assessment of Corporate and Individual Performance.  The Compensation Committee considered certain corporate and individual performance measures that have been established to achieve the Company’s objectives, including long-term total return to stockholders. The corporate and individual performance measures for 2008 included, among others, the following:

 

 

During 2008, the Company achieved numerous strategic investment and operational goals and objectives, including, among other things:

 

 

Compensation Determination

 

In determining the individual compensation for the Company’s NEOs, the Compensation Committee considers the total compensation to be awarded to each NEO and may exercise discretion in determining the portion allocated to the various components of total compensation. There is no pre-determined weighting of any specific components. The Company believes that the focus on total compensation provides the ability to align pay decisions with short- and long-term needs of the business. This approach also allows for the flexibility needed to recognize differences in performance by providing differentiated pay.

Individual compensation levels for NEOs are determined based on individual performance and the achievement of certain corporate and executive performance objectives that have been established to achieve long-term objectives of the Company. Increases to base salary may be awarded to recognize an executive for assuming additional responsibilities and his/her related performance, to address changes in the external competitive market for a given position, or to achieve an appropriate competitive level due to a promotion to a more senior position.

 

In determining the amount of an executive’s variable compensation — an annual cash bonus, performance award, IPA, IPB and stock option award — the Compensation Committee considers the overall funding available for such awards, the executive’s performance, and the desired mix between the various components of total compensation. The Company does not use a formula-based approach in determining individual awards or weighting between the components. Rather, discretion is exercised in determining the overall total compensation to be awarded to the executive. As a result, the amounts delivered in the form of an annual cash bonus, performance award, IPA, IPB and stock option award are designed to work together in conjunction with base salary to deliver an appropriate total compensation level to the NEO.

 

The Company believes that the discretionary design of its variable compensation program supports its overall compensation objectives by allowing for significant differentiation of pay based on individual performance and by providing the flexibility necessary to ensure that pay packages for its NEOs are competitive relative to its market.

 

Determination of 2008 Compensation for the CEO and other NEOs. The compensation of the Chief Executive Officer and other NEOs is determined based on the achievement of certain corporate and individual performance objectives discussed above. The Compensation Committee acknowledged the fact that, while management had achieved numerous strategic investment and operational goals and objectives for the year, market conditions had resulted in a significant reduction in the Company’s net worth and stock price during the latter half of 2008, which adversely affected total return to stockholders for the year. As discussed above, in lieu of paying 2008 bonuses to the Company’s officers, which the Company would typically pay in the first quarter of 2009, the Company will pay a performance award to certain officers in installments ending on January 15, 2010. In addition, the Company currently has not established an IPA or IPB for 2009; IPA and IPB amounts for 2008 were approved in January 2008 and paid throughout 2008.

 

Mr. Walton was paid an annual base salary of $1,703,300 in 2008 compared to $1,500,000 paid in 2007. In connection with the separation of the roles of Chairman of the Board and Chief Executive Officer, Mr. Walton entered into an amendment to his employment agreement which, among other things, provides that Mr. Walton’s base salary will be reduced to $1.1 million, effective March 3, 2009. Mr. Walton did not receive a bonus or a performance award for 2008, compared to an annual bonus for 2007 of $2,150,000, a 22% reduction from the annual bonus that was paid for 2006. Mr. Walton also received a 2008 IPA of $1,475,000 and a 2008 IPB of $1,475,000, which were the same amounts as the prior year. Mr. Walton received a grant of 575,000 stock options in 2008, compared to 186,000 in 2007 and none in 2006.

 

Ms. Sweeney was paid an annual base salary of $1,115,800 for 2008 compared to $1,000,000 for 2007 and 2006. Ms. Sweeney did not receive an annual bonus or a

performance award for 2008, compared to a bonus of $1,300,000 for 2007 and $1,500,000 for 2006. Ms. Sweeney received a 2008 IPA of $850,000 and a 2008 IPB of $850,000. Ms. Sweeney did not receive a grant of stock options in 2008 or 2006; she received a grant of 139,500 stock options in 2007.

