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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2001
COMMISSION FILE NUMBER:
0-22832
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
(State or Jurisdiction of
Incorporation or Organization)
52-1081052
(IRS Employer
Identification No.)
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, DC 20006
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
On May 15, 2001 there were 91,391,506 shares outstanding of the
Registrant's common stock, $0.0001 par value.
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ALLIED CAPITAL CORPORATION
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2001
(unaudited) and December 31, 2000.................. 1
Consolidated Statement of Operations -- For the
Three Months Ended March 31, 2001 and 2000
(unaudited)........................................ 2
Consolidated Statement of Changes in Net
Assets -- For the Three Months Ended March 31, 2001
and 2000 (unaudited)............................... 3
Consolidated Statement of Cash Flows -- For the
Three Months Ended March 31, 2001 and 2000
(unaudited)........................................ 4
Consolidated Statement of Investments as of March
31, 2001 (unaudited) and December 31, 2000......... 5
Notes to Consolidated Financial Statements........ 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 31
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................. 49
Item 2. Changes in Securities and Use of Proceeds...... 49
Item 3. Defaults Upon Senior Securities................ 49
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 49
Item 5. Other Information.............................. 49
Item 6. Exhibits and Reports on Form 8-K............... 49
Signatures............................................. 52
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) (UNAUDITED)
ASSETS
Portfolio at value:
Private finance (cost: 2001-$1,272,863;
2000-$1,262,529) $1,303,288 $1,282,467
Commercial real estate finance (cost: 2001-$579,882;
2000-$503,366)....................................... 583,465 505,534
---------- ----------
Total portfolio at value.......................... 1,886,753 1,788,001
---------- ----------
Cash and cash equivalents................................... 9,392 2,449
Other assets................................................ 77,353 63,367
---------- ----------
Total assets...................................... $1,973,498 $1,853,817
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and debentures.......................... $ 715,276 $ 704,648
Revolving credit facilities........................... 168,500 82,000
Accounts payable and other liabilities................ 28,477 30,477
---------- ----------
Total liabilities................................. 912,253 817,125
---------- ----------
Commitments and Contingencies
Preferred stock............................................. 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 200,000,000 shares
authorized; 85,956,072 and 85,291,696 shares issued
and outstanding at March 31, 2001 and December 31,
2000, respectively................................... 9 9
Additional paid-in capital............................ 1,058,293 1,043,653
Notes receivable from sale of common stock............ (25,062) (25,083)
Net unrealized appreciation on portfolio.............. 30,525 19,378
Distributions in excess of earnings................... (9,520) (8,265)
---------- ----------
Total shareholders' equity........................ 1,054,245 1,029,692
---------- ----------
Total liabilities and shareholders' equity........ $1,973,498 $1,853,817
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
6
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
(UNAUDITED)
Interest and related portfolio income:
Interest and dividends................................ $54,875 $38,812
Premiums from loan dispositions....................... 821 3,289
Investment advisory fees and other income............. 9,375 1,796
------- -------
Total interest and related portfolio income....... 65,071 43,897
------- -------
Expenses:
Interest.............................................. 15,930 12,311
Employee.............................................. 6,418 4,569
Administrative........................................ 2,967 2,753
------- -------
Total operating expenses.......................... 25,315 19,633
------- -------
Formula and cut-off awards............................ 28 1,691
------- -------
Net operating income before net realized and unrealized
gains..................................................... 39,728 22,573
------- -------
Net realized and unrealized gains:
Net realized gains.................................... 1,154 2,176
Net unrealized gains.................................. 11,146 4,832
------- -------
Total net realized and unrealized gains........... 12,300 7,008
------- -------
Net increase in net assets resulting from operations........ $52,028 $29,581
======= =======
Basic earnings per common share............................. $ 0.61 $ 0.45
======= =======
Diluted earnings per common share........................... $ 0.60 $ 0.45
======= =======
Weighted average common shares
outstanding -- basic...................................... 85,504 66,289
======= =======
Weighted average common shares
outstanding -- diluted.................................... 87,059 66,308
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
7
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------- --------
(UNAUDITED)
Operations:
Net operating income before realized and unrealized
gains................................................. $ 39,728 $ 22,573
Net realized gains..................................... 1,154 2,176
Net unrealized gains................................... 11,146 4,832
---------- --------
Net increase in net assets resulting from
operations...................................... 52,028 29,581
---------- --------
Shareholder distributions:
Common stock dividends................................. (42,081) (30,716)
Preferred stock dividends.............................. (55) (55)
---------- --------
Net decrease in net assets resulting from
shareholder distributions....................... (42,136) (30,771)
---------- --------
Capital share transactions:
Sale of common stock................................... 9,950 42,246
Issuance of common stock upon the exercise of stock
options............................................... 2,904 1,101
Issuance of common stock in lieu of cash
distributions......................................... 1,785 1,237
Net decrease (increase) in notes receivable from sale
of common stock....................................... 22 (842)
Net decrease in common stock held in deferred
compensation trust.................................... -- 1,845
Other.................................................. -- (370)
---------- --------
Net increase in net assets resulting from capital
share transactions.............................. 14,661 45,217
---------- --------
Total increase in net assets...................... $ 24,553 $ 44,027
========== ========
Net assets at beginning of period........................... $1,029,692 $667,513
---------- --------
Net assets at end of period................................. $1,054,245 $711,540
---------- --------
Net asset value per common share............................ $ 12.26 $ 10.44
---------- --------
Common shares outstanding at end of period.................. 85,956 68,163
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
8
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2001 2000
(IN THOUSANDS) --------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $ 52,028 $ 29,581
Adjustments
Net unrealized gains................................... (11,146) (4,832)
Depreciation and amortization.......................... 257 202
Amortization of loan discounts and fees................ (2,668) (3,120)
Changes in other assets and liabilities................ (4,076) (3,661)
--------- ---------
Net cash provided by operating
activities........................................ 34,395 18,170
--------- ---------
Cash flows from investing activities:
Portfolio investments..................................... (160,080) (218,308)
Repayments of investment principal........................ 31,027 53,431
Proceeds from loan sales.................................. 35,187 39,628
Other investing activities................................ (3,239) (1,891)
--------- ---------
Net cash used in investing activities................ (97,105) (127,140)
--------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 9,950 42,246
Collections of notes receivable from sale of common
stock.................................................. 1,501 229
Common dividends and distributions paid................... (40,296) (29,479)
Preferred stock dividends paid............................ (55) (55)
Net borrowings under notes payable and debentures......... 10,628 12,000
Net borrowings under revolving lines of credit............ 86,500 78,500
Other financing activities................................ 1,425 180
--------- ---------
Net cash provided by financing activities............ 69,653 103,621
--------- ---------
Net increase (decrease) in cash and cash equivalents........ $ 6,943 $ (5,349)
--------- ---------
Cash and cash equivalents at beginning of period............ $ 2,449 $ 18,155
--------- ---------
Cash and cash equivalents at end of period.................. $ 9,392 $ 12,806
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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9
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Ability One Corporation Loans $ 10,142 $ 10,142
---------------------------------------------------------------------------------------------------------------
ACE Products, Inc. Loans 14,507 14,507
---------------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,986 6,986
Limited Partnership Interest 1,456 --
---------------------------------------------------------------------------------------------------------------
Allied Office Products, Inc. Debt Securities 9,377 9,377
Warrants 629 629
---------------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 --
---------------------------------------------------------------------------------------------------------------
American Home Care Supply, Debt Securities 6,865 6,865
LLC Warrants 579 579
---------------------------------------------------------------------------------------------------------------
Aspen Pet Products, Inc. Loans 13,919 13,919
Series A Preferred Stock (1,860 shares) 1,860 1,860
Series A Common Stock (1,400 shares) 140 140
---------------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
---------------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 14,997 14,997
Equity Interest 1,500 3,347
---------------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,112 12,112
Warrants 1,180 1,180
---------------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 16,168 16,168
---------------------------------------------------------------------------------------------------------------
Border Foods, Inc. Debt Securities 9,269 9,269
Series A Convertible Preferred Stock
(50,919 shares) 2,000 2,000
Warrants 665 665
---------------------------------------------------------------------------------------------------------------
Business Loan Express, Inc. Debt Securities 66,008 66,008
Preferred Stock (25,111 shares) 25,111 25,111
Common Stock (25,503,043 shares) 104,504 120,004
Guaranty ($37.7 million -- See Note 3) -- --
---------------------------------------------------------------------------------------------------------------
Camden Partners Strategic Fund II, L.P. Limited Partnership Interest 613 613
---------------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,607 2,607
Warrants 220 220
---------------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
---------------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 267 267
Warrants 12 662
---------------------------------------------------------------------------------------------------------------
Colibri Holding Corporation Loans 3,445 3,445
Common Stock (3,362 shares) 1,250 1,250
Warrants 290 290
---------------------------------------------------------------------------------------------------------------
Component Hardware Group, Inc. Debt Securities 10,419 10,419
Class A Preferred Stock (18,000 shares) 1,800 1,800
Common Stock (2,000 shares) 200 200
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
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10
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Convenience Corporation of Debt Securities $ 8,355 $ 2,738
America Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,724 3,724
Warrants -- --
---------------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,958 6,958
Debt Securities 4,957 4,957
Warrants -- 500
Options -- --
---------------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Loan 120 120
Resources, LLC Debt Securities 5,856 5,856
Options 87 87
---------------------------------------------------------------------------------------------------------------
Coverall North America, Inc. Loan 9,694 9,694
Debt Securities 4,966 4,966
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
---------------------------------------------------------------------------------------------------------------
CTT Holdings Loan 1,262 1,262
---------------------------------------------------------------------------------------------------------------
CyberRep Loan 1,007 1,007
Debt Securities 11,018 11,018
Warrants 660 1,310
---------------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 107 27
---------------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
---------------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,918 8,762
Company, Inc. Debt Securities 1,500 1,500
Warrants -- --
---------------------------------------------------------------------------------------------------------------
eCentury Capital Partners, L.P. Limited Partnership Interest 1,875 1,875
---------------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
---------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
---------------------------------------------------------------------------------------------------------------
Elexis Beta GmbH Options 424 424
---------------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
---------------------------------------------------------------------------------------------------------------
Esquire Communications Ltd.(1) Warrants 6 --
---------------------------------------------------------------------------------------------------------------
E-Talk Corporation Debt Securities 8,840 5,497
Warrants 1,157 --
---------------------------------------------------------------------------------------------------------------
ExTerra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 594 344
Common Stock (2,500 shares) -- --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,893 15,893
Warrants 360 360
---------------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,825 5,825
Company Warrants 280 3,628
---------------------------------------------------------------------------------------------------------------
FTI Consulting, Inc.(1) Warrants 970 3,654
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
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11
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Galaxy American Loan $ 33,943 $ 33,943
Communications, LLC Debt Securities 4,250 5,000
Options -- --
---------------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
---------------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc.(1) Loan 1,067 534
---------------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 16,623 16,623
Warrants 525 1,525
---------------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 504
---------------------------------------------------------------------------------------------------------------
Global Communications, LLC Debt Securities 13,429 13,429
Equity Interest 10,467 10,467
Options 1,639 1,639
---------------------------------------------------------------------------------------------------------------
Global Vacation Group, Inc.(1) Debt Securities 5,861 5,861
---------------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Warrants 87 5,976
---------------------------------------------------------------------------------------------------------------
Grant Television, Inc. Equity Interest 660 660
---------------------------------------------------------------------------------------------------------------
Grotech Partners, VI, L.P. Limited Partnership Interest 1,179 1,179
---------------------------------------------------------------------------------------------------------------
The Hartz Mountain Corporation Debt Securities 27,237 27,237
Common Stock (200,000 shares) 2,000 2,000
Warrants 2,613 2,613
---------------------------------------------------------------------------------------------------------------
HealthASPex, Inc. Series A Convertible Preferred Stock
(622,020 shares) 3,008 3,008
Series A Preferred Stock
(414,680 shares) 760 760
Common Stock (1,036,700 shares) -- --
Warrants 300 300
---------------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,958 9,958
Common Stock (300,000 shares) 3,000 3,000
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (315,100 shares) 315 315
---------------------------------------------------------------------------------------------------------------
Icon International, Inc. Class A Common Stock (12,114 shares) 1,142 1,423
Class C Common Stock (25,707 shares) 76 95
---------------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 6,421 6,421
Warrants 1,674 1,674
---------------------------------------------------------------------------------------------------------------
Intellirisk Management Corporation Loans 21,566 21,566
---------------------------------------------------------------------------------------------------------------
International Fiber Corporation Debt Securities 21,788 21,788