 

For 2008, Ms. Roll was paid an annual base salary of $584,500, compared to $525,000 for both 2007 and 2006. Ms. Roll did not receive an annual bonus or a performance award for 2008 compared to $850,000 paid in both 2007 and 2006. Ms. Roll received a 2008 IPA of $350,000 and a 2008 IPB of $350,000. Ms. Roll received a grant of 250,000 stock options in 2008 compared to a grant of 139,500 stock options in 2007 and none in 2006.

 

Mr. Monk was paid an annual base salary of $598,300 for 2008. Mr. Monk received a performance award for 2008 in the amount of $1,000,000 which will be paid in installments ending on January 15, 2010, in recognition of his individual performance. He received a 2008 IPA of $250,000 and a 2008 IPB of $250,000. Mr. Monk received a grant of 250,000 stock options in 2008.

 

For 2008, Mr. Russell was paid an annual base salary of $633,300. Mr. Russell did not receive an annual bonus or a performance award for 2008 compared to $1,700,000 paid in 2007. Mr. Russell received a 2008 IPA of $475,000 and a 2008 IPB of $475,000. Mr. Russell received a grant of 250,000 stock options in 2008 compared to a grant of 186,000 stock options in 2007.

 

Mr. Grisius was paid an annual base salary of $653,800 for 2008. Mr. Grisius did not receive an annual bonus for 2008; he received a 2008 IPA of $400,000 and a 2008 IPB of $400,000. Mr. Grisius received a grant of 250,000 stock options in 2008. Effective December 19, 2008, Mr. Grisius was no longer employed by the Company. In connection with his departure from the Company, Mr. Grisius received severance of $700,000, payable in 10 installments beginning December 19, 2008.

 

Stock Option Practices

 

The Company’s principal objective in awarding stock options to the officers and directors of the Company is to align each optionee’s interests with the success of the Company and the financial interests of its stockholders by linking a portion of such optionee’s compensation with the performance of the Company’s stock and the value delivered to stockholders. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance. Stock options are priced at the closing price of the stock on the date the option is granted. See “Amended Stock Option Plan.”

 

Restricted Stock

 

In October 2007, the Company filed an exemptive application with the Commission to permit the issuance of restricted stock to the Company’s employees and non-officer directors. If the Company were to receive an order from the Commission to permit such issuance, the Company would be required to seek the approval of stockholders before it may issue restricted stock. Assuming the Corporation obtained stockholder approval, the Board of Directors would consider the issuance of restricted stock together with the issuance of stock options as another form of equity compensation.

Target Ownership Program

 

During 2006, the Board of Directors established a target ownership program to encourage share ownership by the Company’s senior officers, so that the interests of the officers and stockholders are aligned. Target ownership amounts represent the lesser of a multiple of base salary or a specified number of shares. Generally, officers have five years to achieve their target ownership level, which is determined on an individual basis by the Compensation Committee and adjusted annually to reflect increases in base salary, if any. The Compensation Committee considers these target ownership levels and each individual’s progress toward achieving his or her target ownership in connection with its annual compensation review. See “Target Ownership” for additional information related to the target ownership program.

 

Impact of Regulatory Requirements — Tax Deductibility of Pay

 

Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that the Company may deduct in any one year, which applies with respect to certain of its most highly paid executive officers for 2008. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Compensation Committee has not adopted a performance-based compensation policy. The total compensation for each of Messrs. Walton, Russell, Monk and Ms. Sweeney is above the $1,000,000 threshold for 2008; accordingly, for 2008, a portion of their total compensation, including salaries, bonuses, IPBs, and other compensation is not deductible by the Company.

 

Compensation Committee Report

 

The Compensation Committee, composed entirely of independent directors, reviewed and discussed the above Compensation Discussion and Analysis with the Company’s management. Based on the Compensation Committee’s deliberations and discussions with management, the Compensation Committee recommends that the Board of Directors include the Compensation Discussion and Analysis in the Company’s Proxy Statement.

 

Compensation Committee

Anthony T. Garcia, Chairman

Brooks H. Browne, Member

John D. Firestone, Member

Lawrence I. Hebert, Member

John I. Leahy, Member

Edward J. Mathias, Member

Marc F. Racicot, Member

 

The information contained in the report above shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent specifically incorporated by reference therein.

 

Summary Compensation Table

 

The following table sets forth compensation that the Company paid during the years ended December 31, 2008, 2007 and 2006, to its principal executive officer, principal financial officer and each of the four highest paid executive officers of the Company (collectively, the Named Executive Officers or NEOs) in each capacity in which each NEO served. Certain of the NEOs served as both officers and directors.

 

 

 

 

 

 

 

 

						Company				Employer				SFAS 123R
						Contribution				Contribution				Expense
						to 401(k)				to 2005				Related
		Year				Plan				DCP I(A)				to the OCP(B)				Other(C)
Mr. Walton			2008			$	9,200				—				—			$	19,303
			2007			$	11,250				—			$	3,612,697			$	34,455
			2006			$	11,000			$	201,500				n/a			$	38,263
Ms. Sweeney			2008				—				—				—			$	6,731
			2007			$	11,250				—			$	1,966,137			$	8,772
			2006			$	11,000			$	114,000				n/a			$	9,418
Ms. Roll			2008			$	9,200				—				—			$	4,864
			2007			$	11,250				—			$	493,223			$	4,616
			2006			$	11,000			$	55,154				n/a			$	4,417
Mr. Russell			2008			$	9,200				—				—			$	3,328
			2007			$	11,250				—			$	356,667			$	4,111
Mr. Monk			2008			$	9,200				—				—			$	26,834
			2007			$	11,250				—			$	1,287,492			$	9,615
Mr. Grisius			2008			$	9,200				—				—			$	739,647
			2006			$	11,000			$	66,770				—			$	4,175

 

 

 

 

Employment Agreements

 

The Company entered into employment agreements in 2004 with William L. Walton, the Company’s Chairman and CEO, Joan M. Sweeney, the Company’s Chief Operating Officer, and Penni F. Roll, the Company’s Chief Financial Officer. These agreements were amended in 2007 and in 2008 to comply with Section 409A of the Code and to address other tax-related matters. In connection with the separation of

the Chief Executive Officer and Chairman roles effective in March 2009, Mr. Walton entered into an amendment to his employment agreement with the Company. Under that amendment Mr. Walton agreed to serve as a full time Chairman of the Board Directors with a reduced base salary of $1.1 million. In this capacity, Mr. Walton will be an executive officer of the Company responsible for the overall strategic direction of the Company. In addition, Mr. Walton waived any claims he may have had under his employment agreement to resign for “good reason” upon no longer serving as the Company’s Chief Executive Officer because the change to Mr. Walton’s position had been made at his request.

 

Each of the agreements provides for a three-year term that extends one day at the end of every day during its length, unless either party provides written notice of termination of such extension. In that case, the agreement would terminate three years from such notification.

 

Each agreement specifies each executive’s base salary compensation during the term of the agreement. The Compensation Committee has the right to increase but not decrease the base salary during the term of the employment agreement. In addition, each employment agreement states that the Compensation Committee may provide, at their sole discretion, an annual cash bonus. This bonus is to be determined with reference to each executive’s performance in accordance with performance criteria to be determined by the Compensation Committee in its sole discretion. Under each agreement, each executive is also eligible to participate in the Company’s Amended Stock Option Plan, and to receive all other awards and benefits previously granted to each executive, including the payment of life insurance premiums.

 

The executive has the right to voluntarily terminate employment at any time with 30 days’ notice, and in such case, the employee will not receive any severance pay. Among other things, the employment agreements prohibit the solicitation of employees from the Company in the event of an executive’s departure for a period of two years. See “Severance and Change of Control Arrangements Under Employment Agreements” for a discussion of the severance and change of control arrangements set forth in each of these agreements.

 

The Company anticipates that it will enter into an employment agreement with John M. Scheurer in his role as Chief Executive Officer and President.