Common Stock (1,029,068 shares) 5,483 5,483
Warrants 550 550
---------------------------------------------------------------------------------------------------------------
iSolve Incorporated Series A Preferred Stock (14,853 shares) 874 874
Common Stock (13,306 shares) 14 14
---------------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 19,408 19,408
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
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12
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
JRI Industries, Inc. Debt Securities $ 1,957 $ 1,957
Warrants 74 74
---------------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 1,989 1,989
Warrants 259 6,500
---------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 4,493
Equity Interest 4 11
---------------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,352 6,352
Preferred Stock (917 shares) 412 412
Warrants 96 96
---------------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,752 7,752
Warrants 348 348
---------------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 4,228 4,228
Common Stock (64,535 shares) 142 142
---------------------------------------------------------------------------------------------------------------
The Loewen Group, Inc.(1) High-Yield Senior Secured Debt 15,150 14,150
---------------------------------------------------------------------------------------------------------------
Logic Bay Corporation Preferred Stock (1,131,222 shares) 5,000 5,000
---------------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
---------------------------------------------------------------------------------------------------------------
MagnaCard, Inc. Debt Securities 152 152
Preferred Stock (1,875 shares) 94 94
Common Stock (4,687 shares) -- --
---------------------------------------------------------------------------------------------------------------
Master Plan, Inc. Loan 2,000 2,000
Common Stock (156 shares) 42 3,042
---------------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
---------------------------------------------------------------------------------------------------------------
Mid-Atlantic Venture Fund IV, L.P. Limited Partnership Interest 2,475 2,475
---------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
---------------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 153
Common Stock (33,333 shares) -- --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
MortgageRamp.com, Inc. Class A Common Stock (800,000 shares) 4,000 4,000
---------------------------------------------------------------------------------------------------------------
Morton Grove Loan 15,553 15,553
Pharmaceuticals, Inc. Redeemable Convertible Preferred Stock
(106,947 shares) 5,000 8,500
---------------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,158 14,158
Warrants 643 643
---------------------------------------------------------------------------------------------------------------
NETtel Communications, Inc. Debt Securities 13,483 8,483
---------------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,593 9,593
Inc.(1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 575
---------------------------------------------------------------------------------------------------------------
North American Loans 1,390 840
Archery, LLC Convertible Debentures 2,248 2,008
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
8
13
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Northeast Broadcasting Group, L.P. Debt Securities $ 341 $ 341
---------------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 11,028 11,028
Warrants 900 900
---------------------------------------------------------------------------------------------------------------
Onyx Television GmbH Common Stock (600,000 shares) 200 200
---------------------------------------------------------------------------------------------------------------
Opinion Research Corporation(1) Debt Securities 14,068 14,068
Warrants 996 996
---------------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Loan 128 128
Debt Securities 12,523 12,523
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,865 23,865
Warrants 826 826
---------------------------------------------------------------------------------------------------------------
Packaging Advantage Corporation Debt Securities 11,517 11,517
Common Stock (200,000 shares) 2,000 2,000
Warrants 963 963
---------------------------------------------------------------------------------------------------------------
Physicians Specialty Corporation Debt Securities 15,090 15,090
Redeemable Preferred
Stock (850 shares) 850 --
Convertible Preferred
Stock (97,411 shares) 150 --
Warrants 476 --
---------------------------------------------------------------------------------------------------------------
Pico Products, Inc.(1) Loan 1,300 1,300
Debt Securities 4,591 1,591
Common Stock (208,000 shares) 59 --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,506 6,506
Warrants 1,050 1,050
---------------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 16,129 16,129
---------------------------------------------------------------------------------------------------------------
Proeducation GmbH Loan 40 40
---------------------------------------------------------------------------------------------------------------
Professional Paint, Inc. Debt Securities 20,750 20,750
Preferred Stock (15,000 shares) 15,000 15,000
Common Stock (110,000 shares) 69 69
---------------------------------------------------------------------------------------------------------------
Progressive International Debt Securities 3,951 3,951
Corporation Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Redox Brands, Inc. Debt Securities 9,850 9,850
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Schwinn Holdings Corporation Debt Securities 10,475 7,871
Warrants 395 --
---------------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 500 --
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
9
14
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Soff-Cut Holdings, Inc. Debt Securities $ 8,354 $ 8,354
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
Warrants 446 446
---------------------------------------------------------------------------------------------------------------
Southern Communications, LLC Equity Interest 9,779 9,779
---------------------------------------------------------------------------------------------------------------
Southwest PCS, LLC Loan 7,694 7,694
---------------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 539 429
Common Stock (6,208 shares) 25 18
---------------------------------------------------------------------------------------------------------------
Staffing Partners Holding Debt Securities 4,991 4,991
Company, Inc. Series A Redeemable Preferred Stock
(414,600 shares) 2,073 2,073
Class A1 Common Stock (1,000 shares) 1 1
Class A2 Common Stock (40,000 shares) 40 40
Class B Common Stock (9,200 shares) 9 9
Warrants 10 10
---------------------------------------------------------------------------------------------------------------
Startec Global Communications, Debt Securities 20,210 20,210
Corporation(1) Common Stock (258,064 shares) 3,000 --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Sunsource Inc.(1) Debt Securities 29,418 29,418
Warrants 450 890
---------------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Loans 6,062 4,573
Inc. Debt Securities 2,445 1,384
---------------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Loan 207 207
Preferred Stock (1,116,902 shares) 4,580 4,580
Warrants 662 662
Options -- 900
---------------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,973 12,973
---------------------------------------------------------------------------------------------------------------
The Debt Exchange, Inc. Series B convertible Preferred Stock
(921,829 shares) 1,250 1,250
---------------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 268 127
Common Stock (910 shares) 10 --
---------------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,903 3,903
Warrants 54 54
Equity Interests 500 500
---------------------------------------------------------------------------------------------------------------
United Pet Group, Inc. Debt Securities 4,960 4,960
Warrants 15 15
---------------------------------------------------------------------------------------------------------------
Updata Venture Partners, II, L.P. Limited Partnership Interest 1,300 1,300
---------------------------------------------------------------------------------------------------------------
Velocita, Inc. Debt Securities 11,566 11,566
Warrants 3,540 3,540
---------------------------------------------------------------------------------------------------------------
Venturehouse Group, LLC Common Equity Interest 333 333
---------------------------------------------------------------------------------------------------------------
Walker Investment Fund II, LLLP Limited Partnership Interest 800 800
---------------------------------------------------------------------------------------------------------------
Warn Industries, Inc. Debt Securities 18,601 18,601
Warrants 1,429 3,129
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
10
15
MARCH 31, 2001
PRIVATE FINANCE (UNAUDITED)
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Williams Brothers Lumber Company Warrants $ 24 $ 322
---------------------------------------------------------------------------------------------------------------
Wilmar Industries, Inc. Debt Securities 31,754 31,754
Warrants 3,169 3,169
---------------------------------------------------------------------------------------------------------------
Wilshire Restaurant Group, Inc. Debt Securities 15,233 15,233
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,836 12,836
---------------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 7,600 7,600
Equity Interests 1,700 2,372
Warrants 450 627
---------------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,686 15,686
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 15,850
---------------------------------------------------------------------------------------------------------------
Total private finance (124 investments) $1,272,863 $1,303,288
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
11
16
MARCH 31, 2001
(UNAUDITED)
INTEREST NUMBER OF -----------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
--------------------------------------------- ---------------- --------- ------- -------
COMMERCIAL REAL ESTATE FINANCE
Commercial Mortgage Loans Up to 6.99% 3 $ 885 $ 2,585
7.00%- 8.99% 12 29,933 32,033
9.00%-10.99% 26 26,670 27,208
11.00%-12.99% 30 24,249 24,368
13.00%-14.99% 9 13,229 13,229
15.00% and above 2 96 73
-----------------------------------------------------------------------------------------------
Total commercial mortgage loans 82 $95,062 $99,496
-----------------------------------------------------------------------------------------------
STATED
INTEREST FACE
-------- ----
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 54,491 $ 25,987 $ 25,987
Morgan Stanley Capital I, Series 1999-RM1 6.4% 51,046 21,404 21,404
COMM 1999-1 5.6% 74,879 34,466 34,466
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 45,536 21,978 21,978
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,432 44,508 44,508
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 34,856 16,419 16,419
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 29,005 11,027 11,027
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,531 20,531
FUNB CMT, Series 1999-C4 6.5% 49,287 22,738 22,984
Heller Financial, HFCMC Series 2000 PH-1 6.6% 45,456 18,745 18,745
SBMS VII, Inc., Series 2000-NL1 7.2% 24,230 13,327 13,327
DLJ Commercial Mortgage Trust, Series 2000-CF1 7.0% 40,502 19,279 19,279
Deutsche Bank Alex. Brown, Series Comm 2000-C1 6.9% 41,084 19,267 19,267
LB-UBS Commercial Mortgage Trust, Series 2000-C4 6.9% 31,471 11,555 11,555
Credit Suisse First Boston Mortgage Securities
Corp., Series 2001-CK1........................ 5.9% 58,786 28,627 28,627
Crest 2001-1, Ltd. (collateralized debt
obligation)................................... 0.0% 24,625 24,811 24,811
JP Morgan-CIBC-Deutsche 2001..................... 5.8% 90,065 51,450 51,679
--------------------------------------------------------------------------------------------------
Total purchased CMBS $834,797 $ 406,119 $ 406,594
--------------------------------------------------------------------------------------------------
Residual CMBS $ 72,850 $ 72,850
Residual Interest Spread 2,823 2,523
Real Estate Owned 3,028 2,002
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 579,882 $ 583,465
--------------------------------------------------------------------------------------------------
Total portfolio $1,852,745 $1,886,753
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
12
17
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Ability One Corporation Loans $ 9,974 $ 9,974
---------------------------------------------------------------------------------------------------------------
ACE Products, Inc. Loans 14,276 14,276
---------------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,984 6,984
Limited Partnership Interest 1,456 --
---------------------------------------------------------------------------------------------------------------
Allied Office Products, Inc. Debt Securities 9,360 9,360
Warrants 629 629
---------------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 --
---------------------------------------------------------------------------------------------------------------
American Home Care Supply, Debt Securities 6,853 6,853
LLC Warrants 579 579
---------------------------------------------------------------------------------------------------------------
Aspen Pet Products, Inc. Loans 13,862 13,862
Series A Preferred Stock (1,860 shares) 1,860 1,860
Series A Common Stock (1,400 shares) 140 140
---------------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
---------------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 14,410 14,410
Equity Interest 1,500 3,347
---------------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,255 12,255
Warrants 1,180 1,180
---------------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 15,899 15,899
---------------------------------------------------------------------------------------------------------------
Border Foods, Inc. Debt Securities 9,904 9,904
Series A Convertible Preferred Stock
(50,919 shares) 2,000 2,000
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Business Loan Express, Inc. Debt Securities 74,465 74,465
Preferred Stock (25,111 shares) 25,111 25,111
Common Stock (25,503,043 shares) 104,504 104,504
---------------------------------------------------------------------------------------------------------------
Camden Partners Strategic Fund II, L.P. Limited Partnership Interest 613 613
---------------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,579 2,579
Warrants 220 220
---------------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
---------------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 277 277
Warrants 12 312
---------------------------------------------------------------------------------------------------------------
Colibri Holding Corporation Loans 3,438 3,438
Common Stock (3,362 shares) 1,250 1,250
Warrants 290 290
---------------------------------------------------------------------------------------------------------------
Component Hardware Group Debt Securities 10,302 10,302
Class A Preferred Stock (18,000 shares) 1,800 1,800
Common Stock (2,000 shares) 200 200
---------------------------------------------------------------------------------------------------------------
Convenience Corporation of Debt Securities 8,355 2,738
America Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
13
18
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Cooper Natural Resources, Inc. Debt Securities $ 3,424 $ 3,424
Warrants -- --
---------------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,952 6,952
Debt Securities 4,954 4,954
Warrants -- 500
Options -- --
---------------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Loan 120 120
Resources, LLC Debt Securities 5,848 5,848
Options 87 87
---------------------------------------------------------------------------------------------------------------
Coverall North America, Inc. Loan 9,692 9,692
Debt Securities 4,965 4,965
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
---------------------------------------------------------------------------------------------------------------
CTT Holdings Loan 1,224 1,224
---------------------------------------------------------------------------------------------------------------
CyberRep.coM Loan 949 949
Debt Securities 10,295 10,295
Warrants 660 1,310
---------------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 100 20
---------------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
---------------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,918 8,762
Company, Inc. Debt Securities 1,500 1,500
Warrants -- --
---------------------------------------------------------------------------------------------------------------
eCentury Capital Partners, L.P. Limited Partnership Interest 1,875 1,875
---------------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
---------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
---------------------------------------------------------------------------------------------------------------
Elexis Beta GmbH Options 424 424
---------------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
---------------------------------------------------------------------------------------------------------------
Esquire Communications Ltd.(1) Warrants 6 --
---------------------------------------------------------------------------------------------------------------
E-Talk Corporation Debt Securities 8,804 8,804
Warrants 1,157 1,157
---------------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 594 344
Common Stock (2,500 shares) -- --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,880 15,880
Warrants 360 360
---------------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,810 5,810
Company Warrants 280 3,628
---------------------------------------------------------------------------------------------------------------
FTI Consulting, Inc.(1) Warrants 970 2,554
---------------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 33,399 33,399
Communications, LLC Warrants 500 1,250
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
14
19
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Garden Ridge Corporation Debt Securities $ 26,537 $ 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
---------------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc.(1) Loan 1,067 1,067
---------------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 16,441 16,441
Warrants 525 1,525
---------------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
---------------------------------------------------------------------------------------------------------------
Global Communications, LLC Debt Securities 12,732 12,732
Equity Interest 10,467 10,467
Options 1,639 1,639
---------------------------------------------------------------------------------------------------------------
Global Vacation Group, Inc.(1) Debt Securities 5,688 5,688
---------------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Warrants 87 5,976
---------------------------------------------------------------------------------------------------------------
Grant Television, Inc. Equity Interest 660 660
---------------------------------------------------------------------------------------------------------------
Grotech Partners, VI, L.P. Limited Partnership Interest 869 869
---------------------------------------------------------------------------------------------------------------
The Hartz Mountain Corporation Debt Securities 27,162 27,162
Common Stock (200,000 shares) 2,000 2,000
Warrants 2,613 2,613
---------------------------------------------------------------------------------------------------------------
HealthASPex, Inc. Series A Convertible Preferred Stock
(396,908 shares) 1,340 1,340
Series A Preferred Stock
(225,112 shares) 760 760
Common Stock (1,036,700 shares) -- --
---------------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,956 9,956
Common Stock (300,000 shares) 3,000 3,000
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (315,100 shares) 315 315
---------------------------------------------------------------------------------------------------------------
Icon International, Inc. Class A Common Stock (12,114 shares) 1,142 1,423
Class C Common Stock (25,707 shares) 76 95
---------------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 6,367 6,367
Warrants 1,674 1,674
---------------------------------------------------------------------------------------------------------------
Intellirisk Management Corporation Loans 21,449 21,449
---------------------------------------------------------------------------------------------------------------
International Fiber Corporation Debt Securities 21,626 21,626
Common Stock (1,029,068 shares) 5,483 5,483
Warrants 550 550
---------------------------------------------------------------------------------------------------------------
iSolve Incorporated Series A Preferred Stock (14,853 shares) 874 874
Common Stock (13,306 shares) 14 14
---------------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 19,236 19,236
---------------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 1,953 1,953
Warrants 74 74
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
15
20
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Julius Koch USA, Inc. Debt Securities $ 2,294 $ 2,294
Warrants 259 6,500
---------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 4,493
Equity Interest 4 11
---------------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,347 6,347
Preferred Stock (917 shares) 412 412
Warrants 96 96
---------------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,734 7,734
Warrants 348 348
---------------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,475 3,475
Common Stock (64,535 shares) 142 142
---------------------------------------------------------------------------------------------------------------
The Loewen Group, Inc.(1) High-Yield Senior Secured Debt 15,150 14,150
---------------------------------------------------------------------------------------------------------------
Logic Bay Corporation Preferred Stock (1,131,222 shares) 5,000 5,000
---------------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
---------------------------------------------------------------------------------------------------------------
Master Plan, Inc. Loan 2,000 2,000
Common Stock (156 shares) 42 3,042
---------------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
---------------------------------------------------------------------------------------------------------------
Mid-Atlantic Venture Fund IV, L.P. Limited Partnership Interest 2,475 2,475
---------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
---------------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
MortgageRamp.com, Inc. Class A Common Stock (800,000 shares) 4,000 4,000
---------------------------------------------------------------------------------------------------------------
Morton Grove Loan 15,356 15,356
Pharmaceuticals, Inc. Redeemable Convertible Preferred Stock
(106,947 shares) 5,000 8,500
---------------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,124 14,124
Warrants 643 1,912
---------------------------------------------------------------------------------------------------------------
NETtel Communications, Inc. Debt Securities 13,472 13,472
---------------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,571 9,571
Inc.(1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 500
---------------------------------------------------------------------------------------------------------------
North American Loans 1,390 811
Archery, LLC Convertible Debentures 2,248 1,996
---------------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 349 349
---------------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 11,006 11,006
Warrants 900 900
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
16
21
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Old Mill Holdings, Inc. Debt Securities $ 140 $ --
---------------------------------------------------------------------------------------------------------------
Onyx Television GmbH Common Stock (600,000 shares) 200 200
---------------------------------------------------------------------------------------------------------------
Opinion Research Corporation(1) Debt Securities 14,033 14,033
Warrants 996 996
---------------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Debt Securities 12,456 12,456
Loan 128 128
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,853 23,853
Warrants 826 826
---------------------------------------------------------------------------------------------------------------
Packaging Advantage Corporation Debt Securities 11,497 11,497
Common Stock (200,000 shares) 2,000 2,000
Warrants 963 963
---------------------------------------------------------------------------------------------------------------
Physicians Specialty Corporation Debt Securities 14,809 14,809
Redeemable Preferred
Stock (850 shares) 850 --
Convertible Preferred
Stock (97,411 shares) 150 --
Warrants 476 --
---------------------------------------------------------------------------------------------------------------
Pico Products, Inc.(1) Loan 1,300 1,300
Debt Securities 4,591 1,591
Common Stock (208,000 shares) 59 --
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,483 6,483
Warrants 1,050 1,050
---------------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,707 15,707
---------------------------------------------------------------------------------------------------------------
Proeducation GmbH Loan 40 40
---------------------------------------------------------------------------------------------------------------
Professional Paint, Inc. Debt Securities 20,000 20,000
Preferred Stock (15,000 shares) 15,000 15,000
Common Stock (110,000 shares) 69 69
---------------------------------------------------------------------------------------------------------------
Progressive International Debt Securities 3,949 3,949
Corporation Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Schwinn Holdings Corporation Debt Securities 10,367 10,367
Warrants 395 395
---------------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 500 --
---------------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,454 8,454
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
Warrants 446 446
---------------------------------------------------------------------------------------------------------------
Southern Communications, LLC Equity Interest 9,779 9,779
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
17
22
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Southwest PCS, LLC Loan $ 7,500 $ 7,500
---------------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,518 7,435
---------------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 547 437
Common Stock (6,208 shares) 25 18
---------------------------------------------------------------------------------------------------------------
Staffing Partners Holding Debt Securities 4,990 4,990
Company, Inc. Series A Redeemable Preferred Stock (414,600
shares) 2,073 2,073
Class A1 Common Stock (1,000 shares) 1 1
Class A2 Common Stock (40,000 shares) 40 40
Class B Common Stock (9,200 shares) 9 9
Warrants 10 10
---------------------------------------------------------------------------------------------------------------
Startec Global Communications, Debt Securities 20,200 20,200
Corporation(1) Common Stock (258,064 shares) 3,000 3,000
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Sunsource Inc.(1) Debt Securities 29,850 29,850
Warrants -- --
---------------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Loans 6,062 4,573
Inc. Debt Securities 2,445 1,384
---------------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Loan 207 207
Preferred Stock (1,116,902 shares) 4,558 4,558
Warrants 662 662
Options -- 900
---------------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,973 12,973
---------------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 268 127
Common Stock (910 shares) 10 --
---------------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,899 3,899
Warrants 54 54
Equity Interests 500 500
---------------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,959 4,959
Warrants 15 15
---------------------------------------------------------------------------------------------------------------
Velocita, Inc. Debt Securities 11,532 11,532
Warrants 3,540 3,540
---------------------------------------------------------------------------------------------------------------
Venturehouse Group, LLC Common Equity Interest 333 333
---------------------------------------------------------------------------------------------------------------
Walker Investment Fund II, LLLP Limited Partnership Interest 800 800
---------------------------------------------------------------------------------------------------------------
Warn Industries, Inc. Debt Securities 19,330 19,330
Warrants 1,429 1,929
---------------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
---------------------------------------------------------------------------------------------------------------
Wilmar Industries, Inc. Debt Securities 31,720 31,720
Warrants 3,169 3,169
---------------------------------------------------------------------------------------------------------------
Wilshire Restaurant Group, Inc. Debt Securities 15,191 15,191
Warrants -- --
---------------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,836 12,836
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
18
23
PRIVATE FINANCE DECEMBER 31, 2000
PORTFOLIO COMPANY -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- ---------- ----------
Woodstream Corporation Debt Securities $ 7,590 $ 7,590
Equity Interests 1,700 1,700
Warrants 450 450
---------------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,677 15,677
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 7,100
---------------------------------------------------------------------------------------------------------------
Total private finance (122 investments) $1,262,529 $1,282,467
---------------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
19
24
DECEMBER 31, 2000
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
------------------------------------------- ---------------- --------- -------- --------
COMMERCIAL REAL ESTATE FINANCE
Commercial Mortgage Loans Up to 6.99% 3 $ 882 $ 2,582
7.00%- 8.99% 13 30,032 32,132
9.00%-10.99% 17 22,302 22,190
11.00%-12.99% 38 35,250 35,042
13.00%-14.99% 12 14,391 14,391
15.00% and above 2 100 76
-----------------------------------------------------------------------------------------------
Total commercial mortgage loans 85 $102,957 $106,413
-----------------------------------------------------------------------------------------------
STATED
INTEREST FACE
-------- ----
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 54,491 $ 25,681 $ 25,681
Morgan Stanley Capital I, Series 1999-RM1 6.4% 59,640 27,429 27,429
COMM 1999-1 5.6% 74,879 34,352 34,352
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 45,536 21,972 21,972
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,432 44,332 44,332
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 34,856 16,397 16,397
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 29,005 10,910 10,910
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,552 20,552
FUNB CMT, Series 1999-C4 6.5% 49,287 22,515 22,761
Heller Financial, HFCMC Series 2000 PH-1 6.6% 45,456 19,039 19,039
SBMS VII, Inc., Series 2000-NL1 7.2% 30,079 17,820 18,007
DLJ Commercial Mortgage Trust, Series 2000-CF1 7.0% 40,502 19,166 19,166
Deutsche Bank Alex. Brown, Series Comm 2000-C1 6.9% 41,084 19,170 19,170
LB-UBS Commercial Mortgage Trust, Series 2000-C4 6.9% 31,471 11,552 11,552
--------------------------------------------------------------------------------------------------
Total purchased CMBS $675,764 $ 310,887 $ 311,320
--------------------------------------------------------------------------------------------------
Residual CMBS $ 78,723 $ 78,723
Residual Interest Spread 3,297 2,997
Real Estate Owned 7,502 6,081
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 503,366 $ 505,534
--------------------------------------------------------------------------------------------------
Total portfolio $1,765,895 $1,788,001
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
20
25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation ("ACC") has a wholly owned subsidiary that has
also elected to be regulated as a BDC. Allied Investment Corporation ("Allied
Investment") is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company ("SBIC"). In addition, the Company has a real
estate investment trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT")
and several single-member limited liability companies established primarily to
hold real estate properties.
ACC also owned Allied Capital SBLC Corporation ("Allied SBLC"), a BDC
licensed by the Small Business Administration ("SBA") as a Small Business
Lending Company and a participant in the SBA Section 7(a) Guaranteed Loan
Program. On December 31, 2000, ACC acquired BLC Financial Services, Inc. as a
private portfolio company, which then changed its name to Business Loan Express,
Inc. ("BLX"). As a part of the transaction, Allied SBLC was recapitalized as an
independently managed, private portfolio company on December 28, 2000 and ceased
to be a consolidated subsidiary of the Company at that time. Allied SBLC was
then subsequently merged into BLX. The results of the operations of Allied SBLC
are included in the consolidated financial results of ACC and its subsidiaries
for 2000 through December 27, 2000.
Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company."
The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests in
private and undervalued public companies in a variety of different industries
and in diverse geographic locations.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete consolidated
financial statements. In the opinion of management, the unaudited consolidated
financial results of the Company included herein contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position of the Company as of and for the three months ended March 31,
2001 and 2000 and the results of operations, changes in net assets, and cash
flows for these periods. The results of operations for the three months ended
March 31, 2001 are not necessarily indicative of the operating results to be
expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the 2000 balances to conform with the 2001 financial statement presentation.
21
26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO
PRIVATE FINANCE
At March 31, 2001 and December 31, 2000, the private finance portfolio
consisted of the following:
2001 2000
------------------------------- -------------------------------
COST VALUE YIELD COST VALUE YIELD
($ IN THOUSANDS) ---------- ---------- ----- ---------- ---------- -----
Loans and debt securities...... $ 988,653 $ 959,466 14.7% $ 983,887 $ 966,257 14.6%
Equity interests............... 284,210 343,822 278,642 316,210
---------- ---------- ---------- ----------
Total................ $1,272,863 1,303,288 $1,262,529 $1,282,467
========== ========== ========== ==========
Private finance investments are generally structured as loans and debt
securities that carry a relatively high fixed rate of interest, which may be
combined with equity features, such as conversion privileges, or warrants or
options to purchase a portion of the portfolio company's equity at a nominal
price.
Debt securities typically have a maturity of five to ten years, with
interest-only payments in the early years and payments of both principal and
interest in the later years, although debt maturities and principal amortization
schedules vary.
Equity interests consist primarily of securities issued by privately owned
companies and may be subject to restrictions on their resale or may be otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.
At March 31, 2001 and December 31, 2000, equity interests include the
Company's common stock and preferred stock investment in Business Loan Express,
Inc. ("BLX") of $120,004,000 and $25,111,000 and $104,504,000 and $25,111,000 at
value, respectively. During the first quarter of 2001, BLX secured a 3-year
$117.5 million unsecured revolving credit facility. As the controlling
shareholder of BLX, the Company has provided an unconditional guaranty to the
BLX credit facility lenders in an amount up to 50% of the total obligations
(consisting of principal, accrued interest and other fees) of BLX on the line of
credit. The amount guaranteed by the Company at March 31, 2001 was $37.7
million. This guaranty can be called by the lenders only in the event of a
default by BLX. BLX was in compliance with the terms of its credit facility at
March 31, 2001. In consideration for providing this guaranty, BLX will pay the
Company an annual guaranty fee of $2.9 million.
At March 31, 2001 and December 31, 2000, approximately 98% of the Company's
private finance loan portfolio was composed of fixed interest rate loans. At
March 31, 2001 and December 31, 2000, loans and debt securities with a value of
$81,050,000 and $72,966,000, respectively, were not accruing interest. Loans
greater than 120 days delinquent generally do not accrue interest.
22
27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic and industry compositions of the private finance portfolio
at value at March 31, 2001 and December 31, 2000 were as follows:
2001 2000
---- ----
GEOGRAPHIC REGION
Mid-Atlantic................................................ 40% 43%
Midwest..................................................... 22 18
West........................................................ 17 17
Southeast................................................... 12 12
Northeast................................................... 8 8
International............................................... 1 2
--- ---
Total............................................. 100% 100%
=== ===
INDUSTRY
Consumer Products........................................... 27% 26%
Business Services........................................... 24 24
Financial Services.......................................... 16 16
Industrial Products......................................... 9 9
Retail...................................................... 5 5
Broadcasting & Cable........................................ 5 5
Telecommunications.......................................... 4 6
Education................................................... 4 3
Other....................................................... 6 6
--- ---
Total............................................. 100% 100%
=== ===
COMMERCIAL REAL ESTATE FINANCE
At March 31, 2001 and December 31, 2000, the commercial real estate finance
portfolio consisted of the following:
2001 2000
--------------------------- ---------------------------
($ IN THOUSANDS) COST VALUE YIELD COST VALUE YIELD
---------------- -------- -------- ----- -------- -------- -----
Loans....................................... $ 95,062 $ 99,496 8.9% $102,957 $106,413 9.1%
CMBS........................................ 481,792 481,967 14.6% 392,907 393,040 14.2%
REO......................................... 3,028 2,002 7,502 6,081
-------- -------- -------- --------
Total............................. $579,882 $583,465 $503,366 $505,534
======== ======== ======== ========
LOANS
The commercial mortgage loan portfolio contains loans that were originated
by the Company or were purchased from third-party sellers.
At March 31, 2001 and December 31, 2000, approximately 70% and 30% and 69%
and 31% of the Company's commercial mortgage loan portfolio was composed of
fixed and adjustable interest rate loans, respectively. As of March 31, 2001 and
December 31, 2000, loans with a value of $12,440,000 and $14,433,000,
respectively, were not accruing interest. Loans greater than 120 days delinquent
generally do not accrue interest.
23
28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
In December 2000, the Company purchased commercial mortgage loans with a
face amount of $6.5 million for $5.5 million from Business Mortgage Investors,
Inc., a company managed by ACC.
The geographic composition and the property types securing the commercial
mortgage loan portfolio at value at March 31, 2001 and December 31, 2000 were as
follows:
2001 2000
---- ----
GEOGRAPHIC REGION
Southeast................................................... 37% 39%
Midwest..................................................... 18 14
Northeast................................................... 17 5
West........................................................ 15 20
Mid-Atlantic................................................ 13 22
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Hospitality................................................. 32% 28%
Office...................................................... 28 30
Retail...................................................... 23 19
Recreation.................................................. 3 9
Other....................................................... 14 14
--- ---
Total............................................. 100% 100%
=== ===
CMBS
At March 31, 2001 and December 31, 2000, the CMBS portfolio consisted of
the following:
2001 2000
------------------- -------------------
COST VALUE COST VALUE
(IN THOUSANDS) -------- -------- -------- --------
Purchased CMBS.............................. $406,119 $406,594 $310,887 $311,320
Residual CMBS............................... 72,850 72,850 78,723 78,723
Residual interest spread.................... 2,823 2,523 3,297 2,997
-------- -------- -------- --------
Total............................. $481,792 $481,967 $392,907 $393,040
======== ======== ======== ========
PURCHASED CMBS The Company has Purchased CMBS bonds with a face amount of
$834,797,000 and a cost of $406,119,000, with the difference representing
original issue discount. As of March 31, 2001 and December 31, 2000, the
estimated yield to maturity on the Purchased CMBS was approximately 15.6% and
15.4%, respectively. The Company's yield on its Purchased CMBS is based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples include the timing and magnitude of
credit losses on the mortgage loans underlying the Purchased CMBS that are a
result of the general condition of the real estate market (including competition
for tenants and their related credit quality) and changes in market rental
rates. At March 31, 2001 and December 31, 2000, the yield on the Purchased CMBS
portfolio was computed assuming a 1% loss estimate for its entire underlying
collateral mortgage pool. As these uncertainties and contingencies are difficult
to predict and are subject to future events which may alter these assumptions,
no assurance can be given that the anticipated yields to maturity will be
achieved.
24
29
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The non-investment grade and unrated tranches of the Purchased CMBS bonds
are junior in priority for payment of principal to the more senior tranches of
the related commercial securitization. Cash flow from the underlying mortgages
generally is allocated first to the senior tranches, with the most senior
tranches having a priority right to the cash flow. Then, any remaining cash flow
is allocated, generally, among the other tranches in order of their relative
seniority. To the extent there are defaults and unrecoverable losses on the
underlying mortgages resulting in reduced cash flows, the subordinate tranche
will bear this loss first.
The Company entered into one short sale contract with a financial
institution as part of a strategy to manage interest rate risk with respect to
certain CMBS bonds. The Company used the short sale for hedging and risk
management only and not for speculative purposes. At March 31, 2001, the fair
value of the contract was $240,000. The fair value of this contract has been
reflected in net unrealized gains. The Company held no derivative financial
instruments at December 31, 2000.
The underlying rating classes of the Purchased CMBS at March 31, 2001 and
December 31, 2000 are as follows:
2001 2000
--------------------- ---------------------
PERCENTAGE PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL
($ IN THOUSANDS) -------- ---------- -------- ----------
BB+................................................. $ 22,471 5.5% $ -- --%
BB.................................................. 19,523 4.8 8,472 2.7
BB-................................................. 41,315 10.2 37,061 11.9
B+.................................................. 71,290 17.5 59,827 19.3
B................................................... 100,595 24.8 89,999 28.9
B-.................................................. 60,994 15.0 56,665 18.2
CCC................................................. 7,748 1.9 7,857 2.5
Unrated............................................. 82,658 20.3 51,439 16.5
-------- ----- -------- -----
Total..................................... $406,594 100.0% $311,320 100.0%
======== ===== ======== =====
RESIDUAL CMBS AND RESIDUAL INTEREST SPREAD. The Residual CMBS primarily
consists of a retained interest from a post-Merger asset securitization whereby
bonds were sold in three classes rated "AAA," "AA" and "A."
The Company sold $295 million of loans, and received cash proceeds, net of
costs, of approximately $223 million. The Company retained a trust certificate
for its residual interest in the loan pool sold, and will receive interest
income from this Residual CMBS as well as the Residual Interest Spread from the
interest earned on the loans sold less the interest paid on the bonds over the
life of the bonds.
As a result of this securitization, the Company recorded a gain of $14.8
million, which represents the difference between the cost basis of the assets
sold and the fair value of the assets received, net of the costs of the
securitization and the cost of settlement of interest rate swaps. As of March
31, 2001 and December 31, 2000, the mortgage loan pool had an approximate
weighted average stated interest rate of 9.3%. The three bond classes sold had
an aggregate weighted average interest rate of 6.5% as of March 31, 2001 and
December 31, 2000.
25
30
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The Company uses a discounted cash flow methodology for determining the
value of its retained Residual CMBS and Residual Interest Spread ("Residual").
In determining the cash flow of the Residual, the Company assumes a prepayment
speed of 15% after the applicable prepayment lockout period and credit losses of
1% of the total principal balance of the underlying collateral throughout the
life of the collateral. The value of the resulting Residual cash flows is then
determined by applying a discount rate of 9% which, in the Company's view, is
commensurate with the market's perception of risk of comparable assets.
The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS calculated using the underwritten
principal balance at March 31, 2001 and December 31, 2000 were as follows:
2001 2000
---- ----
GEOGRAPHIC REGION
West........................................................ 31% 31%
Mid-Atlantic................................................ 24 23
Midwest..................................................... 22 22
Southeast................................................... 18 19
Northeast................................................... 5 5
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Retail...................................................... 32% 32%
Housing..................................................... 29 30
Office...................................................... 23 21
Hospitality................................................. 7 8
Other....................................................... 9 9
--- ---
Total............................................. 100% 100%
=== ===
SMALL BUSINESS FINANCE
The Company, through its wholly owned subsidiary, Allied SBLC, participated
in the SBA's Section 7(a) Guaranteed Loan Program ("7(a) loans"). As discussed
in Note 1, Allied SBLC is no longer a consolidated subsidiary of the Company at
December 31, 2000. As a result, the Company's small business portfolio had no
balance at December 31, 2000.
26
31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT
At March 31, 2001 and December 31, 2000, the Company had the following
debt:
2001 2000
--------------------- ---------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
(IN THOUSANDS) ---------- -------- ---------- --------
Notes payable and debentures:
Unsecured long-term notes payable................ $ 544,000 $544,000 $ 544,000 $544,000
SBA debentures................................... 108,800 87,350 87,350 78,350
Auction rate reset note.......................... 78,226 78,226 76,598 76,598
OPIC loan........................................ 5,700 5,700 5,700 5,700
---------- -------- ---------- --------
Total notes payable and debentures....... 736,726 715,276 713,648 704,648
---------- -------- ---------- --------
Revolving credit facilities:
Revolving line of credit......................... 417,500 168,500 417,500 82,000
Master loan and security agreement............... -- -- -- --
---------- -------- ---------- --------
Total revolving credit facilities........ 417,500 168,500 417,500 82,000
---------- -------- ---------- --------
Total............................................ $1,154,226 $883,776 $1,131,148 $786,648
========== ======== ========== ========
NOTES PAYABLE AND DEBENTURES
UNSECURED LONG-TERM NOTES PAYABLE. In June 1998, May 1999, November 1999
and October 2000, the Company issued unsecured long-term notes to private
institutional investors. The notes require semi-annual interest payments until
maturity and have terms of five or seven years. The weighted average interest
rate on the notes was 7.8% and 7.8% at March 31, 2001 and December 31, 2000,
respectively. The notes may be prepaid in whole or in part together with an
interest premium, as stipulated in the note agreement.
SBA DEBENTURES. At March 31, 2001 and December 31, 2000, the Company had
debentures payable to the SBA with terms of ten years and at fixed interest
rates ranging from 6.1% to 9.1%. The weighted average interest rate was 7.4% and
7.6% at March 31, 2001 and December 31, 2000, respectively. The debentures
require semi-annual interest-only payments with all principal due upon maturity.
The SBA debentures are subject to prepayment penalties if paid prior to
maturity.
AUCTION RATE RESET NOTE. The Company has a $75 million Auction Rate Reset
Senior Note Series A that matures on December 2, 2002 and bears interest at the
three-month London Interbank Offer Rate ("LIBOR") plus 1.75%, which adjusts
quarterly. Interest is due quarterly and the Company, at its option, may pay or
defer and capitalize such interest payments. The amount outstanding on the note
will increase as interest due is deferred and capitalized.
As a means to repay the note, the Company has entered into an agreement to
issue $75 million of debt, equity or other securities in one or more public or
private transactions, or prepay the Auction Rate Reset Note, on or before August
31, 2002. If the note is prepaid, the Company will pay a fee equal to 0.5% of
the aggregate amount of the note outstanding.
27
32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
Scheduled future maturities of notes payable and debentures at March 31,
2001 are as follows:
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
2001........................................................ $ 9,350
2002........................................................ 78,226
2003........................................................ 140,000
2004........................................................ 221,000
2005........................................................ 179,000
Thereafter.................................................. 87,700
--------
Total............................................. $715,276
========
REVOLVING CREDIT FACILITIES
REVOLVING LINE OF CREDIT. The Company has an unsecured revolving line of
credit for $417,500,000. The facility may be expanded up to $500,000,000. At the
Company's option, the facility bears interest at a rate equal to (i) the
one-month LIBOR plus 1.25% or (ii) the higher of (a) the Bank of America, N.A.
prime rate or (b) the Federal Funds rate plus 0.50%. The interest rate adjusts
at the beginning of each new interest period, usually every thirty days. The
interest rates were 6.7% and 7.9% at March 31, 2001 and December 31, 2000,
respectively, and the facility requires an annual commitment fee equal to 0.25%
of the committed amount. The line expires in March 2002. The line of credit
requires monthly interest payments and all principal is due upon its expiration.
MASTER LOAN AND SECURITY AGREEMENT. The Company had a facility to borrow
up to $100,000,000, using certain commercial mortgage loans as collateral. The
agreement charged interest at the one-month LIBOR plus 1.0%, adjusted daily. The
agreement matured on October 27, 2000 and was not renewed.
The average debt outstanding on the revolving credit facilities was
$78,344,000 and $154,853,000 for the three months ended March 31, 2001 and for
the year ended December 31, 2000, respectively. The maximum amount borrowed
under these facilities and the weighted average interest rate for the three
months ended March 31, 2001 and for the year ended December 31, 2000, were
$181,500,000 and $257,000,000, and 6.7% and 7.6%, respectively.
NOTE 5. PREFERRED STOCK
Allied Investment has outstanding a total of 60,000 shares of $100 par
value, 3% cumulative preferred stock and 10,000 shares of $100 par value, 4%
redeemable cumulative preferred stock issued to the SBA pursuant to Section
303(c) of the Small Business Investment Act of 1958, as amended. The 3%
cumulative preferred stock does not have a required redemption date. Allied
Investment has the option to redeem in whole or in part the preferred stock by
paying the SBA the par value of such securities and any dividends accumulated
and unpaid to the date of redemption. The 4% redeemable cumulative preferred
stock has a required redemption date in June 2005.
28
33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY
Sales of common stock in the quarter ended March 31, 2001, and the year
ended December 31, 2000 were as follows:
2001 2000
(IN THOUSANDS) ------- --------
Number of common shares..................................... 444 14,812
Gross proceeds.............................................. $10,000 $263,460
Less costs including underwriting fees...................... (50) (12,548)
------- --------
Net proceeds.............................................. $ 9,950 $250,912
======= ========
In addition, the Company issued 4,123,407 shares of common stock to acquire
BLC Financial Services, Inc. in a stock-for-stock exchange on December 31, 2000
for proceeds of $86,076,000.
The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sale prices reported for the
Company's common stock for the five consecutive days immediately prior to the
dividend payment date.
Dividend reinvestment plan activity for the three months ended March 31,
2001 and for the year ended December 31, 2000 was as follows:
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------
Shares issued............................................... 78 254
Average price per share..................................... $22.74 $18.79
NOTE 7. EARNINGS PER COMMON SHARE
Earnings per common share for the three months ended March 31, 2001 and
2000 were as follows:
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------
2001 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ------- -------
Net increase in net assets resulting from operations........ $52,028 $29,581
Less preferred stock dividends.............................. (55) (55)
------- -------
Income available to common shareholders..................... $54,973 $29,526
======= =======
Basic shares outstanding.................................... 85,504 66,289
Dilutive options outstanding to officers.................... 1,555 19
------- -------
Diluted shares outstanding.................................. 87,059 66,308
======= =======
BASIC EARNINGS PER COMMON SHARE............................. $ 0.61 $ 0.45
======= =======
DILUTED EARNINGS PER COMMON SHARE........................... $ 0.60 $ 0.45
======= =======
29
34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award
was computed for each unvested option as of the Merger date. The Cut-off Award
was equal to the difference between the market price on August 14, 1997 (the
Merger announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award was payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the appreciated value in unvested options at the Merger
announcement date, in order to set the foundation to balance option awards upon
the Merger. The Cut-off Award approximated $2.9 million in the aggregate and has
been expensed as the Cut-off Award vests. For the three months ended March 31,
2001 and for the year ended December 31, 2000, $28,000 and $535,000,
respectively, of the Cut-off Award vested.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6%
of the difference between an amount equal to the combined aggregated market
capitalizations of the Predecessor Companies as of the close of the market on
the day before the Merger date (December 30, 1997), less an amount equal to the
combined aggregate market capitalizations of Allied Lending and the Predecessor
Companies as of the close of the market on the Merger announcement date.
Advisers' compensation committee allocated the Formula Award to individual
officers on December 30, 1997. The amount of the Formula Award as computed at
December 30, 1997 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust and was used to purchase shares of the Company's
stock (included in common stock held in deferred compensation trust). The
Formula Award vested equally in three installments on December 31, 1998, 1999
and 2000. The Formula Award has been expensed in each year in which it vested.
For the years ended December 31, 2000, $5,648,000 was expensed as a result of
the Formula Award. At December 31, 2000, the liability related to the Formula
Award was $5,648,000 and has been included in common stock held in deferred
compensation trust. Vested Formula Awards have been distributed to recipients by
the Company, however, sale of the Company's stock by the recipients is
restricted. Unvested Formula Awards were forfeited upon a recipient's separation
from service and the related Company stock was retired. During 2000, $563,000 of
the Formula Award was forfeited.
NOTE 9. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $0.49 per
common share dividend or $42,081,000 for the three months ended March 31, 2001.
30
35
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included herein and in the Company's
annual report on Form 10-K. This Management's Discussion and Analysis contains
certain forward-looking statements. These statements include the plans and
objectives of management for future operations and financial objectives, loan
portfolio growth and availability of funds. These forward-looking statements are
subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are
set forth below in the Investment Considerations section. Other factors that
could cause actual results to differ materially include the uncertainties of
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements included herein are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate. Therefore, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
OVERVIEW
The Company provides private investment capital to private and undervalued
public companies in a variety of different industries and in diverse geographic
locations. Our lending and investment activity is focused in private finance and
commercial real estate finance, primarily the purchase of commercial
mortgage-backed securities.
The Company's portfolio composition at March 31, 2001, and December 31,
2000 was as follows:
AT AT
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Private Finance.......................................... 69% 72%
Commercial Real Estate Finance........................... 31% 28%
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gains earned on the
Company's investment portfolio after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
earned on a loan and the amortization of loan origination points and discounts.
The level of interest income is directly related to the balance of the
interest-bearing investment portfolio multiplied by the weighted average yield
on the interest-bearing portfolio. The Company's ability to generate interest
income is dependent on economic, regulatory and competitive factors that
influence interest rates and loan originations, and the Company's ability to
secure financing for its investment activities.
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36
PORTFOLIO AND INVESTMENT ACTIVITY
Total portfolio investment activity and yields as of and for the three
months ended March 31, 2001 and as of and for the year ended December 31, 2000
were as follows:
AT AND FOR AT AND
THE THREE FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
($ IN MILLIONS) 2001 2000
--------------- ------------ ------------
Portfolio at Value.................................... $1,886.8 $1,788.0
New Investments....................................... $ 150.8 $ 901.5
Repayments............................................ $ 26.6 $ 154.1
Sales................................................. $ 35.2 $ 280.2
Yield................................................. 14.3% 14.1%
PRIVATE FINANCE
Private finance investment activity and yields as of and for the three
months ended March 31, 2001 and as of and for the year ended December 31, 2000
were as follows:
AT AND FOR THE
THREE MONTHS AT AND FOR THE
ENDED YEAR ENDED
($ IN MILLIONS) MARCH 31, 2001 DECEMBER 31, 2000
--------------- -------------- -----------------
Portfolio at Value............................... $1,303.3 $1,282.5
New Investments.................................. $ 20.6 $ 600.9
Repayments....................................... $ 17.1 $ 117.7
Yield............................................ 14.7% 14.6%
The private finance portfolio increased 2% from December 31, 2000 to March
31, 2001, and increased 98% during the year ended December 31, 2000. Buyout and
private finance activity across the industry slowed during the first quarter of
2001 largely due to credit tightening among senior lenders. Equity-focused
buyout firms generally need both senior and subordinated debt to leverage
private equity investments, and during the first quarter of 2001, the senior
bank market, and in particular the senior syndicated loan market, was
effectively closed. As a result, the Company completed the financing for only
one buyout transaction during the quarter, with the Company investing $10.0
million. The Company also funded existing financing commitments for existing
portfolio companies.
32
37
The Company's increasing capital base has enabled it to make larger private
finance investments, supporting the increase in originations in 2000. Key
investment characteristics for new private finance mezzanine investments were as
follows:
FOR THE YEAR ENDED
DECEMBER 31, 2000
------------------
New investment characteristics:
Number of investments..................................... 34
Average investment size (millions)........................ $ 14.0
Average current yield..................................... 14.7%
Average portfolio company revenue (millions).............. $153.5
Average portfolio company years in business............... 36
The average investment characteristics above are computed using simple
averages based upon underwriting data for investment activity for that year. As
a result, any one investment may have had individual investment characteristics
that may vary significantly from the stated simple average. In addition, average
investment characteristics may vary from year to year.
The current yield on the private finance portfolio will fluctuate over time
depending on the equity "kicker" or warrants received with each debt financing.
Private finance investments are generally structured such that equity kickers
may provide an additional future investment return of up to 10%.
In addition to the Company's core private finance investment activity
during 2000, the Company acquired 95% of BLC Financial Services, Inc. in a
"going private" buyout transaction for $95.2 million on December 31, 2000. The
Company issued approximately 4.1 million shares, or $86.1 million of new equity,
and paid $9.1 million in cash to acquire BLC. The new portfolio company has
changed its name to Business Loan Express, Inc. ("BLX").
As part of the transaction, the Company recapitalized its Allied Capital
Express operations as an independently managed private portfolio company and
merged it into BLX. As part of the recapitalization, the Company contributed
certain assets, including the online rules-based underwriting technology and
fixed assets, and transferred 37 employees into the private portfolio company.
Upon completion of the transaction, the Company's investment in BLX totaled
$204.1 million and consisted of $74.5 million of 25% subordinated debt, $25.1
million of preferred stock, and $104.5 million of common stock on December 31,
2000.
At March 31, 2001, the Company's investment in BLX totaled $211.1 million
at value and consisted of $66.0 million of 25% subordinated debt, $25.1 million
of preferred stock and $120.0 million of common stock. During the first quarter
of 2001, BLX secured a 3-year $117.5 million revolving credit facility ("BLX
Credit Facility") and completed a $65 million securitization of unguaranteed SBA
7(a) loans. As a result of the elimination of the refinancing risk that existed
at the time of the merger, and BLX's progress in merger integration, the Company
increased the value of its common stock investment by $15.5 million to $120.0
million at March 31, 2001. As the controlling shareholder of BLX, the Company
has provided an unconditional guaranty to the BLX Credit Facility lenders in an
amount of up to 50% of the total obligations (consisting of principal, accrued
interest and other fees) of BLX on the line of credit. The amount guaranteed by
the Company at March 31, 2001 was $37.7 million. This guaranty can be called by
the lenders only in the event of a default by BLX. BLX was in compliance with
the terms of the BLX Credit Facility at March 31, 2001. In consideration for
providing this guaranty, BLX will pay the Company an annual guaranty fee of $2.9
million. In addition, the Company has entered into a management
33
38
contract with BLX to provide management services, including certain technology
and transition services. The Company's investment in BLX is included in the
private finance portfolio.
BLX is a non-bank small business lender licensed as a participant in the
SBA 7(a) Guaranteed Loan Program. BLX is headquartered in New York City, has 28
offices throughout the country and is an SBA-designated Preferred Lender in 64
markets.
During the second quarter of 2000, the Company began an initiative to
invest in and strategically partner with select private equity funds focused on
venture capital investments. The strategy for these fund investments is to
provide solid investment returns and build strategic relationships with the fund
managers and their portfolio companies. The Company believes that it will have
opportunities to co-invest with the funds as well as finance their portfolio
companies as they mature.
The Company believes that the fund investment strategy is an effective
means of participating in private equity investing through a diverse pooled
investment portfolio. The fund concept allows the Company to participate in a
pooled investment return without exposure to the risk of any single investment.
Since the beginning of 2000, the Company has committed a total of $44.5 million
to eight private equity funds. The committed amount is expected to be invested
over the next three years. The Company funded $1.6 million and $7.0 million of
this commitment for the three months ended March 31, 2001 and for the year ended
December 31, 2000, respectively.
COMMERCIAL REAL ESTATE FINANCE
Commercial real estate finance investment activity and yields as of and for
the three months ended March 31, 2001 and as of and for the year ended December
31, 2000 were as follows:
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED YEAR ENDED
($ IN MILLIONS) MARCH 31, 2001 DECEMBER 31, 2000
--------------- ------------------ ------------------
Portfolio at Value......................... $583.5 $505.5
New Investments............................ $130.2 $149.0
Repayments................................. $ 9.4 $ 24.8
Sales...................................... $ 35.2 $151.7
Yield...................................... 13.7% 13.1%
The commercial real estate finance portfolio increased 15% from December
31, 2000 to March 31, 2001, and decreased 3% for the year ended December 31,
2000. During 1998, the Company reduced its commercial mortgage loan origination
activity for its own portfolio due to declining interest rates and began to sell
its loans to other lenders. Then, beginning in the fourth quarter of 1998, the
Company began to take advantage of a unique market opportunity to acquire
non-investment grade commercial mortgage-backed securities ("CMBS") at
significant discounts from the face amount of the bonds. Turmoil in the capital
markets at that time created a lack of liquidity for the traditional buyers of
non-investment grade bonds. As a result, yields on these collateralized bonds
increased, thus providing an attractive investment opportunity. The Company
believes that CMBS is an attractive asset class because of the yields that can
be earned on a security that is fully secured by commercial mortgage loans. The
Company has opportunistically purchased CMBS since the fourth quarter of 1998.
The Company plans to continue its CMBS investment activity, however, in order to
maintain a balanced portfolio the Company expects that purchased CMBS will
continue to represent approximately 20% to 25% of total assets during 2001. The
Company's CMBS investment activity level will be dependent upon its ability to
purchase CMBS at attractive yields.
34
39
The Company purchases CMBS at an average discount of 50% from the face
amount of the bonds. During the first quarter of 2001, the Company purchased
$104.4 million in CMBS with a face value of $182.3 million. In addition, the
Company purchased $24.6 million in non-investment grade securities related to a
collateralized debt obligation secured by CMBS and investment grade REIT bonds.
The weighted average yield to maturity on first quarter 2001 purchases is 15.9%
after assuming a 1% loss rate on the underlying collateral mortgage pool. During
2000, the Company purchased $124.3 million in CMBS with a face amount of $244.6
million and a weighted average yield to maturity of 14.7% after assuming a 1%
loss rate on the underlying collateral mortgage pool.
As part of the Company's strategy to maximize its return on equity capital,
during the first quarter of 2001 the Company sold $35.2 million and during the
fourth quarter of 2000 the Company sold $98.7 million of CMBS bonds rated BB+,
BB and BB-. These bonds had an effective yield of 10.5% and 11.5%, and were sold
for $36.1 million and $102.5 million, respectively, resulting in a realized gain
on the sale. The sale of these lower-yielding bonds increased the Company's
overall liquidity. The effective yield on the Company's remaining purchased CMBS
portfolio at March 31, 2001 was 15.6%, after assuming a 1% loss on the entire
underlying mortgage loan pool. At March 31, 2001 and December 31, 2000, the
value of the purchased CMBS portfolio was $406.6 million and $311.3 million and
the unamortized discount was $431.7 million and $364.9 million, respectively.
The original principal balance of the underlying pool of the approximately
2,900 loans that are collateral for the Company's CMBS had underwritten loan to
value ("LTV") and underwritten debt service coverage ratios ("DSCR") as follows:
LOAN TO VALUE RANGES $ %
-------------------- --------- ---
($ IN
MILLIONS)
Less than 60%............................................... $ 1,693.3 12%
60-65%...................................................... 1,219.6 8%
65-70%...................................................... 2,425.1 17%
70-75%...................................................... 4,824.1 33%
75-80%...................................................... 4,304.5 29%
Greater than 80%............................................ 190.7 1%
--------- ---
$14,657.3 100%
========= ===
Weighted average LTV........................................ 69.6%
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- --------- ---
($ IN
MILLIONS)
Greater than 2.00........................................... $ 467.6 3%
1.76-2.00................................................... 446.5 3%
1.51-1.75................................................... 1,694.7 12%
1.26-1.50................................................... 8,333.2 57%
1.00-1.25................................................... 3,715.3 25%
--------- ---
$14,657.3 100%
========= ===
Weighted average DSCR....................................... 1.41
The Company has been liquidating much of its whole commercial mortgage loan
portfolio so that it can redeploy the proceeds into higher yielding assets.
There were no commercial mortgage loan sales for the three months ended March
31, 2001. For the year ended December 31, 2000, the Company sold $53.1 million
of commercial mortgage loans. At March 31, 2001, the Company's
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whole commercial real estate loan portfolio had been reduced to $99.5 million
from $106.4 million at December 31, 2000.
SMALL BUSINESS FINANCE
As discussed above in the Private Finance section, the Company established
its Allied Capital Express operations as an independently managed private
portfolio company at the end of 2000. These operations are now included in the
private finance portfolio.
Allied Capital Express loan activity for the year ended December 31, 2000
was as follows:
($ IN MILLIONS) 2000
--------------- ------
New Investments............................................. $151.6
Repayments.................................................. $ 11.6
Sales....................................................... $128.5
Allied Capital Express loan origination activity for 2000 increased due to
the opening of new regional office locations and from opportunities created by
the Company's Internet site launched in the fall of 1999. Loans in the Allied
Capital Express program were originated for sale; therefore, the increase in
loan sales was the result of the increase in originations. In addition,
beginning in 1999, the Company began to sell 90% of the unguaranteed portion of
SBA 7(a) loans through a structured finance agreement with a commercial paper
conduit. Allied Capital Express targeted small commercial real estate loans that
were, in many cases, originated in conjunction with SBA 7(a) loans. SBA 7(a)
loans were originated with variable interest rates priced at spreads ranging
from 1.75% to 2.75% over the prime lending rate.
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RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000
The following table summarizes Allied Capital's operating results for the
three months ended March 31, 2001 and 2000.
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------- PERCENT
2001 2000 CHANGE CHANGE
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------- ------- -------- -------
INTEREST AND RELATED PORTFOLIO INCOME
Interest and dividends......................... $54,875 $38,812 $ 16,063 41%
Premiums from loan dispositions................ 821 3,289 (2,468) (75)%
Investment advisory fees and other income...... 9,375 1,796 7,579 422%
------- ------- -------- ---
Total interest and related portfolio
income................................. 65,071 43,897 21,174 48%
------- ------- -------- ---
EXPENSES
Interest....................................... 15,930 12,311 3,619 29%
Employee....................................... 6,418 4,569 1,849 40%
Administrative................................. 2,967 2,753 214 8%
------- ------- -------- ---
Total operating expenses.................. 25,315 19,633 5,682 29%
------- ------- -------- ---
Formula and cut-off awards..................... 28 1,691 (1,663) (98)%
------- ------- -------- ---
Net operating income before net realized
and unrealized gains................... 39,728 22,573 17,155 76%
------- ------- -------- ---
NET REALIZED AND UNREALIZED GAINS
Net realized gains............................. 1,154 2,176 (1,022) (47)%
Net unrealized gains........................... 11,146 4,832 6,314 131%
------- ------- -------- ---
Total net realized and unrealized gains... 12,300 7,008 5,292 76%
------- ------- -------- ---
Net increase in net assets resulting from
operations........................................ $52,028 $29,581 $ 22,447 76%
======= ======= ======== ===
Diluted net operating income per share.............. $ 0.46 $ 0.34 $ 0.12 35%
======= ======= ======== ===
Diluted earnings per share.......................... $ 0.60 $ 0.45 $ 0.15 33%
======= ======= ======== ===
Weighted average shares outstanding -- diluted...... 87,059 66,308 20,751 31%
Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses.
Total interest and related portfolio income is primarily a function of the
level of interest income earned and the balance of portfolio assets. In
addition, total interest and related portfolio income
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includes dividend income, premiums from loan dispositions, prepayment premiums,
and investment advisory fees and other income.
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------
2001 2000
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ----- -----
Total Interest and Related Portfolio Income................. $65.1 $43.9
Per share................................................... $0.75 $0.66
The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 22% to $1,542.9 million at March 31, 2001 from $1,260.1 million at
March 31, 2000. The weighted average yield on the interest bearing investments
in the portfolio at March 31, 2001 and 2000 was as follows:
MARCH 31,
-------------
2001 2000
----- -----
Private Finance............................................. 14.7% 13.9%
Commercial Real Estate Finance.............................. 13.7% 12.5%
Small Business Finance...................................... --% 11.3%
Total Portfolio............................................. 14.3% 13.0%
Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. There were no
premiums from loan sales for the three months ended March 31, 2001. For the
three months ended March 31, 2000, premiums from loan sales were $2.2 million,
resulting primarily from the premium paid by purchasers of loans originated
through Allied Capital Express, less the origination commissions associated with
the loans sold. Upon the merger of the Allied Capital Express operations into
BLX, the premium from loan sales earned historically is intended to be replaced
with interest income earned by the Company from its subordinated debt investment
in BLX as well as fees earned from its guaranty of the BLX Credit Facility and
its management contract with BLX.
Prepayment premiums were $0.8 million and $1.1 million for the three months
ended March 31, 2001 and 2000, respectively. While the scheduled maturities of
private finance and commercial real estate loans range from five to ten years,
it is not unusual for the Company's borrowers to refinance or pay off their
debts to the Company ahead of schedule. Because the Company seeks to finance
primarily seasoned, performing companies, such companies at times can secure
lower cost financing as their balance sheets strengthen, or as more favorable
interest rates become available. Therefore, the Company generally structures its
loans to require a prepayment premium for the first three to five years of the
loan.
Investment advisory fees and other income include diligence and structuring
fees from our investing activities of $4.8 million and management and guaranty
fees from BLX of $3.7 million for the three months ended March 31, 2001.
Diligence and structuring fees are separately negotiated on each portfolio
investment, and therefore, may vary from quarter to quarter.
Operating expenses include interest, employee and administrative expenses.
The Company's single largest expense is interest on indebtedness. The
fluctuations in interest expense during the three months ended March 31, 2001
and 2000 are attributable to changes in the level of borrowings by the
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Company and its subsidiaries under various notes payable and debentures and
revolving credit facilities. The Company's borrowing activity and weighted
average interest cost, including fees and closing costs, were as follows:
AT AND FOR THE
THREE MONTHS
ENDED
MARCH 31,
---------------
2001 2000
($ IN MILLIONS) ------ ------
Total Outstanding Debt...................................... $883.8 $683.4
Average Outstanding Debt.................................... $790.1 $627.3
Weighted Average Cost....................................... 7.8% 7.9%
BDC Asset Coverage*......................................... 232% 217%
-------------------------
* As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.
Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects wage increases
and the experience level of employees hired. Total employees were 96 and 125 at
March 31, 2001 and 2000, respectively. As part of the recapitalization of Allied
Capital Express discussed above, employees of the Company were transferred to
the portfolio company at the end of 2000. Expenses related to 30 employees
dedicated to Allied Capital Express are reflected in employee expense and the
number of employees for the three months ended March 31, 2000.
Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices, travel costs, stock record
expenses, directors' fees, legal and accounting fees and various other expenses.
For the three months ended March 31, 2001 and 2000, employee and administrative
costs as a percentage of total interest and related portfolio income less
interest expense plus net realized and unrealized gains was 15% and 19%,
respectively.
The formula and cut-off awards totaled $1.7 million, or $0.03 per share,
for the three months ended March 31, 2000. The formula award vested over a
three-year period which ended on December 31, 2000.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance loans,
commercial mortgage loans and Purchased CMBS bonds, offset by losses on
investments. Realized gains and losses were as follows:
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------
2001 2000
($ IN MILLIONS) ----- -----
Realized Gains.............................................. $ 1.9 $ 2.7
Realized Losses............................................. (0.7) (0.5)
----- -----
Net Realized Gains.......................................... $ 1.2 $ 2.2
===== =====
Net Unrealized Gains........................................ $11.1 $ 4.8
===== =====
Realized gains for the three months ended March 31, 2001 primarily resulted
from a transaction involving one portfolio company, Southwest PCS, LLC ($0.8
million). Realized gains for the three
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44
months ended March 31, 2000 resulted primarily from transactions involving two
portfolio companies. The Company reversed previously recorded unrealized
appreciation totaling $1.1 million and $2.1 million when these gains were
realized for the three months ended March 31, 2001 and 2000, respectively.
Realized losses for the three months ended March 31, 2001 resulted from the
liquidation of certain portfolio investments. Losses realized for the three
months ended March 31, 2001 and 2000 had been recognized in NIA over time as
unrealized depreciation when the Company determined that the respective
portfolio security's value had become impaired. Thus, the Company reversed
previously recorded unrealized depreciation totaling $0.7 million and $0.4
million when the related losses were realized for the three months ended March
31, 2001 and 2000, respectively.
Net unrealized gains for the three months ended March 31, 2001 and 2000
consisted of valuation changes resulting from the Board of Directors' valuation
of the Company's assets and the effect of reversals of unrealized appreciation
or depreciation resulting from realized gains or losses.
The Company increased the value of its equity investment in BLX by $15.5
million at March 31, 2001. During the first quarter, BLX secured a 3-year $117.5
million revolving credit facility and completed a $65 million securitization of
unguaranteed SBA 7(a) loans. As a result of the elimination of the refinancing
risk that existed at the time of the merger, and BLX's progress in merger
integration, the Company increased the value of its equity investment. The
Company also increased the value of its investment in Wyo-Tech Acquisition
Corporation by $8.8 million, due to its continued growth and positive
performance. In addition to BLX and Wyo-Tech, the Company increased the value of
other portfolio companies by $6.1 million in total. These companies increased in
value because of continued positive performance, and valuation data that would
indicate that a valuation increase was necessary.
The Company decreased the value of its common equity investment in Startec
Global Communications Corporation by $3.0 million. The Company also decreased
the value of its debt investment in NETtel Communications, Inc. by $5.0 million.
In addition, the Company decreased the value of other portfolio companies by a
total of $11.3 million.
At March 31, 2001, net unrealized appreciation in the portfolio totaled
$30.5 million and was composed of unrealized appreciation of $75.5 million,
resulting primarily from appreciated equity interests in portfolio companies,
and unrealized depreciation of $45.0 million, resulting primarily from
underperforming loan and equity interests in the portfolio. Net realized and
unrealized gains can vary substantially on a quarterly basis.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value.
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45
At March 31, 2001, the Company's portfolio was graded as follows:
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
1..................................................... $ 430.3 22.8%
2..................................................... 1,323.5 70.2%
3..................................................... 35.3 1.9%
4..................................................... 61.1 3.2%
5..................................................... 36.6 1.9%
-------- -----
$1,886.8 100.0%
======== =====
Included in Grade 4 and 5 investments are assets totaling $14.4 million
that are secured by commercial real estate at March 31, 2001. Grade 5 private
finance investments at March 31, 2001, totaled $34.0 million, at value, or 1.8%,
of the Company's total portfolio, respectively. Total Grade 4 and 5 assets as a
percentage of the total portfolio at value at March 31, 2001 and December 31,
2000 and 1999 were 5.1%, 5.7% and 3.8%, respectively. The Company expects that a
certain number of portfolio companies will be in the Grade 4 or 5 category from
time to time. Part of the business of private finance is working with troubled
portfolio companies to improve their businesses and protect the Company's
investment. The number of portfolio companies and related investment amount
included in Grade 4 and 5 may fluctuate significantly from quarter to quarter as
the Company helps these companies work through their problems. The Company
continues to follow its historical practices of working with a troubled
portfolio company in order to recover the maximum amount of the Company's
investment, but records unrealized depreciation for the expected full amount of
the potential loss when such exposure is identified.
At March 31, 2001, delinquencies in the underlying collateral pool for the
Company's CMBS portfolio were 0.5%. The yield used to accrue interest on this
portfolio assumes a 1% loss rate on the entire underlying collateral mortgage
pool, and as of March 31, 2001, no losses have been realized.
For the total investment portfolio, loans greater than 120 days delinquent
were $55.3 million at value at March 31, 2001, or 2.9% of the total portfolio.
Included in this category are loans valued at $9.8 million that are fully
secured by real estate. Loans greater than 120 days delinquent generally do not
accrue interest. Loans greater than 120 days delinquent at December 31, 2000
were $56.4 million at value, or 3.2% of the total portfolio, which included
$13.3 million that were fully secured by real estate. As a provider of long-term
privately negotiated investment capital, it is not atypical to defer payment of
principal or interest from time to time. As a result, the amount of the
portfolio that is greater than 120 days delinquent may vary from quarter to
quarter. The terms of the private finance agreements frequently provide an
opportunity for portfolio companies to restructure their debt and equity
capital. During such restructuring, the Company may not receive or accrue
interest or dividend payments. The investment portfolio is priced to provide
current returns for our shareholders assuming that a portion of the portfolio at
any time may not be accruing interest currently. The Company also prices its
investments for a total return including current interest or dividends plus
capital gains from the sale of equity securities. Therefore, the amount of loans
greater than 120 days delinquent is not necessarily an indication of future
principal loss or loss of anticipated investment return. The Company's portfolio
grading system is used as a means to assess loss of investment return (Grade 4
assets) or loss of investment principal (Grade 5 assets).
The Company has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). As long as the Company qualifies as a RIC, the Company is not taxed on
its investment company taxable income or
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46
realized capital gains, to the extent that such income or gains are distributed,
or deemed to be distributed, to shareholders on a timely basis. Annual tax
distributions may differ from NIA for the fiscal year due to timing differences
in the recognition of income and expenses, returns of capital and net unrealized
appreciation or depreciation, which are not included in taxable income.
In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest, gains from the
sale of securities and other specified types of income; (2) meet investment
diversification requirements as defined in the Code; and (3) distribute annually
to shareholders at least 90% of its investment company taxable ordinary income.
The Company intends to take all steps necessary to continue to meet the RIC
qualifications. However, there can be no assurance that the Company will
continue to elect or qualify for such treatment in future years.
The weighted average common shares outstanding used to compute basic
earnings per share were 85.5 million and 66.3 million for the three months ended
March 31, 2001 and 2000, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 87.1 million and 66.3 million for the three months ended
March 31, 2001 and 2000, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At March 31, 2001, the Company had $9.4 million in cash and cash
equivalents. The Company invests otherwise uninvested cash in U.S. government-
or agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short-term repurchase
agreements fully collateralized by such securities. The Company's objective is
to manage to a low cash balance and fund new originations with its credit
facilities.
DEBT
The Company had outstanding debt at March 31, 2001 as follows:
ANNUAL
FACILITY AMOUNT INTEREST
AMOUNT OUTSTANDING COST(1)
($ IN MILLIONS) -------- --------------- --------
Notes payable and debentures:
Unsecured long-term notes payable........................ $ 544.0 $544.0 8.0%
SBA debentures........................................... 108.8 87.4 8.3%
Auction rate reset note.................................. 78.2 78.2 7.1%
OPIC loan................................................ 5.7 5.7 6.6%
-------- ------ -----
Total notes payable and debentures................ $ 736.7 $715.3 7.9%
-------- ------ -----
Revolving credit facilities:
Revolving line of credit............................... $ 417.5 $168.5 7.6%
-------- ------
Total debt........................................ $1,154.2 $883.8 7.8%
======== ====== =====
-------------------------
(1) The annual interest cost includes the cost of commitment fees and other
facility fees.
UNSECURED LONG-TERM NOTES PAYABLE. The Company has issued long-term debt
to institutional lenders, primarily insurance companies. The notes have five- or
seven-year maturities, with maturity dates beginning in 2003. The notes require
payment of interest only semi-annually, and all principal is due upon maturity.
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47
SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
payable to the SBA with terms of ten years. The notes require payment of
interest only semi-annually, and all principal is due upon maturity. The Company
may borrow up to $108.8 million from the SBA under the SBIC program. At March
31, 2001, the Company has a commitment to borrow up to an additional $21.4
million from the SBA. The commitment expires on September 30, 2005.
AUCTION RATE RESET NOTE. The Company has a $75 million Auction Rate Reset
Senior Note Series A that matures on December 2, 2002 and bears interest at the
three-month London Inter-Bank Offer Rate ("LIBOR") plus 1.75% which adjusts
quarterly. Interest is due quarterly and the Company, at its option, may pay or
defer and capitalize such interest payments. The amount outstanding on the note
will increase as interest due is deferred and capitalized. As a means to repay
the note, the Company has entered into an agreement to issue $75 million of
debt, equity or other securities in one or more public or private transactions,
or prepay the Auction Rate Reset Note, on or before August 31, 2002. If the note
is prepaid, the Company will pay a fee equal to 0.5% of the aggregate amount of
the note outstanding.
REVOLVING LINE OF CREDIT. The Company has a two-year, $417.5 million
unsecured revolving line of credit that expires in May 2002. This facility may
be expanded up to $500 million. At the Company's option, the credit facility
bears interest at a rate equal to (i) the one-month LIBOR plus 1.25% or (ii) the
higher of (a) the Bank of America, N.A. prime rate or (b) the Federal Funds rate
plus 0.50%. The credit facility requires monthly payments of interest, and all
principal is due upon maturity.
EQUITY CAPITAL AND DIVIDENDS
The Company raises debt and equity capital for continued investment in its
portfolio. Because the Company is a RIC, it distributes its income and requires
external capital for growth. Because the Company is a BDC, it is limited in the
amount of debt capital it may use to fund its growth, since it is generally
required to maintain a ratio of 200% of total assets to total borrowings, or
approximately 1 to 1 debt to equity capital ratio.
To support its growth during the first quarter of 2001, the Company raised
$10.0 million in new equity capital primarily through the sale of shares from
its shelf registration statement. The Company issues equity from time to time
using a shelf registration statement when it has a clear use of proceeds for
attractive investment opportunities. Historically, this process has enabled the
Company to raise equity on an accretive basis for existing shareholders. At
March 31, 2001, total shareholders' equity had increased to $1.05 billion.
The Company's Board reviews the dividend rate quarterly, and adjusts the
quarterly dividend rate throughout the year as the Company's earnings momentum
builds. For the first and second quarter of 2001, the Board declared a $0.49 and
$0.50 per common share dividend, respectively.
As a result of growth in ordinary taxable income combined with the
increased size and diversity of the Company's portfolio and its projected future
capital gains, the Company's Board of Directors will continue to evaluate
whether to retain or distribute capital gains as they occur. The Company's
dividend policy allows the Company to continue to distribute some capital gains,
but will also allow the Company to retain gains that exceed a normal capital
gains distribution level, and therefore avoid any unusual spike in dividends in
any one year. The dividend policy also enables the Board to selectively retain
gains to support future growth.
The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowings under short- or long-term credit facilities or other debt securities,
through asset sales, or through the sale or issuance of new equity
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capital. The Company will utilize its short-term credit facilities only as a
means to bridge to long-term financing. The Company evaluates its interest rate
exposure on an ongoing basis. The Company maintains a matched-funding philosophy
that focuses on matching the estimated maturities of its loan and investment
portfolio to the estimated maturities of its borrowings. To the extent deemed
necessary, the Company may hedge variable and short-term interest rate exposure
through interest rate swaps or other techniques. At March 31, 2001, the
Company's debt to equity ratio was less than 1 to 1 and weighted average cost of
funds was 7.8%. There are no significant maturities of long-term debt until
2003. The Company believes that it has access to capital sufficient to fund its
ongoing investment and operating activities, and from which to pay dividends.
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INVESTMENT CONSIDERATIONS
Investing in the Company involves a number of significant risks and other
factors relating to the structure and investment objective of the Company. As a
result, there can be no assurance that the Company will achieve its investment
objective.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our
portfolio consists primarily of long-term loans to and investments in private
companies. Investments in private businesses involve a high degree of business
and financial risk, which can result in substantial losses and accordingly
should be considered speculative. There is generally no publicly available
information about the companies in which we invest, and we rely significantly on
the diligence of our employees and agents to obtain information in connection
with the Company's investment decisions. In addition, some smaller businesses
have narrower product lines and market shares than their competition, and may be
more vulnerable to customer preferences, market conditions or economic
downturns, which may adversely affect the return on, or the recovery of, our
investment in such businesses.
OUR FINANCIAL RESULTS COULD BE NEGATIVELY AFFECTED IF BLX FAILS TO PERFORM
AS EXPECTED. Business Loan Express, Inc. ("BLX") is our largest portfolio
investment. Our financial results could be negatively affected if BLX, as a
portfolio company, fails to perform as expected. At March 31, 2001, the
investment totaled $211.1 million, or 10.7% of total assets. In addition, as
controlling shareholder of BLX, the Company has provided an unconditional
guaranty to BLX's credit facility lenders in an amount equal to 50% of BLX's
total obligations on its $117.5 million unsecured revolving credit facility. The
amount guaranteed by the Company at March 31, 2001 was $37.7 million. This
guaranty can only be called in the event of a default by BLX.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS. We make unsecured,
subordinated loans and invest in equity securities, which may involve a higher
degree of repayment risk. We primarily invest in and lend to companies that may
have limited financial resources and that may be unable to obtain financing from
traditional sources. Numerous factors may affect a borrower's ability to repay
its loan, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. Deterioration in a borrower's
financial condition and prospects may be accompanied by deterioration in any
collateral for the loan.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We acquire most of our
investments directly from private companies. The majority of the investments in
our portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of our portfolio may
adversely affect our ability to dispose of loans and securities at times when it
may be advantageous for us to liquidate such investments.
INVESTMENTS IN NON-INVESTMENT GRADE COMMERCIAL MORTGAGE-BACKED SECURITIES
MAY BE ILLIQUID AND MAY HAVE A HIGHER RISK OF DEFAULT. The commercial
mortgage-backed securities ("CMBS") in which we invest are non-investment grade,
which means that nationally recognized statistical rating organizations rate
them below the top four investment-grade rating categories (i.e., "AAA" through
"BBB"), and are sometimes referred to as "junk bonds." The non-investment grade
CMBS tend to be less liquid, may have a higher risk of default and may be more
difficult to value. Non-investment grade securities usually provide a higher
yield than do investment-grade bonds, but with the higher return comes greater
risk. Non-investment grade securities are considered speculative, and their
capacity to pay principal and interest in accordance with the terms of their
issue is not ensured.
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OUR PORTFOLIO INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED BY THE
BOARD OF DIRECTORS IN ABSENCE OF READILY ASCERTAINABLE PUBLIC MARKET
VALUES. Pursuant to the requirements of the Investment Company Act of 1940
("1940 Act"), the Board of Directors is required to value each asset quarterly,
and we are required to carry our portfolio at fair value as determined by the
Board of Directors. Since there is typically no public market for the loans and
equity securities of the companies in which we make investments, our Board of
Directors estimates the fair value of these loans and equity securities pursuant
to a written valuation policy and a consistently applied valuation process.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses; we are instead required by the 1940 Act to specifically value each
individual investment and record an unrealized loss for an asset that we believe
has become impaired. Without a readily ascertainable market value, the estimated
value of our portfolio of loans and equity securities may differ significantly
from the values that would be placed on the portfolio if there existed a ready
market for the loans and equity securities. We adjust quarterly the valuation of
our portfolio to reflect the Board of Directors' estimate of the current
realizable value of each investment in our portfolio. Any changes in estimated
value are recorded in the Company's statement of operations as "Net unrealized
gains (losses)."
WE BORROW MONEY WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN OUR COMPANY. We borrow from,
and issue senior debt securities to, banks, insurance companies and other
lenders. Lenders of these senior securities have fixed dollar claims on our
consolidated assets that are superior to the claims of our common shareholders.
Borrowings, also known as leverage, magnify the potential for gain or loss on
amounts invested and, therefore, increase the risks associated with investing in
our securities. If the value of our consolidated assets increases, then
leveraging would cause the net asset value attributable to the Company's common
stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments. Leverage is generally considered
a speculative investment technique.
At March 31, 2001, the Company had $883.8 million of outstanding
indebtedness, bearing a weighted annual interest cost of 7.8%. In order for us
to cover these annual interest payments on indebtedness, we must achieve annual
returns on our portfolio of at least 3.5%.
WE MAY NOT BORROW MONEY UNLESS WE MAINTAIN ASSET COVERAGE FOR INDEBTEDNESS
OF AT LEAST 200% WHICH MAY AFFECT RETURNS TO SHAREHOLDERS. We must maintain
asset coverage for a class of senior security representing indebtedness of at
least 200%. Our ability to achieve our investment objective may depend in part
on our continued ability to maintain a leveraged capital structure by borrowing
from banks or other lenders on favorable terms. There can be no assurance that
we will be able to maintain such leverage. If asset coverage declines to less
than 200%, we may be required to sell a portion of our investments when it is
disadvantageous to do so. As of March 31, 2001, our asset coverage for
indebtedness was 232%.
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CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL AND NET OPERATING
INCOME. Because we borrow money to make investments, our net operating income is
dependent upon the difference between the rate at which we borrow funds and the
rate at which we invest these funds. As a result, there can be no assurance that
a significant change in market interest rates will not have a material adverse
effect on our portfolio income. In periods of sharply rising interest rates, our
cost of funds would increase, which would reduce our net operating income before
net realized and unrealized gains. However, there would be no effect on the
return, if any, that could be generated from our equity interests. We use a
combination of long-term and short-term borrowings and equity capital to finance
our investing activities. The Company utilizes its short-term credit facilities
only as a means to bridge to long-term financing. Our long-term fixed-rate
investments are financed primarily with long-term fixed-rate debt and equity. We
may use interest rate risk management techniques in an effort to limit our
exposure to interest rate fluctuations. Such techniques may include various
interest rate hedging activities to the extent permitted by the 1940 Act.
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL
CAPITAL TO GROW. We will continue to need capital to fund incremental growth in
our investments. Historically, we have borrowed from financial institutions and
have issued equity securities. A reduction in the availability of new capital
could limit our ability to grow. We must distribute at least 90% of our taxable
net operating income excluding net realized long-term capital gains to our
stockholders to maintain our regulated investment company ("RIC") status. As a
result such earnings will not be available to fund investment originations. We
expect to continue to borrow from financial institutions and sell additional
equity securities. If we fail to obtain funds from such sources or from other
sources to fund our investments, it could limit our ability to grow, which could
have a material adverse effect on the value of the Company's common stock. In
addition, as a business development company ("BDC"), we are generally required
to maintain a ratio of at least 200% of total assets to total borrowings, which
may restrict our ability to borrow in certain circumstances.
OUR PRIVATE FINANCE INVESTMENTS MAY NOT PRODUCE CAPITAL GAINS. Private
finance investments are typically structured as debt securities with a
relatively high fixed rate of interest and with an equity feature such as
conversion rights, warrants or options. As a result, private finance investments
generate interest income from the time they are made, and may also produce a
realized gain from an accompanying equity feature. We cannot be sure that our
portfolio will generate a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS
AND INCOME AVAILABLE FOR DIVIDENDS. We have operated the Company so as to
qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). If we meet source of income, diversification and
distribution requirements, the Company qualifies for pass-through tax treatment.
If the Company fails to qualify as a RIC, the Company would become subject to
federal income tax as if it were an ordinary corporation, which would
substantially reduce our net assets and the amount of income available for
distribution to our shareholders. The Company would cease to qualify for
pass-through tax treatment if it were unable to comply with these requirements,
or if it ceased to qualify as a BDC under the 1940 Act. We also could be subject
to a 4% excise tax and/or corporate level income tax if we fail to make required
distributions.
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WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We
compete for investments with many other companies and individuals, some of whom
have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.
CHANGES IN THE LAW OR REGULATIONS THAT GOVERN THE COMPANY COULD HAVE A
MATERIAL IMPACT ON THE COMPANY OR OUR OPERATIONS. We are regulated by the
Securities and Exchange Commission and the SBA. In addition, changes in the laws
or regulations that govern BDCs, RICs, real estate investment trusts ("REITs")
and SBICs may significantly affect our business. Any change in the law or
regulations that govern our business could have a material impact on the Company
or its operations. Laws and regulations may be changed from time to time, and
the interpretations of the relevant laws and regulations also are subject to
change.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE
QUARTERLY PERFORMANCE. The Company's quarterly operating results could fluctuate
and therefore, you should not rely on quarterly results to be indicative of the
Company's performance in future quarters. Factors that could cause quarterly
operating results to fluctuate include, among others, variations in the
investment origination volume, variation in timing of prepayments, variations in
and the timing of the recognition of realized and unrealized gains or losses,
the degree to which we encounter competition in our markets and general economic
conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the quantitative or qualitative
disclosures about market risk since December 31, 2000.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in the normal course of business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, the Company does not expect that these proceedings will have a
material effect upon the Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2001 ACC issued a total of 78,197
shares pursuant to a dividend reinvestment plan. This plan is not registered and
relies on an exemption from registration in the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3(i)(a)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(i)(b)(2) Articles of Merger.
3(i)(c)(14) Amendment to the Amended and Restated Articles of
Incorporation.
3(ii)10 Bylaws.
4.1(4) Specimen certificate of the Company's Common stock, par
value $0.0001 per share. See exhibits 3(i), 3(ii) and 3(iii)
for other instruments defining the rights of security
holders.
4.2(2) Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
5 Not applicable.
9 Not applicable.
10.1(14) Amended and Restated Credit Agreement dated May 17, 2000.
10.2(5) Note Agreement dated as of April 30, 1998.
10.3(3) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
10.4(8) Note Agreement dated as of May 1, 1999.
10.4a(10) Note Agreement dated as of November 15, 1999.
10.4b(13) Note Agreement dated as of October 15, 2000.
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.4c(14) Auction Rate Reset Note Agreement, dated as of August 31,
2000 between the Company and Intrepid Funding Master Trust,
a Delaware business trust administered by Banc of America
Securities LLC; Forward Issuance Agreement, dated as of
August 31, 2000, between the Company and Banc of America
Securities LLC; Remarketing and Contingency Purchase
Agreement, dated as of August 31, 2000 between the Company
and Banc of America Securities LLC.
10.5(14) Amendment and Consent Agreement to the Amended and Restated
Credit Agreement dated December 11, 2000.
10.6(4) Sale and Servicing Agreement dated as of January 1, 1998
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and the Company and LaSalle National
Bank Inc. and ABN AMRO Bank N.V.
10.7(4) Indenture dated as of January 1, 1998 between Allied Capital
Commercial Mortgage Trust 1998-1 and LaSalle National Bank.
10.8(4) Amended and Restated Trust Agreement dated January 1, 1998
between Allied Capital CMT, Inc., LaSalle National Bank Inc.
and Wilmington Trust Company.
10.9(4) Guaranty dated as of January 1, 1998 by the Company.
10.10a(14) Employment agreement dated June 15, 2000 between the Company
and William L. Walton.
10.10b(14) Employment agreement dated June 15, 2000 between the Company
and Joan M. Sweeney.
10.10c(14) Employment agreement dated June 15, 2000 between the Company
and John M. Scheurer.
10.11(7) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
10.11a(14) Amendment to Deferred Compensation Plan dated October 18,
2000.
10.12(6) Amended Stock Option Plan.
10.12a(9) Allied Capital 401(k) Plan dated September 1, 1999.
10.12b(14) Amendment to 401(k) Plan dated December 31, 2000.
10.13a(4) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
10.13b(4) Form of Custody Agreement with La Salle National Bank.
10.14a(11) Agreement and Plan of Merger dated October 31, 2000 by and
among the Company, Allied Capital B Sub Corporation, and BLC
Financial Services, Inc.
10.14b(12) Voting and Support Agreement with key shareholders of BLC
Financial Services, Inc.
10.14c(12) Lockup Agreement with key shareholders of BLC Financial
Services, Inc.
10.14d(12) Agreement and Plan of Merger dated as of October 31, 2000 by
and among the Company, Allied Capital F Sub Corporation and
Futuronics Corporation.
10.14e(12) Voting and Support Agreement with key shareholders of
Futuronics Corporation dated October 31, 2000.
10.14f(12) Lockup Agreement with key shareholders of Futuronics
Corporation dated October 31, 2000.
10.15(14) Control Investor Guaranty Agreement, dated as of March 28,
2001, between the Company and Fleet National Bank, in its
capacity as Administrative Agent for the Lenders and
Business Loan Express, Inc.
10.18(1) Dividend Reinvestment Plan.
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
11 Statement regarding computation of per share earnings is
incorporated by reference to Note 8 to the Company's Notes
to the Consolidated Financial Statements contained in the
Company's 2000 Annual Report on Form 10-K for the year ended
December 31, 2000.
21 Subsidiaries of the Company and jurisdiction of
incorporation/organization:
Allied Investment Corporation Maryland
Allied Capital REIT, Inc. Maryland
Allied Capital Holdings LLC Delaware
Allied Capital Beteiligungsberatung GmbH Germany
--------------------
(1) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(2) Incorporated by reference to the exhibit of the same name filed with
Allied I's Annual Report on Form 10-K for the year ended December 31,
1996.
(3) Incorporated by reference to Exhibit f.7 of Allied I's Pre-Effective
Amendment No. 2 filed with the registration statement on Form N-2 on
January 24, 1996 (File No. 33-64629). Assignment to Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(4) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on May 5, 1998 (File No. 333-51899).
(5) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
(6) Incorporated by reference to Exhibit A of the Company's definitive
proxy materials for the Company's 2000 Annual Meeting of Stockholders
filed with the Commission on March 29, 2000.
(7) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
(8) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1999.
(9) Incorporated by reference to Exhibit 4.4 of the Allied Capital 401(k)
Plan registration statement on Form S-8, filed on behalf of such Plan
on October 8, 1999 (File No. 333-88681).
(10) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
(11) Incorporated by reference to Appendix A to the Company's registration
statement on Form N-14 filed on the Company's behalf with the
Commission on November 6, 2000.
(12) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-14 filed on the Company's
behalf with the Commission on November 6, 2000.
(13) Incorporated by reference to the exhibit of the same name to the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 2000.
(14) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 (File No. 333-43534) as
amended.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended March
31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALLIED CAPITAL CORPORATION
(Registrant)
Dated: May 15, 2001 /s/ PENNI F. ROLL
----------------------------------------------
Executive Vice President and Chief Financial
Officer
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