 

Grants of Plan-Based Awards

 

 

Amended Stock Option Plan

 

The Company’s Amended Stock Option Plan, or Option Plan, is intended to encourage stock ownership in the Company by officers and directors, thus giving them a proprietary interest in the Company’s performance, to reward outstanding performance, and to provide a means to attract and retain persons of outstanding ability to the service of the Company. The Option Plan was last approved by stockholders in May 2007.

 

As discussed in the Compensation Discussion and Analysis, the Company’s Compensation Committee believes that stock-based incentive compensation is a key element of officer and director compensation. The Compensation Committee’s principal objective in awarding stock options to the eligible officers of the Company is to align each optionee’s interests with the success of the Company and the financial interests of its stockholders by linking a portion of such optionee’s compensation with the performance of the Company’s stock and the value delivered to stockholders.

 

Stock options are granted under the Option Plan at a price not less than the prevailing market value at the grant date and will have realizable value only if the Company’s stock price increases. The Compensation Committee determines the amount and features of the stock options, if any, to be awarded to optionees. The Compensation Committee evaluates a number of criteria, including the past service of each such optionee to the Company, the present and potential contributions of such optionee to the success of the Company, and such other factors as the Compensation Committee shall deem relevant in connection with accomplishing the purposes of the Option Plan, including the recipient’s current stock holdings, years of service, position with the Company, and other factors. The Compensation Committee does not apply a formula assigning specific weights to any of these factors when making its determination. The Compensation Committee awards stock options on a subjective basis and such awards depend in each case on the performance of the officer under consideration, and in the case of new hires, their potential performance. Pursuant to the 1940 Act, options may not be repriced for any participant.

 

All rights to exercise options terminate 60 days after an optionee ceases to be (i) a non-officer director, (ii) both an officer and a director, if such optionee serves in both capacities, or (iii) an officer (if such officer is not also a director) of the Company for any reason other than death or total and permanent disability. If an optionee’s employment is terminated for any reason other than death or total and permanent disability before expiration of his option and before he has fully exercised it, the optionee has the right to exercise the option during the balance of a 60-day period from the date of termination. If an optionee dies or becomes totally and permanently disabled before expiration of the option without fully exercising it, he or she or the executors or administrators or legatees or distributees of the estate shall, as may be provided at the time of the grant, have the right, within one year after the optionee’s death or total and permanent disability, to exercise the option in whole or in part before the expiration of its term.

 

All outstanding options will become fully vested and exercisable upon a Change of Control. For purposes of the Option Plan, a “Change of Control” means (i) the sale or other disposition of all or substantially all of the Company’s assets; or (ii) the acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the Exchange Act), or of record, as a result of a merger, consolidation or

otherwise, of securities of the Company representing fifteen percent (15%) or more of the aggregate voting power of the Company’s then outstanding common stock by any person (within the meaning of Section 13(d) and 14(d) of the Exchange Act), including, but not limited to, any corporation or group of persons acting in concert, other than (A) the Company or its subsidiaries and/or (B) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974) of the Company or its subsidiaries, including a trust established pursuant to any such plan; or (iii) the individuals who were members of the Board of Directors as of the Effective Date (the “Incumbent Board”) cease to constitute at least two-thirds (2/3) of the Board of Directors; provided, however, that any director appointed by at least two-thirds (2/3) of the then Incumbent Board or nominated by at least two-thirds (2/3) of the Corporate Governance/ Nominating Committee of the Board of Directors (a majority of the members of the Corporate Governance/ Nominating Committee are members of the then Incumbent Board or appointees thereof), other than any director appointed or nominated in connection with, or as a result of, a threatened or actual proxy or control contest, shall be deemed to constitute a member of the Incumbent Board.

 

The Option Plan is designed to satisfy the conditions of Section 422 of the Code so that options granted under the Option Plan may qualify as “incentive stock options.” To qualify as “incentive stock options,” options may not become exercisable for the first time in any year if the number of incentive options first exercisable in that year multiplied by the exercise price exceeds $100,000.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth the stock option awards outstanding at December 31, 2008: