FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
| x |
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For The Quarterly
Period
Ended March 31,
2008
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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) 721-6100
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 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 o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting
company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES o NO x
On May 9, 2008, there were 169,691,875 shares outstanding of the
Registrant’s common stock, $0.0001 par value.
ALLIED
CAPITAL CORPORATION
FORM 10-Q TABLE OF CONTENTS
|
PART I. FINANCIAL INFORMATION
|
||
|
Item 1. Financial Statements
|
||
|
Consolidated Balance Sheet as of March 31, 2008 (unaudited)
and
December 31, 2007 |
1 | |
|
Consolidated Statement of Operations (unaudited) — For the
Three Months Ended March 31, 2008 and 2007
|
2 | |
|
Consolidated Statement of Changes in Net Assets (unaudited)
— For the Three Months Ended March 31, 2008 and 2007
|
3 | |
|
Consolidated Statement of Cash Flows (unaudited) — For the
Three Months Ended March 31, 2008 and 2007
|
4 | |
|
Consolidated Statement of Investments as of March 31,
2008
(unaudited) |
5 | |
|
Consolidated Statement of Investments as of December 31,
2007
|
22 | |
|
Notes to Consolidated Financial Statements
|
37 | |
|
Report of Independent Registered Public Accounting Firm
|
69 | |
|
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
73 | |
|
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
|
110 | |
|
Item 4. Controls and Procedures
|
110 | |
|
PART II. OTHER INFORMATION
|
||
|
Item 1. Legal Proceedings
|
111 | |
|
Item 1A. Risk Factors
|
112 | |
|
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
|
118 | |
|
Item 3. Defaults Upon Senior Securities
|
119 | |
|
Item 4. Submission of Matters to a Vote of Security
Holders
|
119 | |
|
Item 5. Other Information
|
120 | |
|
Item 6. Exhibits
|
120 | |
|
Signatures
|
124 |
PART I:
FINANCIAL INFORMATION
Item
1. Financial Statements
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
|
March 31, |
December 31, |
|||||
| (in thousands, except per share amounts) | 2008 | 2007 | ||||
|
(unaudited) |
||||||
|
ASSETS
|
||||||
|
Portfolio at value:
|
||||||
|
Private finance
|
||||||
|
Companies more than 25% owned (cost:
2008-$1,656,009;
2007-$1,622,094)
|
$ | 1,157,473 | $ | 1,279,080 | ||
|
Companies 5% to 25% owned (cost:
2008-$361,410;
2007-$426,908)
|
381,758 | 389,509 | ||||
|
Companies less than 5% owned (cost:
2008-$3,001,894;
2007-$2,994,880)
|
2,980,548 | 2,990,732 | ||||
|
Total private finance (cost:
2008-$5,019,313;
2007-$5,043,882)
|
4,519,779 | 4,659,321 | ||||
|
Commercial real estate finance (cost:
2008-$89,707;
2007-$96,942)
|
115,854 | 121,200 | ||||
|
Total portfolio at value (cost:
2008-$5,109,020;
2007-$5,140,824)
|
4,635,633 | 4,780,521 | ||||
|
Investments in U.S. Treasury bills, money market and other
securities
|
120,406 | 201,222 | ||||
|
Accrued interest and dividends receivable
|
73,709 | 71,429 | ||||
|
Other assets
|
171,327 | 157,864 | ||||
|
Cash
|
81,167 | 3,540 | ||||
|
Total assets
|
$ | 5,082,242 | $ | 5,214,576 | ||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||
|
Liabilities:
|
||||||
|
Notes payable and debentures (maturing within one year:
2008-$170,813;
2007-$153,000)
|
$ | 1,922,813 | $ | 1,922,220 | ||
|
Revolving line of credit
|
268,750 | 367,250 | ||||
|
Accounts payable and other liabilities
|
62,261 | 153,259 | ||||
|
Total liabilities
|
2,253,824 | 2,442,729 | ||||
|
Commitments and contingencies
|
||||||
|
Shareholders’ equity:
|
||||||
|
Common stock, $0.0001 par value, 400,000 shares authorized;
166,472 and 158,002 shares issued and outstanding at
March 31, 2008, and December 31, 2007, respectively
|
16 | 16 | ||||
|
Additional paid-in capital
|
2,823,218 | 2,657,939 | ||||
|
Common stock held in deferred compensation trusts
|
— | (39,942) | ||||
|
Notes receivable from sale of common stock
|
(2,549) | (2,692) | ||||
|
Net unrealized appreciation (depreciation)
|
(492,731) | (379,327) | ||||
|
Undistributed earnings
|
500,464 | 535,853 | ||||
|
Total shareholders’ equity
|
2,828,418 | 2,771,847 | ||||
|
Total liabilities and shareholders’ equity
|
$ | 5,082,242 | $ | 5,214,576 | ||
|
Net asset value per common share
|
$ | 16.99 | $ | 17.54 | ||
The accompanying notes are an
integral part of these consolidated financial statements.
1
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three |
||||||||
|
Months Ended |
||||||||
| March 31, | ||||||||
| (in thousands, except per share amounts) | 2008 | 2007 | ||||||
|
(unaudited) |
||||||||
|
Interest and Related Portfolio Income:
|
||||||||
|
Interest and dividends
|
||||||||
|
Companies more than 25% owned
|
$ | 28,624 | $ | 27,157 | ||||
|
Companies 5% to 25% owned
|
12,674 | 11,861 | ||||||
|
Companies less than 5% owned
|
93,362 | 62,965 | ||||||
|
Total interest and dividends
|
134,660 | 101,983 | ||||||
|
Fees and other income
|
||||||||
|
Companies more than 25% owned
|
5,465 | 3,989 | ||||||
|
Companies 5% to 25% owned
|
53 | 28 | ||||||
|
Companies less than 5% owned
|
4,766 | 1,952 | ||||||
|
Total fees and other income
|
10,284 | 5,969 | ||||||
|
Total interest and related portfolio income
|
144,944 | 107,952 | ||||||
|
Expenses:
|
||||||||
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Interest
|
37,560 | 30,288 | ||||||
|
Employee
|
22,652 | 21,928 | ||||||
|
Employee stock options
|
4,195 | 3,661 | ||||||
|
Administrative
|
9,019 | 13,224 | ||||||
|
Total operating expenses
|
73,426 | 69,101 | ||||||
|
Net investment income before income taxes
|
71,518 | 38,851 | ||||||
|
Income tax expense (benefit), including excise tax
|
1,969 | (649 | ) | |||||
|
Net investment income
|
69,549 | 39,500 | ||||||
|
Net Realized and Unrealized Gains (Losses):
|
||||||||
|
Net realized gains (losses)
|
||||||||
|
Companies more than 25% owned
|
(303 | ) | (1,350 | ) | ||||
|
Companies 5% to 25% owned
|
1,243 | 166 | ||||||
|
Companies less than 5% owned
|
2,203 | 28,850 | ||||||
|
Total net realized gains
|
3,143 | 27,666 | ||||||
|
Net change in unrealized appreciation or depreciation
|
(113,404 | ) | 65,920 | |||||
|
Total net gains (losses)
|
(110,261 | ) | 93,586 | |||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (40,712 | ) | $ | 133,086 | |||
|
Basic earnings (loss) per common share
|
$ | (0.25 | ) | $ | 0.89 | |||
|
Diluted earnings (loss) per common share
|
$ | (0.25 | ) | $ | 0.87 | |||
|
Weighted average common shares outstanding — basic
|
161,507 | 149,503 | ||||||
|
Weighted average common shares outstanding — diluted
|
161,507 | 152,827 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements.
2
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three Months |
||||||||
| Ended March 31, | ||||||||
| (in thousands, except per share amounts) | 2008 | 2007 | ||||||
|
(unaudited) |
||||||||
|
Operations:
|
||||||||
|
Net investment income
|
$ | 69,549 | $ | 39,500 | ||||
|
Net realized gains
|
3,143 | 27,666 | ||||||
|
Net change in unrealized appreciation or depreciation
|
(113,404 | ) | 65,920 | |||||
|
Net increase (decrease) in net assets resulting from operations
|
(40,712 | ) | 133,086 | |||||
|
Shareholder distributions:
|
||||||||
|
Common stock dividends
|
(108,081 | ) | (95,753 | ) | ||||
|
Net decrease in net assets resulting from shareholder
distributions
|
(108,081 | ) | (95,753 | ) | ||||
|
Capital share transactions:
|
||||||||
|
Sale of common stock
|
170,883 | 93,784 | ||||||
|
Issuance of common stock in lieu of cash distributions
|
3,751 | 4,266 | ||||||
|
Issuance of common stock upon the exercise of stock options
|
— | 1,366 | ||||||
|
Stock option expense
|
4,195 | 3,661 | ||||||
|
Net decrease in notes receivable from sale of common stock
|
143 | 135 | ||||||
|
Purchase of common stock held in deferred compensation trusts
|
(943 | ) | (3,089 | ) | ||||
|
Distribution of common stock held in deferred compensation trusts
|
27,335 | 53 | ||||||
|
Other
|
— | (476 | ) | |||||
|
Net increase in net assets resulting from capital share
transactions
|
205,364 | 99,700 | ||||||
|
Total increase in net assets
|
56,571 | 137,033 | ||||||
|
Net assets at beginning of period
|
2,771,847 | 2,841,244 | ||||||
|
Net assets at end of period
|
$ | 2,828,418 | $ | 2,978,277 | ||||
|
Net asset value per common share
|
$ | 16.99 | $ | 19.58 | ||||
|
Common shares outstanding at end of period
|
166,472 | 152,124 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements.
3
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three Months |
||||||||
| Ended March 31, | ||||||||
| (in thousands) | 2008 | 2007 | ||||||
|
(unaudited) |
||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (40,712 | ) | $ | 133,086 | |||
|
Adjustments:
|
||||||||
|
Portfolio investments
|
(275,130 | ) | (170,216 | ) | ||||
|
Principal collections related to investment repayments or sales
|
264,777 | 235,509 | ||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
(13,392 | ) | (8,143 | ) | ||||
|
Change in accrued interest and dividends
|
(2,280 | ) | (3,124 | ) | ||||
|
Net collection (amortization) of discounts and fees
|
(3,748 | ) | (1,844 | ) | ||||
|
Redemption of (investments in) U.S. Treasury bills, money market
and other securities
|
80,834 | (66,335 | ) | |||||
|
Stock option expense
|
4,195 | 3,661 | ||||||
|
Changes in other assets and liabilities
|
(46,218 | ) | (40,453 | ) | ||||
|
Depreciation and amortization
|
528 | 507 | ||||||
|
Realized gains from the receipt of notes and other consideration
from sale of investments, net of collections
|
(565 | ) | (2,814 | ) | ||||
|
Realized losses
|
29,597 | 5,515 | ||||||
|
Net change in unrealized (appreciation) or depreciation
|
113,404 | (65,920 | ) | |||||
|
Net cash provided by operating activities
|
111,290 | 19,429 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Sale of common stock
|
170,883 | 93,784 | ||||||
|
Sale of common stock upon the exercise of stock options
|
— | 1,366 | ||||||
|
Collections of notes receivable from sale of common stock
|
143 | 135 | ||||||
|
Borrowings under notes payable
|
— | 200,000 | ||||||
|
Net borrowings under (repayments on) revolving line of credit
|
(98,500 | ) | (207,750 | ) | ||||
|
Purchase of common stock held in deferred compensation trusts
|
(943 | ) | (3,089 | ) | ||||
|
Other financing activities
|
(916 | ) | (6,325 | ) | ||||
|
Common stock dividends and distributions paid
|
(104,330 | ) | (98,910 | ) | ||||
|
Net cash provided by (used in) financing activities
|
(33,663 | ) | (20,789 | ) | ||||
|
Net increase (decrease) in cash
|
77,627 | (1,360 | ) | |||||
|
Cash at beginning of period
|
3,540 | 1,687 | ||||||
|
Cash at end of period
|
$ | 81,167 | $ | 327 | ||||
The accompanying notes are an
integral part of these consolidated financial statements.
4
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
AGILE Fund I,
LLC(5)
|
Equity Interests | $ | 860 | $ | 860 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 860 | 860 | |||||||||||
|
Alaris Consulting, LLC
|
Senior Loan (16.5%, Due 12/05 – 12/07)(6) | $ | 27,055 | 26,986 | — | |||||||||
|
(Business Services)
|
Equity Interests | 6,400 | — | |||||||||||
| Total Investment | 33,386 | — | ||||||||||||
| Guaranty ($1,100) | ||||||||||||||
| Standby Letters of Credit ($231) | ||||||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 21,744 | 15,470 | |||||||||||
|
(Asset Management)
|
Total Investment | 21,744 | 15,470 | |||||||||||
| Standby Letter of Credit ($30,000) | ||||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Equity Interests (See Note 3) | 31,800 | 32,605 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 32,605 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | 611 | 1,684 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | 611 | 1,684 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Preferred Stock (1,568 shares) | — | 157 | |||||||||||
|
(Business Services)
|
Common Stock (2,750 shares) | — | 1,037 | |||||||||||
| Total Investment | — | 1,194 | ||||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 65 | — | |||||||||||
|
(Business Services)
|
Total Investment | 65 | — | |||||||||||
| Standby Letters of Credit ($1,000) | ||||||||||||||
|
Border Foods, Inc.
|
Preferred Stock (100,000 shares) | 12,721 | 3,141 | |||||||||||
|
(Consumer Products)
|
Common Stock (148,838 shares) | 3,847 | — | |||||||||||
| Total Investment | 16,568 | 3,141 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (9.4%, Due 5/09)(6) | 2,880 | 2,880 | 3,073 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,397 | 3,534 | |||||||||||
| Total Investment | 5,277 | 6,607 | ||||||||||||
|
Callidus Capital Corporation
|
Senior Loan (12.0%, Due 12/08) | 1,500 | 1,500 | 1,500 | ||||||||||
|
(Asset Management)
|
Subordinated Debt (16.6%, Due 10/08 – 2/14) | 11,180 | 11,180 | 11,180 | ||||||||||
| Common Stock (100 shares) | 2,067 | 40,022 | ||||||||||||
| Total Investment | 14,747 | 52,702 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(7)
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies. |
The accompanying notes are an
integral part of these consolidated financial statements.
5
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Ciena Capital LLC
|
Class A Equity Interests (25.0% — See Note 3)(6) | $ | 99,044 | $ | 99,044 | $ | 29,291 | |||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 109,301 | — | ||||||||||||
| Total Investment | 327,781 | 29,291 | ||||||||||||
| Guaranty ($384,819 — See Note 3) | ||||||||||||||
|
Standby Letters of Credit ($59,500 — See Note 3) |
||||||||||||||
|
CitiPostal Inc.
|
Senior Loan (6.1%, Due 12/13) | 691 | 680 | 680 | ||||||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 51,369 | 51,126 | 51,126 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 8,092 | 8,092 | 8,092 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | 16,777 | ||||||||||||
| Total Investment | 72,624 | 76,675 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 32,035 | 31,923 | 31,923 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 5,563 | 5,545 | 5,545 | ||||||||||
| Common Stock (763,333 shares) | 14,362 | 28,008 | ||||||||||||
| Total Investment | 51,830 | 65,476 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13) | 38,306 | 38,180 | 38,180 | ||||||||||
|
(Consumer Products)
|
Common Stock (32,090,696 shares) | 28,744 | 27,482 | |||||||||||
| Total Investment | 66,924 | 65,662 | ||||||||||||
|
Crescent Equity
Corp.(8)
|
Senior Loan (10.0%, Due 12/07) | 433 | 433 | 433 | ||||||||||
|
(Business Services/
|
Subordinated Debt (11.0%, Due 1/10 – 6/17) | 31,095 | 30,979 | 30,979 | ||||||||||
|
Broadcasting & Cable)
|
Subordinated Debt (12.5%, Due 11/07 – 3/08)(6) | 1,450 | 1,450 | 1,683 | ||||||||||
| Common Stock (174 shares) | 80,571 | 24,313 | ||||||||||||
| Total Investment | 113,433 | 57,408 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
| Standby Letters of Credit ($200) | ||||||||||||||
|
Direct Capital Corporation
|
Subordinated Debt (16.0%, Due 3/13) | 49,841 | 49,706 | 49,706 | ||||||||||
|
(Financial Services)
|
Common Stock (1,809,159 shares) | 22,644 | 11,006 | |||||||||||
| Total Investment | 72,350 | 60,712 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 68,056 | 67,898 | 67,898 | ||||||||||
|
(Financial Services)
|
Preferred Stock (9,458 shares) | 8,865 | 17,551 | |||||||||||
| Common Stock (12,711 shares) | 12,783 | 24,021 | ||||||||||||
| Total Investment | 89,546 | 109,470 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Crescent Equity Corp. had a cost basis of $113.4 million and holds investments in Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a value of $54.9 million, and Longview Cable & Data, LLC (Broadcasting & Cable) with a value of $2.6 million, for a total value of $57.4 million. |
The accompanying notes are an
integral part of these consolidated financial statements.
6
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | $ | — | $ | 803 | |||||||||
|
(Tower Leasing)
|
Total Investment | — | 803 | |||||||||||
|
Global Communications, LLC
|
Senior Loan (10.0%, Due 9/02)(6) | $ | 1,350 | 1,350 | 1,350 | |||||||||
|
(Business Services)
|
Total Investment | 1,350 | 1,350 | |||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan (9.0%, Due 2/11)(6) | 29,277 | 29,277 | 29,628 | ||||||||||
|
(Retail)
|
Common Stock (93,500 shares) | 5,151 | 1,150 | |||||||||||
| Total Investment | 34,428 | 30,778 | ||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (6.2%, Due 2/11-2/12) | 52,414 | 52,238 | 52,238 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (9.9%, Due 8/12) | 30,540 | 30,452 | 20,399 | ||||||||||
| Subordinated Debt (15.4%, Due 2/13)(6) | 52,373 | 52,151 | — | |||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 191,028 | 72,637 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/12) | 55,927 | 55,717 | 55,717 | ||||||||||
|
(Retail)
|
Common Stock (358,428 shares) | 35,828 | 36,824 | |||||||||||
| Total Investment | 91,545 | 92,541 | ||||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 321 | |||||||||||
|
(Business Services)
|
Total Investment | — | 321 | |||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | 45,554 | 45,441 | 45,441 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (19.0%, Due 9/12)(6) | 16,181 | 16,130 | 16,967 | ||||||||||
| Preferred Stock (25,000 shares) | 25,000 | 10,561 | ||||||||||||
| Common Stock (620,000 shares) | 6,325 | — | ||||||||||||
| Total Investment | 92,896 | 72,969 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 748 | 748 | 748 | ||||||||||
|
(Industrial Products)
|
Total Investment | 748 | 748 | |||||||||||
|
Legacy Partners Group, Inc.
|
Senior Loan (14.0%, Due 5/09)(6) | 843 | 843 | 843 | ||||||||||
|
(Financial Services)
|
Equity Interests | 4,261 | 1,145 | |||||||||||
| Total Investment | 5,104 | 1,988 | ||||||||||||
|
Litterer
Beteiligungs-GmbH(4)
|
Subordinated Debt (8.0%, Due 3/07) | 828 | 828 | 828 | ||||||||||
|
(Business Services)
|
Equity Interest | 1,809 | 850 | |||||||||||
| Total Investment | 2,637 | 1,678 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
7
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt (13.0%, Due 6/12 – 6/13)(6) | $ | 49,841 | $ | 49,613 | $ | 9,319 | |||||||
|
(Business Services)
|
Preferred Stock (10,000 shares) | — | — | |||||||||||
| Common Stock (20,934 shares) | 20,942 | — | ||||||||||||
| Total Investment | 70,555 | 9,319 | ||||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 6/09 – 7/09) | 30,674 | 30,645 | 30,645 | ||||||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 6/09 – 7/09) | 40,447 | 40,239 | 40,239 | ||||||||||
| Common Stock (559,377 shares) | 555 | 4,373 | ||||||||||||
| Total Investment | 71,439 | 75,257 | ||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt (18.0%, Due 7/14) | 18,402 | 18,325 | 18,325 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 15,857 | 25,302 | |||||||||||
| Total Investment | 34,182 | 43,627 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt (15.5%, Due 8/13) | 37,145 | 37,011 | 37,011 | ||||||||||
|
(Business Services)
|
Equity Interests | 18,850 | 33,522 | |||||||||||
| Total Investment | 55,861 | 70,533 | ||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 26,542 | 26,461 | 26,461 | ||||||||||
|
(Business Services)
|
Common Stock (55,112 shares) | 11,785 | 23,751 | |||||||||||
| Total Investment | 38,246 | 50,212 | ||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 191 | 397 | |||||||||||
|
(Telecommunications)
|
Total Investment | 191 | 397 | |||||||||||
|
Sweet Traditions, Inc.
|
Senior Loan (10.0%, Due 9/08)(6) | 694 | 694 | 427 | ||||||||||
|
(Retail)
|
Total Investment | 694 | 427 | |||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates (12.4%) | 31,491 | 31,491 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | 1 | |||||||||||
| Total Investment | 31,492 | 31,492 | ||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt (14.0%, Due 2/14) | 2,695 | 2,539 | 2,539 | ||||||||||
|
(Business Services)
|
Equity Interests | 11,384 | 18,664 | |||||||||||
| Warrants | 144 | 236 | ||||||||||||
| Total Investment | 14,067 | 21,439 | ||||||||||||
|
Total
companies more than 25% owned
|
$ | 1,656,009 | $ | 1,157,473 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
8
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th
Street, LLC
|
Subordinated Debt (13.0%, Due 11/14) | $ | 20,774 | $ | 20,650 | $ | 20,774 | |||||||
|
(Business Services)
|
Equity Interests | 421 | 1,075 | |||||||||||
| Option | 25 | 25 | ||||||||||||
| Total Investment | 21,096 | 21,874 | ||||||||||||
|
Advantage Sales & Marketing, Inc.
|
Subordinated Debt (12.0%, Due 3/14) | 156,218 | 155,663 | 157,443 | ||||||||||
|
(Business Services)
|
Equity Interests | — | 10,200 | |||||||||||
| Total Investment | 155,663 | 167,643 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (5.2%, Due 3/11) | 4,023 | 3,977 | 3,865 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 2,993 | 9,900 | |||||||||||
| Total Investment | 6,970 | 13,765 | ||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock (536 shares) | 536 | 622 | |||||||||||
|
(Business Services)
|
Common Stock (11,657 shares) | 12 | — | |||||||||||
| Total Investment | 548 | 622 | ||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt (12.0%, Due 1/13) | 7,789 | 7,789 | 7,789 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 3,509 | 12,772 | |||||||||||
| Total Investment | 11,298 | 20,561 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
||||||||||||||
|
Mezzanine Fund,
LLC(5)
|
Equity Interests | 11,739 | 11,475 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,739 | 11,475 | |||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt (14.5%, Due 8/12) | 25,023 | 24,960 | 25,524 | ||||||||||
|
(Industrial Products)
|
Common Stock (4,376 shares) | 5,014 | 4,000 | |||||||||||
| Total Investment | 29,974 | 29,524 | ||||||||||||
|
BI Incorporated
|
Subordinated Debt (13.5%, Due 2/14) | 30,615 | 30,504 | 30,921 | ||||||||||
|
(Business Services)
|
Common Stock (34,506 shares) | 3,451 | 6,200 | |||||||||||
| Total Investment | 33,955 | 37,121 | ||||||||||||
|
Creative Group, Inc.
|
Subordinated Debt (14.0%, Due 9/13)(6) | 15,000 | 13,686 | 5,185 | ||||||||||
|
(Business Services)
|
Common Stock (20,000 shares) | — | — | |||||||||||
| Warrant | 1,387 | — | ||||||||||||
| Total Investment | 15,073 | 5,185 | ||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock (622,555 shares) | 623 | 270 | |||||||||||
|
(Business Services)
|
Common Stock (6,286 shares) | 6 | — | |||||||||||
| Total Investment | 629 | 270 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
9
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Hilden America, Inc.
|
Common Stock (19 shares) | $ | 454 | $ | 445 | |||||||||
|
(Consumer Products)
|
Total Investment | 454 | 445 | |||||||||||
|
MedBridge Healthcare, LLC
|
Senior Loan (8.0%, Due 8/09)(6) | $ | 7,164 | 7,164 | 7,164 | |||||||||
|
(Healthcare Services)
|
Subordinated Debt (10.0%, Due 8/14)(6) | 5,184 | 5,184 | 2,601 | ||||||||||
| Convertible Subordinated Debt (2.0%, Due 8/14)(6) | 2,970 | 984 | — | |||||||||||
| Equity Interests | 1,416 | — | ||||||||||||
| Total Investment | 14,748 | 9,765 | ||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 19,750 | 19,660 | 19,732 | ||||||||||
|
(Business Services)
|
Equity Interests | 1,725 | 1,014 | |||||||||||
| Total Investment | 21,385 | 20,746 | ||||||||||||
|
Progressive International
|
||||||||||||||
|
Corporation
|
Subordinated Debt (16.0%, Due 12/09) | 1,576 | 1,565 | 1,576 | ||||||||||
|
(Consumer Products)
|
Preferred Stock (500 shares) | 500 | 1,059 | |||||||||||
| Common Stock (197 shares) | 13 | 5,800 | ||||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 2,078 | 8,435 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Unitranche Debt (11.1%, Due 6/12) | 12,000 | 11,944 | 12,297 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,294 | 1,497 | |||||||||||
| Total Investment | 13,238 | 13,794 | ||||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | 4,099 | 2,580 | |||||||||||
|
(Business Services)
|
Total Investment | 4,099 | 2,580 | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (11.9%, Due 11/10) | 15,750 | 15,029 | 15,750 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,872 | 2,203 | |||||||||||
| Total Investment | 16,901 | 17,953 | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,562 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,562 | — | |||||||||||
|
Total
companies 5% to 25% owned
|
$ | 361,410 | $ | 381,758 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (14.5%, Due 8/13) | $ | 28,234 | $ | 28,139 | $ | 27,836 | |||||||
|
(Consumer Products)
|
Total Investment | 28,139 | 27,836 | |||||||||||
|
AgData, L.P.
|
Senior Loan (10.3%, Due 7/12) | 1,843 | 1,836 | 1,862 | ||||||||||
|
(Consumer Services)
|
Unitranche Debt (10.3%, Due 7/12) | 4,120 | 4,080 | 4,161 | ||||||||||
| Total Investment | 5,916 | 6,023 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
10
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Augusta Sportswear Group, Inc.
|
Subordinated Debt (13.0%, Due 1/15) | $ | 53,000 | $ | 52,807 | $ | 52,807 | |||||||
|
(Consumer Products)
|
Common Stock (2,500 shares) | 2,500 | 2,227 | |||||||||||
| Total Investment | 55,307 | 55,034 | ||||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Senior Loan (14.0%, Due 12/12) | 3,750 | 3,719 | 3,750 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (14.0%, Due 12/12) | 8,500 | 8,465 | 8,500 | ||||||||||
| Common Stock (22,860 shares) | 2,286 | 800 | ||||||||||||
| Total Investment | 14,470 | 13,050 | ||||||||||||
|
Baird Capital Partners IV
Limited(5)
|
Limited Partnership Interest | 2,630 | 2,492 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,630 | 2,492 | |||||||||||
|
BenefitMall, Inc.
|
Subordinated Debt (14.9%, Due 10/13-10/14) | 76,189 | 75,978 | 75,978 | ||||||||||
|
(Business Services)
|
Common Stock (39,274,290 shares)(12) | 39,274 | 82,250 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 115,252 | 158,228 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (8.0%, Due 7/12)(6) | 4,913 | 4,884 | 2,781 | ||||||||||
|
(Business Services)
|
Total Investment | 4,884 | 2,781 | |||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (9.2%, Due 2/14) | 41,325 | 39,862 | 38,206 | ||||||||||
|
(Consumer Products)
|
Total Investment | 39,862 | 38,206 | |||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CDO Fund I,
Ltd.(4)(10)
|
Class C Notes (12.9%, Due 12/13) | 18,800 | 18,924 | 18,988 | ||||||||||
|
(CDO)
|
Class D Notes (17.0%, Due 12/13) | 9,400 | 9,462 | 9,494 | ||||||||||
| Total Investment | 28,386 | 28,482 | ||||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund III,
Ltd.(4)(10)
|
Preferred Shares (23,600,000 shares, 15.3%)(11) | 21,435 | 20,029 | |||||||||||
|
(CLO)
|
Total Investment | 21,435 | 20,029 | |||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund IV,
Ltd.(4)(10)
|
Class D Notes (7.6%, Due 4/20) | 3,000 | 1,953 | 2,627 | ||||||||||
|
(CLO)
|
Income Notes (18.6%)(11) | 15,192 | 14,929 | |||||||||||
| Total Investment | 17,145 | 17,556 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
11
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund V,
Ltd.(4)(10)
|
Income Notes (20.3%)(11) | $ | 13,838 | $ | 13,818 | |||||||||
|
(CLO)
|
Total Investment | 13,838 | 13,818 | |||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund VI,
Ltd.(4)(10)
|
Class D Notes (11.4%) Due 10/21) | $ | 5,000 | 4,341 | 4,487 | |||||||||
|
(CLO)
|
Income Notes (18.0%)(11) | 28,308 | 26,540 | |||||||||||
| Total Investment | 32,649 | 31,027 | ||||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund VII,
Ltd.(4)(10)
|
Income Notes (16.6%)(11) | 23,041 | 23,041 | |||||||||||
|
(CLO)
|
Total Investment | 23,041 | 23,041 | |||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (8.1%, Due 12/17) | 17,000 | 17,000 | 15,497 | ||||||||||
|
(CLO)
|
Income Notes (3.7%)(11) | 48,422 | 31,530 | |||||||||||
| Total Investment | 65,422 | 47,027 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Income Notes (15.7%)(11) | 18,755 | 16,741 | |||||||||||
|
(CLO)
|
Total Investment | 18,755 | 16,741 | |||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Senior Loan (7.8%, Due 6/11) | 500 | 497 | 496 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (10.0%, Due 6/11) | 3,161 | 3,132 | 3,161 | ||||||||||
| Preferred Stock (345,056 Shares) | 345 | 362 | ||||||||||||
| Total Investment | 3,974 | 4,019 | ||||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | 2,536 | 2,477 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,536 | 2,477 | |||||||||||
|
Centre Capital Investors V,
L.P.(5)
|
Limited Partnership Interest | 720 | 720 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 720 | 720 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
12
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
CK Franchising, Inc.
|
Senior Loan (5.9%, Due 7/12) | $ | 8,150 | $ | 8,066 | $ | 8,066 | |||||||
|
(Consumer Services)
|
Subordinated Debt (12.3%, Due 7/12 – 7/17) | 21,038 | 20,951 | 20,951 | ||||||||||
| Preferred Stock (1,281,887 shares) | 1,282 | 1,422 | ||||||||||||
| Common Stock (7,585,549 shares) | 7,586 | 7,600 | ||||||||||||
| Total Investment | 37,885 | 38,039 | ||||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (14.8%, Due 2/11) | 12,000 | 12,021 | 12,021 | ||||||||||
|
(Financial Services)
|
Preferred Stock (64,679 shares) | 15,543 | 9,073 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 27,564 | 21,094 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (13.5%, Due 11/13) | 35,145 | 35,074 | 34,211 | ||||||||||
|
(Education Services)
|
Total Investment | 35,074 | 34,211 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,501 | 18,435 | 18,666 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,435 | 18,666 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 90,000 | 89,552 | 90,954 | ||||||||||
|
(Business Services)
|
Equity Interests | 552 | 700 | |||||||||||
| Total Investment | 90,104 | 91,654 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 3,470 | 2,998 | |||||||||||
|
(Private Equity)
|
Total Investment | 3,470 | 2,998 | |||||||||||
|
Diversified Mercury
|
Senior Loan (6.1%, Due 3/13) | 233 | 218 | 220 | ||||||||||
|
Communications, LLC
|
||||||||||||||
|
(Business Services)
|
Total Investment | 218 | 220 | |||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | 17,257 | 17,177 | 17,528 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (10.0%, Due 2/16) | 4,220 | 4,207 | 5,894 | ||||||||||
| Total Investment | 21,384 | 23,422 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (14.5%, Due 5/13) | 75,000 | 74,648 | 72,744 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | 5,400 | |||||||||||
| Total Investment | 82,648 | 78,144 | ||||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (10.3%, Due 11/11) | 9,000 | 8,968 | 8,736 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (13.0%, Due 11/11) | 42,375 | 42,235 | 42,423 | ||||||||||
| Common Stock (3,451 shares) | 3,451 | 905 | ||||||||||||
| Total Investment | 54,654 | 52,064 | ||||||||||||
|
Driven Brands, Inc.
|
Senior Loan (8.2%, Due 6/11) | 40,270 | 40,148 | 40,148 | ||||||||||
|
d/b/a Meineke and Econo Lube
|
Subordinated Debt (12.1%, Due 6/12 – 6/13) | 82,960 | 82,715 | 82,715 | ||||||||||
|
(Consumer Services)
|
Common Stock (10,463,473 shares)(12) | 26,398 | 6,079 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 149,261 | 128,942 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
13
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Dryden XVIII Leveraged
|
||||||||||||||
|
Loan 2007
Limited(4)
|
Class B Notes (9.7%, Due 10/19) | $ | 9,000 | $ | 7,420 | $ | 8,257 | |||||||
|
(CLO)
|
Income Notes (12.7%)(11) | 22,727 | 19,803 | |||||||||||
| Total Investment | 30,147 | 28,060 | ||||||||||||
|
Dynamic India Fund
IV(4)(5)
|
Equity Interests | 9,350 | 11,524 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,350 | 11,524 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13) | 117,759 | 117,284 | 117,284 | ||||||||||
|
(Business Services)
|
Common Stock (63,438 shares)(12) | 63,438 | 66,434 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 180,722 | 183,718 | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 7,274 | 2,076 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,274 | 2,076 | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (12.0%, Due 7/14-1/15) | 47,000 | 46,774 | 45,738 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 2,700 | |||||||||||
| Total Investment | 49,274 | 48,438 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (12.7%, Due 3/11) | 18,000 | 17,937 | 17,100 | ||||||||||
|
(Consumer Products)
|
Total Investment | 17,937 | 17,100 | |||||||||||
|
FCP-BHI Holdings, LLC
|
Subordinated Debt (12.5%, Due 9/13) | 24,939 | 24,831 | 24,241 | ||||||||||
|
d/b/a Bojangles’
|
Equity Interests | 863 | 1,400 | |||||||||||
|
(Retail)
|
Total Investment | 25,694 | 25,641 | |||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | 6,357 | 6,357 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 6,357 | 6,357 | |||||||||||
|
Freedom Financial Network, LLC
|
Senior Loan (6.8%, Due 2/13) | 12,968 | 12,968 | 12,968 | ||||||||||
|
(Financial Services)
|
Subordinated Debt (13.5%, Due 2/14) | 13,000 | 12,936 | 12,936 | ||||||||||
| Total Investment | 25,904 | 25,904 | ||||||||||||
|
Frozen Specialties, Inc.
|
Warrants | 375 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 375 | — | |||||||||||
|
Garden Ridge Corporation
|
Subordinated Debt (7.0%, Due 5/12)(6) | 20,500 | 20,500 | 20,500 | ||||||||||
|
(Retail)
|
Total Investment | 20,500 | 20,500 | |||||||||||
|
Geotrace Technologies, Inc.
|
Subordinated Debt (10.0%, Due 6/09) | 6,198 | 6,068 | 6,260 | ||||||||||
|
(Energy Services)
|
Warrants | 2,027 | 2,700 | |||||||||||
| Total Investment | 8,095 | 8,960 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
14
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Gilchrist & Soames, Inc.
|
Senior Loan (8.4%, Due 10/13) | $ | 5,000 | $ | 4,956 | $ | 4,756 | |||||||
|
(Consumer Products)
|
Subordinated Debt (13.4%, Due 10/13) | 25,800 | 25,682 | 25,342 | ||||||||||
| Total Investment | 30,638 | 30,098 | ||||||||||||
|
Havco Wood Products LLC
|
Unitranche Debt (11.5%, Due 8/11) | 5,100 | 4,293 | 5,208 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 910 | 2,900 | |||||||||||
| Total Investment | 5,203 | 8,108 | ||||||||||||
|
Haven Eldercare of New England, LLC
|
Subordinated Debt (12.0%, Due 8/09)(6) | 1,439 | 1,439 | — | ||||||||||
|
(Healthcare Services)
|
Total Investment | 1,439 | — | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Senior Loan (7.2%, Due 8/12) | 17,546 | 17,459 | 17,459 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.6%, Due 8/13 – 8/14) | 46,883 | 46,669 | 46,669 | ||||||||||
| Common Stock (22,020 shares)(12) | 22,020 | 22,887 | ||||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 86,148 | 87,015 | ||||||||||||
|
The Hillman Companies,
Inc.(3)
|
Subordinated Debt (10.0%, Due 9/11) | 44,580 | 44,466 | 44,580 | ||||||||||
|
(Consumer Products)
|
Total Investment | 44,466 | 44,580 | |||||||||||
|
The Homax Group, Inc.
|
Senior Loan (8.7%, Due 10/12) | 10,940 | 10,940 | 10,508 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.0%, Due 4/14) | 14,000 | 13,283 | 13,571 | ||||||||||
| Preferred Stock (76 shares) | 76 | 5 | ||||||||||||
| Common Stock (24 shares) | 5 | — | ||||||||||||
| Warrants | 954 | 80 | ||||||||||||
| Total Investment | 25,258 | 24,164 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (7.0%, Due 6/10) | 545 | 545 | 535 | ||||||||||
|
(Consumer Products)
|
Total Investment | 545 | 535 | |||||||||||
|
Integrity Interactive Corporation
|
Unitranche Debt (10.5%, Due 2/12) | 11,952 | 11,860 | 12,175 | ||||||||||
|
(Business Services)
|
Total Investment | 11,860 | 12,175 | |||||||||||
|
International Fiber Corporation
|
Subordinated Debt (14.0%, Due 6/12) | 24,697 | 24,607 | 25,438 | ||||||||||
|
(Industrial Products)
|
Preferred Stock (21,566 shares) | 2,157 | 2,157 | |||||||||||
| Total Investment | 26,764 | 27,595 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(3)
|
Public company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
15
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Jones Stephens Corporation
|
Senior Loan (7.5%, Due 9/12) | $ | 5,516 | $ | 5,505 | $ | 5,272 | |||||||
|
(Consumer Products)
|
Total Investment | 5,505 | 5,272 | |||||||||||
|
Knightsbridge CLO 2007-1
Limited(4)
|
Class E Notes (14.1%, Due 1/22) | 22,000 | 22,000 | 21,983 | ||||||||||
|
(CLO)
|
Income Notes (18.5%)(11) | 32,413 | 30,985 | |||||||||||
| Total Investment | 54,413 | 52,968 | ||||||||||||
|
Kodiak Fund
LP(5)
|
Equity Interests | 9,423 | 2,835 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,423 | 2,835 | |||||||||||
|
Line-X, Inc.
|
Senior Loan (15.0%, Due 8/11) | 900 | 886 | 886 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (15.0% Due 8/11) | 48,204 | 48,055 | 42,810 | ||||||||||
| Total Investment | 48,941 | 43,696 | ||||||||||||
| Standby Letter of Credit ($1,500) | ||||||||||||||
|
MedAssets,
Inc.(3)
|
Common Stock (224,817 shares) | 2,289 | 3,332 | |||||||||||
|
(Business Services)
|
Total Investment | 2,289 | 3,332 | |||||||||||
|
Milestone AV Technologies, Inc.
|
Subordinated Debt (9.2%, Due 6/13) | 37,500 | 37,500 | 37,500 | ||||||||||
|
(Business Services)
|
Total Investment | 37,500 | 37,500 | |||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (6.5%, Due 2/13) | 5,820 | 5,792 | 5,282 | ||||||||||
|
(Industrial Products)
|
Total Investment | 5,792 | 5,282 | |||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (10.5%, Due 12/11) | 20,219 | 20,314 | 20,624 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (9.8%, Due 12/15) | 14,533 | 14,591 | 16,560 | ||||||||||
| Total Investment | 34,905 | 37,184 | ||||||||||||
|
Norwesco, Inc.
|
Subordinated Debt (12.4%, Due 1/12 – 7/12) | 61,866 | 61,558 | 61,558 | ||||||||||
|
(Industrial Products)
|
Common Stock (482,736 shares)(12) | 3,676 | 64,854 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 65,234 | 126,412 | ||||||||||||
|
Novak Biddle Venture Partners III,
L.P.(5)
|
Limited Partnership Interest | 1,910 | 1,496 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,910 | 1,496 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(3)
|
Public company. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
16
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | $ | 206 | $ | 1,000 | |||||||||
|
(Business Services)
|
Total Investment | 206 | 1,000 | |||||||||||
|
Pangaea CLO 2007-1
Ltd.(4)
|
Class D Notes (8.7%, Due 10/21) | $ | 15,000 | 11,594 | 10,760 | |||||||||
|
(CLO)
|
Total Investment | 11,594 | 10,760 | |||||||||||
|
Passport Health
|
||||||||||||||
|
Communications, Inc.
|
Preferred Stock (561,908 shares) | 1,725 | 2,207 | |||||||||||
|
(Healthcare Services)
|
Common Stock (16,977 shares) | 42 | 54 | |||||||||||
| Total Investment | 1,767 | 2,261 | ||||||||||||
|
PC Helps Support, LLC
|
Senior Loan (6.6%, Due 12/13) | 19,214 | 19,206 | 18,732 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.3%, Due 12/13) | 29,681 | 29,535 | 29,196 | ||||||||||
| Total Investment | 48,741 | 47,928 | ||||||||||||
|
Pendum, Inc.
|
Subordinated Debt (17.0%, Due 1/11)(6) | 34,028 | 34,028 | — | ||||||||||
|
(Business Services)
|
Preferred Stock (82,715 shares) | — | — | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 34,028 | — | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | — | |||||||||||
|
(Business Services)
|
Total Investment | 734 | — | |||||||||||
|
Peter Brasseler Holdings, LLC
|
Equity Interests | 2,500 | 2,279 | |||||||||||
|
(Business Services)
|
Total Investment | 2,500 | 2,279 | |||||||||||
|
PharMEDium Healthcare Corporation
|
Senior Loan (6.6%, Due 10/13) | 20,042 | 20,042 | 19,356 | ||||||||||
|
(Healthcare Services)
|
Total Investment | 20,042 | 19,356 | |||||||||||
|
Postle Aluminum Company, LLC
|
Unitranche Debt (11.0%, Due 10/12) | 61,250 | 61,015 | 60,104 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 2,157 | 2,202 | |||||||||||
| Total Investment | 63,172 | 62,306 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
17
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Pro Mach, Inc.
|
Subordinated Debt (13.0%, Due 6/12) | $ | 14,598 | $ | 14,545 | $ | 14,781 | |||||||
|
(Industrial Products)
|
Equity Interests | 1,294 | 1,600 | |||||||||||
| Total Investment | 15,839 | 16,381 | ||||||||||||
|
Promo Works, LLC
|
Unitranche Debt (10.3%, Due 12/11) | 25,899 | 25,702 | 25,985 | ||||||||||
|
(Business Services)
|
Total Investment | 25,702 | 25,985 | |||||||||||
| Guaranty ($300) | ||||||||||||||
|
Reed Group, Ltd.
|
Senior Loan (8.5%, Due 12/13) | 21,000 | 20,970 | 20,044 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (13.8%, Due 12/13) | 18,000 | 17,914 | 17,258 | ||||||||||
| Equity Interests | 1,800 | 900 | ||||||||||||
| Total Investment | 40,684 | 38,202 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 38,501 | 38,232 | 38,127 | ||||||||||
|
(Retail)
|
Preferred Stock (46,690 shares) | 117 | 117 | |||||||||||
| Warrants | 534 | 1,000 | ||||||||||||
| Total Investment | 38,883 | 39,244 | ||||||||||||
| Standby Letters of Credit ($2,540) | ||||||||||||||
|
Service Center Metals, LLC
|
Subordinated Debt (15.5%, Due 9/11) | 5,000 | 4,982 | 4,948 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 270 | 302 | |||||||||||
| Total Investment | 5,252 | 5,250 | ||||||||||||
|
Snow Phipps Group,
L.P.(5)
|
Limited Partnership Interest | 2,329 | 2,329 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,329 | 2,329 | |||||||||||
|
SPP Mezzanine Funding II,
L.P.(5)
|
Limited Partnership Interest | 5,223 | 4,897 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 5,223 | 4,897 | |||||||||||
|
Stag-Parkway, Inc.
|
Unitranche Debt (10.8%, Due 7/12) | 50,096 | 49,916 | 50,096 | ||||||||||
|
(Business Services)
|
Total Investment | 49,916 | 50,096 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,279 | 30,994 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,279 | 30,994 | |||||||||||
|
Summit Energy Services, Inc.
|
Senior Loan (8.0%, Due 8/13) | 9,179 | 9,179 | 8,903 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.6%, Due 8/13) | 35,765 | 35,603 | 36,029 | ||||||||||
| Common Stock (385,626 shares) | 1,725 | 1,600 | ||||||||||||
| Total Investment | 46,507 | 46,532 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
18
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Tappan Wire and Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14) | $ | 22,346 | $ | 22,235 | $ | 22,235 | |||||||
|
(Business Services)
|
Common Stock (12,940 shares)(12) | 1,941 | 6,201 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 24,176 | 28,436 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 95,801 | 95,473 | 96,465 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,142 | 2,419 | |||||||||||
| Total Investment | 97,615 | 98,884 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 49,124 | 48,489 | 47,820 | ||||||||||
|
(Business Services)
|
Total Investment | 48,489 | 47,820 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (14.0%, Due 11/12) | 24,195 | 24,035 | 23,235 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,034 | 576 | |||||||||||
| Total Investment | 25,069 | 23,811 | ||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt (19.0%, Due 2/12) | 10,193 | 10,150 | 10,334 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,528 | 41,093 | |||||||||||
| Total Investment | 26,678 | 51,427 | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 60,230 | 59,983 | 59,987 | ||||||||||
|
(Business Services)
|
Total Investment | 59,983 | 59,987 | |||||||||||
|
Universal Air Filter Company
|
Subordinated Debt (12.0%, Due 11/12) | 14,625 | 14,566 | 14,728 | ||||||||||
|
(Industrial Products)
|
Total Investment | 14,566 | 14,728 | |||||||||||
|
United Road Towing, Inc.
|
Subordinated Debt (10.4%, Due 1/14) | 44,000 | 43,787 | 43,787 | ||||||||||
|
(Consumer Services)
|
Total Investment | 43,787 | 43,787 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
VICORP Restaurants, Inc.
|
Warrants | 33 | — | |||||||||||
|
(Retail)
|
Total Investment | 33 | — | |||||||||||
|
Walker Investment Fund II,
LLLP(5)
|
Limited Partnership Interest | 1,330 | 333 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,330 | 333 | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (14.0%, Due 4/13) | 125,323 | 124,380 | 121,395 | ||||||||||
|
d/b/a Wear Me Apparel
|
Subordinated Debt (9.0%, Due 4/14)(6) | 11,151 | 11,151 | 11,749 | ||||||||||
|
(Consumer Products)
|
Common Stock (86 shares) | 39,721 | 5,349 | |||||||||||
| Total Investment | 175,252 | 138,493 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
19
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2008 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | $ | 897 | $ | 897 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 897 | 897 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | $ | 90,000 | 89,588 | 85,374 | |||||||||
|
(Consumer Products)
|
Common Stock (6,470 shares) | 6,470 | 4,200 | |||||||||||
| Total Investment | 96,058 | 89,574 | ||||||||||||
|
York Insurance Services Group, Inc.
|
Subordinated Debt (14.5%, Due 1/14) | 45,367 | 45,199 | 45,236 | ||||||||||
|
(Business Services)
|
Common Stock (12,939 shares) | 1,294 | 1,600 | |||||||||||
| Total Investment | 46,493 | 46,836 | ||||||||||||
|
Other companies
|
Other debt investments | 3,236 | 3,142 | 3,169 | ||||||||||
| Other equity investments | 8 | — | ||||||||||||
| Total Investment | 3,150 | 3,169 | ||||||||||||
|
Total companies less than 5% owned
|
$ | 3,001,894 | $ | 2,980,548 | ||||||||||
|
Total private finance (152 portfolio investments)
|
$ | 5,019,313 | $ | 4,519,779 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
20
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
| March 31, 2008 | ||||||||||||||||
| (unaudited) | ||||||||||||||||
|
Stated Interest |
Number of |
|||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 1 | $ | 13,702 | $ | 13,702 | |||||||||||
| 7.00%–8.99% | 7 | 17,411 | 16,763 | |||||||||||||
| 9.00%–10.99% | 1 | 6,455 | 6,455 | |||||||||||||
| 11.00%–12.99% | 1 | 10,459 | 10,459 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 6,109 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
$ | 51,997 | $ | 53,488 | ||||||||||||
|
Real Estate Owned
|
$ | 23,531 | $ | 30,220 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 14,179 | $ | 32,146 | ||||||||||||
|
Guarantees ($6,871)
|
||||||||||||||||
|
Standby Letter of Credit ($1,295)
|
||||||||||||||||
|
Total commercial real estate finance
|
$ | 89,707 | $ | 115,854 | ||||||||||||
|
Total portfolio
|
$ | 5,109,020 | $ | 4,635,633 | ||||||||||||
| Yield | Cost | Value | ||||||||||
|
Investments in U.S. Treasury Bills, Money Market and Other
Securities
|
||||||||||||
|
U.S. Treasury bills (Due April 2008)
|
1.6% | $ | 119,842 | $ | 119,976 | |||||||
|
Blackrock Liquidity Funds
|
3.3% | 344 | 344 | |||||||||
|
SEI Daily Income Tr Prime Obligation Money Market Fund
|
3.1% | 59 | 59 | |||||||||
|
American Beacon Money Market Fund
|
3.1% | 20 | 20 | |||||||||
|
Columbia Treasury Reserves Money Market Fund
|
3.2% | 7 | 7 | |||||||||
|
Total
|
$ | 120,272 | $ | 120,406 | ||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $7.4 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
21
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
Alaris Consulting, LLC
|
Senior Loan (16.5%, Due 12/05 – 12/07)(6) | $ | 27,055 | $ | 26,987 | $ | — | |||||||
|
(Business Services)
|
Equity Interests | 5,189 | — | |||||||||||
| Total Investment | 32,176 | — | ||||||||||||
| Guaranty ($1,100) | ||||||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 7,800 | 7,800 | |||||||||||
|
(Asset Management)
|
Total Investment | 7,800 | 7,800 | |||||||||||
| Standby Letter of Credit ($30,000) | ||||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Equity Interests (See Note 3) | 31,800 | 32,811 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 32,811 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | 611 | 1,633 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | 611 | 1,633 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Preferred Stock (1,568 shares) | 2,401 | 2,557 | |||||||||||
|
(Business Services)
|
Common Stock (2,750 shares) | — | 370 | |||||||||||
| Total Investment | 2,401 | 2,927 | ||||||||||||
| Guaranty ($2,401) | ||||||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 65 | — | |||||||||||
|
(Business Services)
|
Total Investment | 65 | — | |||||||||||
| Standby Letters of Credit ($1,000) | ||||||||||||||
|
Border Foods, Inc.
|
Preferred Stock (100,000 shares) | 12,721 | 4,648 | |||||||||||
|
(Consumer Products)
|
Common Stock (148,838 shares) | 3,847 | — | |||||||||||
| Total Investment | 16,568 | 4,648 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (9.4%, Due 5/09)(6) | 2,907 | 2,907 | 3,035 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,396 | 3,559 | |||||||||||
| Total Investment | 5,303 | 6,594 | ||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt (18.0%, Due 10/08) | 6,871 | 6,871 | 6,871 | ||||||||||
|
(Asset Management)
|
Common Stock (100 shares) | 2,067 | 44,587 | |||||||||||
| Total Investment | 8,938 | 51,458 | ||||||||||||
|
Ciena Capital LLC
|
Class A Equity Interests(25.0% — See Note 3)(6) | 99,044 | 99,044 | 68,609 | ||||||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 109,301 | — | ||||||||||||
| Total Investment | 327,781 | 68,609 | ||||||||||||
| Guaranty ($258,707 — See Note 3) | ||||||||||||||
|
Standby Letters of Credit ($18,000 — See Note 3) |
||||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(7)
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies. |
The accompanying notes are an
integral part of these consolidated financial statements.
22
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
CitiPostal Inc.
|
Senior Loan (8.4%, Due 12/13) | $ | 692 | $ | 679 | $ | 679 | |||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 50,852 | 50,597 | 50,597 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 8,049 | 8,049 | 8,049 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | 12,726 | ||||||||||||
| Total Investment | 72,051 | 72,051 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 35,054 | 34,923 | 34,923 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 6,000 | 5,979 | 5,979 | ||||||||||
| Common Stock (884,880 shares) | 16,648 | 27,597 | ||||||||||||
| Total Investment | 57,550 | 68,499 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13) | 40,956 | 40,812 | 40,812 | ||||||||||
|
(Consumer Products)
|
Common Stock (37,200,551 shares) | 33,321 | 40,934 | |||||||||||
| Total Investment | 74,133 | 81,746 | ||||||||||||
|
Direct Capital Corporation
|
Subordinated Debt (16.0%, Due 3/13) | 39,184 | 39,030 | 39,030 | ||||||||||
|
(Financial Services)
|
Common Stock (2,097,234 shares) | 19,250 | 6,906 | |||||||||||
| Total Investment | 58,280 | 45,936 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 73,031 | 72,850 | 72,850 | ||||||||||
|
(Financial Services)
|
Preferred Stock (10,964 shares) | 10,276 | 19,330 | |||||||||||
| Common Stock (14,735 shares) | 14,819 | 38,544 | ||||||||||||
| Total Investment | 97,945 | 130,724 | ||||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | — | 878 | |||||||||||
|
(Tower Leasing)
|
||||||||||||||
| Total Investment | — | 878 | ||||||||||||
|
Global Communications, LLC
|
Senior Loan (10.0%, Due 9/02)(6) | 1,822 | 1,822 | 1,822 | ||||||||||
|
(Business Services)
|
Total Investment | 1,822 | 1,822 | |||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (8.4%, Due 2/11-2/12) | 50,940 | 50,752 | 50,752 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.1%, Due 8/12) | 30,000 | 29,907 | 29,907 | ||||||||||
| Subordinated Debt (15.4%, Due 2/13)(6) | 52,373 | 52,150 | 1,337 | |||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 188,996 | 81,996 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/12) | 59,857 | 59,618 | 59,618 | ||||||||||
|
(Retail)
|
Common Stock (415,328 shares) | 41,533 | 44,154 | |||||||||||
| Total Investment | 101,151 | 103,772 | ||||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 320 | |||||||||||
|
(Business Services)
|
Total Investment | — | 320 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
23
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | $ | 44,257 | $ | 44,136 | $ | 45,041 | |||||||
|
(Consumer Products)
|
Subordinated Debt (19.0%, Due 9/12)(6) | 16,181 | 16,130 | 16,796 | ||||||||||
| Preferred Stock (25,000 shares) | 25,000 | 1,462 | ||||||||||||
| Common Stock (620,000 shares) | 6,325 | — | ||||||||||||
| Total Investment | 91,591 | 63,299 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 1,563 | 1,563 | 1,563 | ||||||||||
|
(Industrial Products)
|
Total Investment | 1,563 | 1,563 | |||||||||||
|
Legacy Partners Group, Inc.
|
Senior Loan (14.0%, Due 5/09)(6) | 3,843 | 3,843 | 3,843 | ||||||||||
|
(Business Services)
|
Equity Interests | 4,261 | 1,332 | |||||||||||
| Total Investment | 8,104 | 5,175 | ||||||||||||
|
Litterer
Beteiligungs-GmbH(4)
|
Subordinated Debt (8.0%, Due 12/08) | 772 | 772 | 772 | ||||||||||
|
(Business Services)
|
Equity Interest | 1,809 | 700 | |||||||||||
| Total Investment | 2,581 | 1,472 | ||||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 6/09 – 7/09) | 30,674 | 30,639 | 30,639 | ||||||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 6/09 – 7/09) | 40,191 | 39,943 | 39,943 | ||||||||||
| Common Stock (648,661 shares) | 643 | 4,949 | ||||||||||||
| Total Investment | 71,225 | 75,531 | ||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt (18.0%, Due 7/14) | 19,632 | 19,544 | 19,544 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 18,767 | 25,419 | |||||||||||
| Total Investment | 38,311 | 44,963 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt (15.5%, Due 8/13) | 39,331 | 39,180 | 39,180 | ||||||||||
|
(Business Services)
|
Equity Interests | 21,128 | 37,965 | |||||||||||
| Total Investment | 60,308 | 77,145 | ||||||||||||
|
Powell Plant Farms, Inc.
|
Senior Loan (15.0%, Due 12/07)(6) | 1,350 | 1,350 | 1,534 | ||||||||||
|
(Consumer Products)
|
Total Investment | 1,350 | 1,534 | |||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 28,443 | 28,351 | 28,351 | ||||||||||
|
(Business Services)
|
Common Stock (63,888 shares) | 13,662 | 26,292 | |||||||||||
| Total Investment | 42,013 | 54,643 | ||||||||||||
|
Staffing Partners Holding
|
||||||||||||||
|
Company, Inc.
|
Subordinated Debt (13.5%, Due 1/07)(6) | 509 | 509 | 223 | ||||||||||
|
(Business Services)
|
Total Investment | 509 | 223 | |||||||||||
|
Startec Equity, LLC
|
Equity Interests | 190 | 430 | |||||||||||
|
(Telecommunications)
|
Total Investment | 190 | 430 | |||||||||||
|
Sweet Traditions, Inc.
|
Senior Loan (13.0%, Due 9/08 – 8/11)(6) | 39,692 | 36,052 | 35,229 | ||||||||||
|
(Retail)
|
Preferred Stock (961 shares) | 950 | — | |||||||||||
| Common Stock (10,000 shares) | 50 | — | ||||||||||||
| Total Investment | 37,052 | 35,229 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
24
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Triview Investments,
Inc.(8)
|
Senior Loan (10.0%, Due 12/07) | $ | 433 | $ | 433 | $ | 433 | |||||||
|
(Broadcasting & Cable/Business
|
Subordinated Debt (12.9%, Due 1/10 – 6/17) | 43,157 | 42,977 | 42,977 | ||||||||||
|
Services/Consumer Products)
|
Subordinated Debt (12.5%, Due 11/07 – 3/08)(6) | 1,400 | 1,400 | 1,583 | ||||||||||
| Common Stock (202 shares) | 120,638 | 83,453 | ||||||||||||
| Total Investment | 165,448 | 128,446 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
| Standby Letter of Credit ($200) | ||||||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates | 744 | 744 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | 1 | |||||||||||
| Total Investment | 745 | 745 | ||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt (14.0%, Due 2/14) | 2,845 | 2,670 | 2,670 | ||||||||||
|
(Business Services)
|
Equity Interests | 12,900 | 21,516 | |||||||||||
| Warrants | 163 | 272 | ||||||||||||
| Total Investment | 15,733 | 24,458 | ||||||||||||
|
Total
companies more than 25% owned
|
$ | 1,622,094 | $ | 1,279,080 | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th
Street, LLC
|
Subordinated Debt (13.0%, Due 12/14) | $ | 20,774 | $ | 20,645 | $ | 20,645 | |||||||
|
(Business Services)
|
Equity Interests | 446 | 1,100 | |||||||||||
| Total Investment | 21,091 | 21,745 | ||||||||||||
|
Advantage Sales & Marketing, Inc.
|
Subordinated Debt (12.0%, Due 3/14) | 155,432 | 154,854 | 154,854 | ||||||||||
|
(Business Services)
|
Equity Interests | — | 10,973 | |||||||||||
| Total Investment | 154,854 | 165,827 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (7.8%, Due 3/11) | 3,030 | 2,980 | 2,980 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 3,470 | 10,800 | |||||||||||
| Total Investment | 6,450 | 13,780 | ||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock (622 shares) | 622 | 749 | |||||||||||
|
(Business Services)
|
Common Stock (13,513 shares) | 14 | 262 | |||||||||||
| Total Investment | 636 | 1,011 | ||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt (12.0%, Due 1/13) | 8,400 | 8,400 | 8,400 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 3,509 | 13,713 | |||||||||||
| Total Investment | 11,909 | 22,113 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
||||||||||||||
|
Mezzanine Fund,
LLC(5)
|
Equity Interests | 11,739 | 11,467 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,739 | 11,467 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Triview Investments, Inc. had a cost basis of $165.4 million and holds investments in Longview Cable & Data, LLC (Broadcasting & Cable) with a value of $7.0 million, Triax Holdings, LLC (Consumer Products) with a value of $62.0 million, and Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a value of $59.4 million, for a total value of $128.4 million. |
The accompanying notes are an
integral part of these consolidated financial statements.
25
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt (14.5%, Due 8/12) | $ | 24,865 | $ | 24,798 | $ | 24,798 | |||||||
|
(Industrial Products)
|
Common Stock (5,073 shares) | 5,813 | 4,190 | |||||||||||
| Total Investment | 30,611 | 28,988 | ||||||||||||
|
BI Incorporated
|
Subordinated Debt (13.5%, Due 2/14) | 30,615 | 30,499 | 30,499 | ||||||||||
|
(Business Services)
|
Common Stock (40,000 shares) | 4,000 | 7,382 | |||||||||||
| Total Investment | 34,499 | 37,881 | ||||||||||||
|
Creative Group, Inc.
|
Subordinated Debt (14.0%, Due 9/13)(6) | 15,000 | 13,686 | 6,197 | ||||||||||
|
(Business Services)
|
Common Stock (20,000 shares) | — | — | |||||||||||
| Warrant | 1,387 | — | ||||||||||||
| Total Investment | 15,073 | 6,197 | ||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock (722 shares) | 722 | 396 | |||||||||||
|
(Business Services)
|
Common Stock (7,287 shares) | 7 | — | |||||||||||
| Total Investment | 729 | 396 | ||||||||||||
|
MedBridge Healthcare, LLC
|
Senior Loan (8.0%, Due 8/09)(6) | 7,164 | 7,164 | 7,164 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (10.0%, Due 8/14)(6) | 5,184 | 5,184 | 2,406 | ||||||||||
|
Convertible Subordinated Debt (2.0%, Due 8/14)(6) |
2,970 | 984 | — | |||||||||||
| Equity Interests | 1,416 | — | ||||||||||||
| Total Investment | 14,748 | 9,570 | ||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt (11.5%, Due 6/12)(6) | 33,600 | 33,448 | 9,280 | ||||||||||
|
(Business Services)
|
Subordinated Debt (18.0%, Due 6/13)(6) | 11,211 | 11,154 | — | ||||||||||
| Common Stock (20,934 shares)(12) | 20,942 | — | ||||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 65,544 | 9,280 | ||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 19,800 | 19,704 | 19,704 | ||||||||||
|
(Business Services)
|
Equity Interests | 2,000 | 940 | |||||||||||
| Total Investment | 21,704 | 20,644 | ||||||||||||
|
Progressive International
|
||||||||||||||
|
Corporation
|
Subordinated Debt (16.0%, Due 12/09) | 1,557 | 1,545 | 1,545 | ||||||||||
|
(Consumer Products)
|
Preferred Stock (500 shares) | 500 | 1,038 | |||||||||||
| Common Stock (197 shares) | 13 | 4,900 | ||||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 2,058 | 7,483 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Unitranche Debt (11.1%, Due 6/12) | 12,000 | 11,941 | 11,941 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,500 | 1,681 | |||||||||||
| Total Investment | 13,441 | 13,622 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
26
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | $ | 4,098 | $ | 3,075 | |||||||||
|
(Business Services)
|
Total Investment | 4,098 | 3,075 | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (12.0%, Due 11/10) | $ | 14,500 | 13,744 | 13,744 | |||||||||
|
(Healthcare Services)
|
Equity Interests | 2,170 | 2,686 | |||||||||||
| Total Investment | 15,914 | 16,430 | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,810 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,810 | — | |||||||||||
|
Total
companies 5% to 25% owned
|
$ | 426,908 | $ | 389,509 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (14.5%, Due 8/13) | $ | 27,937 | $ | 27,837 | $ | 27,837 | |||||||
|
(Consumer Products)
|
Total Investment | 27,837 | 27,837 | |||||||||||
|
AgData, L.P.
|
Senior Loan (10.3%, Due 7/12) | 843 | 815 | 815 | ||||||||||
|
(Consumer Services)
|
Total Investment | 815 | 815 | |||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Senior Loan (12.5%, Due 12/12) | 2,600 | 2,567 | 2,567 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (12.5%, Due 12/12) | 8,500 | 8,463 | 8,463 | ||||||||||
| Common Stock (26,500 shares) | 2,650 | 1,097 | ||||||||||||
| Total Investment | 13,680 | 12,127 | ||||||||||||
|
Baird Capital Partners IV Limited
Partnership(5)
(Private Equity Fund) |
Limited Partnership Interest | 2,234 | 2,114 | |||||||||||
| Total Investment | 2,234 | 2,114 | ||||||||||||
|
BenefitMall, Inc.
|
Subordinated Debt (14.9%, Due 10/13-10/14) | 82,167 | 81,930 | 81,930 | ||||||||||
|
(Business Services)
|
Common Stock (45,528,000 shares)(12) | 45,528 | 82,404 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Standby Letters of Credit ($3,961) | ||||||||||||||
| Total Investment | 127,458 | 164,334 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (9.0%, Due 7/12)(6) | 4,913 | 4,884 | 3,273 | ||||||||||
|
(Business Services)
|
Total Investment | 4,884 | 3,273 | |||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (11.3%, Due 2/14) | 41,325 | 39,821 | 39,821 | ||||||||||
|
(Consumer Products)
|
Total Investment | 39,821 | 39,821 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
27
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CDO Fund I,
Ltd.(4)(10)
|
Class C Notes (12.9%, Due 12/13) | $ | 18,800 | $ | 18,929 | $ | 18,988 | |||||||
|
(CDO)
|
Class D Notes (17.0%, Due 12/13) | 9,400 | 9,465 | 9,494 | ||||||||||
| Total Investment | 28,394 | 28,482 | ||||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund III,
Ltd.(4)(10)
|
Preferred Shares (23,600,000 shares, | |||||||||||||
|
(CLO)
|
12.9%)(11) | 21,783 | 19,999 | |||||||||||
| Total Investment | 21,783 | 19,999 | ||||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund IV,
Ltd.(4)(10)
|
Income Notes (14.8%)(11) | 12,298 | 11,290 | |||||||||||
|
(CLO)
|
Total Investment | 12,298 | 11,290 | |||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund V,
Ltd.(4)(10)
|
Income Notes (20.3%)(11) | 13,977 | 14,658 | |||||||||||
|
(CLO)
|
Total Investment | 13,977 | 14,658 | |||||||||||
|
Callidus Debt Partners
|
||||||||||||||
|
CLO Fund VI,
Ltd.(4)(10)
|
Class D Notes (11.3%, Due 10/21) | 5,000 | 4,329 | 4,329 | ||||||||||
|
(CLO)
|
Income Notes (19.3%)(11) | 26,985 | 26,985 | |||||||||||
| Total Investment | 31,314 | 31,314 | ||||||||||||
|
Callidus Debt
Partners(4)(10)
|
||||||||||||||
|
CLO Fund VII, Ltd.
|
Income Notes (16.6%)(11) | 22,113 | 22,113 | |||||||||||
|
(CLO)
|
Total Investment | 22,113 | 22,113 | |||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (10.4%, Due 12/17) | 17,000 | 17,000 | 16,119 | ||||||||||
|
(CLO)
|
Income Notes (5.6%)(11) | 49,252 | 36,085 | |||||||||||
| Total Investment | 66,252 | 52,204 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Income Notes (14.7%)(11) | 18,753 | 18,753 | |||||||||||
|
(CLO)
|
Total Investment | 18,753 | 18,753 | |||||||||||
|
Camden Partners Strategic Fund II,
L.P.(5)
|
Limited Partnership Interest | 997 | 1,350 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 997 | 1,350 | |||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Senior Loan (9.8%, Due 6/11) | 500 | 497 | 497 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (10.0%, Due 6/11) | 3,161 | 3,129 | 3,129 | ||||||||||
| Preferred Stock (400,000 Shares) | 400 | 507 | ||||||||||||
| Total Investment | 4,026 | 4,133 | ||||||||||||
|
Catterton Partners V,
L.P.(5)
|
Limited Partnership Interest | 3,624 | 2,952 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 3,624 | 2,952 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
28
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | $ | 2,259 | $ | 2,103 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 2,259 | 2,103 | |||||||||||
|
Centre Capital Investors IV,
L.P.(5)
|
Limited Partnership Interest | 2,215 | 2,276 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,215 | 2,276 | |||||||||||
|
Centre Capital Investors V,
L.P.(5)
|
Limited Partnership Interest | 628 | 628 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 628 | 628 | |||||||||||
|
CK Franchising, Inc.
|
Senior Loan (8.7%, Due 7/12) | $ | 9,000 | 8,911 | 8,911 | |||||||||
|
(Consumer Services)
|
Subordinated Debt (12.3%, Due 7/12 – 7/17) | 21,000 | 20,908 | 20,908 | ||||||||||
| Preferred Stock (1,486,004 shares) | 1,486 | 1,586 | ||||||||||||
| Common Stock (8,793,408 shares) | 8,793 | 8,654 | ||||||||||||
| Total Investment | 40,098 | 40,059 | ||||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (14.8%, Due 2/11) | 12,000 | 12,023 | 12,023 | ||||||||||
|
(Financial Services)
|
Preferred Stock (74,978 shares) | 18,018 | 19,421 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 30,041 | 31,444 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (13.5%, Due 11/13) | 35,011 | 34,936 | 34,936 | ||||||||||
|
(Education Services)
|
Total Investment | 34,936 | 34,936 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,432 | 18,363 | 18,363 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,363 | 18,363 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 95,000 | 94,530 | 94,530 | ||||||||||
|
(Business Services)
|
Equity Interests | 640 | 1,696 | |||||||||||
| Total Investment | 95,170 | 96,226 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 3,383 | 2,922 | |||||||||||
|
(Private Equity)
|
Total Investment | 3,383 | 2,922 | |||||||||||
|
Diversified Mercury
|
||||||||||||||
|
Communications, LLC
|
Senior Loan (8.5%, Due 3/13) | 233 | 217 | 217 | ||||||||||
|
(Business Services)
|
Total Investment | 217 | 217 | |||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | 17,213 | 17,128 | 17,128 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt | |||||||||||||
| (10.0%, Due 2/16) | 4,118 | 4,103 | 5,397 | |||||||||||
| Total Investment | 21,231 | 22,525 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (14.5%, Due 5/13) | 75,000 | 74,631 | 74,631 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | 8,000 | |||||||||||
| Total Investment | 82,631 | 82,631 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
29
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (10.3%, Due 11/11) | $ | 10,000 | $ | 9,966 | $ | $9,966 | |||||||
|
(Consumer Products)
|
Unitranche Debt (11.0%, Due 11/11) | 42,375 | 42,226 | 42,226 | ||||||||||
| Common Stock (4,000 shares) | 4,000 | 2,645 | ||||||||||||
| Total Investment | 56,192 | 54,837 | ||||||||||||
|
Driven Brands, Inc.
|
Senior Loan (8.7%, Due 6/11) | 37,070 | 36,951 | 36,951 | ||||||||||
|
d/b/a Meineke and Econo Lube
|
Subordinated Debt (12.1%, Due 6/12 – 6/13) | 83,000 | 82,754 | 82,754 | ||||||||||
|
(Consumer Services)
|
Common Stock (11,675,331 shares)(12) | 29,455 | 15,977 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 149,160 | 135,682 | ||||||||||||
|
Dryden XVIII Leveraged
|
||||||||||||||
|
Loan 2007
Limited(4)
|
Subordinated Debt (9.7%, Due 10/19) | 9,000 | 7,406 | 7,406 | ||||||||||
|
(CLO)
|
Income Notes (14.2%)(11) | 21,940 | 21,940 | |||||||||||
| Total Investment | 29,346 | 29,346 | ||||||||||||
|
Dynamic India Fund
IV(4)(5)
|
Equity Interests | 6,050 | 6,215 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 6,050 | 6,215 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13) | 127,000 | 126,463 | 126,463 | ||||||||||
|
(Business Services)
|
Common Stock (73,540 shares)(12) | 73,540 | 62,675 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 200,003 | 189,138 | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 6,899 | 2,176 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 6,899 | 2,176 | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (13.5%, Due 7/14-1/15) | 47,000 | 46,765 | 46,765 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 2,500 | |||||||||||
| Total Investment | 49,265 | 49,265 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (13.7%, Due 3/11) | 18,000 | 17,932 | 17,932 | ||||||||||
|
(Consumer Products)
|
Total Investment | 17,932 | 17,932 | |||||||||||
|
FCP-BHI Holdings, LLC
|
Subordinated Debt (12.8%, Due 9/13) | 24,000 | 23,887 | 23,887 | ||||||||||
|
d/b/a Bojangles’
|
Equity Interests | 1,000 | 998 | |||||||||||
|
(Retail)
|
Total Investment | 24,887 | 24,885 | |||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | 6,357 | 6,357 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 6,357 | 6,357 | |||||||||||
|
Frozen Specialties, Inc.
|
Warrants | 435 | 229 | |||||||||||
|
(Consumer Products)
|
Total Investment | 435 | 229 | |||||||||||
|
Garden Ridge Corporation
|
Subordinated Debt (7.0%, Due 5/12)(6) | 20,500 | 20,500 | 20,500 | ||||||||||
|
(Retail)
|
Total Investment | 20,500 | 20,500 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
30
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Geotrace Technologies, Inc.
|
Subordinated Debt (10.0%, Due 6/09) | $ | 6,772 | $ | 6,616 | $ | 6,616 | |||||||
|
(Energy Services)
|
Warrants | 2,350 | 2,993 | |||||||||||
| Total Investment | 8,966 | 9,609 | ||||||||||||
|
Gilchrist & Soames, Inc.
|
Senior Loan (9.0%, Due 10/13) | 20,000 | 19,954 | 19,954 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (13.4%, Due 10/13) | 25,800 | 25,676 | 25,676 | ||||||||||
| Total Investment | 45,630 | 45,630 | ||||||||||||
|
Grotech Partners, VI,
L.P.(5)
|
Limited Partnership Interest | 8,808 | 8,252 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 8,808 | 8,252 | |||||||||||
|
Havco Wood Products LLC
|
Senior Loan (9.7%, Due 8/11) | 600 | 585 | 585 | ||||||||||
|
(Industrial Products)
|
Unitranche Debt (11.5%, Due 8/11) | 5,100 | 4,248 | 4,248 | ||||||||||
| Equity Interests | 1,055 | 3,192 | ||||||||||||
| Total Investment | 5,888 | 8,025 | ||||||||||||
|
Haven Eldercare of New England, LLC
|
Subordinated Debt (12.0%, Due 8/09)(6) | 1,927 | 1,927 | — | ||||||||||
|
(Healthcare Services)
|
Total Investment | 1,927 | — | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Senior Loan (7.7%, Due 8/12) | 15,033 | 14,942 | 14,942 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.5%, Due 8/13 – 8/14) |
46,356 | 46,136 | 46,136 | ||||||||||
| Common Stock (23,926 shares)(12) | 23,926 | 23,868 | ||||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 85,004 | 84,946 | ||||||||||||
|
The Hillman Companies,
Inc.(3)
|
Subordinated Debt (10.0%, Due 9/11) | 44,580 | 44,458 | 44,458 | ||||||||||
|
(Consumer Products)
|
Total Investment | 44,458 | 44,458 | |||||||||||
|
The Homax Group, Inc.
|
Senior Loan (8.7%, Due 10/12) | 10,969 | 10,969 | 10,969 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.0%, Due 4/14) | 14,000 | 13,244 | 13,244 | ||||||||||
| Preferred Stock (89 shares) | 89 | 13 | ||||||||||||
| Common Stock (28 shares) | 6 | — | ||||||||||||
| Warrants | 1,106 | 194 | ||||||||||||
| Total Investment | 25,414 | 24,420 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (9.0%, Due 6/10) | 288 | 288 | 288 | ||||||||||
|
(Consumer Products)
|
Total Investment | 288 | 288 | |||||||||||
|
Integrity Interactive Corporation
|
Unitranche Debt (10.5%, Due 2/12) | 12,193 | 12,095 | 12,095 | ||||||||||
|
(Business Services)
|
Total Investment | 12,095 | 12,095 | |||||||||||
|
International Fiber Corporation
|
Subordinated Debt (14.0%, Due 6/12) | 24,572 | 24,476 | 24,476 | ||||||||||
|
(Industrial Products)
|
Preferred Stock (25,000 shares) | 2,500 | 2,194 | |||||||||||
| Total Investment | 26,976 | 26,670 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(3)
|
Public company. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
31
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Jones Stephens Corporation
|
Senior Loan (8.8%, Due 9/12) | $ | 5,537 | $ | 5,525 | $ | 5,525 | |||||||
|
(Consumer Products)
|
Total Investment | 5,525 | 5,525 | |||||||||||
|
Knightsbridge CLO 2007-1
Limited(4)
|
Subordinated Debt (14.1%, Due 1/22) | 22,000 | 22,000 | 22,000 | ||||||||||
|
(CLO)
|
Income Notes (15.2%)(11) | 31,211 | 31,211 | |||||||||||
| Total Investment | 53,211 | 53,211 | ||||||||||||
|
Kodiak Fund
LP(5)
|
Equity Interests | 9,423 | 2,853 | |||||||||||
|
(Private Equity Fund
|
Total Investment | 9,423 | 2,853 | |||||||||||
|
Line-X, Inc.
|
Senior Loan (12.0%, Due 8/11) | 900 | 885 | 885 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (12.0% Due 8/11) | 48,198 | 48,039 | 42,784 | ||||||||||
| Total Investment | 48,924 | 43,669 | ||||||||||||
| Standby Letter of Credit ($1,500) | ||||||||||||||
|
MedAssets,
Inc.(3)
|
Common Stock (224,817 shares) | 2,049 | 6,652 | |||||||||||
|
(Business Services)
|
Total Investment | 2,049 | 6,652 | |||||||||||
|
Mid-Atlantic Venture Fund IV,
L.P.(5)
|
Limited Partnership Interest | 6,975 | 1,791 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 6,975 | 1,791 | |||||||||||
|
Milestone AV Technologies, Inc.
|
Subordinated Debt (11.3%, Due 6/13) | 37,500 | 37,500 | 36,750 | ||||||||||
|
(Business Services)
|
Total Investment | 37,500 | 36,750 | |||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (8.6%, Due 2/13) | 5,802 | 5,773 | 5,773 | ||||||||||
|
(Industrial Products)
|
Total Investment | 5,773 | 5,773 | |||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (10.5%, Due 12/11) | 20,512 | 20,614 | 20,614 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (9.8%, Due 12/15) | 13,242 | 13,302 | 15,586 | ||||||||||
| Total Investment | 33,916 | 36,200 | ||||||||||||
|
Norwesco, Inc.
|
Subordinated Debt (12.7%, Due 1/12 – 7/12) | 82,924 | 82,674 | 82,674 | ||||||||||
|
(Industrial Products)
|
Common Stock (559,603 shares)(12) | 38,313 | 117,831 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 120,987 | 200,505 | ||||||||||||
|
Novak Biddle Venture Partners III,
L.P.(5)
|
Limited Partnership Interest | 1,910 | 1,256 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,910 | 1,256 | |||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | 239 | 998 | |||||||||||
|
(Business Services)
|
Total Investment | 239 | 998 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(3)
|
Public company. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
32
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Odyssey Investment Partners Fund III,
LP(5)
|
Limited Partnership Interest | $ | 2,276 | $ | 2,567 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 2,276 | 2,567 | |||||||||||
|
Pangaea CLO 2007-1
Ltd.(4)
|
Subordinated Debt (10.2%, Due 10/21) | $ | 15,000 | 11,570 | 11,570 | |||||||||
|
(CLO)
|
Total Investment | 11,570 | 11,570 | |||||||||||
|
Passport Health
|
||||||||||||||
|
Communications, Inc.
|
Preferred Stock (651,381 shares) | 2,000 | 2,433 | |||||||||||
|
(Healthcare Services)
|
Common Stock (19,680 shares) | 48 | 7 | |||||||||||
| Total Investment | 2,048 | 2,440 | ||||||||||||
|
PC Helps Support, LLC
|
Senior Loan (8.9%, Due 12/13) | 20,000 | 20,000 | 20,000 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.3%, Due 12/13) | 30,895 | 30,743 | 30,743 | ||||||||||
| Total Investment | 50,743 | 50,743 | ||||||||||||
|
Pendum, Inc.
|
Subordinated Debt (17.0%, Due 1/11)(6) | 34,028 | 34,028 | — | ||||||||||
|
(Business Services)
|
Preferred Stock (82,715 shares) | — | — | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 34,028 | — | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | — | |||||||||||
|
(Business Services)
|
Total Investment | 734 | — | |||||||||||
|
PharMEDium Healthcare Corporation
|
Senior Loan (8.6%, Due 10/13) | 19,577 | 19,577 | 19,577 | ||||||||||
|
(Healthcare Services)
|
Total Investment | 19,577 | 19,577 | |||||||||||
|
Postle Aluminum Company, LLC
|
Unitranche Debt (11.0%, Due 10/12) | 61,500 | 61,252 | 61,252 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 2,500 | 3,092 | |||||||||||
| Total Investment | 63,752 | 64,344 | ||||||||||||
|
Pro Mach, Inc.
|
Subordinated Debt (13.0%, Due 6/12) | 14,562 | 14,506 | 14,506 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 1,500 | 1,596 | |||||||||||
| Total Investment | 16,006 | 16,102 | ||||||||||||
|
Promo Works, LLC
|
Unitranche Debt (10.3%, Due 12/11) | 26,215 | 26,006 | 26,006 | ||||||||||
|
(Business Services)
|
Guaranty ($600) | |||||||||||||
| Total Investment | 26,006 | 26,006 | ||||||||||||
|
Reed Group, Ltd.
|
Senior Loan (8.7%, Due 12/13) | 21,000 | 20,970 | 20,970 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (13.8%, Due 12/13) | 18,000 | 17,910 | 17,910 | ||||||||||
| Equity Interests | 1,800 | 1,800 | ||||||||||||
| Total Investment | 40,680 | 40,680 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 34,001 | 33,733 | 33,733 | ||||||||||
|
(Retail)
|
Preferred Stock (54,125 shares) | 135 | 135 | |||||||||||
| Warrants | 619 | 2,095 | ||||||||||||
| Standby Letters of Credit ($2,540) | ||||||||||||||
| Total Investment | 34,487 | 35,963 | ||||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
33
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
SBBUT, LLC
|
Equity Interests | $ | — | $ | — | |||||||||
|
(Consumer Products)
|
Total Investment | — | — | |||||||||||
|
Service Center Metals, LLC
|
Subordinated Debt (15.5%, Due 9/11) | $ | 5,000 | 4,981 | 4,981 | |||||||||
|
(Industrial Products)
|
Equity Interests | 313 | 343 | |||||||||||
| Total Investment | 5,294 | 5,324 | ||||||||||||
|
Snow Phipps Group,
L.P.(5)
|
Limited Partnership Interest | 2,288 | 2,288 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,288 | 2,288 | |||||||||||
|
SPP Mezzanine Funding,
L.P.(5)
|
Limited Partnership Interest | 2,268 | 1,942 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,268 | 1,942 | |||||||||||
|
SPP Mezzanine Funding II,
L.P.(5)
|
Limited Partnership Interest | 4,077 | 3,731 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 4,077 | 3,731 | |||||||||||
|
Stag-Parkway, Inc.
|
Unitranche Debt (10.8%, Due 7/12) | 51,000 | 50,810 | 50,810 | ||||||||||
|
(Business Services)
|
Total Investment | 50,810 | 50,810 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,273 | 30,273 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,273 | 30,273 | |||||||||||
|
Summit Energy Services, Inc.
|
Senior Loan (8.5%, Due 8/13) | 24,239 | 24,239 | 23,512 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.6%, Due 8/13) | 35,765 | 35,596 | 35,596 | ||||||||||
| Common Stock (89,406 shares) | 2,000 | 1,995 | ||||||||||||
| Total Investment | 61,835 | 61,103 | ||||||||||||
|
Tappan Wire and Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14) | 24,100 | 23,975 | 23,975 | ||||||||||
|
(Business Services)
|
Common Stock (15,000 shares)(12) | 2,250 | 5,810 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 26,225 | 29,785 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 96,041 | 95,693 | 95,693 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,483 | 2,987 | |||||||||||
| Total Investment | 98,176 | 98,680 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 49,124 | 48,431 | 48,431 | ||||||||||
|
(Business Services)
|
Total Investment | 48,431 | 48,431 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (14.0%, Due 11/12) | 24,076 | 23,907 | 23,907 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,198 | 1,014 | |||||||||||
| Total Investment | 25,105 | 24,921 | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 60,000 | 59,740 | 59,740 | ||||||||||
|
(Business Services)
|
Total Investment | 59,740 | 59,740 | |||||||||||
|
Universal Air Filter Company
|
Subordinated Debt (12.0%, Due 11/12) | 14,750 | 14,688 | 14,688 | ||||||||||
|
(Industrial Products)
|
Total Investment | 14,688 | 14,688 | |||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
34
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2007 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Updata Venture Partners II,
L.P.(5)
|
Limited Partnership Interest | $ | 4,465 | $ | 4,306 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 4,465 | 4,306 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | 54 | |||||||||||
|
(Business Services)
|
Total Investment | — | 54 | |||||||||||
|
Venturehouse Group,
LLC(5)
|
Equity Interest | — | 613 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | — | 613 | |||||||||||
|
VICORP Restaurants, Inc.
|
Warrants | 33 | — | |||||||||||
|
(Retail)
|
Total Investment | 33 | — | |||||||||||
|
Walker Investment Fund II,
LLLP(5)
|
Limited Partnership Interest | 1,330 | — | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,330 | — | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (13.6%, Due 4/13) | $ | 125,000 | 124,010 | 124,010 | |||||||||
|
d/b/a Wear Me Apparel
|
Subordinated Debt (9.0%, Due 4/14)(6) | 13,033 | 13,033 | 13,302 | ||||||||||
|
(Consumer Products)
|
Common Stock (100 shares) | 46,046 | 13,726 | |||||||||||
| Total Investment | 183,089 | 151,038 | ||||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | 897 | 897 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 897 | 897 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | 90,000 | 89,574 | 89,574 | ||||||||||
|
(Consumer Products)
|
Common Stock (7,500 shares) | 7,500 | 7,482 | |||||||||||
| Total Investment | 97,074 | 97,056 | ||||||||||||
|
York Insurance Services Group, Inc.
|
Subordinated Debt (14.5%, Due 1/14) | 45,141 | 44,966 | 44,966 | ||||||||||
|
(Business Services)
|
Common Stock (15,000 shares) | 1,500 | 1,995 | |||||||||||
| Total Investment | 46,466 | 46,961 | ||||||||||||
|
Other companies
|
Other debt investments | 159 | 57 | 62 | ||||||||||
| Other equity investments | 8 | — | ||||||||||||
| Total Investment | 65 | 62 | ||||||||||||
|
Total
companies less than 5% owned
|
$ | 2,994,880 | $ | 2,990,732 | ||||||||||
|
Total
private finance (156 portfolio investments)
|
$ | 5,043,882 | $ | 4,659,321 | ||||||||||
|
(1)
|
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates. | |
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
35
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
|
Stated Interest |
Number of |
December 31, 2007 | ||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 3 | $ | 20,361 | $ | 19,842 | |||||||||||
| 7.00%–8.99% | 8 | 22,768 | 22,768 | |||||||||||||
| 9.00%–10.99% | 3 | 8,372 | 8,372 | |||||||||||||
| 11.00%–12.99% | 1 | 10,456 | 10,456 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 3,970 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
17 | $ | 65,927 | $ | 65,408 | |||||||||||
|
Real Estate Owned
|
$ | 15,272 | $ | 21,253 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 15,743 | $ | 34,539 | ||||||||||||
|
Guarantees ($6,871)
|
||||||||||||||||
|
Standby Letter of Credit ($1,295)
|
||||||||||||||||
|
Total commercial real estate finance
|
$ | 96,942 | $ | 121,200 | ||||||||||||
|
Total portfolio
|
$ | 5,140,824 | $ | 4,780,521 | ||||||||||||
| Yield | Cost | Value | ||||||||||
|
Investments in U.S. Treasury Bills, Money Market and Other
Securities
|
||||||||||||
|
American Beacon Money Market Select FD Fund
|
4.5% | $ | 126,910 | $ | 126,910 | |||||||
|
American Beacon Money Market Fund
|
4.8% | 40,163 | 40,163 | |||||||||
|
SEI Daily Income Tr Prime Obligation Money Market Fund
|
4.9% | 34,143 | 34,143 | |||||||||
|
Columbia Treasury Reserves Money Market Fund
|
4.6% | 6 | 6 | |||||||||
|
Total
|
$ | 201,222 | $ | 201,222 | ||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $14.3 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
36
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
(Information at and for the three months ended March 31,
2008 and 2007 is unaudited)
Note 1. Organization
Allied Capital Corporation, a Maryland corporation, is a
closed-end, non-diversified 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 real estate investment trust subsidiary,
Allied Capital REIT, Inc. (“Allied REIT”), and several
subsidiaries that are single member limited liability companies
established for specific purposes including holding real estate
properties. ACC also has a subsidiary, A.C. Corporation
(“AC Corp”), that generally provides diligence and
structuring services, as well as transaction, management,
consulting, and other services, including underwriting and
arranging senior loans, to the Company, its portfolio companies
and its managed funds.
ACC and its subsidiaries, collectively, are referred to as the
“Company.” The Company consolidates the results of its
subsidiaries for financial reporting purposes.
Pursuant to Article 6 of
Regulation S-X,
the financial results of the Company’s portfolio
investments are not consolidated in the Company’s financial
statements. Portfolio investments are held for purposes of
deriving investment income and future capital gains.
The investment objective of the Company is to achieve current
income and capital gains. In order to achieve this objective,
the Company has primarily invested in debt and equity securities
of private companies in a variety of industries.
Note 2. Summary
of Significant Accounting Policies
Basis
of Presentation
The consolidated financial statements include the accounts of
ACC and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2007 balances to conform
with the 2008 financial statement presentation.
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with U.S. 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 March 31, 2008, the
results of operations for the three months ended March 31,
2008 and 2007, and changes in net assets and cash flows for the
three months ended March 31, 2008 and 2007. The results of
operations for the three months ended March 31, 2008, are
not necessarily indicative of the operating results to be
expected for the full year.
The private finance portfolio and the interest and related
portfolio income and net realized gains (losses) on the private
finance portfolio are presented in three categories: companies
more than 25% owned, which represent portfolio companies where
the Company directly or indirectly owns more than 25% of the
outstanding voting securities of such portfolio company or where
the Company controls the portfolio company’s board of
directors and, therefore, are deemed controlled by the Company
under the 1940 Act; companies owned 5% to 25%, which represent
portfolio companies where the Company directly or indirectly
owns 5% to 25% of the outstanding voting securities of such
portfolio company or
37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
where the Company holds one or
more seats on the portfolio company’s board of directors
and, therefore, are deemed to be an affiliated person under the
1940 Act; and companies less than 5% owned which represent
portfolio companies where the Company directly or indirectly
owns less than 5% of the outstanding voting securities of such
portfolio company and where the Company has no other
affiliations with such portfolio company. The interest and
related portfolio income and net realized gains (losses) from
the commercial real estate finance portfolio and other sources,
including investments in U.S. treasury bills, money market and
other securities, are included in the companies less than 5%
owned category on the consolidated statement of operations.
In the ordinary course of business, the Company enters into
transactions with portfolio companies that may be considered
related party transactions.
Valuation
Of Portfolio Investments
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s investments may be subject
to certain restrictions on resale and generally have no
established trading market. The Company values substantially all
of its investments at fair value as determined in good faith by
the Board of Directors in accordance with the Company’s
valuation policy and the provisions of the Investment Company
Act of 1940 and FASB Statement No. 157, Fair Value
Measurements (“SFAS 157” or the
“Statement”). The Company determines fair value to be
the price that would be received for an investment in a current
sale, which assumes an orderly transaction between market
participants on the measurement date. The Company’s
valuation policy considers the fact that no ready market exists
for substantially all of the securities in which it invests and
that fair value for its investments must typically be determined
using unobservable inputs. The Company’s valuation policy
is intended to provide a consistent basis for determining the
fair value of the portfolio.
The Company adopted SFAS 157 on a prospective basis in the
first quarter of 2008. SFAS 157 requires the Company to
assume that the portfolio investment is assumed to be sold in
the principal market to market participants, or in the absence
of a principal market, the most advantageous market, which may
be a hypothetical market. Market participants are defined as
buyers and sellers in the principal or most advantageous market
that are independent, knowledgeable, and willing and able to
transact. In accordance with the Statement, the Company has
considered its principal market, or the market in which the
Company exits its portfolio investments with the greatest volume
and level of activity.
The Company has determined that for its buyout investments,
where the Company has control or could gain control through an
option or warrant security, both the debt and equity securities
of the portfolio investment would exit in the merger and
acquisition (“M&A”) market as the principal
market generally through a sale or recapitalization of the
portfolio company. The Company believes that the in-use premise
of value (as defined in SFAS 157), which assumes the debt
and equity securities are sold together, is appropriate as this
would provide maximum proceeds to the seller. As a result, the
Company will continue to use the enterprise value methodology to
determine the fair value of these investments under
SFAS 157. Enterprise value means the entire value of the
company to a market participant, including the sum of the values
of debt and equity securities used to capitalize the enterprise
at a point in time. Enterprise value is determined using various
factors, including cash flow from operations of the portfolio
company, multiples at which private companies are bought and
sold, and other pertinent factors, such as recent offers to
purchase a portfolio company, recent transactions involving the
purchase or sale
38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
of the portfolio company’s
equity securities, liquidation events, or other events. The
Company allocates the enterprise value to these securities in
order of the legal priority of the securities.
While the Company typically exits its securities upon the sale
or recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where the Company
does not have control or the ability to gain control through an
option or warrant security, the Company cannot typically control
the exit of its investment into its principal market (the
M&A market). As a result, in accordance with SFAS 157,
the Company is required to determine the fair value of these
investments assuming a sale of the individual investment in a
hypothetical market to a hypothetical market participant (the
in-exchange premise of value). The Company continues to perform
an enterprise value analysis for the investments in this
category to assess the credit risk of the loan or debt security
and to determine the fair value of its equity investment in
these portfolio companies. The determined equity values are
generally discounted when the Company has a minority ownership
position, restrictions on resale, specific concerns about the
receptivity of the capital markets to a specific company at a
certain time, or other factors. For loan and debt securities,
the Company performs a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires the
Company to estimate the expected repayment date of the
instrument and a market participant’s required yield. The
Company’s estimate of the expected repayment date of a loan
or debt security is generally shorter than the legal maturity of
the instruments as the Company’s loans have historically
been repaid prior to the maturity date. The yield analysis
considers changes in interest rates and changes in leverage
levels of the loan or debt security as compared to market
interest rates and leverage levels. Assuming the credit quality
of the loan or debt security remains stable, the Company will
use the value determined by the yield analysis as the fair value
for that security. A change in the assumptions that the Company
uses to estimate the fair value of its loans and debt securities
using the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, the
Company may consider other factors in determining the fair value
of a loan or debt security, including the value attributable to
the loan or debt security from the enterprise value of the
portfolio company or the proceeds that would be received in a
liquidation analysis.
The Company’s equity investments in private debt and equity
funds are generally valued at the fund’s net asset value,
unless other factors lead to a determination of fair value at a
different amount. The value of the Company’s equity
securities in public companies for which quoted prices in an
active market are readily available is based on the closing
public market price on the measurement date.
The fair value of the Company’s CLO bonds and preferred
shares/income notes and CDO bonds (“CLO/CDO Assets”)
is generally based on a discounted cash flow model that utilizes
prepayment, re-investment and loss assumptions based on
historical experience and projected performance, economic
factors, the characteristics of the underlying cash flow, and
comparable yields for similar bonds and preferred shares/ income
notes, when available. The Company recognizes unrealized
appreciation or depreciation on its CLO/CDO Assets as comparable
yields in the market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool. The Company determines the fair value of its
CLO/CDO Assets on an individual
security-by-security
basis.
The Company will record unrealized depreciation on investments
when it determines that the fair value of a security is less
than its cost basis, and will record unrealized appreciation
when it determines that the fair value is greater than its cost
basis. Because of the inherent uncertainty of valuation, the
39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
values determined at the measurement date may differ
significantly from the values that would have been used had a
ready market existed for the investments, and the differences
could be material. Additionally, changes in the market
environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on
these investments to be different than the values determined at
the measurement date.
Net
Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation
Realized gains or losses are measured by the difference between
the net proceeds from the repayment or sale and the cost basis
of the investment without regard to unrealized appreciation or
depreciation previously recognized, and include investments
charged off during the period, net of recoveries. Net change in
unrealized appreciation or depreciation primarily reflects the
change in portfolio investment values during the reporting
period, including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation or depreciation also
reflects the change in the value of U.S. Treasury bills and
depreciation on accrued interest and dividends receivable and
other assets where collection is doubtful.
Interest
and Dividend Income
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. For loans and
debt securities with contractual payment-in-kind interest, which
represents contractual interest accrued and added to the loan
balance that generally becomes due at maturity, the Company will
not accrue payment-in-kind interest if the portfolio company
valuation indicates that the payment-in-kind interest is not
collectible. In general, interest is not accrued on loans and
debt securities if the Company has doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. Loans in workout status
do not accrue interest. In addition, interest may not accrue on
loans or debt securities to portfolio companies that are more
than 50% owned by the Company depending on such company’s
capital requirements.
When the Company receives nominal cost warrants or free equity
securities (“nominal cost equity”), the Company
allocates its cost basis in its investment between its debt
securities and its nominal cost equity at the time of
origination. At that time, the original issue discount basis of
the nominal cost equity is recorded by increasing the cost basis
in the equity and decreasing the cost basis in the related debt
securities. Loan origination fees, original issue discount, and
market discount are capitalized and then amortized into interest
income using a method that approximates the effective interest
method. Upon the prepayment of a loan or debt security, any
unamortized loan origination fees are recorded as interest
income and any unamortized original issue discount or market
discount is recorded as a realized gain.
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest on accruing
loans and debt securities plus the annual amortization of loan
origination fees, original issue discount, and market discount
on accruing loans and debt securities less the annual
amortization of loan origination costs, divided by
(b) total loans and debt securities at value. The weighted
average yield is computed as of the balance sheet date.
The Company recognizes interest income on the CLO preferred
shares/income notes using the effective interest method, based
on the anticipated yield that is determined using the estimated
cash flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated
40
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
cash flows due to changes in prepayments and/or re-investments,
credit losses or asset pricing. Changes in estimated yield are
recognized as an adjustment to the estimated yield over the
remaining life of the preferred shares/income notes from the
date the estimated yield was changed. CLO and CDO bonds have
stated interest rates. The weighted average yield on the CLO/CDO
Assets is calculated as the (a) annual stated interest or
the effective interest yield on the accruing bonds or the
effective yield on the preferred shares/income notes, divided by
(b) CLO/CDO Assets at value. The weighted average yields
are computed as of the balance sheet date.
| Fee Income |
Fee income includes fees for loan prepayment premiums,
guarantees, commitments, and services rendered by the Company to
portfolio companies and other third parties such as diligence,
structuring, transaction services, management and consulting
services, and other services. Loan prepayment premiums are
recognized at the time of prepayment. Guaranty and commitment
fees are generally recognized as income over the related period
of the guaranty or commitment, respectively. Diligence,
structuring, and transaction services fees are generally
recognized as income when services are rendered or when the
related transactions are completed. Management, consulting and
other services fees, including fund management fees, are
generally recognized as income as the services are rendered.
Fees are not accrued if the Company has doubt about collection
of those fees.
Guarantees
Guarantees meeting the characteristics described in FASB
Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and issued or modified
after December 31, 2002, are recognized at fair value at
inception. Guarantees made on behalf of portfolio companies are
considered in determining the fair value of the Company’s
investments. See Note 5.
Financing
Costs
Debt financing costs are based on actual costs incurred in
obtaining debt financing and are deferred and amortized as part
of interest expense over the term of the related debt instrument
using a method that approximates the effective interest method.
Costs associated with the issuance of common stock are recorded
as a reduction to the proceeds from the sale of common stock.
Financing costs generally include underwriting, accounting and
legal fees, and printing costs.
Dividends
to Shareholders
Dividends to shareholders are recorded on the record date.
Stock
Compensation Plans
The Company has a stock-based employee compensation plan. See
Note 9. Effective January 1, 2006, the Company adopted
the provisions of FASB Statement No. 123 (Revised 2004),
Share-Based Payment (“SFAS 123R”). SFAS 123R
was adopted using the modified prospective method of
application, which required the Company to recognize
compensation costs on a prospective basis beginning
January 1,
41
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
2006. Accordingly, the Company did not restate prior year
financial statements. Under this method, the unamortized cost of
previously awarded options that were unvested as of
January 1, 2006, is recognized over the remaining service
period in the statement of operations beginning in 2006, using
the fair value amounts determined for pro forma disclosure under
SFAS 123R. With respect to options granted on or after
January 1, 2006, compensation cost based on estimated grant
date fair value is recognized over the related service period in
the statement of operations. The stock option expense for the
three months ended March 31, 2008 and 2007, was as follows:
| ($ in millions, except per share amounts) | 2008 | 2007 | ||||||
|
Employee Stock Option Expense:
|
||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$ | 1.7 | $ | 3.2 | ||||
|
Options granted on or after January 1, 2006
|
2.5 | 0.5 | ||||||
|
Total employee stock option expense
|
$ | 4.2 | $ | 3.7 | ||||
|
Per basic share
|
$ | 0.03 | $ | 0.02 | ||||
|
Per diluted share
|
$ | 0.03 | $ | 0.02 | ||||
The stock option expense for options granted for 2008 and 2007
was based on the underlying value of the options granted by the
Company. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option pricing model
and expensed over the vesting period. The following weighted
average assumptions were used to calculate the fair value of
options granted during the three months ended March 31,
2008 and 2007:
| 2008 | 2007(1) | |||||||
|
Expected term (in years)
|
5.0 | — | ||||||
|
Risk-free interest rate
|
2.7 | % | — | % | ||||
|
Expected volatility
|
27.6 | % | — | % | ||||
|
Dividend yield
|
8.5 | % | — | % | ||||
|
Weighted average fair value per option
|
$ | 2.19 | $ | — | ||||
| (1) | The Company did not grant any options during the three months ended March 31, 2007. |
The expected term of the options granted represents the period
of time that such options are expected to be outstanding. To
determine the expected term of the options, the Company used
historical data to estimate option exercise time frames,
including considering employee terminations. The risk free rate
was based on the U.S. Treasury bond yield curve at the date of
grant consistent with the expected term. Expected volatilities
were determined based on the historical volatility of the
Company’s common stock over a historical time period
consistent with the expected term. The dividend yield was
determined based on the Company’s historical dividend yield
over a historical time period consistent with the expected term.
To determine the stock options expense for the options granted,
the calculated fair value of the options granted is applied to
the options granted, net of assumed future option forfeitures.
The Company estimates that the employee-related stock option
expense for outstanding unvested options as of March 31,
2008, will be $13.2 million, $6.8 million, and
$4.0 million for the years ended December 31, 2008,
2009, and 2010, respectively. This estimate may change if the
Company’s assumptions related to future option forfeitures
change. This estimate does not include any expense related to
stock option grants after March 31, 2008, as the fair value
of those stock options will be determined at the time of grant.
The
42
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
aggregate total stock option expense remaining as of
March 31, 2008, is expected to be recognized over an
estimated weighted-average period of 1.8 years.
Federal
and State Income Taxes and Excise Tax
The Company intends to comply with the requirements of the Code
that are applicable to regulated investment companies
(“RIC”) and real estate investment trusts
(“REIT”). ACC and any subsidiaries that qualify as a
RIC or a REIT intend to distribute or retain through a deemed
distribution all of their annual taxable income to shareholders;
therefore, the Company has made no provision for income taxes
exclusive of excise taxes for these entities.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the Company’s annual taxable income exceeds the
distributions from such taxable income during the year earned.
To the extent that the Company determines that its estimated
current year annual taxable income will be in excess of
estimated current year dividend distributions from such taxable
income, the Company accrues excise taxes on estimated excess
taxable income as taxable income is earned using an annual
effective excise tax rate. The annual effective excise tax rate
is determined by dividing the estimated annual excise tax by the
estimated annual taxable income.
Income taxes for AC Corp are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Per
Share Information
Basic earnings per common share is calculated using the weighted
average number of common shares outstanding for the period
presented. Diluted earnings per common share reflects the
potential dilution that could occur if options to issue common
stock were exercised into common stock. Earnings per share is
computed after subtracting dividends on preferred shares, if any.
Use of
Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
The consolidated financial statements include portfolio
investments at value of $4.6 billion and $4.8 billion
at March 31, 2008, and December 31, 2007,
respectively. At March 31, 2008, and December 31,
2007, 91% and 92%, respectively, of the Company’s total
assets represented portfolio investments whose fair values have
been determined by the Board of Directors in good faith in the
absence of readily available market values. Because of the
inherent uncertainty of valuation, the Board of
43
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Directors’ determined values may differ significantly from
the values that would have been used had a ready market existed
for the investments, and the differences could be material.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company has adopted this
statement on a prospective basis beginning in the quarter ended
March 31, 2008. Adoption of this statement did not have a
material effect on the Company’s consolidated financial
statements for the period ended March 31, 2008. However,
the impact on its consolidated financial statements for periods
subsequent to the period of adoption cannot be determined at
this time as it will be influenced by the estimates of fair
value for those periods, the number and amount of investments
the Company originates, acquires or exits, and the effect of any
additional guidance or any changes in the interpretation of this
statement.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115. This statement permits an entity to choose to
measure many financial instruments and certain other items at
fair value. This statement applies to all reporting entities,
and contains financial statement presentation and disclosure
requirements for assets and liabilities reported at fair value
as a consequence of the election. This statement is effective
for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company did not
elect fair value measurement for assets or liabilities other
than portfolio investments, which are already measured at fair
value, therefore, the adoption of this statement did not impact
the Company’s consolidated financial position or its
results of operations.
44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio
Private
Finance
At March 31, 2008, and December 31, 2007, the private
finance portfolio consisted of the following:
| 2008 | 2007 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 358.5 | $ | 325.7 | 7.0% | $ | 374.1 | $ | 344.3 | 7.7% | ||||||||||||||
|
Unitranche
debt(2)
|
656.5 | 655.7 | 11.8% | 659.2 | 653.9 | 11.5% | ||||||||||||||||||
|
Subordinated debt
|
2,655.6 | 2,430.4 | 13.0% | 2,576.4 | 2,416.4 | 12.8% | ||||||||||||||||||
|
Total loans and debt
securities(3)
|
3,670.6 | 3,411.8 | 12.2% | 3,609.7 | 3,414.6 | 12.1% | ||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(4)
|
224.1 | 197.4 | 15.8% | 218.3 | 203.0 | 14.6% | ||||||||||||||||||
|
Subordinated certificates in Unitranche Fund
LLC(4)
|
31.5 | 31.5 | 12.4% | 0.7 | 0.7 | 12.4% | ||||||||||||||||||
|
Other equity securities
|
1,093.1 | 879.1 | 1,215.2 | 1,041.0 | ||||||||||||||||||||
|
Total equity securities
|
1,348.7 | 1,108.0 | 1,434.2 | 1,244.7 | ||||||||||||||||||||
|
Total
|
$ | 5,019.3 | $ | 4,519.8 | $ | 5,043.9 | $ | 4,659.3 | ||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. At March 31, 2008, and December 31, 2007, the cost and value of subordinated debt included the Class A equity interests in Ciena Capital LLC, which were placed on non-accrual status during the fourth quarter of 2006. |
The weighted average yield on the
preferred shares/income notes of CLOs is calculated as the
(a) effective interest yield on the preferred shares/income
notes of CLOs, divided by (b) total preferred shares/income
notes of CLOs at value. The weighted average yields are computed
as of the balance sheet date. The yield on the CLO assets
represents the yield used for recording interest income. The
market yield used in the valuation of the CLO assets may be
different than the interest yields.
The weighted average yield on the
subordinated certificates in the Unitranche Fund LLC is
computed as the (a) annual stated interest (LIBOR plus
7.5%) divided by (b) total investment at value.
| (2) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. |
| (3) | The total principal balance outstanding on loans and debt securities was $3,697.4 million and $3,639.6 million at March 31, 2008, and December 31, 2007, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $26.8 million and $29.9 million at March 31, 2008, and December 31, 2007, respectively. |
| (4) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Unitranche Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations. |
The Company’s private finance investment activity
principally involves providing financing through privately
negotiated long-term debt and equity investments. The
Company’s private finance debt and equity investments are
generally issued by private companies and are generally illiquid
and may be subject to certain restrictions on resale.
The Company’s private finance debt 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 pre-determined strike price, which is generally a
nominal price for warrants or options in a private company. The
annual stated interest rate is only one factor in pricing the
investment relative to the Company’s rights and priority in
the portfolio company’s capital structure, and will vary
depending on many factors, including if the Company has received
nominal cost equity or other components of
45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
investment return, such as loan origination fees or market
discount. The stated interest rate may include some component of
contractual payment-in-kind interest, which represents
contractual interest accrued and added to the loan balance that
generally becomes due at maturity.
At March 31, 2008, 85% of the private finance loans and
debt securities had a fixed rate of interest and 15% had a
floating rate of interest. At December 31, 2007, 86% of the
private finance loans and debt securities had a fixed rate of
interest and 14% had a floating rate of interest. Senior loans
may carry a fixed rate of interest or a floating rate of
interest, usually set as a spread over LIBOR, and may require
payments of both principal and interest throughout the life of
the loan. Senior loans generally have contractual maturities of
three to six years and interest is generally paid to the Company
monthly or quarterly. Unitranche debt generally carries a fixed
rate of interest and generally requires payments of both
principal and interest throughout the life of the loan.
Unitranche debt generally has contractual maturities of five to
six years and interest is generally paid to the Company
quarterly. Subordinated debt generally carries a fixed rate of
interest generally with contractual maturities of five to ten
years and generally has interest-only payments in the early
years and payments of both principal and interest in the later
years, although maturities and principal amortization schedules
may vary. Interest on subordinated debt is generally paid to the
Company quarterly.
Equity securities consist primarily of securities issued by
private companies and may be subject to certain restrictions on
their resale and are generally illiquid. The Company may make
equity investments for minority stakes in portfolio companies or
may receive equity features, such as nominal cost warrants, in
conjunction with its debt investments. The Company may also
invest in the equity (preferred and/or voting or non-voting
common) of a portfolio company where the Company’s equity
ownership may represent a significant portion of the equity, but
may or may not represent a controlling interest. If the Company
invests in non-voting equity in a buyout investment, the Company
generally has the option to acquire a controlling stake in the
voting securities of the portfolio company at fair market value.
The Company may incur costs associated with making buyout
investments that will be included in the cost basis of the
Company’s equity investment. These include costs such as
legal, accounting and other professional fees associated with
diligence, referral and investment banking fees, and other
costs. Equity securities generally do not produce a current
return, but are held with the potential for investment
appreciation and ultimate gain on sale.
Ciena Capital LLC. Ciena Capital LLC
(“Ciena”) focuses on loan products that provide
financing to commercial real estate owners and operators. Ciena
is also a participant in the Small Business
Administration’s 7(a) Guaranteed Loan Program and its
wholly-owned subsidiary is licensed by the SBA as a Small
Business Lending Company (SBLC). Ciena is headquartered in
New York, NY.
At March 31, 2008, the Company’s investment in Ciena
totaled $327.8 million at cost and $29.3 million at
value, after the effect of unrealized depreciation of
$298.5 million. At December 31, 2007, the
Company’s investment in Ciena totaled $327.8 million at
cost and $68.6 million at value, after the effect of
unrealized depreciation of $259.2 million.
Net change in unrealized appreciation or depreciation included a
net decrease in the Company’s investment in Ciena of
$39.3 million for the three months ended March 31,
2008, and no change in the unrealized depreciation on the
Company’s investment in Ciena for the three months ended
March 31, 2007.
46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Total interest and related portfolio income earned from the
Company’s investment in Ciena for the three months ended
March 31, 2008 and 2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Interest income on subordinated debt and Class A equity
interests
|
$ | — | $ | — | ||||
|
Fees and other income
|
— | 1.4 | ||||||
|
Total interest and related portfolio income
|
$ | — | $ | 1.4 | ||||
In the fourth quarter of 2006, the Company placed its investment
in Ciena’s 25% Class A equity interests on non-accrual
status. As a result, there was no interest income from the
Company’s investment in Ciena for the three months ended
March 31, 2008 and 2007. In consideration for providing a
guaranty on Ciena’s revolving credit facility and standby
letters of credit (discussed below), the Company earned fees of
$1.4 million for the three months ended March 31,
2007, and $5.4 million for the year ended December 31,
2007, which were included in fees and other income. Ciena has
not yet paid the $5.4 million in such fees earned by the
Company during 2007, and at March 31, 2008, such fees were
included as a receivable in other assets. The Company considered
this outstanding receivable in its valuation of Ciena at
March 31, 2008. The Company did not accrue the fees earned
from Ciena for providing the guaranty and standby letters of
credit for the three months ended March 31, 2008.
The Company guarantees Ciena’s revolving credit facility
that matures in March 2009. On January 30, 2008, Ciena
completed an amendment of the terms of its revolving credit
facility. The amendment reduced the commitments from the lenders
under the facility from $500 million to $450 million
at the effective date of the amendment, with further periodic
reductions in total commitments to $325 million by
December 31, 2008. In addition, certain financial and other
covenants were amended. In connection with this amendment, the
Company increased its unconditional guarantee from 60% to 100%
of the total obligations under this facility (consisting of
principal, letters of credit issued under the facility, accrued
interest, and other fees) and replaced $42.5 million in
letters of credit issued under the Ciena credit facility with
new letters of credit under the Company’s revolving line of
credit. The guaranty of the Ciena revolving credit facility can
be called by the lenders in the event of a default, which
includes the occurrence of any event of default under the
Company’s revolving credit facility, subject to grace
periods in certain cases. The amendment also prohibits cash
payments from Ciena to the Company for interest, guarantee fees,
management fees, and dividends. At March 31, 2008, the
principal amount outstanding on Ciena’s revolving credit
facility was $335.0 million and letters of credit issued
under the facility were $46.9 million. The total obligation
guaranteed by the Company at March 31, 2008, was
$384.8 million. At March 31, 2008, the Company had
provided standby letters of credit totaling $59.5 million
in connection with term securitization transactions completed by
Ciena.
Ciena relies on the asset-backed securitization market to
finance its loan origination activity. That financing source
continues to be unreliable in the current capital markets, and
as a result, Ciena has substantially curtailed loan origination
activity, including loan originations under the SBA’s 7(a)
Guaranteed Loan Program. Ciena continues to reposition its
business. However, there is an inherent risk in this
repositioning and the Company continues to work with Ciena on
restructuring. Ciena maintains two non-recourse securitization
warehouse facilities, and there is no assurance that Ciena will
be able to refinance these facilities in the loan securitization
market. The Company has issued performance guaranties whereby
the Company agreed to indemnify the warehouse providers for any
damages, losses, liabilities and related costs and expenses that
they may incur as a result of Ciena’s failure to perform
any of its obligations as loan originator, loan seller or loan
servicer under the warehouse securitizations.
47
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
The Office of the Inspector General of the SBA (OIG) and the
United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA-guaranteed
loans issued by Ciena. Specifically, on or about January 9,
2007, Ciena became aware of an indictment captioned as the
United States v. Harrington,
No. 2:06-CR-20662
pending in the United States District Court for the Eastern
District of Michigan. The indictment alleged that a former Ciena
employee in the Detroit office engaged in the fraudulent
origination of loans guaranteed, in substantial part, by the
SBA. The Company understands that Ciena is working cooperatively
with the U.S. Attorney’s Office and the investigating
agencies with respect to this matter. On October 1, 2007,
the former Ciena employee pled guilty to one count of conspiracy
to fraudulently originate SBA-guaranteed loans and one count of
making a false statement before a grand jury.
On March 6, 2007, Ciena entered into an agreement with the
SBA. According to the agreement, Ciena remains a preferred
lender in the SBA 7(a) Guaranteed Loan Program and retains the
ability to sell loans into the secondary market. As part of this
agreement, Ciena agreed to the immediate payment of
approximately $10 million to the SBA to cover amounts paid
by the SBA with respect to some of the SBA-guaranteed loans that
have been the subject of the charges by the
U.S. Attorney’s Office for the Eastern District of
Michigan against Mr. Harrington. Ciena also entered into an
escrow agreement with the SBA and an escrow agent in which Ciena
agreed to deposit $10 million with the escrow agent for any
additional payments Ciena may be obligated to pay to the SBA in
the future under the agreement. During the term of the
agreement, any loans originated by Ciena that will be sold into
the secondary market or loans that default after having been
sold into the secondary market will be reviewed by an
independent third party selected by the SBA prior to the sale of
such loans into the secondary market or prior to reimbursement
by the SBA. Ciena remains subject to SBA rules and regulations
and as a result may be required to make additional payments to
the SBA in the ordinary course of business.
As an SBA lender, Ciena is also subject to other SBA and OIG
audits, investigations, and reviews. In addition, the Office of
the Inspector General of the U.S. Department of Agriculture is
conducting an investigation of Ciena’s lending practices
under the Business and Industry Loan (B&I) program. The OIG
and the U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. These investigations, audits and reviews are
ongoing.
On or about January 16, 2007, Ciena (f/k/a Business Loan
Express, LLC) and its subsidiary Business Loan Center LLC
(BLC) became aware of a lawsuit titled, United States, ex
rel James R. Brickman and Greenlight Capital, Inc. v.
Business Loan Express LLC f/k/a Business Loan Express,
Inc.; Business Loan Center LLC f/k/a Business
Loan Center, Inc.; Robert Tannenhauser; Matthew McGee; and
George Harrigan, 05-CV-3147 (JEC). The complaint includes
allegations arising under the False Claims Act and relating to
alleged fraud in connection with SBA guarantees on shrimp vessel
loans. On December 18, 2007, the United States District
Court for the Northern District of Georgia dismissed all claims
in this matter. The plaintiffs are appealing the dismissal.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect the
Company’s financial results. The Company has considered
Ciena’s current regulatory issues, ongoing investigations,
litigation, and the repositioning of its business in performing
the valuation of Ciena at March 31, 2008. The Company is
monitoring the situation.
48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
At both March 31, 2008, and December 31, 2007, the
Company held all of the Class A equity interests, all of
the Class B equity interests and 94.9% of the Class C
equity interests.
Mercury Air Centers, Inc. In April
2004, the Company completed the purchase of a majority ownership
in Mercury Air Centers, Inc. (“Mercury”). At
March 31, 2007, the Company’s investment in Mercury
totaled $84.8 million at cost and $301.4 million at
value, which included unrealized appreciation of
$216.6 million.
In August 2007, the Company completed the sale of its majority
equity interest in Mercury. For the year ended December 31,
2007, the Company realized a gain of $262.4 million,
subject to post-closing adjustments. In addition, the Company
was repaid approximately $51 million of subordinated debt
outstanding to Mercury at closing.
Mercury owned and operated fixed base operations generally under
long-term leases from local airport authorities, which consisted
of terminal and hangar complexes that serviced the needs of the
general aviation community. Mercury was headquartered in
Richmond Heights, OH.
Total interest and related portfolio income earned from the
Company’s investment in Mercury for the three months ended
March 31, 2007, was as follows:
| ($ in millions) | 2007 | |||
|
Interest income
|
$ | 2.0 | ||
|
Fees and other income
|
0.1 | |||
|
Total interest and related portfolio income
|
$ | 2.1 | ||
Net change in unrealized appreciation or depreciation for the
three months ended March 31, 2007, included an increase in
unrealized appreciation totaling $56.7 million related to
the Company’s investment in Mercury.
49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Collateralized Loan Obligations (“CLOs”) and
Collateralized Debt Obligations
(“CDOs”). At March 31, 2008,
and December 31, 2007, the Company owned bonds and
preferred shares/income notes in CLOs and bonds in a CDO as
follows:
| 2008 | 2007 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Bonds(2):
|
||||||||||||||||||||||||
|
Callidus Debt Partners CDO Fund I, Ltd.
|
$ | 28.4 | $ | 28.5 | 14.0% | $ | 28.4 | $ | 28.5 | 14.0% | ||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
2.0 | 2.6 | 10.1% | — | — | — | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
4.3 | 4.5 | 13.1% | 4.3 | 4.3 | 13.4% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
17.0 | 15.5 | 8.9% | 17.0 | 16.1 | 11.0% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
7.4 | 8.2 | 11.4% | 7.4 | 7.4 | 12.7% | ||||||||||||||||||
|
Knightsbridge CLO 2007-1 Limited
|
22.0 | 22.0 | 14.1% | 22.0 | 22.0 | 14.1% | ||||||||||||||||||
|
Pangaea CLO 2007-1 Ltd.
|
11.6 | 10.8 | 13.1% | 11.6 | 11.6 | 13.9% | ||||||||||||||||||
|
Total bonds
|
92.7 | 92.1 | 12.7% | 90.7 | 89.9 | 13.3% | ||||||||||||||||||
|
Preferred Shares/Income Notes:
|
||||||||||||||||||||||||
|
Callidus Debt Partners CLO Fund III, Ltd.
|
21.4 | 20.0 | 16.4% | 21.8 | 20.0 | 14.1% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
15.2 | 14.9 | 17.5% | 12.3 | 11.3 | 16.1% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund V, Ltd.
|
13.8 | 13.8 | 20.3% | 14.0 | 14.7 | 19.3% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
28.3 | 26.5 | 19.2% | 27.0 | 27.0 | 19.3% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VII, Ltd.
|
23.1 | 23.1 | 16.6% | 22.1 | 22.1 | 16.6% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
48.4 | 31.5 | 5.6% | 49.3 | 36.1 | 7.6% | ||||||||||||||||||
|
Callidus MAPS CLO Fund II, Ltd.
|
18.8 | 16.8 | 17.6% | 18.7 | 18.7 | 14.7% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
22.7 | 19.8 | 14.6% | 21.9 | 21.9 | 14.2% | ||||||||||||||||||
|
Knightsbridge CLO
2007-1
Limited
|
32.4 | 31.0 | 19.3% | 31.2 | 31.2 | 15.2% | ||||||||||||||||||
|
Total preferred shares/income notes
|
224.1 | 197.4 | 15.8% | 218.3 | 203.0 | 14.6% | ||||||||||||||||||
|
Total
|
$ | 316.8 | $ | 289.5 | $ | 309.0 | $ | 292.9 | ||||||||||||||||
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations. |
The market yield used in the
valuation of the CLO and CDO assets may be different than the
interest yields shown above.
| (2) | These securities are included in private finance subordinated debt. |
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis is adjusted as necessary.
As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
The bonds, preferred shares and income notes of the CLOs and CDO
in which the Company has invested are junior in priority for
payment of interest and principal to the more senior notes
issued by the CLOs and CDO. Cash flow from the underlying
collateral assets in the CLOs and CDO is generally allocated
first to the senior bonds in order of priority, then any
remaining cash flow is generally distributed to the preferred
shareholders and income note holders. To the extent there are
defaults and unrecoverable losses on the underlying collateral
assets that result in reduced cash flows, the preferred
shares/income notes will bear this loss first and then the
subordinated bonds would bear any loss after
50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
the preferred shares/income notes.
At both March 31, 2008, and December 31, 2007, the
face value of the CLO and CDO assets held by the Company was
subordinate to as much as 94% of the face value of the
securities outstanding in these CLOs and CDO.
At March 31, 2008, and December 31, 2007, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
636 issuers and 671 issuers, respectively, and had
balances as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Bonds
|
$ | 286.1 | $ | 288.5 | ||||
|
Syndicated loans
|
4,206.5 | 4,122.7 | ||||||
|
Cash(1)
|
101.4 | 104.4 | ||||||
|
Total underlying collateral
assets(2)
|
$ | 4,594.0 | $ | 4,515.6 | ||||
| (1) | Includes undrawn liability amounts. |
| (2) | At March 31, 2008, and December 31, 2007, the total face value of defaulted obligations was $42.3 million and $18.4 million, respectively, or approximately 0.9% and 0.4% respectively, of the total underlying collateral assets. |
Loans and Debt Securities on Non-Accrual
Status. At March 31, 2008, and
December 31, 2007, private finance loans and debt
securities at value not accruing interest were as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Loans and debt securities in workout status
|
||||||||
|
Companies more than 25% owned
|
$ | 62.4 | $ | 114.1 | ||||
|
Companies 5% to 25% owned
|
2.6 | 11.7 | ||||||
|
Companies less than 5% owned
|
23.3 | 23.8 | ||||||
|
Loans and debt securities not in workout status
|
||||||||
|
Companies more than 25% owned
|
31.0 | 21.4 | ||||||
|
Companies 5% to 25% owned
|
12.3 | 13.4 | ||||||
|
Companies less than 5% owned
|
11.7 | 13.3 | ||||||
|
Total
|
$ | 143.3 | $ | 197.7 | ||||
51
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Industry and Geographic
Compositions. The industry and geographic
compositions of the private finance portfolio at value at
March 31, 2008, and December 31, 2007, were as follows:
| 2008 | 2007 | |||||||
|
Industry
|
||||||||
|
Business services
|
36 | % | 37 | % | ||||
|
Consumer products
|
25 | 25 | ||||||
|
Industrial products
|
8 | 10 | ||||||
|
Financial services
|
5 | 6 | ||||||
|
CLO/CDO(1)
|
6 | 6 | ||||||
|
Retail
|
5 | 4 | ||||||
|
Consumer services
|
5 | 4 | ||||||
|
Healthcare services
|
3 | 3 | ||||||
|
Asset management
|
2 | 1 | ||||||
|
Other
|
5 | 4 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic
Region(2)
|
||||||||
|
Mid-Atlantic
|
35 | % | 36 | % | ||||
|
Midwest
|
31 | 32 | ||||||
|
Southeast
|
18 | 17 | ||||||
|
West
|
14 | 14 | ||||||
|
Northeast
|
2 | 1 | ||||||
|
Total
|
100 | % | 100 | % | ||||
| (1) | These funds primarily invest in senior corporate loans. Certain of these funds are managed by Callidus Capital, a portfolio company of Allied Capital. |
| (2) | The geographic region for the private finance portfolio depicts the location of the headquarters for the Company’s portfolio companies. The portfolio companies may have a number of other locations in other geographic regions. |
Commercial
Real Estate Finance
At March 31, 2008, and December 31, 2007, the
commercial real estate finance portfolio consisted of the
following:
| 2008 | 2007 | |||||||||||||||||||||||
| Cost | Value | Yield(1) | Cost | Value | Yield(1) | |||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
Commercial mortgage loans
|
$ | 52.0 | $ | 53.5 | 7.9% | $ | 65.9 | $ | 65.4 | 6.8% | ||||||||||||||
|
Real estate owned
|
23.5 | 30.2 | 15.3 | 21.3 | ||||||||||||||||||||
|
Equity interests
|
14.2 | 32.1 | 15.7 | 34.5 | ||||||||||||||||||||
|
Total
|
$ | 89.7 | $ | 115.8 | $ | 96.9 | $ | 121.2 | ||||||||||||||||
| (1) | The weighted average yield on the commercial mortgage loans is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. |
52
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Commercial Mortgage Loans and Equity
Interests. The commercial mortgage loan
portfolio contains loans that were originated by the Company or
were purchased from third-party sellers. At both March 31,
2008, and December 31, 2007, approximately 85% and 15% of
the Company’s commercial mortgage loan portfolio was
composed of fixed and adjustable interest rate loans,
respectively. At March 31, 2008, and December 31,
2007, loans with a value of $7.4 million and
$14.3 million, respectively, were not accruing interest.
Loans greater than 120 days delinquent generally do not
accrue interest.
Equity interests consist primarily of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to certain
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of investment appreciation and
ultimate realized gain on sale.
The property types and the geographic composition securing the
commercial real estate finance portfolio at value at
March 31, 2008, and December 31, 2007, were as follows:
| 2008 | 2007 | |||||||
|
Property Type
|
||||||||
|
Hospitality
|
44 | % | 44 | % | ||||
|
Office
|
20 | 21 | ||||||
|
Retail
|
18 | 18 | ||||||
|
Recreation
|
16 | 15 | ||||||
|
Other
|
2 | 2 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic Region
|
||||||||
|
Southeast
|
44 | % | 40 | % | ||||
|
Midwest
|
25 | 31 | ||||||
|
West
|
21 | 20 | ||||||
|
Northeast
|
8 | 7 | ||||||
|
Mid-Atlantic
|
2 | 2 | ||||||
|
Total
|
100 | % | 100 | % | ||||
Fair
Value Measurements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157). This statement
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company has adopted this
statement on a prospective basis beginning in the quarter ended
March 31, 2008. Adoption of this statement did not have a
material effect on the Company’s consolidated financial
statements for the period ended March 31, 2008.
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s investments may be subject
to certain restrictions on resale and generally have no
established trading market. The Company values substantially all
of its investments at fair value as determined in good faith by
the Board of Directors in accordance with the Company’s
valuation policy
53
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
and the provisions of the
Investment Company Act of 1940 and SFAS 157. The Company
determines fair value to be the price that would be received for
an investment in a current sale, which assumes an orderly
transaction between market participants on the measurement date.
The Company’s valuation policy considers the fact that no
ready market exists for substantially all of the securities in
which it invests and that fair value for its investments must
typically be determined using unobservable inputs.
SFAS 157 establishes a fair value hierarchy that encourages
and is based on the use of observable inputs, but allows for
unobservable inputs when observable inputs do not exist. Inputs
are classified into one of three categories:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets | |
| • | Level 2 — Inputs other than quoted prices that are observable to the market participant for the asset or quoted prices in a market that is not active | |
| • | Level 3 — Unobservable inputs |
When there are multiple inputs for determining the fair value of
an investment, the Company classifies the investment in total
based on the lowest level input that is significant to the fair
value measurement.
Assets measured at fair value on a recurring basis by level
within the fair value hierarchy at March 31, 2008, were as
follows:
|
Fair Value |
Quoted Prices in |
Significant Other |
Significant |
|||||||||||||
|
Measurement |
Active Markets for |
Observable |
Unobservable |
|||||||||||||
|
as of March 31, |
Identical Assets |
Inputs |
Inputs |
|||||||||||||
| ($ in millions) | 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets at Fair Value:
|
||||||||||||||||
|
U.S. Treasury Bills
|
$ | 120.0 | $ | 120.0 | $ | — | $ | — | ||||||||
|
Portfolio
|
||||||||||||||||
|
Private finance
|
$ | 4,519.8 | $ | 3.3 | $ | — | $ | 4,516.5 | ||||||||
|
Commercial real estate finance
|
115.8 | — | — | 115.8 | ||||||||||||
|
Total portfolio
|
$ | 4,635.6 | $ | 3.3 | $ | — | $ | 4,632.3 | ||||||||
54
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
The table below sets forth a summary of changes in the
Company’s assets measured at fair value using level 3
inputs.
|
Commercial |
||||||||||||
|
Private |
Real Estate |
|||||||||||
| ($ in millions) | Finance | Finance | Total | |||||||||
|
Balance at December 31, 2007
|
$ | 4,652.7 | $ | 121.2 | $ | 4,773.9 | ||||||
|
Total gains or losses
|
||||||||||||
|
Net realized gains
(losses)(1)
|
12.8 | (0.2 | ) | 12.5 | ||||||||
|
Net change in unrealized appreciation or
depreciation(2)
|
(111.4 | ) | 1.9 | (109.5 | ) | |||||||
|
Purchases, issuances, repayments and exits,
net(3)
|
(37.6 | ) | (7.1 | ) | (44.6 | ) | ||||||
|
Transfers in and/or out of level 3
|
— | — | — | |||||||||
|
Balance at March 31, 2008
|
$ | 4,516.5 | $ | 115.8 | $ | 4,632.3 | ||||||
|
Net unrealized appreciation (depreciation) during the period
relating to assets still held at the reporting
date(2)
|
$ | (93.5 | ) | $ | 1.5 | $ | (92.0 | ) | ||||
| (1) | Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations), and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations). |
| (2) | Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. |
Net change in unrealized
appreciation or depreciation includes net unrealized
appreciation (depreciation) resulting from changes in portfolio
investment values during the reporting period and the reversal
of previously recorded unrealized appreciation or depreciation
when gains or losses are realized.
| (3) | Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations). |
The impact on the Company’s consolidated financial
statements for periods subsequent to the period of adoption of
SFAS 157 cannot be determined at this time as it will be
influenced by the estimates of fair value for those periods, the
number and amount of investments the Company originates,
acquires or exits, and the effect of any additional guidance or
any changes in the interpretation of the statement.
Managed
Funds
The Company manages funds that invest in the debt and equity of
primarily private middle market companies in a variety of
industries (together, the “Managed Funds”). As of
March 31, 2008, the funds that the Company manages had
total assets of approximately $1.2 billion. During 2007,
the Company established the Allied Capital Senior Debt Fund,
L.P. and the Unitranche Fund LLC, and in the first quarter
of 2008, the Company formed the AGILE Fund I, LLC and
assumed the management of Knightsbridge CLO 2007-1 Ltd., all
discussed below. The Company’s responsibilities to the
Managed Funds may include deal origination, underwriting, and
portfolio monitoring and development services consistent with
the activities that the Company performs for its portfolio. Each
of the Managed Funds may separately invest in the debt or equity
of a portfolio company. The Company’s portfolio may include
debt or equity investments issued by the same portfolio company
as investments held by one or more Managed Funds, and these
investments may be senior, pari passu or junior to the debt and
equity investments held by the Company.
The Company accounts for the sale of securities to funds with
which it has continuing involvement as sales pursuant to SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125, when the securities have been
legally isolated from the Company, the Company has no ability to
restrict or constrain the ability of the funds to pledge or
exchange the transferred securities, and the Company does not
have either the entitlement and the obligation to repurchase the
securities or the ability to unilaterally cause the fund to put
the securities back to the Company.
55
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Allied Capital Senior Debt Fund,
L.P. The Company is a special limited partner
in the Allied Capital Senior Debt Fund, L.P.
(“ACSDF”), a private fund that generally invests in
senior, unitranche and second lien debt. The Company has
committed and funded $31.8 million to ACSDF, which is a
portfolio company. The Company’s investment in ACSDF
totaled $31.8 million at cost and $32.6 million at
value at March 31, 2008, and $31.8 million at cost and
$32.8 million at value at December 31, 2007. ACSDF has
closed on $125 million in equity capital commitments and
had total assets of approximately $432 million at
March 31, 2008. As a special limited partner, the Company
expects to earn an incentive allocation of 20% of ACSDF’s
annual net income earned in excess of a specified minimum
return, subject to certain performance benchmarks. The value of
the Company’s investment in ACSDF is based on the net asset
value of ACSDF, which reflects the capital invested plus its
allocation of the net earnings of ACSDF, including the incentive
allocation.
AC Corp is the investment manager to ACSDF. Callidus Capital
Corporation, a portfolio investment controlled by the Company,
acts as special manager to ACSDF. An affiliate of the Company is
the general partner of ACSDF, and AC Corp serves as collateral
manager to a warehouse financing vehicle associated with ACSDF.
AC Corp earns a management fee of up to 2% per annum of the net
asset value of ACSDF and pays Callidus 25% of that management
fee to compensate Callidus for its role as special manager.
The Company may offer to sell loans to ACSDF or the warehouse
financing vehicle. ACSDF or the warehouse financing vehicle may
purchase loans from the Company. In connection with ACSDF’s
formation in June 2007 and during the second half of 2007, the
Company sold $224.2 million of seasoned assets with a
weighted average yield of 10.0% to a warehouse financing vehicle
associated with ACSDF. In the first quarter of 2008, the Company
sold $30.0 million of seasoned assets with a weighted
average yield of 8.2% to the warehouse financing vehicle. ACSDF
also purchases loans from other third parties.
Unitranche Fund LLC. In December
2007, the Company formed the Unitranche Fund LLC
(“Unitranche Fund”), which the Company co-manages with
an affiliate of General Electric Capital Corporation
(“GE”). The Unitranche Fund is a private fund that
generally focuses on making first lien unitranche loans to
middle market companies with Earnings before Interest, Taxes,
Depreciation, and Amortization of at least $15 million. GE
has committed $3.075 billion to the Unitranche Fund
consisting of $3.0 billion of senior notes and
$0.075 billion of subordinated certificates and the Company
has committed $525.0 million of subordinated certificates.
The Unitranche Fund will be capitalized as transactions are
completed. The Company earns a management and sourcing fee
totaling 0.375% per annum of managed assets. At March 31,
2008, the Unitranche Fund had total assets of approximately
$142 million and the Company’s investment in the
Unitranche Fund totaled $31.5 million at cost and at value.
AGILE Fund I, LLC. In January
2008, the Company entered into an investment agreement with the
Goldman Sachs Private Equity Group, part of Goldman Sachs Asset
Management (“Goldman Sachs”). As part of the
investment agreement, the Company agreed to sell a pro-rata
strip of private equity and debt investments to AGILE
Fund I, LLC (“AGILE”), a private fund in which a
fund managed by Goldman Sachs owns substantially all of the
interests, for a total transaction value of $167 million.
The sales of the assets closed in the first quarter of 2008.
The sale to AGILE included 13.7% of the Company’s equity
investments in 23 of its buyout portfolio companies and 36 of
its minority equity portfolio companies for a total purchase
price of $104 million, which resulted in a net realized
gain of $8.8 million and dividend income of
$5.4 million.
56
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
In addition, the Company sold approximately $63 million in
debt investments, which represented 7.3% of its unitranche,
second lien and subordinated debt investments in the buyout
investments included in the equity sale. AGILE generally has the
right to co-invest in its proportional share of any future
follow-on investment opportunities presented by the companies in
its portfolio.
The Company is the managing member of AGILE, and is entitled to
an incentive allocation subject to certain performance
benchmarks. The Company owns the remaining interests in AGILE
not held by Goldman Sachs. At March 31, 2008, AGILE had
total assets of approximately $174 million and the
Company’s investment in AGILE totaled $0.9 million at
cost and at value.
In addition, pursuant to the investment agreement Goldman Sachs
has committed to invest at least $125 million in future
investment vehicles managed by the Company and will have future
opportunities to invest in the Company’s affiliates, or
vehicles managed by them, and to coinvest alongside the Company
in the future, subject to various terms and conditions.
As part of this transaction, the Company also sold
nine venture capital and private equity limited partnership
investments for approximately $28 million to a fund managed
by Goldman Sachs, which assumed the $4.7 million of
unfunded commitments related to these limited partnership
investments. The sale of these limited partnership investments
closed at the end of the first quarter of 2008 and resulted in a
net realized loss of $5.5 million.
Knightsbridge CLO
2007-1
Ltd. On March 31, 2008, the Company
assumed the management of Knightsbridge CLO
2007-1 Ltd.
The Company earns a management fee of up to 0.6% per annum of
the assets of the fund. Callidus may assist the Company in the
management of the fund and the Company may pay Callidus a
portion of the management fee earned for this assistance. This
CLO invests primarily in middle market senior loans. At
March 31, 2008, Knightsbridge CLO
2007-1 Ltd.
had total assets of approximately $500 million and the
Company’s investment in this CLO totaled $54.4 million
at cost and $53.0 million at value.
Note 4. Debt
At March 31, 2008, and December 31, 2007, the Company
had the following debt:
| 2008 | 2007 | |||||||||||||||||
|
Annual |
Annual |
|||||||||||||||||
|
Facility |
Amount |
Interest |
Facility |
Amount |
Interest |
|||||||||||||
| Amount | Drawn | Cost(1) | Amount | Drawn | Cost(1) | |||||||||||||
| ($ in millions) | ||||||||||||||||||
|
Notes payable and debentures:
|
||||||||||||||||||
|
Privately issued unsecured notes payable
|
$1,042.8 | $1,042.8 | 6.1 | % | $1,042.2 | $1,042.2 | 6.1 | % | ||||||||||
|
Publicly issued unsecured notes payable
|
880.0 | 880.0 | 6.7 | % | 880.0 | 880.0 | 6.7 | % | ||||||||||
|
Total notes payable and debentures
|
1,922.8 | 1,922.8 | 6.4 | % | 1,922.2 | 1,922.2 | 6.4 | % | ||||||||||
|
Revolving line of credit
|
922.5 | 268.8 | (4) | 3.8 | %(2) | 922.5 | 367.3 | 5.9 | %(2) | |||||||||
|
Total debt
|
$2,845.3 | $2,191.6 | 6.2 | %(3) | $2,844.7 | $2,289.5 | 6.5 | %(3) | ||||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus the annual amortization of commitment fees, other facility fees and amortization of debt financing costs that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
| (2) | The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $3.7 million at both March 31, 2008, and December 31, 2007. |
| (3) | The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the revolving line of credit regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date. |
| (4) | On April 9, 2008, the Company entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, which replaced the Company’s previous line of credit. Under this new revolving line of credit, in addition to the current interest rate payable, the annual costs of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million. See discussion below. |
57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt, continued
Notes
Payable and Debentures
Privately Issued Unsecured
Notes Payable. The Company has privately
issued unsecured long-term notes to institutional investors. The
notes have five- or seven-year maturities and have fixed rates
of interest. The notes generally require payment of interest
only semi-annually, and all principal is due upon maturity. At
March 31, 2008, the notes had maturities from May 2008
to May 2013. The notes may be prepaid in whole or in part,
together with an interest premium, as stipulated in the note
agreements.
The Company also has issued five-year unsecured long-term notes
denominated in Euros and Sterling for a total U.S. dollar
equivalent of $15.2 million. The notes have fixed interest
rates and have substantially the same terms as the
Company’s other unsecured notes. The Euro notes require
annual interest payments and the Sterling notes require
semi-annual interest payments until maturity. These notes mature
in March 2009. Simultaneous with issuing the notes, the Company
entered into a cross currency swap with a financial institution
which fixed the Company’s interest and principal payments
in U.S. dollars for the life of the debt.
Publicly Issued Unsecured Notes
Payable. At March 31, 2008, the Company
had outstanding publicly issued unsecured notes as follows:
| ($ in millions) | Amount | Maturity Date | ||
|
6.625% Notes due 2011
|
$400.0 | July 15, 2011 | ||
|
6.000% Notes due 2012
|
250.0 | April 1, 2012 | ||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||
|
Total
|
$880.0 | |||
The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require
payment of interest only semi-annually, and all principal is due
upon maturity. The Company has the option to redeem these notes
in whole or in part, together with a redemption premium, as
stipulated in the notes.
On March 28, 2007, the Company completed the issuance of
$200.0 million of 6.875% Notes due 2047 for net proceeds of
$193.0 million. In April 2007, the Company issued
additional notes, through an over-allotment option, totaling
$30.0 million for net proceeds of $29.1 million. Net
proceeds are net of underwriting discounts and estimated
offering expenses.
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. The Company
may redeem these notes in whole or in part at any time or from
time to time on or after April 15, 2012, at par and upon
the occurrence of certain tax events as stipulated in the notes.
58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt, continued
Scheduled Maturities. Scheduled future
maturities of notes payable at March 31, 2008, were as
follows:
|
Year
|
Amount Maturing | |||
| ($ in millions) | ||||
|
2008
|
$ | 153.0 | ||
|
2009
|
270.3 | |||
|
2010
|
408.0 | |||
|
2011
|
472.5 | |||
|
2012
|
339.0 | |||
|
Thereafter
|
280.0 | |||
|
Total
|
$ | 1,922.8 | ||
| Revolving Line of Credit |
At December 31, 2007, the Company had an unsecured
revolving line of credit with a committed amount of
$922.5 million that was scheduled to expire on
September 30, 2008. On April 9, 2008, the Company
entered into a three-year unsecured revolving line of credit
with total commitments of $632.5 million, with Bank of
America, N.A., as a lender and as administrative agent, and the
other lenders thereunder, which replaced the Company’s
previous revolving line of credit. The Company may obtain
additional commitments up to a total committed facility of
$1.5 billion, subject to customary conditions. The
revolving line of credit expires on April 11, 2011.
At the Company’s option, borrowings under the revolving
line of credit effective April 9, 2008, generally bear
interest at a rate per annum equal to (i) LIBOR (for the period
selected by the Company) plus 2.00% or (ii) the higher of
the Federal Funds rate plus 0.50% or the Bank of America N.A.
prime rate. The revolving line of credit requires the payment of
an annual commitment fee equal to 0.50% of the committed amount
(whether used or unused). The revolving line of credit generally
requires payments of interest at the end of each LIBOR interest
period, but no less frequently than quarterly, on
LIBOR-based
loans, and monthly payments of interest on other loans. All
principal is due upon maturity.
The revolving credit facility provides for a swing line
sub-facility. The swing line sub-facility bears interest at the
Bank of America N.A. cost of funds plus 2.00%. The revolving
credit facility also provides for a sub-facility for the
issuance of letters of credit for up to an aggregate amount of
$175 million. This letter of credit sub-facility will
increase to the extent of 15% of the aggregate amount of
commitments over $1.0 billion. The letter of credit fee is
2.00% per annum on letters of credit issued, which is payable
quarterly.
The annual cost of commitment fees, other facility fees and
amortization of debt financing costs prior to entering into the
new
three-year
facility in April 2008, was $3.7 million at both
March 31, 2008, and December 31, 2007, respectively.
Subsequent to entering into the new facility in April 2008, the
annual cost of commitment fees, other facility fees and
amortization of debt financing costs will be approximately
$6.7 million.
The average debt outstanding on the revolving line of credit was
$289.3 million and $142.1 million, respectively, for
the three months ended March 31, 2008 and 2007. The maximum
amount borrowed under this facility and the weighted average
stated interest rate during the three months ended
March 31, 2008 and 2007, were $403.8 million and 4.9%,
respectively, and $225.5 million and 6.4%, respectively. At
March 31, 2008, the amount available under the revolving
line of credit in effect on March 31, 2008,
59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt, continued
was $557.5 million, net of amounts committed for standby
letters of credit of $96.3 million issued under the credit
facility. On April 9, 2008, the amount available under the
new revolving line of credit was $325.4 million, net of
amounts committed for standby letters of credit of
$96.3 million issued under the credit facility.
Covenant
Compliance
The Company has various financial and operating covenants
required by the revolving line of credit and the privately
issued unsecured notes payable outstanding at March 31,
2008, and December 31, 2007. These covenants require the
Company to maintain certain financial ratios, including asset
coverage, debt to equity and interest coverage, and a minimum
net worth. These credit facilities provide for customary events
of default, including, but not limited to, payment defaults,
breach of representations or covenants, cross-defaults,
bankruptcy events, failure to pay judgments, attachment of the
Company’s assets, change of control and the issuance of an
order of dissolution. Certain of these events of default are
subject to notice and cure periods or materiality thresholds.
The Company’s credit facilities limit its ability to
declare dividends if the Company defaults under certain
provisions. As of March 31, 2008, and December 31,
2007, the Company was in compliance with these covenants. The
financial and operating covenants under the new revolving line
of credit are substantially similar to the previous facility.
The Company has certain financial and operating covenants that
are required by the publicly issued unsecured notes payable,
including that the Company will maintain a minimum ratio of 200%
of total assets to total borrowings, as required by the
Investment Company Act of 1940, as amended, while these notes
are outstanding. As of March 31, 2008, and
December 31, 2007, the Company was in compliance with these
covenants.
Note 5. Guarantees
and Commitments
In the ordinary course of business, the Company has issued
guarantees and has extended standby letters of credit through
financial intermediaries on behalf of certain portfolio
companies. All standby letters of credit have been issued
through Bank of America, N.A. As of March 31, 2008, and
December 31, 2007, the Company had issued guarantees of
debt and rental obligations aggregating $394.0 million and
$270.6 million, respectively, and had extended standby
letters of credit aggregating $96.3 million and
$58.5 million, respectively. Under these arrangements, the
Company would be required to make payments to third-party
beneficiaries if the portfolio companies were to default on
their related payment obligations. The maximum amount of
potential future payments was $490.3 million and
$329.1 million at March 31, 2008, and
December 31, 2007, respectively.
As of March 31, 2008, the guarantees and standby letters of
credit expired as follows:
| (in millions) | Total | 2008 | 2009 | 2010 | 2011 | 2012 | After 2012 | |||||||||||||||||||||
|
Guarantees
|
$ | 394.0 | $ | 0.3 | $ | 387.3 | $ | — | $ | 4.4 | $ | 0.1 | $ | 1.9 | ||||||||||||||
|
Standby letters of
credit(1)
|
96.3 | 96.3 | — | — | — | — | — | |||||||||||||||||||||
|
Total(2)
|
$ | 490.3 | $ | 96.6 | $ | 387.3 | $ | — | $ | 4.4 | $ | 0.1 | $ | 1.9 | ||||||||||||||
| (1) | Standby letters of credit are issued under the Company’s revolving line of credit that expires in September 2008. Therefore, unless a standby letter of credit is set to expire at an earlier date, it is assumed that the standby letters of credit will expire contemporaneously with the expiration of the Company’s line of credit that was in effect at March 31, 2008, which was scheduled to expire in September 2008. In April 2008, the Company entered into a new three-year revolving line of credit that expires in April 2011. |
| (2) | The Company’s most significant commitments relate to its investment in Ciena Capital LLC (Ciena), which commitments totaled $444.3 million at March 31, 2008. At March 31, 2008, the Company guaranteed 100% of the outstanding total obligations on Ciena’s revolving line of credit, which matures in March 2009, for a total guaranteed amount of $384.8 million and had standby letters of credit issued totaling $59.5 million in connection with term securitizations completed by Ciena. See Note 3. |
60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 5. Guarantees and Commitments, continued
In the ordinary course of business, the Company enters into
agreements with service providers and other parties that may
contain provisions for the Company to indemnify and guaranty
certain minimum fees to such parties under certain circumstances.
At March 31, 2008, the Company had outstanding commitments
to fund investments totaling $885.3 million, including
$845.3 million related to private finance investments and
$40.0 million related to commercial real estate finance
investments. Total outstanding commitments related to private
finance investments included $493.5 million to the
Unitranche Fund LLC, which the Company estimates will be funded
over a two to three year period as investments are funded by the
Unitranche Fund. See Note 3.
Note 6. Shareholders’
Equity
Sales of common stock for the three months ended March 31,
2008 and 2007, were as follows:
| (in millions) | 2008 | 2007 | ||||||
|
Number of common shares
|
8.3 | 3.3 | ||||||
|
Gross proceeds
|
$ | 175.5 | $ | 97.3 | ||||
|
Less costs, including underwriting fees
|
4.6 | 3.5 | ||||||
|
Net proceeds
|
$ | 170.9 | $ | 93.8 | ||||
In addition, in April 2008, the Company sold
3.2 million shares of its common stock for proceeds of
$56.3 million, net of underwriting discounts and estimated
offering expenses.
There were no stock options exercised during the three months
ended March 31, 2008. The Company issued 0.1 million
shares of common stock upon the exercise of stock options during
the three months ended March 31, 2007.
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 trading
days immediately prior to the dividend payment date. For the
three months ended March 31, 2008 and 2007, the Company
issued new shares in order to satisfy dividend reinvestment
requests. Dividend reinvestment plan activity for the three
months ended March 31, 2008 and 2007, was as follows:
|
For the Three |
||||
|
Months Ended |
||||
| March 31, | ||||
| 2008 | 2007 | |||
| (in millions, except per share amounts) | ||||
|
Shares issued
|
0.2 | 0.1 | ||
|
Average price per share
|
$19.49 | $29.23 | ||
61
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 7. Earnings
Per Common Share
Earnings per common share for the three months ended
March 31, 2008 and 2007, were as follows:
|
For the Three |
||||||||
|
Months Ended |
||||||||
| March 31, | ||||||||
| (in millions, except per share amounts) | 2008 | 2007 | ||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (40.7) | $ | 133.1 | ||||
|
Weighted average common shares
outstanding — basic |
161.5 | 149.5 | ||||||
|
Dilutive options outstanding
|
— | 3.3 | ||||||
|
Weighted average common shares outstanding — diluted
|
161.5 | 152.8 | ||||||
|
Basic earnings (loss) per common share
|
$ | (0.25) | $ | 0.89 | ||||
|
Diluted earnings (loss) per common share
|
$ | (0.25) | $ | 0.87 | ||||
Note 8. Employee
Compensation Plans
In December 2007, the Company’s Board of Directors made a
determination that it was in the best interests of the Company
to terminate its deferred compensation arrangements (each
individually a Plan, or collectively, the Plans). The Board of
Directors’ decision was primarily in response to increased
complexity resulting from recent changes in the regulation of
deferred compensation arrangements. The Board of Directors
resolved that the accounts under these Plans would be
distributed to participants in full on March 18, 2008, the
termination and distribution date, or as soon as was reasonably
practicable thereafter, in accordance with the provisions of
each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination date in
accordance with the transition rule for payment elections under
Section 409A of the Code. Distributions from the plans were
made in cash or shares of the Company’s common stock, net
of required withholding taxes.
The Company has an Individual Performance Award
(“IPA”), which is generally determined annually at the
beginning of each year but may be adjusted throughout the year.
Through December 31, 2007, the IPA was deposited in a
deferred compensation trust in four equal installments,
generally on a quarterly basis, in the form of cash. The
Compensation Committee of the Board of Directors designed the
trust to require the trustee to use the cash to purchase shares
of the Company’s common stock in the open market.
Through December 31, 2007, the IPA amounts were contributed
into the trust and invested in the Company’s common stock.
The accounts of the trust were consolidated with the
Company’s accounts. The common stock was classified as
common stock held in deferred compensation trust in the
accompanying financial statements and the deferred compensation
obligation, which represented the amount owed to the employees,
was included in other liabilities. Changes in the value of the
Company’s common stock held in the deferred compensation
trust were not recognized. However, the liability was marked to
market with a corresponding charge or credit to employee
compensation expense. On
62
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 8. Employee Compensation Plans, continued
March 18, 2008, prior to the distribution of the assets
held in the trust, the Company was required to record a final
mark to market of the liability with a corresponding credit to
employee compensation expense.
For 2008, the Compensation Committee has determined that the
IPAs will be paid in cash in two equal installments during the
year to eligible officers as long as the recipient remains
employed by the Company, rather than contributed to a deferred
compensation plan and invested in shares of the Company’s
common stock.
The IPA expense for the three months ended March 31, 2008
and 2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
IPA
|
$ | 2.4 | $ | 2.5 | ||||
|
IPA mark to market expense (benefit)
|
(4.1 | ) | (4.0 | ) | ||||
|
Total IPA expense (benefit)
|
$ | (1.7 | ) | $ | (1.5 | ) | ||
The Company also has an individual performance bonus
(“IPB”), which is distributed in cash to award
recipients equally throughout the year (beginning in February of
each year) as long as the recipient remains employed by the
Company. If a recipient terminates employment during the year,
any remaining cash payments under the IPB would be forfeited.
For the three months ended March 31, 2008 and 2007, the IPB
expense was $1.7 million and $2.0 million,
respectively. The IPA and IPB expenses are included in employee
expenses.
Note 9. Stock
Option Plan
The purpose of the stock option plan (“Option Plan”)
is to provide officers and non-officer directors of the Company
with additional incentives. Options are exercisable at a price
equal to the fair market value of the shares on the day the
option is granted. Each option states the period or periods of
time within which the option may be exercised by the optionee,
which may not exceed ten years from the date the option is
granted. The options granted to officers generally vest ratably
over up to a three year period. Options granted to
non-officer directors vest on the grant date.
All rights to exercise options terminate 60 days after an
optionee ceases to be (i) a non-officer director,
(ii) both an officer and a director, if such optionee
serves in both capacities, or (iii) an officer (if such
officer is not also a director) of the Company for any cause
other than death or total and permanent disability. In the event
of a change of control of the Company, all outstanding options
will become fully vested and exercisable as of the change of
control.
At March 31, 2008, and December 31, 2007, there were
37.2 million shares authorized under the Option Plan and
the number of shares available to be granted under the Option
Plan was 3.9 million and 10.7 million, respectively.
63
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 9. Stock Option Plan, continued
Information with respect to options granted, exercised and
forfeited under the Option Plan for the three months ended
March 31, 2008, was as follows:
|
Weighted |
Aggregate |
||||||||||
|
Weighted |
Average |
Intrinsic |
|||||||||
|
Average |
Contractual |
Value at |
|||||||||
|
Exercise Price |
Remaining |
March 31, |
|||||||||
| (in millions, except per share amounts) | Shares | Per Share | Term (Years) | 2008(1) | |||||||
|
Options outstanding at January 1, 2008
|
18.5 | $ | 28.36 | ||||||||
|
Granted
|
7.1 | $ | 22.96 | ||||||||
|
Exercised
|
— | $ | — | ||||||||
|
Forfeited
|
(0.3 | ) | $ | 27.46 | |||||||
|
Options outstanding at March 31, 2008
|
25.3 | $ | 26.86 | 6.35 | $— | ||||||
|
Exercisable at March 31,
2008(2)
|
11.7 | $ | 27.99 | 6.13 | $— | ||||||
|
Exercisable and expected to be exercisable at March 31,
2008(3)
|
23.5 | $ | 27.02 | 6.33 | $— | ||||||
| (1) | Represents the difference between the market value of the options at March 31, 2008, and the cost for the option holders to exercise the options. |
| (2) | Represents vested options. |
| (3) | The amount of options expected to be exercisable at March 31, 2008, is calculated based on an estimate of expected forfeitures. |
During the three months ended March 31, 2007, no options
were granted, 0.1 million options were exercised and
0.3 million options were forfeited.
There were no shares vested during the three months ended
March 31, 2008 and 2007. The total intrinsic value of the
options exercised during the three months ended March 31,
2007, was $0.9 million. There were no options exercised
during the three months ended March 31, 2008.
Note 10. Dividends
and Distributions and Taxes
The Company’s Board of Directors declared and the Company
paid a dividend of $0.65 per common share and $0.63 per
common share for the first quarters of 2008 and 2007,
respectively. These dividends totaled $108.1 million and
$95.8 million for the three months ended March 31,
2008 and 2007, respectively. The Company declared an extra cash
dividend of $0.05 per share during 2006, which was paid to
shareholders on January 19, 2007.
The Company’s Board of Directors also declared a dividend
of $0.65 per common share for the second quarter of 2008.
At December 31, 2007, the Company had estimated excess
taxable income of $403.1 million available for distribution
to shareholders in 2008. Estimated excess taxable income for
2007 represents approximately $50.0 million of ordinary
income and approximately $353.1 million of net long-term
capital gains.
Dividends for 2008 will first be paid out of the excess taxable
income carried over from 2007. Given the regular quarterly
dividend payout, which for the first quarter of 2008 was
$108.1 million, the
64
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
Company expects that a majority of
the 2008 dividend payments will be made from excess 2007 taxable
earnings. The Company currently expects that the excess taxable
income carried over from 2007 plus its estimated annual taxable
income for 2008 will be in excess of its estimated dividend
distributions to shareholders in 2008, therefore, the Company
expects to carry over excess taxable income earned in 2008 for
distribution to shareholders in 2009. The Company will generally
be required to pay a nondeductible excise tax equal to 4% of the
amount by which 98% of the Company’s annual taxable income
exceeds the distributions from such taxable income for the year.
The Company has accrued an excise tax on the estimated excess
taxable income earned for the respective periods. For the three
months ended March 31, 2008 and 2007, the Company recorded
an excise tax of $2.3 million and $3.6 million,
respectively.
In addition to excess taxable income carried forward, the
Company currently estimates that it has cumulative deferred
taxable income related to installment sale gains of
approximately $234.5 million as of December 31, 2007,
which is composed of cumulative deferred taxable income of
$211.5 million as of December 31, 2006, and
approximately $23.0 million for the year ended
December 31, 2007. These gains have been recognized for
financial reporting purposes in the respective years they were
realized, but are generally deferred for tax purposes until the
notes or other amounts received from the sale of the related
investments are collected in cash.
The excess taxable income carried forward from 2007 and the
realized gains deferred through installment treatment for 2007
are estimates and will not be finally determined until the
Company files its 2007 tax return in September 2008.
The Company’s undistributed book earnings of
$535.9 million as of December 31, 2007, resulted from
undistributed ordinary income and long-term capital gains. The
difference between undistributed book earnings at the end of the
year and taxable income carried over from the current year into
the next year relates to a variety of timing and permanent
differences in the recognition of income and expenses for book
and tax purposes.
The Company’s consolidated subsidiary, AC Corp, is subject
to federal and state income taxes. For the three months ended
March 31, 2008 and 2007, AC Corp’s income tax
benefit was $0.3 million and $4.2 million,
respectively.
Note 11. Supplemental
Disclosure of Cash Flow Information
The Company paid interest of $31.1 million and
$24.9 million, respectively, for the three months ended
March 31, 2008 and 2007.
Non-cash operating activities for the three months ended
March 31, 2008 and 2007, totaled $132.0 million and
$3.1 million, respectively. Non-cash operating activity for
the three months ended March 31, 2008, included the exchange of
existing debt securities and accrued interest with a cost basis
of $99.6 million for new debt and equity securities and
consideration received in connection with the sale of securities
of $32.4 million, which was received in cash in April 2008.
Non-cash financing activities included the issuance of common
stock in lieu of cash distributions totaling $3.8 million
and $4.3 million, for the three months ended March 31,
2008 and 2007, respectively.
65
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 12. Financial
Highlights
|
At and |
||||||||||||
|
At and for the |
for the |
|||||||||||
|
Three Months Ended |
Year Ended |
|||||||||||
| March 31, | December 31, | |||||||||||
| 2008(1) | 2007 | 2007 | ||||||||||
|
Per Common Share Data
|
||||||||||||
|
Net asset value, beginning of period
|
$ | 17.54 | $ | 19.12 | $ | 19.12 | ||||||
|
Net investment
income(2)
|
0.43 | 0.26 | 0.91 | |||||||||
|
Net realized
gains(2)(3)
|
0.02 | 0.18 | 1.74 | |||||||||
|
Net investment income plus net realized
gains(2)
|
0.45 | 0.44 | 2.65 | |||||||||
|
Net change in unrealized appreciation or
depreciation(2)(3)
|
(0.70 | ) | 0.43 | (1.66 | ) | |||||||
|
Net increase (decrease) in net assets resulting from
operations(2)
|
(0.25 | ) | 0.87 | 0.99 | ||||||||
|
Net decrease in net assets from shareholder distributions
|
(0.65 | ) | (0.63 | ) | (2.64 | ) | ||||||
|
Net increase in net assets from capital share
transactions(2)(4)
|
0.35 | 0.22 | 0.41 | |||||||||
|
Decrease in net assets from cash portion of the option
cancellation
payment(2)(6)
|
— | — | (0.34 | ) | ||||||||
|
Net asset value, end of period
|
$ | 16.99 | $ | 19.58 | $ | 17.54 | ||||||
|
Market value, end of period
|
$ | 18.43 | $ | 28.81 | $ | 21.50 | ||||||
|
Total
return(5)
|
(11.4 | )% | (9.9 | )% | (27.6 | )% | ||||||
|
Ratios and Supplemental Data
($ and shares in thousands, except per share amounts) |
||||||||||||
|
Ending net assets
|
$ | 2,828.4 | $ | 2,978.3 | $ | 2,771.8 | ||||||
|
Common shares outstanding at end of period
|
166.5 | 152.1 | 158.0 | |||||||||
|
Diluted weighted average common shares outstanding
|
161.5 | 152.8 | 154.7 | |||||||||
|
Employee, employee stock option and administrative
expenses/average net
assets(7)
|
1.28 | % | 1.33 | % | 6.10 | % | ||||||
|
Total operating expenses/average net
assets(7)
|
2.62 | % | 2.37 | % | 10.70 | % | ||||||
|
Income tax expense (benefit), including excise tax/average net
assets(7)
|
0.07 | % | (0.02 | )% | 0.47 | % | ||||||
|
Net investment income/average net
assets(7)
|
2.48 | % | 1.36 | % | 4.91 | % | ||||||
|
Net increase (decrease) in net assets resulting from
operations/average net
assets(7)
|
(1.45 | )% | 4.57 | % | 5.34 | % | ||||||
|
Portfolio turnover
rate(7)
|
5.62 | % | 3.78 | % | 26.84 | % | ||||||
|
Average debt outstanding
|
$ | 2,209.5 | $ | 1,841.2 | $ | 1,924.2 | ||||||
|
Average debt per
share(2)
|
$ | 13.68 | $ | 12.05 | $ | 12.44 | ||||||
| (1) | The results for the three months ended March 31, 2008, are not necessarily indicative of the operating results to be expected for the full year. |
| (2) | Based on diluted weighted average number of common shares outstanding for the period. |
| (3) | Net realized gains and net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful. |
| (4) | Excludes capital share transactions related to the cash portion of the option cancellation payment. |
| (5) | Total return assumes the reinvestment of all dividends paid for the periods presented. |
| (6) | On July 18, 2007, the Company completed a tender offer, which resulted in a total option cancellation payment of approximately $105.6 million, of which $52.8 million was paid in cash and $52.8 million was paid through the issuance of unregistered shares of the Company’s common stock. |
| (7) | The ratios for the three months ended March 31, 2008 and 2007, do not represent annualized results. |
66
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 13. Litigation
On June 23, 2004, the Company was notified by the SEC that
the SEC was conducting an informal investigation of the Company.
The investigation related to the valuation of securities in the
Company’s private finance portfolio and other matters. On
June 20, 2007, the Company announced that it entered into a
settlement with the SEC that resolved the SEC’s informal
investigation. As part of the settlement and without admitting
or denying the SEC’s allegations, the Company agreed to the
entry of an administrative order. In the order the SEC alleged
that, between June 30, 2001, and March 31, 2003, the
Company did not maintain books, records and accounts which, in
reasonable detail, supported or accurately and fairly reflected
valuations of certain securities in the Company’s private
finance portfolio and, as a result, did not meet certain
recordkeeping and internal controls provisions of the federal
securities laws. In the administrative order, the SEC ordered
the Company to continue to maintain certain of its current
valuation-related controls. Specifically, for a period of two
years, the Company has undertaken to: (1) continue to
employ a Chief Valuation Officer, or a similarly structured
officer-level employee, to oversee its quarterly valuation
processes; and (2) continue to employ third-party valuation
consultants to assist in its quarterly valuation processes.
On December 22, 2004, the Company received letters from the
U.S. Attorney for the District of Columbia requesting the
preservation and production of information regarding the Company
and Business Loan Express, LLC (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating to
matters similar to those investigated by and settled with the
SEC as discussed above. The Company produced materials in
response to the requests from the U.S. Attorney’s office
and certain current and former employees were interviewed by the
U.S. Attorney’s Office. The Company has voluntarily
cooperated with the investigation.
In late December 2006, the Company received a subpoena from the
U.S. Attorney for the District of Columbia requesting,
among other things, the production of records regarding the use
of private investigators by the Company or its agents. The Board
established a committee, which was advised by its own counsel,
to review this matter. In the course of gathering documents
responsive to the subpoena, the Company became aware that an
agent of the Company obtained what were represented to be
telephone records of David Einhorn and which purport to be
records of calls from Greenlight Capital during a period of time
in 2005. Also, while the Company was gathering documents
responsive to the subpoena, allegations were made that the
Company’s management had authorized the acquisition of
these records and that management was subsequently advised that
these records had been obtained. The Company’s management
has stated that these allegations are not true. The Company has
cooperated fully with the inquiry by the U.S. Attorney’s
Office.
On February 13, 2007, Rena Nadoff filed a shareholder
derivative action in the Superior Court of the District of
Columbia, captioned Rena Nadoff v. Walton, et al.,
CA 001060-07,
seeking unspecified compensatory and other damages, as well as
equitable relief on behalf of Allied Capital Corporation. The
complaint was summarily dismissed in July 2007. The complaint
alleged breach of fiduciary duty by the Board of Directors
arising from internal control failures and mismanagement of
Business Loan Express, LLC, an Allied Capital portfolio company.
On October 5, 2007, Rena Nadoff sent a letter to the
67
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 13. Litigation,
continued
Company’s Board of Directors with substantially the same
claims and a request that the Board of Directors investigate the
claims and take appropriate action. The Board of Directors has
established a committee, which is advised by its own counsel, to
review the matter.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
its portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. The Company believes the lawsuit is without merit,
and intends to defend the lawsuit vigorously. On
September 13, 2007, the Company filed a motion to dismiss
the lawsuit. The motion is pending.
In addition, the Company is party to certain lawsuits in the
normal course of business.
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, the
Company does not expect these matters will materially affect its
financial condition or results of operations.
68
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Allied Capital Corporation:
We have reviewed the accompanying consolidated balance sheet of
Allied Capital Corporation and subsidiaries (the Company),
including the consolidated statement of investments, as of
March 31, 2008, the related consolidated statements of
operations, changes in net assets and cash flows and the
financial highlights (included in Note 12) for the
three-month periods ended March 31, 2008 and 2007. These
consolidated financial statements and financial highlights are
the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the consolidated financial
statements and financial highlights referred to above for them
to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Allied Capital Corporation and
subsidiaries, including the consolidated statement of
investments, as of December 31, 2007, and the related
consolidated statements of operations, changes in net assets and
cash flows (not presented herein), and the financial highlights,
for the year then ended; and in our report dated
February 28, 2008, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet including the consolidated statement of
investments as of December 31, 2007, is fairly stated, in
all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Washington, D.C.
May 9, 2008
69
Schedule 12-14
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2007 |
Gross |
Gross |
2008 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | $ | — | $ | 860 | $ | — | $ | 860 | |||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
|
Alaris Consulting, LLC
|
Senior Loan(5) | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
Equity Interests | — | 1,211 | (1,211 | ) | — | ||||||||||||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 7,800 | 13,944 | (6,274 | ) | 15,470 | ||||||||||||||||||||
|
(Asset Management)
|
||||||||||||||||||||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity Interests | 32,811 | — | (206 | ) | 32,605 | ||||||||||||||||||||
|
(Private Debt Fund)
|
||||||||||||||||||||||||||
|
Avborne, Inc.
|
Preferred Stock | 1,633 | 51 | — | 1,684 | |||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
| Avborne Heavy Maintenance, Inc. | Preferred Stock | 2,557 | — | (2,400 | ) | 157 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | 370 | 667 | — | 1,037 | |||||||||||||||||||||
| Aviation Properties Corporation | Common Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
| Border Foods, Inc. | Preferred Stock | 4,648 | — | (1,507 | ) | 3,141 | ||||||||||||||||||||
|
(Consumer Products)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Calder Capital Partners, LLC
|
Senior Loan(5) | $ | 65 | 3,035 | 540 | (502 | ) | 3,073 | ||||||||||||||||||
|
(Asset Management)
|
Equity Interests | 3,559 | — | (25 | ) | 3,534 | ||||||||||||||||||||
|
Callidus Capital Corporation
|
Senior Loan | $ | 4 | — | 1,500 | — | 1,500 | |||||||||||||||||||
|
(Asset Management)
|
Subordinated Debt | 348 | 6,871 | 4,309 | — | 11,180 | ||||||||||||||||||||
| Common Stock | 3,000 | 44,587 | — | (4,565 | ) | 40,022 | ||||||||||||||||||||
| Ciena Capital LLC | Class A Equity | |||||||||||||||||||||||||
|
(f/k/a Business Loan
|
Interests(5) | 68,609 | — | (39,318 | ) | 29,291 | ||||||||||||||||||||
|
Express, LLC)
|
Class B Equity Interests | — | — | —— | — | |||||||||||||||||||||
|
(Financial Services)
|
Class C Equity Interests | — | — | — | — | |||||||||||||||||||||
|
CitiPostal Inc.
|
Senior Loan | 13 | 679 | 1 | — | 680 | ||||||||||||||||||||
|
(Business Services)
|
Unitranche Debt | 1,561 | 50,597 | 529 | — | 51,126 | ||||||||||||||||||||
| Subordinated Debt | 327 | 8,049 | 43 | — | 8,092 | |||||||||||||||||||||
| Common Stock | 12,726 | 4,051 | — | 16,777 | ||||||||||||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt | 1,013 | 34,923 | 19 | (3,019 | ) | 31,923 | |||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 216 | 5,979 | 3 | (437 | ) | 5,545 | |||||||||||||||||||
| Common Stock | 27,597 | 2,698 | (2,287 | ) | 28,008 | |||||||||||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt | 1,645 | 40,812 | 374 | (3,006 | ) | 38,180 | |||||||||||||||||||
|
(Consumer Products)
|
Common Stock | 40,934 | — | (13,452 | ) | 27,482 | ||||||||||||||||||||
|
Crescent Equity Corp.
|
Senior Loan | 11 | 433 | — | — | 433 | ||||||||||||||||||||
|
(Business Services/
|
Subordinated Debt | 892 | 42,977 | 488 | (12,486 | ) | 30,979 | |||||||||||||||||||
|
Broadcasting & Cable)
|
Subordinated Debt(5) | 1,583 | 100 | — | 1,683 | |||||||||||||||||||||
| Common Stock | 36 | 83,453 | 5,622 | (64,762 | ) | 24,313 | ||||||||||||||||||||
|
Direct Capital Corporation
|
Subordinated Debt | 1,661 | 39,030 | 13,641 | (2,965 | ) | 49,706 | |||||||||||||||||||
|
(Financial Services)
|
Common Stock | 6,906 | 6,744 | (2,644 | ) | 11,006 | ||||||||||||||||||||
|
Financial Pacific Company
|
Subordinated Debt | 3,027 | 72,850 | 362 | (5,314 | ) | 67,898 | |||||||||||||||||||
|
(Financial Services)
|
Preferred Stock | 1,281 | 19,330 | — | (1,779 | ) | 17,551 | |||||||||||||||||||
| Common Stock | 38,544 | − | (14,523 | ) | 24,021 | |||||||||||||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | 878 | — | (75 | ) | 803 | ||||||||||||||||||||
|
(Tower Leasing)
|
||||||||||||||||||||||||||
|
Global Communications, LLC
|
Senior Loan(5) | 1,822 | — | (472 | ) | 1,350 | ||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan(5) | — | 29,628 | — | 29,628 | |||||||||||||||||||||
|
(Retail)
|
Common Stock | — | 5,151 | (4,001 | ) | 1,150 | ||||||||||||||||||||
See related footnotes at the end of
this schedule.
70
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2007 |
Gross |
Gross |
2008 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan | $ | 956 | $ | 50,752 | $ | 1,596 | $ | (110 | ) | $ | 52,238 | ||||||||||||||
|
(Consumer Products)
|
Subordinated Debt | 826 | 29,907 | 545 | (10,053 | ) | 20,399 | |||||||||||||||||||
| Subordinated Debt(5) | 1,337 | — | (1,337 | ) | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt | 2,165 | 59,618 | 454 | (4,355 | ) | 55,717 | |||||||||||||||||||
|
(Retail)
|
Common Stock | 44,154 | — | (7,330 | ) | 36,824 | ||||||||||||||||||||
| Impact Innovations Group, LLC | Equity Interests in | |||||||||||||||||||||||||
|
(Business Services)
|
Affiliate | 320 | 1 | — | 321 | |||||||||||||||||||||
|
Insight Pharmaceuticals
|
Subordinated Debt | 2,633 | 45,041 | 1,304 | (904 | ) | 45,441 | |||||||||||||||||||
|
Corporation
|
Subordinated Debt(5) | 16,796 | 171 | — | 16,967 | |||||||||||||||||||||
|
(Consumer Products)
|
Preferred Stock | 1,462 | 9,099 | — | 10,561 | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Jakel, Inc.
|
Subordinated Debt(5) | 1,563 | — | (815 | ) | 748 | ||||||||||||||||||||
|
(Industrial Products)
|
||||||||||||||||||||||||||
|
Legacy Partners Group, Inc.
|
Senior Loan(5) | 3,843 | — | (3,000 | ) | 843 | ||||||||||||||||||||
|
(Business Services)
|
Equity Interests | 1,332 | — | (187 | ) | 1,145 | ||||||||||||||||||||
|
Litterer Beteiligungs-GmbH
|
Subordinated Debt | 16 | 772 | 56 | — | 828 | ||||||||||||||||||||
|
(Business Services)
|
Equity Interest | 700 | 150 | — | 850 | |||||||||||||||||||||
|
MHF Logistical Solutions,
Inc.(7)
|
Subordinated Debt(5) | — | 14,310 | (4,991 | ) | 9,319 | ||||||||||||||||||||
|
(Business Services)
|
Preferred Stock | — | — | — | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
MVL Group, Inc.
|
Senior Loan | 922 | 30,639 | 6 | — | 30,645 | ||||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 1,518 | 39,943 | 296 | — | 40,239 | ||||||||||||||||||||
| Common Stock | 4,949 | — | (576 | ) | 4,373 | |||||||||||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt | 838 | 19,544 | 209 | (1,428 | ) | 18,325 | |||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 25,419 | 2,793 | (2,910 | ) | 25,302 | ||||||||||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt | 1,457 | 39,180 | 714 | (2,883 | ) | 37,011 | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 37,965 | — | (4,443 | ) | 33,522 | ||||||||||||||||||||
|
Powell Plant Farms, Inc.
|
Senior Loan | 1,534 | — | (1,534 | ) | — | ||||||||||||||||||||
|
(Consumer Products)
|
||||||||||||||||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt | 1,086 | 28,351 | 193 | (2,083 | ) | 26,461 | |||||||||||||||||||
|
(Business Services)
|
Common Stock | 26,292 | — | (2,541 | ) | 23,751 | ||||||||||||||||||||
|
Staffing Partners Holding
|
Subordinated Debt | 223 | 286 | (509 | ) | — | ||||||||||||||||||||
|
Company, Inc.
|
||||||||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 430 | — | (33 | ) | 397 | ||||||||||||||||||||
|
(Telecommunications)
|
||||||||||||||||||||||||||
|
Sweet Traditions, Inc.
|
Senior Loan(5) | 35,229 | 4,597 | (39,399 | ) | 427 | ||||||||||||||||||||
|
(Retail)
|
Preferred Stock | — | 950 | (950 | ) | — | ||||||||||||||||||||
| Common Stock | — | 50 | (50 | ) | — | |||||||||||||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates | 274 | 744 | 30,747 | — | 31,491 | ||||||||||||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | — | — | 1 | |||||||||||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt | 102 | 2,670 | 81 | (212 | ) | 2,539 | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 796 | 21,516 | — | (2,852 | ) | 18,664 | |||||||||||||||||||
| Warrants | 272 | — | (36 | ) | 236 | |||||||||||||||||||||
|
Total companies more than 25% owned
|
$ | 28,624 | $ | 1,279,080 | $ | 1,157,473 | ||||||||||||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||||||||||||||
|
10th Street, LLC
|
Subordinated Debt | $ | 680 | $ | 20,645 | $ | 129 | — | $ | 20,774 | ||||||||||||||||
|
(Business Services)
|
Equity Interests | 1,100 | — | (25 | ) | 1,075 | ||||||||||||||||||||
| Option | — | 25 | — | 25 | ||||||||||||||||||||||
|
Advantage Sales &
|
||||||||||||||||||||||||||
|
Marketing, Inc.
|
Subordinated Debt | 4,738 | 154,854 | 2,589 | — | 157,443 | ||||||||||||||||||||
|
(Business Services)
|
Equity Interests | 10,973 | — | (773 | ) | 10,200 | ||||||||||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan | 63 | 2,980 | 3,217 | (2,332 | ) | 3,865 | |||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,011 | 10,800 | — | (900 | ) | 9,900 | |||||||||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock | 19 | 749 | — | (127 | ) | 622 | |||||||||||||||||||
|
(Business Services)
|
Common Stock | 262 | — | (262 | ) | — | ||||||||||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt | 241 | 8,400 | — | (611 | ) | 7,789 | |||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 2,349 | 13,713 | — | (941 | ) | 12,772 | |||||||||||||||||||
|
BB&T Capital
|
||||||||||||||||||||||||||
|
Partners/Windsor
|
||||||||||||||||||||||||||
|
Mezzanine Fund, LLC
|
Equity Interests | 11,467 | 8 | — | 11,475 | |||||||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
See related footnotes at the end of
this schedule.
71
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2007 |
Gross |
Gross |
2008 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt | 921 | 24,798 | 726 | — | 25,524 | ||||||||||||||||||||
|
(Industrial Products)
|
Common Stock | 4,190 | 609 | (799 | ) | 4,000 | ||||||||||||||||||||
|
BI Incorporated
|
Subordinated Debt | $ | 1,049 | $ | 30,499 | $ | 422 | $ | — | $ | 30,921 | |||||||||||||||
|
(Business Services)
|
Common Stock | 7,382 | — | (1,182 | ) | 6,200 | ||||||||||||||||||||
|
Creative Group, Inc.
|
Subordinated Debt(5) | 6,197 | — | (1,012 | ) | 5,185 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
| Warrant | — | — | —— | — | ||||||||||||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock | 396 | — | (126 | ) | 270 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | 1 | (1 | ) | — | ||||||||||||||||||||
|
Hilden America, Inc.
|
Common Stock | — | 454 | (9 | ) | 445 | ||||||||||||||||||||
|
(Consumer Products)
|
||||||||||||||||||||||||||
|
MedBridge Healthcare, LLC
|
Senior Loan(5) | 7,164 | — | — | 7,164 | |||||||||||||||||||||
|
(Healthcare Services)
|
Subordinated Debt(5) | 2,406 | 195 | — | 2,601 | |||||||||||||||||||||
| Convertible | ||||||||||||||||||||||||||
| Subordinated Debt(5) | — | — | — | — | ||||||||||||||||||||||
| Equity Interests | — | — | — | — | ||||||||||||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt | 9,280 | — | (9,280 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
| Warrants | — | — | — | — | ||||||||||||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt | 568 | 19,704 | 78 | (50 | ) | 19,732 | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 940 | 348 | (274 | ) | 1,014 | ||||||||||||||||||||
|
Progressive International
|
||||||||||||||||||||||||||
|
Corporation
|
Subordinated Debt | 65 | 1,545 | 31 | — | 1,576 | ||||||||||||||||||||
|
(Consumer Products)
|
Preferred Stock | 1,038 | 21 | — | 1,059 | |||||||||||||||||||||
| Common Stock | 4,900 | 900 | — | 5,800 | ||||||||||||||||||||||
| Warrants | — | — | — | — | ||||||||||||||||||||||
|
Regency Healthcare Group, LLC
|
Senior Loan | 1 | — | — | — | — | ||||||||||||||||||||
|
(Healthcare Services)
|
Unitranche Debt | 340 | 11,941 | 356 | — | 12,297 | ||||||||||||||||||||
| Equity Interests | 25 | 1,681 | 22 | (206 | ) | 1,497 | ||||||||||||||||||||
|
SGT India Private Limited
|
Common Stock | 3,075 | — | (495 | ) | 2,580 | ||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt | 530 | 13,744 | 2,006 | — | 15,750 | ||||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 74 | 2,686 | — | (483 | ) | 2,203 | |||||||||||||||||||
|
Universal Environmental
|
Equity Interests | — | 249 | (249 | ) | — | ||||||||||||||||||||
|
Services, LLC
|
||||||||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Total companies 5% to 25% owned
|
$ | 12,674 | $ | 389,509 | $ | 381,758 | ||||||||||||||||||||
This schedule should be read in conjunction with the
Company’s consolidated financial statements, including the
consolidated statement of investments and Note 3 to the
consolidated financial statements. Note 3 includes
additional information regarding activities in the private
finance portfolio.
| (1) | Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common stock and preferred stock is shown in the consolidated statement of investments as of March 31, 2008. |
| (2) | Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable. |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation. |
| (4) | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation. |
| (5) | Loan or debt security is on non-accrual status at March 31, 2008, and is therefore considered non-income producing. Loans or debt securities on non-accrual status at the end of the period may or may not have been on non-accrual status for the full period. |
| (6) | Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the companies more than 25% owned or companies 5% to 25% owned categories, respectively. |
| (7) | In the first quarter of 2008, the Company exercised its option to acquire a majority of the voting securities of MHF Logistical Solutions, Inc. (MHF). Therefore, MHF was reclassified to companies more than 25% owned in the first quarter of 2008. At December 31, 2007, the Company’s investment in MHF was included in the companies 5% to 25% owned category. |
72
| 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
for the year ended December 31, 2007. In addition, this
quarterly report on Form 10-Q contains certain forward-looking
statements. These statements include the plans and objectives of
management for future operations and financial objectives and
can be identified by the use of forward-looking terminology such
as “may,” “will,” “expect,”
“intend,” “anticipate,”
“estimate,” or “continue” or the negative
thereof or other variations thereon or comparable terminology.
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 Risk
Factors section. Other factors that could cause actual results
to differ materially include:
| • | changes in the economy, including economic downturns or recessions; | |
| • | risks associated with possible disruption in our operations due to terrorism; | |
| • | future changes in laws or regulations or changes in accounting principles; and | |
| • | other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings. |
Financial or other information presented for private finance
portfolio companies has been obtained from the portfolio
companies, and the financial information presented may represent
unaudited, projected or pro forma financial information, and
therefore may not be indicative of actual results. In addition,
the private equity industry uses financial measures such as
EBITDA or EBITDAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management
fees) in order to assess a portfolio company’s financial
performance and to value a portfolio company. EBITDA and EBITDAM
are not intended to represent cash flow from operations as
defined by U.S. generally accepted accounting principles and
such information should not be considered as an alternative to
net income, cash flow from operations or any other measure of
performance prescribed by U.S. generally accepted accounting
principles.
OVERVIEW
As a business development company, we are in the private equity
business. Specifically, we provide long-term debt and equity
investment capital to companies in a variety of industries. Our
private finance activity principally involves providing
financing to middle market U.S. companies through privately
negotiated long-term debt and equity investment capital. Our
financing is generally used to fund buyouts, acquisitions,
growth, recapitalizations, note purchases, and other types of
financings. We generally invest in private companies though,
from time to time, we may invest in companies that are public
but lack access to additional public capital. Our investment
objective is to achieve current income and capital gains.
Our portfolio composition at March 31, 2008 and 2007, and
December 31, 2007, was as follows:
| March 31, | December 31, | |||||||||||
| 2008 | 2007 | 2007 | ||||||||||
|
Private finance
|
98 | % | 97% | 97% | ||||||||
|
Commercial real estate finance
|
2 | % | 3% | 3% | ||||||||
Our earnings depend primarily on the level of interest and
dividend income, fee and other income, and net realized and
unrealized gains or losses on our investment portfolio after
deducting interest expense on borrowed capital, operating
expenses and income taxes, including excise tax. Interest income
primarily results from the stated interest rate earned on a loan
or debt security and the amortization of loan origination fees
and discounts. The level
73
of interest income is directly
related to the balance of the interest-bearing investment
portfolio outstanding during the period multiplied by the
weighted average yield. Our ability to generate interest income
is dependent on economic, regulatory, and competitive factors
that influence new investment activity, interest rates on the
types of loans we make, the level of repayments in the
portfolio, the amount of loans and debt securities for which
interest is not accruing and our ability to secure debt and
equity capital for our investment activities. The level of fee
income is primarily related to the level of new investment
activity and the level of fees earned from portfolio companies
and managed funds. The level of investment activity can vary
substantially from period to period depending on many factors,
including the amount of debt and equity capital available to
middle market companies, the level of merger and acquisition
activity for such companies, the general economic environment,
and the competitive environment for the types of investments we
make.
Because we are a regulated investment company for tax purposes,
we intend to distribute substantially all of our annual taxable
income available for distribution as dividends to our
shareholders. See “Other Matters” below.
PORTFOLIO AND
INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield
on interest-bearing investments at and for the three months
ended March 31, 2008 and 2007, and at and for the year
ended December 31, 2007, were as follows:
|
At and for the |
At and for the |
|||||||||||
|
Three Months Ended |
Year Ended |
|||||||||||
| March 31, | December 31, | |||||||||||
| ($ in millions) | 2008 | 2007 | 2007 | |||||||||
|
Portfolio at value
|
$ | 4,635.6 | $ | 4,498.8 | $ | 4,780.5 | ||||||
|
Investments funded
|
$ | 275.1 | $ | 170.2 | $ | 1,846.0 | ||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
$ | 13.4 | $ | 8.1 | $ | 12.0 | ||||||
|
Principal collections related to investment repayments
or sales(1)
|
$ | 264.8 | $ | 235.5 | $ | 1,211.6 | ||||||
|
Yield on interest-bearing portfolio
investments(2)
|
12.3 | % | 11.6 | % | 12.1 | % | ||||||
| (1) | Principal collections related to investment repayments or sales for the three months ended March 31, 2008, and year ended December 31, 2007, included collections of $30.0 million and $224.2 million, respectively, related to the sale of loans to the Allied Capital Senior Debt Fund, L.P. See discussion below. |
| (2) | The weighted average yield on interest-bearing investments is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, plus the effective interest yield on the preferred shares/income notes of CLOs, plus the annual stated interest (LIBOR plus 7.5%) on the subordinated certificates in the Unitranche Fund LLC divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. |
74
Private
Finance
The private finance portfolio at value, investment activity, and
the yield on loans and debt securities at and for the three
months ended March 31, 2008 and 2007, and at and for the
year ended December 31, 2007, were as follows:
|
At and for |
At and for the |
|||||||||||||||||||||||
| Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2007 | ||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 325.7 | 7.0% | $ | 365,0 | 8.4% | $ | 344.3 | 7.7% | |||||||||||||||
|
Unitranche debt
|
655.7 | 11.8% | 780.2 | 11.4% | 653.9 | 11.5% | ||||||||||||||||||
|
Subordinated debt
|
2,430.4 | 13.0% | 1,946.1 | 12.5% | 2,416.4 | 12.8% | ||||||||||||||||||
|
Total loans and debt securities
|
3,411.8 | 12.2% | 3,091.3 | 11.7% | 3,414.6 | 12.1% | ||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(2)
|
197.4 | 15.8% | 96.1 | 13.5% | 203.0 | 14.6% | ||||||||||||||||||
|
Subordinated certificates in Unitranche
Fund LLC(2)
|
31.5 | 12.4% | — | 0.7 | 12.4% | |||||||||||||||||||
|
Other equity securities
|
879.1 | 1,188.9 | 1,041.0 | |||||||||||||||||||||
|
Total equity securities
|
1,108.0 | 1,285.0 | 1,244.7 | |||||||||||||||||||||
|
Total portfolio
|
$ | 4,519.8 | $ | 4,376.3 | $ | 4,659.3 | ||||||||||||||||||
|
Investments funded
|
$ | 274.6 | $ | 170.2 | $ | 1,828.0 | ||||||||||||||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
$ | 13.2 | $ | 5.3 | $ | 12.7 | ||||||||||||||||||
|
Principal collections related to investment repayments or
sales(3)
|
$ | 256.4 | $ | 235.1 | $ | 1,188.2 | ||||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs at value. The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest (LIBOR plus 7.5%) divided by (b) total investment at value. The weighted average yields are computed as of the balance sheet date. |
| (2) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in the Unitranche Fund LLC earn a current return that is included in interest income in the consolidated statement of operations. |
| (3) | Includes collections from the sale or repayment of senior loans totaling $48.6 million, $94.7 million, and $393.4 million for the three months ended March 31, 2008 and 2007, and for the year ended December 31, 2007, respectively. |
Our investment activity is primarily focused on making long-term
investments in the debt and equity of primarily private middle
market companies. Debt investments may include senior loans,
unitranche debt (an investment that combines both senior and
subordinated financing, generally in a first lien position), or
subordinated debt (with or without equity features). The junior
debt that we invest in that is lower in repayment priority than
senior debt is also known as mezzanine debt. Equity investments
may include a minority equity stake in connection with a debt
investment or a substantial equity stake in connection with a
buyout transaction. In a buyout transaction, we generally invest
in senior and/or subordinated debt and equity (preferred and/or
voting or non-voting common) where our equity ownership
represents a significant portion of the equity, but may or may
not represent a controlling interest.
75
We intend to take a balanced approach to private equity
investing that emphasizes a complementary mix of debt
investments and buyout investments. The combination of these two
types of investments provides current interest and related
portfolio income and the potential for future capital gains. In
addition, we may invest in funds that are managed or co-managed
by us that are complementary to our business of investing in
middle market companies, such as the Allied Capital Senior Debt
Fund, L.P. and the Unitranche Fund LLC. Investments in funds may
provide current interest and related portfolio income, including
management fees.
During the first six months of 2007, we found it difficult to
find investments with attractive prices and structures. As a
result, new investment activity was lower than in prior
quarters. During the second half of 2007 and into the first
quarter of 2008, our investment pace increased as pricing and
structures improved. In the first quarter of 2008, we invested
$274.6 million in private finance as compared to
$170.2 million in the first quarter of 2007.
The level of investment activity for investments funded and
principal repayments for private finance investments can vary
substantially from period to period depending on the number and
size of investments that we make or that we exit and many other
factors, including the amount of debt and equity capital
available to middle market companies, the level of merger and
acquisition activity for such companies, the general economic
environment, and the competitive environment for the types of
investments we make.
76
Investments Funded. Investments funded
and the weighted average yield on loans and debt securities
funded for the three months ended March 31, 2008 and 2007,
and for the year ended December 31, 2007, consisted of the
following:
| For the Three Months Ended March 31, 2008 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 26.8 | 7.4% | $ | 10.4 | 6.7% | $ | 37.2 | 7.2% | |||||||||||||||
|
Unitranche
debt(2)
|
4.5 | 10.3% | 0.5 | 6.6% | 5.0 | 9.9% | ||||||||||||||||||
|
Subordinated debt
|
129.9 | (3) | 12.0% | 31.3 | 14.2% | 161.2 | 12.4% | |||||||||||||||||
|
Total loans and debt securities
|
161.2 | 11.2% | 42.2 | 12.3% | 203.4 | 11.4% | ||||||||||||||||||
|
Preferred shares/income notes of
CLOs(4)
|
3.0 | 27.6% | — | 3.0 | 27.6% | |||||||||||||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
30.7 | 12.4% | — | 30.7 | 12.4% | |||||||||||||||||||
|
Equity
|
13.6 | 23.9 | 37.5 | |||||||||||||||||||||
|
Total
|
$ | 208.5 | $ | 66.1 | $ | 274.6 | ||||||||||||||||||
| For the Three Months Ended March 31, 2007 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 41.2 | 8.8% | $ | 12.7 | 10.4% | $ | 53.9 | 9.2% | |||||||||||||||
|
Unitranche
debt(2)
|
5.3 | 11.0% | — | — | 5.3 | 11.0% | ||||||||||||||||||
|
Subordinated debt
|
14.4 | 9.3% | 62.1 | 10.5% | 76.5 | 10.3% | ||||||||||||||||||
|
Total loans and debt securities
|
60.9 | 9.1% | 74.8 | 10.5% | 135.7 | 9.9% | ||||||||||||||||||
|
Equity
|
9.7 | 24.8 | 34.5 | |||||||||||||||||||||
|
Total
|
$ | 70.6 | $ | 99.6 | $ | 170.2 | ||||||||||||||||||
| For the Year Ended December 31, 2007 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 249.0 | 9.2% | $ | 63.1 | 8.8% | $ | 312.1 | 9.1% | |||||||||||||||
|
Unitranche
debt(2)
|
109.1 | 10.8% | 74.9 | 13.0% | 184.0 | 11.7% | ||||||||||||||||||
|
Subordinated debt
|
719.4 | (3) | 12.8% | 197.6 | 12.1% | 917.0 | 12.6% | |||||||||||||||||
|
Total loans and debt securities
|
1,077.5 | 11.7% | 335.6 | 11.7% | 1,413.1 | 11.7% | ||||||||||||||||||
|
Preferred shares/income notes of
CLOs(4)
|
116.2 | 16.4% | — | 116.2 | 16.4% | |||||||||||||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
0.7 | 12.4% | — | 0.7 | 12.4% | |||||||||||||||||||
|
Equity
|
152.0 | (5) | 146.0 | 298.0 | ||||||||||||||||||||
|
Total
|
$ | 1,346.4 | $ | 481.6 | $ | 1,828.0 | ||||||||||||||||||
| (1) | The weighted average yield on interest-bearing investments is computed as the (a) annual stated interest on accruing interest-bearing investments, divided by (b) total interest-bearing investments funded. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs funded. The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest (LIBOR plus 7.5%) divided by (b) total investment at value. The weighted average yield is calculated using yields as of the date an investment is funded. |
| (2) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. The yield on a unitranche investment reflects the blended yield of senior and subordinated debt. |
| (3) | Subordinated debt investments for the three months ended March 31, 2008, and year ended December 31, 2007, included $2.0 million and $45.3 million, respectively, in investments in the bonds of collateralized loan obligations (CLOs). Certain of these CLOs are managed by Callidus Capital Corporation (Callidus), a portfolio company controlled by us. These CLOs primarily invest in senior corporate loans. |
| (4) | CLO equity investments included preferred shares/income notes of CLOs that primarily invest in senior corporate loans. Certain of these CLOs are managed by Callidus. |
| (5) | Equity investments for the year ended December 31, 2007, included $31.8 million invested in the Allied Capital Senior Debt Fund, L.P. See “Managed Funds” below. |
77
We generally fund new investments using cash. In addition, we
may acquire securities in exchange for our common equity. Also,
we may acquire new securities through the reinvestment of
previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend
income through the receipt of a debt or equity security
(payment-in-kind income). From time to time we may opt to
reinvest accrued interest receivable in a new debt or equity
security in lieu of receiving such interest in cash.
We may underwrite or arrange senior loans related to our
portfolio investments or for other companies that are not in our
portfolio. When we underwrite or arrange senior loans, we may
earn a fee for such activities. Senior loans underwritten or
arranged by us may be funded by us at closing. When these senior
loans are closed, we may fund all or a portion of the
underwritten commitment pending sale of the loan to other
investors, which may include loan sales to Callidus Capital
Corporation (Callidus), a portfolio company controlled by us, or
funds managed by Callidus or by us, including the Allied Capital
Senior Debt Fund, L.P. (discussed below). After completion of
loan sales, we may retain a position in these senior loans. We
generally earn a fee on the senior loans we underwrite or
arrange whether or not we fund the underwritten commitment. In
addition, we may fund most or all of the debt and equity capital
upon the closing of certain buyout transactions, which may
include investments in lower-yielding senior debt. Subsequent to
the closing, the portfolio company may refinance all or a
portion of the lower-yielding senior debt, which would reduce
our investment. Principal collections include repayments of
senior debt funded by us that was subsequently sold by us or
refinanced or repaid by the portfolio companies.
We are currently focused on selling or encouraging the
recapitalization or refinancing of some of our lower yielding
debt investments. We may sell loans or debt securities to
Managed Funds or portfolio companies may refinance their debt
through a Managed Fund.
Yield. The weighted average yield on
private finance loans and debt securities was 12.2% at
March 31, 2008, as compared to 12.1% and 11.7% at
December 31, 2007, and March 31, 2007, respectively.
The weighted average yield on private finance loans and debt
securities may fluctuate from period to period depending on the
yield on new loans and debt securities funded, the yield on
loans and debt securities repaid, the amount of loans and debt
securities for which interest is not accruing (see
“Portfolio Asset Quality — Loans and Debt
Securities on Non-Accrual Status” below) and the amount of
lower-yielding senior or unitranche debt in the portfolio at the
end of the period.
78
Outstanding Investment Commitments. At
March 31, 2008, we had outstanding private finance
investment commitments as follows:
|
Companies |
Companies |
|||||||||||||||
|
More Than |
Companies 5% |
Less Than |
||||||||||||||
| ($ in millions) | 25% Owned(1) | to 25% Owned | 5% Owned | Total | ||||||||||||
|
Senior loans
|
$ | 8.6 | $ | 12.0 | $ | 98.5 | $ | 119.1 | (2) | |||||||
|
Unitranche debt
|
3.0 | — | 44.6 | 47.6 | ||||||||||||
|
Subordinated debt
|
23.0 | 4.3 | — | 27.3 | ||||||||||||
|
Total loans and debt securities
|
34.6 | 16.3 | 143.1 | 194.0 | ||||||||||||
|
Unitranche
Fund(3)
|
493.5 | — | — | 493.5 | ||||||||||||
|
Equity securities
|
91.7 | 9.8 | 56.3 | 157.8 | (4) | |||||||||||
|
Total
|
$ | 619.8 | $ | 26.1 | $ | 199.4 | $ | 845.3 | ||||||||
| (1) | Includes various commitments to Callidus Capital Corporation (Callidus), a portfolio company controlled by us, which owns 80% (subject to dilution) of Callidus Capital Management, LLC, an asset management company that structures and manages collateralized loan obligations (CLOs), collateralized debt obligations (CDOs), and other related investments, as follows: |
|
Amount |
||||||||||||
|
Committed |
Amount |
Available |
||||||||||
| ($ in millions) | Amount | Drawn | to be Drawn | |||||||||
|
Revolving line of credit for working capital
|
$ | 4.0 | $ | 1.6 | $ | 2.4 | ||||||
|
Subordinated debt to support warehouse facilities &
warehousing
activities(*)
|
18.0 | 4.0 | 14.0 | |||||||||
|
Total
|
$ | 22.0 | $ | 5.6 | $ | 16.4 | ||||||
| (*) | Callidus has a synthetic credit facility with a third party for up to approximately $55 million. We have agreed to designate our subordinated debt commitment for Callidus to draw upon to provide first loss capital as needed to support this facility. |
| (2) | Includes $113.2 million in the form of revolving senior debt facilities to 33 companies. | |
| (3) | Represents our commitment to the Unitranche Fund LLC (see discussion below), which we estimate will be funded over a two to three year period as investments are made by the Unitranche Fund. | |
| (4) | Includes $66.1 million to 13 private equity and venture capital funds, including $3.9 million in co-investment commitments to one private equity fund. |
In addition to these outstanding investment commitments at
March 31, 2008, we may be required to fund additional
amounts under earn-out arrangements primarily related to buyout
transactions in the future if those companies meet agreed-upon
performance targets. We also had commitments to private finance
portfolio companies in the form of standby letters of credit and
guarantees. See “Financial Condition, Liquidity and Capital
Resources.”
Investments in Collateralized Loan Obligations and
Collateralized Debt Obligations (CLO/CDO
Assets). At both March 31, 2008, and
December 31, 2007, we had investments in ten CLO issuances
and one CDO bond, which totaled as follows:
| 2008 | 2007 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
CLO/CDO bonds
|
$ | 92.7 | $ | 92.1 | 12.7% | $ | 90.7 | $ | 89.9 | 13.3% | ||||||||||||||
|
Preferred shares/income notes of CLOs
|
224.1 | 197.4 | 15.8% | 218.3 | 203.0 | 14.6% | ||||||||||||||||||
|
Total
|
$ | 316.8 | $ | 289.5 | $ | 309.0 | $ | 292.9 | ||||||||||||||||
|
Percentage of total assets
|
5.7% | 5.6% | ||||||||||||||||||||||
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO/CDO Assets at value. |
The market yield used in the
valuation of the CLO/CDO Assets may be different than the
interest yields shown above. See discussion below.
The CLO and CDO issuances in which we have invested are
primarily invested in senior corporate loans. See also
Note 3, “Portfolio” from our Notes to the
Consolidated Financial Statements included in Item 1.
79
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis is adjusted as necessary.
As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
The CLO/CDO Assets in which we have invested are junior in
priority for payment of interest and principal to the more
senior notes issued by the CLOs and CDO. Cash flow from the
underlying collateral assets in the CLOs and CDO is generally
allocated first to the senior bonds in order of priority, then
any remaining cash flow is generally distributed to the
preferred shareholders and income note holders. To the extent
there are defaults and unrecoverable losses on the underlying
collateral assets that result in reduced cash flows, the
preferred shares/income notes will bear this loss first and then
the subordinated bonds would bear any loss after the preferred
shares/income notes. At both March 31, 2008, and
December 31, 2007, the face value of the CLO/CDO Assets
held by us was subordinate to as much as 94% of the face value
of the securities outstanding in these CLOs and CDO.
At March 31, 2008, and December 31, 2007, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
636 issuers and 671 issuers, respectively, and had balances
as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Bonds
|
$ | 286.1 | $ | 288.5 | ||||
|
Syndicated loans
|
4,206.5 | 4,122.7 | ||||||
|
Cash(1)
|
101.4 | 104.4 | ||||||
|
Total underlying collateral
assets(2)
|
$ | 4,594.0 | $ | 4,515.6 | ||||
| (1) | Includes undrawn liability amounts. |
| (2) | At March 31, 2008, and December 31, 2007, the total face value of defaulted obligations was $42.3 million and $18.4 million, respectively, or approximately 0.9% and 0.4%, respectively, of the total underlying collateral assets. |
Since the third quarter of 2007, the debt capital markets have
been volatile and market yields for CLO securities have
increased. We believe the market yields for our investments in
CLO preferred shares/income notes have increased, and as a
result, the fair value of certain of our investments in these
assets has decreased. At March 31, 2008, the market yields
used to value our preferred shares/income notes were 22% to 23%,
with the exception of the income notes in one CLO with a cost
and value of $23.1 million where we used a market yield of
18% due to the characteristics of the issuance. Net change in
unrealized appreciation or depreciation for the three months
ended March 31, 2008, included a net decrease of
$11.2 million related to our investments in CLO/CDO Assets.
We received valuation assistance for our investments in the
CLO/CDO Assets in each quarter of 2007 and in the first quarter
of 2008. See “Results of Operations — Valuation
Methodology — Private Finance” below for further
discussion of the third-party valuation assistance we received.
Ciena Capital LLC. Ciena Capital LLC
(Ciena) focuses on loan products that provide financing to
commercial real estate owners and operators. Ciena is also a
participant in the SBA’s 7(a) Guaranteed Loan Program and
its wholly-owned subsidiary is licensed by the SBA as a Small
Business Lending Company (SBLC). Ciena is headquartered in New
York, NY and maintains offices in other U.S. locations. We
invested in Ciena in 2000.
At March 31, 2008, our investment in Ciena totaled
$327.8 million at cost and $29.3 million at value,
after the effect of unrealized depreciation of
$298.5 million. See “Results of Operations, Valuation
of Ciena Capital LLC” for a discussion of the determination
of the value of Ciena at March 31, 2008. At
December 31, 2007, our investment in Ciena totaled
$327.8 million at cost and $68.6 million at value,
after the effect of unrealized depreciation of
$259.2 million.
Net change in unrealized appreciation or depreciation included a
net decrease on our investment in Ciena of $39.3 million
for the three months ended March 31, 2008, and no change in
unrealized depreciation on our
80
investment in Ciena for the three months ended March 31,
2007. See “Results of Operations, Valuation of Ciena
Capital LLC” below.
Total interest and related portfolio income earned from our
investment in Ciena for the three months ended March 31,
2008 and 2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Interest income on subordinated debt and Class A equity
interests
|
$ | — | $ | — | ||||
|
Fees and other income
|
— | 1.4 | ||||||
|
Total interest and related portfolio income
|
$ | — | $ | 1.4 | ||||
In the fourth quarter of 2006, we placed our investment in
Ciena’s 25% Class A equity interests on non-accrual
status. As a result, there was no interest income from our
investment in Ciena for the three months ended March 31,
2008 and 2007. In consideration for providing a guaranty on
Ciena’s revolving credit facility and standby letters of
credit (discussed below), we earned fees of $1.4 million
for the three months ended March 31, 2007, and
$5.4 million for the year ended December 31, 2007,
which were included in fees and other income. Ciena has not yet
paid the $5.4 million in such fees earned by us during
2007, and at March 31, 2008, such fees were included as a
receivable in other assets. We considered this outstanding
receivable in our valuation of Ciena at March 31, 2008. We
did not accrue the fees earned from Ciena for providing the
guaranty and standby letters of credit for the three months
ended March 31, 2008.
We guarantee Ciena’s revolving credit facility that matures
in March 2009. On January 30, 2008, Ciena completed an
amendment of the terms of its revolving credit facility. The
amendment reduced the commitments from the lenders under the
facility from $500 million to $450 million at the
effective date of the amendment, with further periodic
reductions in total commitments to $325 million by
December 31, 2008. In addition, certain financial and other
covenants were amended. In connection with this amendment, we
increased our unconditional guarantee from 60% to 100% of the
total obligations under this facility (consisting of principal,
letters of credit issued under the facility, accrued interest,
and other fees) and replaced $42.5 million in letters of
credit issued under the Ciena credit facility with new letters
of credit under our revolving line of credit. The guaranty of
the Ciena revolving credit facility can be called by the lenders
in the event of a default, which includes the occurrence of any
event of default under our revolving credit facility, subject to
grace periods in certain cases. The amendment also prohibits
cash payments from Ciena to us for interest, guarantee fees,
management fees, and dividends. At March 31, 2008, the
principal amount outstanding on Ciena’s revolving credit
facility was $335.0 million and letters of credit issued
under the facility were $46.9 million. The total obligation
guaranteed by us at March 31, 2008, was
$384.8 million. At March 31, 2008, we had provided
standby letters of credit totaling $59.5 million in
connection with term securitization transactions completed by
Ciena.
Ciena relies on the asset-backed securitization market to
finance its loan origination activity. That financing source
continues to be unreliable in the current capital markets, and
as a result, Ciena has substantially curtailed loan origination
activity, including loan originations under the SBA’s 7(a)
Guaranteed Loan Program. Ciena continues to reposition its
business. However, there is an inherent risk in this
repositioning and we continue to work with Ciena on
restructuring. Ciena maintains two non-recourse securitization
warehouse facilities, and there is no assurance that Ciena will
be able to refinance these facilities in the loan securitization
market. We have issued performance guaranties whereby we have
agreed to indemnify the warehouse providers for any damages,
losses, liabilities and related costs and expenses that they may
incur as a result of Ciena’s failure to perform any of its
obligations as loan originator, loan seller or loan servicer
under the warehouse securitizations.
The Office of the Inspector General of the SBA (OIG) and
the United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA guaranteed
loans issued by Ciena. Specifically, on or about January 9,
2007, Ciena became aware of an indictment captioned as the
United States v. Harrington, No. 2:06-CR-20662 pending in
the United States District Court for the Eastern District of
Michigan. The indictment alleged that a former Ciena employee in
the Detroit office engaged in the fraudulent origination of
loans guaranteed, in substantial part, by the SBA. We understand
that Ciena is working cooperatively with the U.S.
Attorney’s Office and
81
the investigating agencies with
respect to this matter. On October 1, 2007, the former
Ciena employee pled guilty to one count of conspiracy to
fraudulently originate SBA-guaranteed loans and one count of
making a false statement before a grand jury.
On March 6, 2007, Ciena entered into an agreement with the
SBA. According to the agreement, Ciena remains a preferred
lender in the SBA 7(a) Guaranteed Loan Program and retains the
ability to sell loans into the secondary market. As part of this
agreement, Ciena agreed to the immediate payment of
approximately $10 million to the SBA to cover amounts paid
by the SBA with respect to some of the SBA-guaranteed loans that
have been the subject of the charges by the U.S. Attorney’s
Office for the Eastern District of Michigan against
Mr. Harrington. Ciena also entered into an escrow agreement
with the SBA and an escrow agent in which Ciena agreed to
deposit $10 million with the escrow agent for any
additional payments Ciena may be obligated to pay to the SBA in
the future under the agreement. During the term of the
agreement, any loans originated by Ciena that will be sold into
the secondary market or loans that default after having been
sold into the secondary market will be reviewed by an
independent third party selected by the SBA prior to the sale of
such loans into the secondary market or prior to reimbursement
by the SBA. Ciena remains subject to SBA rules and regulations
and as a result may be required to make additional payments to
the SBA in the ordinary course of business.
As an SBA lender, Ciena is also subject to other SBA and OIG
audits, investigations, and reviews. In addition, the Office of
the Inspector General of the U.S. Department of Agriculture is
conducting an investigation of Ciena’s lending practices
under the Business and Industry Loan (B&I) program. The OIG
and the U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. These investigations, audits and reviews are
ongoing.
On or about January 16, 2007, Ciena (f/k/a Business Loan
Express, LLC) and its subsidiary Business Loan Center LLC
(BLC) became aware of a lawsuit titled, United States, ex
rel James R. Brickman and Greenlight Capital, Inc. v. Business
Loan Express LLC f/k/a Business Loan Express, Inc.; Business
Loan Center LLC f/k/a Business Loan Center, Inc.; Robert
Tannenhauser; Matthew McGee; and George Harrigan, 05-CV-3147
(JEC). The complaint includes allegations arising under the
False Claims Act and relating to alleged fraud in connection
with SBA guarantees on shrimp vessel loans. On December 18,
2007, the United States District Court for the Northern District
of Georgia dismissed all claims in this matter. The plaintiffs
are appealing the dismissal.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect our financial
results. We have considered Ciena’s current regulatory
issues, ongoing investigations, litigation, and the
repositioning of its business in performing the valuation of
Ciena at March 31, 2008. See “Results of
Operations — Valuation of Ciena Capital LLC”
below. We are monitoring the situation.
Mercury Air Centers, Inc. At
March 31, 2007, our investment in Mercury Air Centers, Inc.
(Mercury) totaled $84.8 million at cost and
$301.4 million at value, which included unrealized
appreciation of $216.6 million. In April 2004, we completed
the purchase of a majority ownership in Mercury.
In August 2007, we completed the sale of our majority equity
interest in Mercury. For the year ended December 31, 2007,
we realized a gain of $262.4 million, subject to
post-closing adjustments. In addition, we were repaid
approximately $51 million of subordinated debt outstanding
to Mercury at closing.
Mercury owned and operated fixed base operations generally under
long-term leases from local airport authorities, which consisted
of terminal and hangar complexes that serviced the needs of the
general aviation community. Mercury was headquartered in
Richmond Heights, OH.
82
Total interest and related portfolio income earned from our
investment in Mercury for the three months ended March 31,
2007, was as follows:
| ($ in millions) | 2007 | |||
|
Interest income
|
$ | 2.0 | ||
|
Fees and other income
|
0.1 | |||
|
Total interest and related portfolio income
|
$ | 2.1 | ||
Net change in unrealized appreciation or depreciation for the
three months ended March 31, 2007, included an increase in
unrealized appreciation totaling $56.7 million related to
our investment in Mercury.
Commercial Real
Estate Finance
The commercial real estate finance portfolio at value,
investment activity, and the yield on interest-bearing
investments at and for the three months ended March 31,
2008 and 2007, and at and for the year ended December 31,
2007, were as follows:
|
At and for the |
||||||||||||||||||||||||
|
At and for the |
Year Ended |
|||||||||||||||||||||||
| Three Months Ended March 31, | December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2007 | ||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||
|
Commercial mortgage loans
|
$ | 53.5 | 7.9% | $ | 72.2 | 7.5% | $ | 65.4 | 6.8% | |||||||||||||||
|
Real estate owned
|
30.2 | 21.0 | 21.3 | |||||||||||||||||||||
|
Equity interests
|
32.1 | 29.3 | 34.5 | |||||||||||||||||||||
|
Total portfolio
|
$ | 115.8 | $ | 122.5 | $ | 121.2 | ||||||||||||||||||
|
Investments funded
|
$ | 0.5 | $ | — | $ | 18.0 | ||||||||||||||||||
|
Payment-in-kind interest, net of cash collections
|
$ | 0.2 | $ | 0.2 | $ | (0.7 | ) | |||||||||||||||||
|
Principal collections related to investment repayments or sales
|
$ | 8.4 | $ | 0.4 | $ | 23.4 | ||||||||||||||||||
| (1) | The weighted average yield on the interest-bearing investments is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing interest-bearing investments less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. Interest-bearing investments for the commercial real estate finance portfolio include all investments except for real estate owned and equity interests. |
At March 31, 2008, we had outstanding funding commitments
related to the commercial real estate portfolio of
$40.0 million, and commitments in the form of standby
letters of credit and guarantees related to equity interests of
$8.2 million.
Managed
Funds
We manage funds that invest in the debt and equity of primarily
private middle market companies in a variety of industries
(together, the Managed Funds). As of March 31, 2008, the
funds that we manage had total assets of approximately
$1.2 billion. During 2007, we established the Allied
Capital Senior Debt Fund, L.P. and the Unitranche Fund LLC,
and in the first quarter of 2008, we formed the AGILE
Fund I, LLC and assumed the management of Knightsbridge CLO
2007-1 Ltd., all discussed below. Our responsibilities to the
Managed Funds may include deal origination, underwriting, and
portfolio monitoring and development services consistent with
the activities that we perform for our portfolio. Each of the
Managed Funds may separately invest in the debt or equity of a
portfolio company. Our portfolio may include debt or equity
investments issued by the same portfolio company as investments
held by one or more Managed Funds, and these
83
investments may be senior, pari
passu or junior to the debt and equity investments held by us.
We may or may not participate in investments made by investment
funds managed by us or one of our affiliates. We expect to
continue to grow our managed capital base and have identified
other private equity-related funds that we intend to develop. By
growing our privately managed capital base, we are seeking to
diversify our sources of capital, leverage our core investment
expertise and increase fees and other income from asset
management activities. See “Risk Factors — There
are potential conflicts of interest between us and the funds
managed by us” under Item 1A.
Allied Capital Senior Debt Fund,
L.P. The Allied Capital Senior Debt Fund,
L.P. (ACSDF) is a private fund that generally invests in senior,
unitranche and second lien debt. ACSDF has closed on
$125 million in equity capital commitments and had total
assets of approximately $432 million at March 31,
2008. AC Corp, our wholly-owned subsidiary, is the investment
manager and Callidus acts as special manager to ACSDF. One of
our affiliates is the general partner of ACSDF, and AC Corp
serves as collateral manager to a warehouse financing vehicle
associated with ACSDF. AC Corp will earn a management fee of up
to 2% per annum of the net asset value of ACSDF and will pay
Callidus 25% of that management fee to compensate Callidus for
its role as special manager.
We are a special limited partner in ACSDF, which is a portfolio
investment, and have committed and funded $31.8 million to
ACSDF. At March 31, 2008, our investment in ACSDF totaled
$31.8 million at cost and $32.6 million at value. As a
special limited partner, we expect to earn an incentive
allocation of 20% of ACSDF’s annual net income earned in
excess of a specified minimum return, subject to certain
performance benchmarks. The value of our investment in ACSDF is
based on the net asset value of ACSDF, which reflects the
capital invested plus our allocation of the net earnings of
ACSDF, including the incentive allocation.
We may offer to sell loans to ACSDF or the warehouse financing
vehicle. ACSDF or the warehouse financing vehicle may purchase
loans from us. In connection with ACSDF’s formation in June
2007 and during the second half of 2007, we sold
$224.2 million of seasoned assets with a weighted average
yield of 10.0% to a warehouse financing vehicle associated with
ACSDF. In the first quarter of 2008, we sold $30.0 million
of seasoned assets with a weighted average yield of 8.2% to the
warehouse financing vehicle. ACSDF also purchases loans from
other third parties.
Unitranche Fund LLC. In
December 2007, we formed the Unitranche Fund LLC
(Unitranche Fund), which we co-manage with an affiliate of
General Electric Capital Corporation (GE). The Unitranche Fund
is a private fund that generally focuses on making first lien
unitranche loans to middle market companies with EBITDA of at
least $15 million. The Unitranche Fund may invest up to
$270 million in a single borrower. For financing needs
greater than $270 million, we and GE may jointly underwrite
additional financing for a total unitranche financing of up to
$500 million. Allied Capital, GE and the Unitranche Fund
may co-invest in a single borrower, with the Unitranche Fund
holding at least a majority of the issuance. GE has committed
$3.075 billion to the Unitranche Fund consisting of
$3.0 billion of senior notes and $0.075 billion of
subordinated certificates and we have committed
$525.0 million of subordinated certificates. The Unitranche
Fund will be capitalized as transactions are completed. At
March 31, 2008, the Unitranche Fund had total assets
of approximately $142 million and our investment in the
Unitranche Fund totaled $31.5 million at cost and at value.
The Unitranche Fund is governed by an investment committee with
equal representation from Allied Capital and GE and both Allied
Capital and GE provide origination, underwriting and portfolio
management services to the Unitranche Fund and its affiliates.
We earn a management and sourcing fee totaling 0.375% per
annum of managed assets.
AGILE Fund I, LLC. In January
2008, we entered into an investment agreement with the Goldman
Sachs Private Equity Group, part of Goldman Sachs Asset
Management (Goldman Sachs). As part of the investment agreement,
we agreed to sell a pro-rata strip of private equity and debt
investments to AGILE Fund I, LLC (AGILE), a private fund in
which a fund managed by Goldman Sachs owns substantially all of
the interests, for a total transaction value of
$167 million. The sales of the assets closed in the first
quarter of 2008.
The sale to AGILE included 13.7% of our equity investments in 23
of our buyout portfolio companies and 36 of our minority equity
portfolio companies for a total purchase price of
$104 million, which resulted in a net
84
realized gain of $8.8 million
and dividend income of $5.4 million. In addition, we sold
approximately $63 million in debt investments, which
represented 7.3% of our unitranche, second lien and subordinated
debt investments in the buyout investments included in the
equity sale. AGILE generally has the right to co-invest in its
proportional share of any future follow-on investment
opportunities presented by the companies in its portfolio.
We are the managing member of AGILE, and are entitled to an
incentive allocation subject to certain performance benchmarks.
We own the remaining interests in AGILE not held by Goldman
Sachs. At March 31, 2008, AGILE had total assets of
approximately $174 million and our investment in AGILE
totaled $0.9 million at cost and at value.
In addition, pursuant to the investment agreement Goldman Sachs
has committed to invest at least $125 million in future
investment vehicles managed by us and will have future
opportunities to invest in our affiliates, or vehicles managed
by them, and to coinvest alongside us in the future, subject to
various terms and conditions.
As part of this transaction, we sold nine venture capital and
private equity limited partnership investments for approximately
$28 million to a fund managed by Goldman Sachs, which assumed
the $4.7 million of unfunded commitments related to these
limited partnership investments. The sales of these limited
partnership investments closed at the end of the first quarter
of 2008, and resulted in a net realized loss of
$5.5 million.
Knightsbridge CLO 2007-1 Ltd. On
March 31, 2008, we assumed the management of Knightsbridge
CLO 2007-1
Ltd. We earn a management fee of up to 0.6% per annum of the
assets of the fund. Callidus may assist us in the management of
the fund and we may pay Callidus a portion of the management fee
earned for this assistance. This CLO invests primarily in middle
market senior loans. At March 31, 2008, Knightsbridge CLO
2007-1 Ltd.
had total assets of approximately $500 million and our
investment in this CLO totaled $54.4 million at cost and
$53.0 million at value.
In aggregate, including the total assets on our balance sheet
and capital committed to our Managed Funds, we have more than $9
billion in managed capital.
85
PORTFOLIO ASSET
QUALITY
Portfolio by Grade. We employ a grading
system for our entire portfolio. Grade 1 is used for those
investments from which a capital gain is expected. Grade 2
is used for investments performing in accordance with plan.
Grade 3 is used for investments that require closer
monitoring; however, no loss of investment return or principal
is expected. Grade 4 is used for investments that are in
workout and for which some loss of current investment return is
expected, but no loss of principal is expected. Grade 5 is
used for investments that are in workout and for which some loss
of principal is expected.
At March 31, 2008, and December 31, 2007, our
portfolio was graded as follows:
| 2008 | 2007 | |||||||||||||
|
Portfolio |
Percentage of |
Portfolio |
Percentage of |
|||||||||||
|
Grade
|
at Value | Total Portfolio | at Value | Total Portfolio | ||||||||||
| ($ in millions) | ||||||||||||||
|
1
|
$ | 1,301.7 | 28.1 | % | $ | 1,539.6 | 32.2 | % | ||||||
|
2
|
3,079.8 | 66.4 | 2,915.7 | 61.0 | ||||||||||
|
3
|
141.1 | 3.1 | 122.5 | 2.6 | ||||||||||
|
4
|
61.6 | 1.3 | 157.2 | 3.3 | ||||||||||
|
5
|
51.4 | 1.1 | 45.5 | 0.9 | ||||||||||
| $ | 4,635.6 | 100.0 | % | $ | 4,780.5 | 100.0 | % | |||||||
The amount of the portfolio in each grading category may vary
substantially from period to period resulting primarily from
changes in the composition of the portfolio as a result of new
investment, repayment, and exit activity, changes in the grade
of investments to reflect our expectation of performance, and
changes in investment values. We expect that a number of
investments will be in the Grades 4 or 5 categories from
time to time. Part of the private equity business is working
with troubled portfolio companies to improve their businesses
and protect our investment. The number and amount of investments
included in Grade 4 and 5 may fluctuate from period to
period. We continue to follow our historical practice of working
with portfolio companies in order to recover the maximum amount
of our investment.
Total Grade 4 and 5 portfolio assets were $113.0 million
and $202.7 million, respectively, or were 2.4% and 4.2%,
respectively, of the total portfolio value at March 31,
2008, and December 31, 2007. Grade 4 and 5 assets
include loans, debt securities, and equity securities. At
March 31, 2008, and December 31, 2007, our
Class A equity interests in Ciena, valued at
$29.3 million and $68.6 million, respectively, were
classified as Grade 5 and Grade 4, respectively, and our
Class B and Class C equity interests, which had no
value, were classified as Grade 5 at both periods. See
“— Private Finance — Ciena Capital
LLC” above.
Loans and Debt Securities on Non-Accrual
Status. In general, interest is not accrued
on loans and debt securities if we have doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. In addition, interest
may not accrue on loans to portfolio companies that are more
than 50% owned by us depending on such company’s capital
requirements. To the extent interest payments are received on a
loan that is not accruing interest, we may use such payments to
reduce our cost basis in the investment in lieu of recognizing
interest income.
86
At March 31, 2008, and December 31, 2007, loans and
debt securities at value not accruing interest for the total
investment portfolio were as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Loans and debt securities in workout status (classified as
Grade 4 or
5)(1)
|
||||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned
|
$ | 62.4 | $114.1 | |||||
|
Companies 5% to 25% owned
|
2.6 | 11.7 | ||||||
|
Companies less than 5% owned
|
23.3 | 23.8 | ||||||
|
Commercial real estate finance
|
5.9 | 12.4 | ||||||
|
Loans and debt securities not in workout status
|
||||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned
|
31.0 | 21.4 | ||||||
|
Companies 5% to 25% owned
|
12.3 | 13.4 | ||||||
|
Companies less than 5% owned
|
11.7 | 13.3 | ||||||
|
Commercial real estate finance
|
1.5 | 1.9 | ||||||
|
Total
|
$ | 150.7 | $212.0 | |||||
|
Percentage of total portfolio
|
3.3 | % | 4.4 | % | ||||
| (1) | Workout loans and debt securities exclude equity securities that are included in the total Grade 4 and 5 assets above. |
At March 31, 2008, and December 31, 2007, our
Class A equity interests in Ciena of $29.3 million and
$68.6 million, respectively, which represented 0.6% and
1.4% of the total portfolio at value, respectively, were
included in private finance
non-accruals.
At March 31, 2008, and December 31, 2007, these
Class A equity interests were classified as Grade 5 and
Grade 4, respectively. See “— Private
Finance — Ciena Capital LLC” above.
Loans and Debt Securities Over 90 Days
Delinquent. Loans and debt securities greater
than 90 days delinquent at value at March 31, 2008,
and December 31, 2007, were as follows:
| ($ in millions) |
2008
|
2007
|
||||||
|
Private finance
|
$54.0 | $139.9 | ||||||
|
Commercial mortgage loans
|
15.4 | 9.2 | ||||||
|
Total
|
$69.4 | $149.1 | ||||||
|
Percentage of total portfolio
|
1.5 | % | 3.1 | % | ||||
Loans and debt securities over 90 days delinquent include
our investment in the Class A equity interests of Ciena,
which became over 90 days delinquent in the first quarter
of 2007. At March 31, 2008, and December 31, 2007, the
Class A equity interests were $29.3 million or 0.6% of
the total portfolio at value and $68.6 million or 1.4% of
the total portfolio at value, respectively. These equity
interests were placed on
non-accrual
during the fourth quarter of 2006. See “— Private
Finance, Ciena Capital, LLC” above.
The amount of the portfolio that is on non-accrual status or
greater than 90 days delinquent may vary from period to
period. Loans and debt securities on non-accrual status and over
90 days delinquent should not be added together as they are
two separate measures of portfolio asset quality. Loans and debt
securities that are in both categories (i.e., on non-accrual
status and over 90 days delinquent) totaled
$55.5 million and $149.1 million at March 31,
2008, and December 31, 2007, respectively.
PORTFOLIO
RETURNS
Since our merger on December 31, 1997, through
March 31, 2008, our combined aggregate cash flow internal
rate of return, or IRR, has been approximately 21% for private
finance and real estate-related CMBS/CDO
87
investments exited during this
period. The IRR is calculated using the aggregate portfolio cash
flow for all investments exited over this period. For
investments exited during this period, we invested capital
totaling $4.7 billion. The weighted average holding period
of these investments was 39 months. Investments are
considered to be exited when the original investment objective
has been achieved through the receipt of cash and/or non-cash
consideration upon the repayment of our debt investment or sale
of an equity investment, or through the determination that no
further consideration was collectible and, thus, a loss may have
been realized. The aggregate cash flow IRR for private finance
investments was approximately 20% and for CMBS/CDO investments
was approximately 24% for the same period. The weighted average
holding period of the private finance and CMBS/CDO investments
was 49 months and 22 months, respectively, for the
same period. These IRR results represent historical results.
Historical results are not necessarily indicative of future
results.
OTHER ASSETS AND
OTHER LIABILITIES
Other assets is primarily composed of fixed assets, prepaid
expenses, deferred financing and offering costs, and accounts
receivable, which includes amounts received in connection with
the sale of portfolio companies, including amounts held in
escrow, and other receivables from portfolio companies. At
March 31, 2008, and December 31, 2007, other assets
totaled $171.3 million and $157.9 million,
respectively. The increase in other assets since year end 2007
was primarily the result of an increase in accounts receivable
due to $32.4 million in consideration received in connection
with the sale of investments, which was received in cash in
April 2008, partially offset by the March 2008 distribution
of the assets held in deferred compensation trusts, which
totaled $21.1 million at December 31, 2007.
Accounts payable and other liabilities is primarily composed of
the liabilities related to accrued interest, bonus and taxes,
including excise tax. At March 31, 2008, and
December 31, 2007, accounts payable and other liabilities
totaled $62.3 million and $153.3 million,
respectively. The decrease in accounts payable and other
liabilities since year end 2007 was primarily the result of the
termination of the deferred compensation plans in March 2008,
the liability for which totaled $52.5 million at
December 31, 2007. In addition, accounts payable and other
liabilities were reduced by the payment of liabilities at
December 31, 2007, related to accrued 2007 bonuses of
$40.1 million and excise tax of $16.0 million, offset
by increases in the first quarter of 2008 related to accrued
bonuses and excise tax totaling $12.6 million and interest
payable totaling $11.5 million. Accrued interest payable
fluctuates from period to period depending on the amount of debt
outstanding and the contractual payment dates of the interest on
such debt.
88
RESULTS OF
OPERATIONS
Comparison of the
Three Months Ended March 31, 2008 and 2007
The following table summarizes our operating results for the
three months ended March 31, 2008 and 2007.
|
For the Three Months |
||||||||||||||||
| Ended March 31, |
Percent |
|||||||||||||||
| (in thousands, except per share amounts) | 2008 | 2007 | Change | Change | ||||||||||||
|
(unaudited) |
||||||||||||||||
| Interest and Related Portfolio Income | ||||||||||||||||
|
Interest and dividends
|
$ | 134,660 | $ | 101,983 | $ | 32,677 | 32 | % | ||||||||
|
Fees and other income
|
10,284 | 5,969 | 4,315 | 72 | % | |||||||||||
|
Total interest and related portfolio income
|
144,944 | 107,952 | 36,992 | 34 | % | |||||||||||
|
Expenses
|
||||||||||||||||
|
Interest
|
37,560 | 30,288 | 7,272 | 24 | % | |||||||||||
|
Employee
|
22,652 | 21,928 | 724 | 3 | % | |||||||||||
|
Employee stock options
|
4,195 | 3,661 | 534 | 15 | % | |||||||||||
|
Administrative
|
9,019 | 13,224 | (4,205 | ) | (32 | )% | ||||||||||
|
Total operating expenses
|
73,426 | 69,101 | 4,325 | 6 | % | |||||||||||
|
Net investment income before income taxes
|
71,518 | 38,851 | 32,667 | 84 | % | |||||||||||
|
Income tax expense (benefit), including excise tax
|
1,969 | (649 | ) | 2,618 | 403 | % | ||||||||||
|
Net investment income
|
69,549 | 39,500 | 30,049 | 76 | % | |||||||||||
|
Net Realized and Unrealized Gains (Losses)
|
||||||||||||||||
|
Net realized gains
|
3,143 | 27,666 | (24,523 | ) | * | |||||||||||
|
Net change in unrealized appreciation or depreciation
|
(113,404 | ) | 65,920 | (179,324 | ) | * | ||||||||||
|
Total net gains (losses)
|
(110,261 | ) | 93,586 | (203,847 | ) | * | ||||||||||
|
Net income
|
$ | (40,712 | ) | $ | 133,086 | $ | (173,798 | ) | (131 | )% | ||||||
|
Diluted earnings per common share
|
$ | (0.25 | ) | $ | 0.87 | $ | (1.12 | ) | (129 | )% | ||||||
|
Weighted average common shares outstanding — diluted
|
161,507 | 152,827 | 8,686 | 6 | % | |||||||||||
| * | Net change in unrealized appreciation or depreciation and net gains (losses) can fluctuate significantly from period to period. As a result, comparisons may not be meaningful. |
89
Total Interest and Related Portfolio Income. Total
interest and related portfolio income includes interest and
dividend income and fees and other income.
Interest and Dividends. Interest and dividend income for
the three months ended March 31, 2008 and 2007, was
composed of the following:
| ($ in millions) | 2008 | 2007 | ||||
|
Interest
|
||||||
|
Private finance loans and debt securities
|
$ | 107.0 | $ | 92.9 | ||
|
Preferred shares/income notes of CLOs
|
7.5 | 3.7 | ||||
|
Subordinated certificates in Unitranche Fund LLC
|
0.3 | — | ||||
|
Commercial mortgage loans
|
1.2 | 1.3 | ||||
|
Cash, U.S. Treasury bills, money market and other securities
|
1.8 | 2.8 | ||||
|
Total interest
|
117.8 | 100.7 | ||||
|
Dividends
|
16.9 | 1.3 | ||||
|
Total interest and dividends
|
$ | 134.7 | $ | 102.0 | ||
The level of interest income, which includes interest paid in
cash and in kind, is directly related to the balance of the
interest-bearing investment portfolio outstanding during the
period multiplied by the weighted average yield. The
interest-bearing investments in the portfolio at value and the
yield on the interest-bearing investments in the portfolio at
March 31, 2008 and 2007, were as follows:
| 2008 | 2007 | |||||||||||
|
($ in millions)
|
Value | Yield(1) | Value | Yield(1) | ||||||||
|
Loans and debt securities:
|
||||||||||||
|
Private finance
|
$3,411.8 | 12.2 | % | $3,091.3 | 11.7 | % | ||||||
|
Commercial mortgage loans
|
53.5 | 7.9 | % | 72.2 | 7.5 | % | ||||||
|
Total loans and debt securities
|
3,465.3 | 12.1 | % | $3,163.5 | 11.6 | % | ||||||
|
Equity securities:
|
||||||||||||
|
Preferred shares/income notes of CLOs
|
197.4 | 15.8 | % | 96.1 | 13.5 | % | ||||||
|
Subordinated certificates in Unitranche Fund LLC
|
31.5 | 12.4 | % | — | — | |||||||
|
Total
|
$3,694.2 | 12.3 | % | $3,259.6 | 11.7 | % | ||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total interest-bearing investments at value. |
The weighted average yield on the
preferred shares/income notes of CLOs is calculated as the
(a) effective interest yield on the preferred shares/income
notes of CLOs, divided by (b) preferred shares/income notes
of CLOs at value.
The weighted average yield on the
subordinated certificates in the Unitranche Fund LLC is
computed as the (a) annual stated interest (LIBOR plus
7.5%) divided by (b) total investment at value.
The weighted average yields are
computed as of the balance sheet date.
Our interest income from our private finance loans and debt
securities has increased period over period primarily as a
result of the growth in this portfolio. The private finance loan
and debt securities portfolio yield at March 31, 2008, of
12.2% as compared to the private finance portfolio yield of
11.7% at March 31, 2007, reflects the mix of debt
investments in the private finance loan and debt securities
portfolio. The weighted average yield varies from period to
period based on the current stated interest on loans and debt
securities and the amount of loans and debt securities for which
interest is not accruing. See the discussion of the private
finance portfolio yield above under the caption
“— Portfolio and Investment Activity —
Private Finance.”
Interest income also includes the effective interest yield on
our investments in the preferred shares/income notes of CLOs.
Interest income from these investments has increased period over
period primarily as a result of the growth
90
in these assets. The weighted average yield on the preferred
shares/income notes of the CLOs at March 31, 2008, was
15.8%, as compared to the weighted average yield on the
preferred shares/income notes of the CLOs of 13.5% at
March 31, 2007.
The value and weighted average yield of the cash, U.S. Treasury
bills, money market and other securities was $201.6 million
and 1.5%, respectively, at March 31, 2008, and
$271.5 million and 5.3%, respectively, at March 31,
2007. See “Financial Condition, Liquidity and Capital
Resources” below.
Dividend income results from the dividend yield on preferred
equity interests, if any, or the declaration of dividends by a
portfolio company on preferred or common equity interests.
Dividend income for the three months ended March 31, 2008,
was $16.9 million as compared to $1.3 million for the
three months ended March 31, 2007. The increase period over
period was primarily a result of a $7.1 million dividend
received in connection with the recapitalization of Norwesco,
Inc., a portfolio company, and $5.5 million of dividends
paid in cash in connection with the sale to AGILE Fund I, LLC
during the first quarter of 2008. See “Portfolio and
Investment Activity — Managed Funds” above.
Dividend income will vary from period to period depending upon
the timing and amount of dividends that are declared or paid by
a portfolio company on preferred or common equity interests.
Fees and Other Income. Fees and other income
primarily include fees related to financial structuring,
diligence, transaction services, management and consulting
services to portfolio companies and managed funds, commitments,
guarantees, and other services and loan prepayment premiums. As
a business development company, we are required to make
significant managerial assistance available to the companies in
our investment portfolio. Managerial assistance includes, but is
not limited to, management and consulting services related to
corporate finance, marketing, human resources, personnel and
board member recruiting, business operations, corporate
governance, risk management and other general business matters.
Fees and other income for the three months ended March 31,
2008 and 2007, included fees relating to the following:
| ($ in millions) | 2008 | 2007 | ||||||
|
Structuring and diligence
|
$5.1 | $1.8 | ||||||
|
Management, consulting and other services provided to portfolio
companies
|
2.9 | 1.8 | ||||||
|
Commitment, guaranty and other fees from portfolio
companies(1)
|
1.7 | 2.0 | ||||||
|
Fund management
fees(2)
|
0.6 | — | ||||||
|
Loan prepayment premiums
|
— | 0.3 | ||||||
|
Other income
|
— | 0.1 | ||||||
|
Total fees and other income
|
$10.3 | $ 6.0 | ||||||
| (1) | Includes guaranty and other fees from Ciena of $1.4 million for 2007. See “— Private Finance, Ciena Capital, LLC” above. |
| (2) | See “Portfolio and Investment Activity — Managed Funds” above. |
Fees and other income are generally related to specific
transactions or services and therefore may vary substantially
from period to period depending on the level of investment
activity and types of services provided and the level of assets
in managed funds for which we earn management or other fees.
Loan origination fees that represent yield enhancement on a loan
are capitalized and amortized into interest income over the life
of the loan.
Structuring and diligence fees primarily relate to the level of
new investment originations. Private finance investments funded
were $274.6 million for the three months ended
March 31, 2008, as compared to $170.2 million for the
three months ended March 31, 2007. Structuring and
diligence fees for the three months ended March 31, 2008,
included $1.8 million earned by us in connection with
investments made by the Unitranche Fund, LLC.
While the scheduled maturities of private finance and commercial
real estate loans generally range from five to ten years, it is
not unusual for our borrowers to refinance or pay off their
debts to us ahead of schedule. Therefore, we generally structure
our loans to require a prepayment premium for the first three to
five years of the loan.
91
Accordingly, the amount of prepayment premiums will vary
depending on the level of repayments and the age of the loans at
the time of repayment.
See “— Portfolio and Investment Activity”
above for further information regarding our total interest
related portfolio income for Ciena and Mercury.
Operating Expenses. Operating expenses
include interest, employee, employee stock options, and
administrative expenses.
Interest Expense. The fluctuations in interest
expense during the three months ended March 31, 2008 and
2007, were primarily attributable to changes in the level of our
borrowings under various notes payable and our revolving line of
credit. Our borrowing activity and weighted average cost of
debt, including fees and debt financing costs, at and for the
three months ended March 31, 2008 and 2007, were as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Total outstanding debt
|
$ | 2,191.6 | $ | 1,891.5 | ||||
|
Average outstanding debt
|
$ | 2,209.5 | $ | 1,841.2 | ||||
|
Weighted average
cost(1)
|
6.2% | 6.5% | ||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest rate on the debt plus the annual amortization of commitment fees, other facility fees and debt financing costs that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
In addition, interest expense included interest paid to the
Internal Revenue Service related to installment sale gains
totaling $1.9 million and $0.3 million for the three
months ended March 31, 2008 and 2007, respectively.
Installment interest expense for the year ended
December 31, 2008, is estimated to be a total of
$7.7 million. See “Dividends and Distributions”
below.
Employee Expense. Employee expenses for the
three months ended March 31, 2008 and 2007, were as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Salaries and employee benefits
|
$ | 22.7 | $ | 21.4 | ||||
|
Individual performance award (IPA)
|
2.4 | 2.5 | ||||||
|
IPA mark to market expense (benefit)
|
(4.1 | ) | (4.0 | ) | ||||
|
Individual performance bonus (IPB)
|
1.7 | 2.0 | ||||||
|
Total employee
expense(1)
|
$ | 22.7 | $ | 21.9 | ||||
|
Number of employees at end of period
|
186 | 170 | ||||||
| (1) | Excludes stock options expense. See below. |
The change in salaries and employee benefits reflects the effect
of an increase in the number of employees, compensation
increases, and the change in mix of employees given their area
of responsibility and relevant experience level. Salaries and
employee benefits include an accrual for employee bonuses, which
are generally paid annually after the completion of the fiscal
year. The quarterly accrual is based upon an estimate of annual
bonuses and is subject to change. The amount of the current year
bonuses will be finalized by the Compensation Committee and the
Board of Directors at the end of the year. Salaries and employee
benefits included accrued bonuses of $10.3 million and
$10.4 million for the three months ended March 31,
2008 and 2007, respectively.
The IPA is an incentive compensation program for certain
officers and is generally determined annually at the beginning
of each year but may be adjusted throughout the year. Through
December 31, 2007, the IPA was deposited in a deferred
compensation trust in four equal installments, generally on a
quarterly basis, in the form of cash. The trustee was required
to use the cash to purchase shares of our common stock in the
open market.
92
Through December 31, 2007, the IPA amounts were contributed
into the trust and invested in our common stock. The accounts of
the trust were consolidated with our accounts. The common stock
was classified as common stock held in deferred compensation
trust in the accompanying financial statements and the deferred
compensation obligation, which represented the amount owed to
the employees, was included in other liabilities. Changes in the
value of our common stock held in the deferred compensation
trust were not recognized. However, the liability was marked to
market with a corresponding charge or credit to employee
compensation expense. On March 18, 2008, prior to the
distribution of the assets held in the trust, we were required
to record a final mark to market of the liability with a
corresponding credit to employee compensation expense.
In December 2007, our Board of Directors made a determination
that it was in Allied Capital’s best interest to terminate
our deferred compensation arrangements. The Board of
Directors’ decision was primarily in response to increased
complexity resulting from recent changes in the regulation of
deferred compensation arrangements. The Board of Directors
resolved that the accounts under these Plans would be
distributed to participants in full on March 18, 2008, the
termination and distribution date, or as soon as was reasonably
practicable thereafter, in accordance with the provisions of
each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination
date, in accordance with the transition rule for payment
elections under Section 409A of the Code. Distributions
from the plans were made in cash or shares of our common stock,
net of required withholding taxes. The distribution of the
accounts under the deferred compensation arrangements will
result in a tax deduction for 2008, subject to the limitations
set by Section 162(m) of the Code for persons subject to such
section.
The IPB is distributed in cash to award recipients throughout
the year (beginning in February of each respective year) as long
as the recipient remains employed by us.
The Compensation Committee and the Board of Directors have
determined the IPA and the IPB for 2008 and they are currently
estimated to be approximately $9.5 million each; however,
the Compensation Committee may adjust the IPA or IPB as needed,
or make new awards as new officers are hired. For 2008, the
Compensation Committee has determined that the IPAs will be paid
in cash in two equal installments during the year, as long as
the recipient remains employed by us. If a recipient terminates
employment during the year, any further cash contribution for
the IPA or remaining cash payments under the IPB would be
forfeited.
Stock Options Expense. Effective
January 1, 2006, we adopted FASB Statement No. 123
(Revised 2004), Share-Based Payment (SFAS 123R)
using the modified prospective method of application, which
required us to recognize compensation costs on a prospective
basis beginning January 1, 2006. Under this method, the
unamortized cost of previously awarded options that were
unvested as of January 1, 2006, is recognized over the
remaining service period in the statement of operations
beginning in 2006, using the fair value amounts determined for
proforma disclosure under SFAS 123R. With respect to
options granted on or after January 1, 2006, compensation
cost based on estimated grant date fair value is recognized in
the consolidated statement of operations over the service
period. Our employee stock options are typically granted with
ratable vesting provisions, and we amortize the compensation
cost over the related service period.
On February 1, 2008, the Compensation Committee of our Board of
Directors granted 7.1 million options with an exercise
price of $22.96 per share. The options vest ratably over a
three-year period beginning on June 30, 2009.
The stock option expense for the three months ended
March 31, 2008 and 2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Employee Stock Option Expense:
|
||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$ | 1.7 | $ | 3.2 | ||||
|
Options granted on or after January 1, 2006
|
2.5 | 0.5 | ||||||
|
Total employee stock option expense
|
$ | 4.2 | $ | 3.7 | ||||
93
We estimate that the employee-related stock option expense for
outstanding unvested options as of March 31, 2008, will be
approximately $13.2 million, $6.8 million, and
$4.0 million for the years ended December 31, 2008,
2009, and 2010, respectively. This estimate may change if our
assumptions related to future option forfeitures change. This
estimate does not include any expense related to stock option
grants after March 31, 2008, as the fair value of those
stock options will be determined at the time of grant.
Administrative Expense. Administrative
expenses include legal and accounting fees, valuation assistance
fees, insurance premiums, the cost of leases for our
headquarters in Washington, DC, and our regional offices,
portfolio origination and development expenses, travel costs,
stock record expenses, directors’ fees and stock option
expense, and various other expenses.
Administrative expenses for the three months ended
March 31, 2008 and 2007, were $9.0 million and
$13.2 million, respectively. Administrative expenses
declined due to a reduction in investigation and litigation
costs, net of insurance reimbursements, of $3.8 million.
Administrative expenses for the three months ended
March 31, 2007, included costs of $1.4 million
incurred to engage a third party to conduct a review of
Ciena’s internal control systems. See
“— Private Finance, Ciena Capital LLC” above.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense (benefit) for the
three months ended March 31, 2008 and 2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Income tax expense (benefit)
|
$ | (0.3 | ) | $ | (4.2 | ) | ||
|
Excise tax
expense(1)
|
2.3 | 3.6 | ||||||
|
Income tax expense (benefit), including excise tax
|
$ | 2.0 | $ | (0.6 | ) | |||
| (1) | While excise tax expense is presented in the Consolidated Statement of Operations as a reduction to net investment income, excise tax relates to both net investment income and net realized gains. |
Our wholly-owned subsidiary, A.C. Corporation, is a
corporation subject to federal and state income taxes and
records a benefit or expense for income taxes as appropriate
based on its operating results in a given period.
Our excess taxable income carried over from 2007 plus our
estimated annual taxable income for 2008 currently exceeds our
estimated dividend distributions to shareholders in 2008,
therefore, we expect to carry over excess taxable income earned
in 2008 for distribution in 2009. Therefore, we will generally
be required to pay an excise tax equal to 4% of the amount by
which 98% of our annual taxable income exceeds the distributions
for the year. We have recorded an estimated excise tax of
$2.3 million for the three months ended March 31,
2008. See “Dividends and Distributions.”
Realized Gains and Losses. Net realized
gains primarily result from the sale of equity securities
associated with certain private finance investments and the
realization of unamortized discount resulting from the sale and
early repayment of private finance loans and commercial mortgage
loans, offset by losses on investments. Net realized gains for
the three months ended March 31, 2008 and 2007, were as
follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Realized gains
|
$ | 32.7 | $ | 33.2 | ||||
|
Realized losses
|
(29.6 | ) | (5.5 | ) | ||||
|
Net realized gains
|
$ | 3.1 | $ | 27.7 | ||||
The realized gains and losses for the three months ended
March 31, 2008, were primarily a result of the sale to
AGILE Fund I, LLC. The net realized gain from this transaction
totaled $8.8 million. In addition, realized losses for the
quarter included $5.5 million related to the sale of the
venture capital and private equity limited partnership
investments to a fund managed by Goldman Sachs. See “—
Managed Funds” above.
94
When we exit an investment and realize a gain or loss, we make
an accounting entry to reverse any unrealized appreciation or
depreciation, respectively, we had previously recorded to
reflect the appreciated or depreciated value of the investment.
For the three months ended March 31, 2008 and 2007, we
reversed previously recorded unrealized appreciation or
depreciation when gains or losses were realized as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Reversal of previously recorded net unrealized appreciation
associated with realized gains
|
$ | (32.5 | ) | $ | (32.1 | ) | ||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(13.5 | ) | — | |||||
|
Reversal of previously recorded net unrealized depreciation
associated with realized losses
|
28.5 | 5.8 | ||||||
|
Total reversal
|
$ | (17.5 | ) | $ | (26.3 | ) | ||
Realized gains for the three months ended March 31, 2008
and 2007, were as follows:
($ in
millions)
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Norwesco, Inc.
|
$ | 10.7 | ||
|
BenefitMall, Inc.
|
4.9 | |||
|
Financial Pacific Company
|
3.1 | |||
|
Penn Detroit Diesel Allison, LLC
|
1.7 | |||
|
Service Champ, Inc.
|
1.7 | |||
|
Advantage Sales & Marketing,
Inc.(1)
|
3.2 | |||
|
Coverall North America, Inc.
|
1.4 | |||
|
CR Holding, Inc.
|
1.0 | |||
|
Other
|
4.9 | |||
|
Total private finance
|
32.6 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.1 | |||
|
Total commercial real estate
|
0.1 | |||
|
Total realized gains
|
$ | 32.7 | ||
| 2007 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Palm Coast Data, LLC
|
$ | 20.0 | ||
|
Mogas Energy, LLC
|
4.5 | |||
|
Tradesmen International, Inc.
|
3.8 | |||
|
ForeSite Towers, LLC
|
3.8 | |||
|
Other
|
1.1 | |||
|
Total realized gains
|
$ | 33.2 | ||
(1) Includes
an additional realized gain of $1.7 million related to the
release of escrowed funds from the sale of our majority equity
investment in 2006.
95
Realized losses for the three months ended March 31, 2008
and 2007, were as follows:
($ in
millions)
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Crescent Equity Corp. — Longview Cable &
Data, LLC
|
$ | 8.4 | ||
|
Mid-Atlantic Venture Fund IV, L.P.
|
5.2 | |||
|
WMA Equity Corporation and Affiliates
|
4.5 | |||
|
Driven Brands, Inc.
|
1.9 | |||
|
Direct Capital Corporation
|
1.7 | |||
|
EarthColor, Inc.
|
1.7 | |||
|
Sweet Traditions, Inc.
|
1.0 | |||
|
Other
|
4.9 | |||
|
Total private finance
|
29.3 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.3 | |||
|
Total commercial real estate
|
0.3 | |||
|
Total realized losses
|
$ | 29.6 | ||
| 2007 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Legacy Partners Group, LLC
|
$ | 5.8 | ||
|
Other
|
(0.3 | ) | ||
|
Total realized losses
|
$ | 5.5 | ||
Change in Unrealized Appreciation or
Depreciation. We determine the value of each
investment in our portfolio on a quarterly basis, and changes in
value result in unrealized appreciation or depreciation being
recognized in our statement of operations. Value, as defined in
Section 2(a)(41) of the Investment Company Act of 1940
(1940 Act), is (i) the market price for those securities
for which a market quotation is readily available and
(ii) for all other securities and assets, fair value is as
determined in good faith by the Board of Directors. Since there
is typically no readily available market value for the
investments in our portfolio, we value substantially all of our
portfolio investments at fair value as determined in good faith
by the Board of Directors in accordance with our valuation
policy and the provisions of the 1940 Act and FASB Statement
No. 157, Fair Value Measurements (SFAS 157 or
the Statement). We determine fair value to be the price that
would be received for an investment in a current sale, which
assumes an orderly transaction between market participants on
the measurement date. At March 31, 2008, portfolio
investments recorded at fair value using level 3 inputs (as
defined under the Statement) were approximately 91% of our total
assets. Because of the inherent uncertainty of determining the
fair value of investments that do not have a readily available
market quotation in an active market, the fair value of our
investments determined in good faith by the Board of Directors
may differ significantly from the values that would have been
used had a ready market existed for the investments, and the
differences could be material.
There is no single approach for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. Unlike
banks, we are not permitted to provide a general reserve for
anticipated loan losses. Instead, we are required to
specifically value each individual investment on a quarterly
basis. We will record unrealized depreciation on investments
when we determine that the fair value of a security is less than
its cost basis, and we will record unrealized appreciation when
we determine that the fair value is greater than its cost basis.
Changes in fair value are recorded in the statement of
operations as net change in unrealized appreciation or
depreciation.
As a business development company, we invest in illiquid
securities including debt and equity securities of portfolio
companies, CLO bonds and preferred shares/income notes, CDO
bonds and investment funds. The structure of each debt and
equity security is specifically negotiated to enable us to
protect our investment and maximize our returns. We include many
terms governing interest rate, repayment terms, prepayment
penalties, financial covenants, operating covenants, ownership
parameters, dilution parameters, liquidation preferences, voting
96
rights, and put or call rights.
Our investments may be subject to certain restrictions on resale
and generally have no established trading market.
Because of the type of investments that we make and the nature
of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the
examination of, among other things, the underlying investment
performance, financial condition, and market changing events
that impact valuation.
Valuation Methodology. We adopted
SFAS 157 on a prospective basis in the first quarter of
2008. SFAS 157 requires us to assume that the portfolio
investment is assumed to be sold in the principal market to
market participants, or in the absence of a principal market,
the most advantageous market, which may be a hypothetical
market. Market participants are defined as buyers and sellers in
the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact. In accordance
with the Statement, we have considered our principal market, or
the market in which we exit our portfolio investments with the
greatest volume and level of activity.
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition
(“M&A”) market as the principal market generally
through a sale or recapitalization of the portfolio company. We
believe that the in-use premise of value (as defined in
SFAS 157), which assumes the debt and equity securities are
sold together, is appropriate as this would provide maximum
proceeds to the seller. As a result, we will continue to use the
enterprise value methodology to determine the fair value of
these investments under SFAS 157. Enterprise value means
the entire value of the company to a market participant,
including the sum of the values of debt and equity securities
used to capitalize the enterprise at a point in time. Enterprise
value is determined using various factors, including cash flow
from operations of the portfolio company, multiples at which
private companies are bought and sold, and other pertinent
factors, such as recent offers to purchase a portfolio company,
recent transactions involving the purchase or sale of the
portfolio company’s equity securities, liquidation events,
or other events. We allocate the enterprise value to these
securities in order of the legal priority of the securities.
There is no one methodology to determine enterprise value and,
in fact, for any one portfolio company, enterprise value is best
expressed as a range of fair values. However, we must derive a
single estimate of enterprise value. To determine the enterprise
value of a portfolio company, we analyze its historical and
projected financial results. This financial and other
information is generally obtained from the portfolio companies,
and may represent unaudited, projected or pro forma financial
information. We generally require portfolio companies to provide
annual audited and quarterly unaudited financial statements, as
well as annual projections for the upcoming fiscal year.
Typically in the private equity business, companies are bought
and sold based on multiples of EBITDA, cash flow, net income,
revenues or, in limited instances, book value. The private
equity industry uses financial measures such as EBITDA or
EBITDAM (Earnings Before Interest, Taxes, Depreciation,
Amortization and, in some instances, Management fees) in order
to assess a portfolio company’s financial performance and
to value a portfolio company. EBITDA and EBITDAM are not
intended to represent cash flow from operations as defined by
U.S. generally accepted accounting principles and such
information should not be considered as an alternative to net
income, cash flow from operations, or any other measure of
performance prescribed by U.S. generally accepted
accounting principles. When using EBITDA to determine enterprise
value, we may adjust EBITDA for non-recurring items. Such
adjustments are intended to normalize EBITDA to reflect the
portfolio company’s earnings power. Adjustments to EBITDA
may include compensation to previous owners, acquisition,
recapitalization, or restructuring related items or one-time
non-recurring income or expense items.
In determining a multiple to use for valuation purposes, we
generally look to private merger and acquisition statistics, the
entry multiple for the transaction, discounted public trading
multiples or industry practices. In estimating a reasonable
multiple, we consider not only the fact that our portfolio
company may be a private company relative to a peer group of
public comparables, but we also consider the size and scope of
our portfolio company and its specific strengths and weaknesses.
In some cases, the best valuation methodology may be a
discounted cash flow analysis based on future projections. If a
portfolio company is distressed, a liquidation analysis may
provide the best indication of enterprise value.
97
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into the principal market (the M&A market). As a
result, in accordance with SFAS 157, we are required to
determine the fair value of these investments assuming a sale of
the individual investment in a hypothetical market to a
hypothetical market participant (the in-exchange premise of
value). We continue to perform an enterprise value analysis for
investments in this category to assess the credit risk of the
loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. Our estimate of the
expected repayment date of a loan or debt security is generally
shorter than the legal maturity of the instruments as our loans
have historically been repaid prior to the maturity date. The
yield analysis considers changes in interest rates and changes
in leverage levels of the loan or debt security as compared to
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. A change in the assumptions that we use to
estimate the fair value of our loans and debt securities using
the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, we may
consider other factors in determining the fair value of a loan
or debt security, including the value attributable to the loan
or debt security from the enterprise value of the portfolio
company or the proceeds that would be received in a liquidation
analysis.
Our equity investments in private debt and equity funds are
generally valued at the fund’s net asset value, unless
other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO/CDO Assets is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment and loss assumptions based on historical
experience and projected performance, economic factors, the
characteristics of the underlying cash flow and comparable
yields for similar bonds and preferred shares/ income notes,
when available. We recognize unrealized appreciation or
depreciation on our CLO/CDO Assets as comparable yields in the
market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool. We determine the fair value of our CLO/CDO
Assets on an individual
security-by-security
basis. If we were to sell a group of these CLO/CDO Assets in a
pool in one or more transactions, the total value received for
that pool may be different than the sum of the fair values of
the individual assets.
We will record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and will record unrealized appreciation when we
determine that the fair value is greater than its cost basis.
Because of the inherent uncertainty of valuation, the values
determined at the measurement date may differ significantly from
the values that would have been used had a ready market existed
for the investments, and the differences could be material.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date.
As a participant in the private equity business, we invest
primarily in private middle market companies for which there is
generally no publicly available information. Because of the
private nature of these businesses, there is a need to maintain
the confidentiality of the financial and other information that
we have for the private companies in our portfolio. We believe
that maintaining this confidence is important, as disclosure of
such information could disadvantage our portfolio companies and
could put us at a disadvantage in attracting new investments.
Therefore, we do not
98
intend to disclose financial or other information about our
portfolio companies, unless required, because we believe doing
so may put them at an economic or competitive disadvantage,
regardless of our level of ownership or control.
We work with third-party consultants to obtain assistance in
determining fair value for a portion of the private finance
portfolio each quarter. We work with these consultants to obtain
assistance as additional support in the preparation of our
internal valuation analysis. In addition, we may receive
third-party assessments of a particular private finance
portfolio company’s value in the ordinary course of
business, most often in the context of a prospective sale
transaction or in the context of a bankruptcy process.
The valuation analysis prepared by management is submitted to
our Board of Directors who is ultimately responsible for the
determination of fair value of the portfolio in good faith.
Valuation assistance from Duff & Phelps, LLC
(Duff & Phelps) for our private finance portfolio
consisted of certain limited procedures (the Procedures) we
identified and requested them to perform. Based upon the
performance of the Procedures on a selection of our final
portfolio company valuations, Duff & Phelps concluded
that the fair value of those portfolio companies subjected to
the Procedures did not appear unreasonable. In addition, we also
received third-party valuation assistance from other third-party
consultants for certain private finance portfolio companies. For
the three months ended March 31, 2008 and 2007, we received
third-party valuation assistance as follows:
| 2008 | 2007 | |||||||
|
Number of private finance portfolio companies reviewed
|
124 | 88 | ||||||
|
Percentage of private finance portfolio reviewed at value
|
94.0 | % | 91.8 | % | ||||
Professional fees for third-party valuation assistance were
$1.8 million for the year ended December 31, 2007, and are
estimated to be approximately $2.3 million for 2008.
Net Change in Unrealized Appreciation or
Depreciation. Net change in unrealized
appreciation or depreciation for the three months ended
March 31, 2008 and 2007, consisted of the following:
| ($ in millions) | 2008(1) | 2007(1) | ||||||
|
Net unrealized appreciation (depreciation)
|
$ | (95.9 | ) | $ | 92.2 | |||
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
(32.5 | ) | (32.1 | ) | ||||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(13.5 | ) | — | |||||
|
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
28.5 | 5.8 | ||||||
|
Net change in unrealized appreciation or depreciation
|
$ | (113.4 | ) | $ | 65.9 | |||
| (1) | The net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful. |
The primary drivers of the net unrealized depreciation of
$95.9 million resulting from changes in portfolio value for
the quarter ended March 31, 2008, were (i) non-buyout
debt investments, which depreciated by $9.3 million as a
result of using a yield analysis in connection with the adoption
of SFAS 157, (ii) additional depreciation of
$39.3 million on our investment in Ciena resulting from the
decline in value of their residual interest assets and other
financial assets as discussed below, and (iii) depreciation
in our other financial services and asset management portfolio
companies, and our CLO/CDO investments, which totaled
$39.4 million.
Valuation of Ciena Capital LLC. Our
investment in Ciena totaled $327.8 million at cost and
$29.3 million at value, which included unrealized
depreciation of $298.5 million, at March 31, 2008, and
$327.8 million at cost and $68.6 million at value,
which included unrealized depreciation of $259.2 million,
at December 31, 2007.
Ciena relies on the asset-backed securitization market to
finance its loan origination activity. That financing source
continues to be unreliable in the current capital markets, and
as a result, Ciena has substantially curtailed loan origination
activity. To value our investment at March 31, 2008, we
continued to attribute no value to Ciena’s origination
platform or enterprise due to the state of the securitization
markets, among other factors. The decline in value at
March 31, 2008, of $39.3 million reflects the decline
in value of Ciena’s financial assets, including residual
interests, which reduced its book value. We valued our
investment in Ciena at March 31, 2008, solely based on the
99
estimated realizable value of Ciena’s net assets, including
the estimated realizable value of the cash flows generated from
Ciena’s retained interests in its current servicing
portfolio, which includes portfolio servicing fees as well as
cash flows from Ciena’s equity investments in its
securitizations and its interest-only strip. This resulted in a
value to our investment, after repayment of senior debt
outstanding, of $29.3 million at March 31, 2008.
We also continued to consider Ciena’s current regulatory
issues and ongoing investigations and litigation in performing
the valuation analysis at March 31, 2008. (See
“— Private Finance, Ciena Capital LLC”
above.)
Net change in unrealized appreciation or depreciation included a
net decrease of $39.3 million for the three months ended
March 31, 2008, and no change for the three months ended
March 31, 2007. We received valuation assistance from
Duff & Phelps for our investment in Ciena at
March 31, 2008 and 2007. See “Valuation
Methodology — Private Finance” above for further
discussion of the third-party valuation assistance we received.
Per Share Amounts. All per share
amounts included in the Management’s Discussion and
Analysis of Financial Condition and Results of Operations
section have been computed using the weighted average common
shares used to compute diluted earnings per share, which were
161.5 million and 152.8 million for the three months
ended March 31, 2008 and 2007, respectively.
OTHER
MATTERS
Regulated Investment Company Status. We
have elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the
Code). As long as we qualify as a regulated investment company,
we are not taxed on our investment company taxable income or
realized net capital gains, to the extent that such taxable
income or gains are distributed, or deemed to be distributed, to
shareholders on a timely basis.
Dividends are paid to shareholders from taxable income. Taxable
income generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the
recognition of income and expenses, and generally excludes net
unrealized appreciation or depreciation, as gains or losses are
not included in taxable income until they are realized. In
addition, gains realized for financial reporting purposes may
differ from gains included in taxable income as a result of our
election to recognize gains using installment sale treatment,
which generally results in the deferment of gains for tax
purposes until notes or other amounts, including amounts held in
escrow, received as consideration from the sale of investments
are collected in cash. See “Dividends and
Distributions” below.
Dividends declared and paid by us in a year generally differ
from taxable income for that year as such dividends may include
the distribution of current year taxable income, the
distribution of prior year taxable income carried over into and
distributed in the current year, or returns of capital. We are
generally required to distribute 98% of our taxable income
during the year the income is earned to avoid paying an excise
tax. If this requirement is not met, the Code imposes a
nondeductible excise tax equal to 4% of the amount by which 98%
of the current year’s taxable income exceeds the
distribution for the year from such taxable income. The taxable
income on which an excise tax is paid is generally carried over
and distributed to shareholders in the next tax year. Depending
on the level of taxable income earned in a tax year, we may
choose to carry over taxable income in excess of current year
distributions from such taxable income into the next tax year
and pay a 4% excise tax on such income, as required. See
“Dividends and Distributions” below.
In order to maintain our status as a regulated investment
company and obtain regulated investment company tax benefits, we
must, in general, (1) continue to qualify as a business
development company; (2) derive at least 90% of our gross
income from dividends, interest, gains from the sale of
securities and other specified types of income; (3) meet
asset diversification requirements as defined in the Code; and
(4) timely distribute to shareholders at least 90% of our
annual investment company taxable income as defined in the Code.
We intend to take all steps necessary to continue to qualify as
a regulated investment company. However, there can be no
assurance that we will continue to qualify for such treatment in
future years.
100
DIVIDENDS AND
DISTRIBUTIONS
Dividends to common shareholders for the three months ended
March 31, 2008 and 2007, were $108.1 million and
$95.8 million, respectively, or $0.65 per common share
for the first quarter of 2008 and $0.63 per common share
for the first quarter of 2007. An extra cash dividend of $0.05
per common share was declared during 2006 and was paid to
shareholders on January 19, 2007.
The Board of Directors has declared a dividend of $0.65 per
common share for the second quarter of 2008.
Our Board of Directors reviews the dividend rate quarterly, and
may adjust the quarterly dividend throughout the year. Dividends
are declared considering our estimate of annual taxable income
available for distribution to shareholders and the amount of
taxable income carried over from the prior year for distribution
in the current year. Our goal is to declare what we believe to
be sustainable increases in our regular quarterly dividends. To
the extent that we earn annual taxable income in excess of
dividends paid from such taxable income for the year, we may
carry over the excess taxable income into the next year and such
excess income will be available for distribution in the next
year as permitted under the Code (see discussion below). Such
income will be treated under the Code as having been distributed
during the prior year for purposes of our qualification for RIC
tax treatment for such year. The maximum amount of excess
taxable income that we may carry over for distribution in the
next year under the Code is the total amount of dividends paid
in the following year, subject to certain declaration and
payment guidelines. Excess taxable income carried over and paid
out in the next year is generally subject to a nondeductible 4%
excise tax. We believe that carrying over excess taxable income
into future periods may provide increased visibility with
respect to taxable earnings available to pay the regular
quarterly dividend.
Taxable income includes our taxable interest, dividend and fee
income, as well as taxable net capital gains. Taxable income
generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the
recognition of income and expenses, and generally excludes net
unrealized appreciation or depreciation, as gains or losses are
not included in taxable income until they are realized. In
addition, gains realized for financial reporting purposes may
differ from gains included in taxable income as a result of our
election to recognize gains using installment sale treatment,
which generally results in the deferment of gains for tax
purposes until notes or other amounts, including amounts held in
escrow, received as consideration from the sale of investments
are collected in cash. Taxable income includes non-cash income,
such as changes in accrued and reinvested interest and
dividends, which includes contractual payment-in-kind interest,
and the amortization of discounts and fees. Cash collections of
income resulting from contractual payment-in-kind interest or
the amortization of discounts and fees generally occur upon the
repayment of the loans or debt securities that include such
items. Non-cash taxable income is reduced by non-cash expenses,
such as realized losses and depreciation and amortization
expense.
Our estimated annual taxable income for 2007 exceeded our
dividend distributions to shareholders for 2007 from such
taxable income, and, therefore, we have carried over excess
taxable income, which is currently estimated to be
$403.1 million, for distribution to shareholders in 2008.
Estimated excess taxable income for 2007 represents
approximately $50.0 million of ordinary income and
approximately $353.1 million of net long-term capital
gains. Our taxable income for 2007 is an estimate and will not
be finally determined until we file our 2007 tax return in
September 2008. Therefore, the excess taxable income earned in
2007 and carried forward for distribution in 2008 may be
different than this estimate.
Dividends paid in 2008 will first be paid out of the excess
taxable income carried over from 2007. Given our regular
quarterly dividend payout, which for the first quarter of 2008
was $108.1 million, we expect that a majority of the 2008
dividend payments will be made from excess 2007 taxable
earnings. Given the significant amount of estimated excess
taxable income carried forward from 2007 for distribution in
2008, we currently expect that our excess taxable income carried
over from 2007 plus our estimated annual taxable income for 2008
will be in excess of our estimated dividend distributions to
shareholders in 2008, therefore, we expect to carry over excess
taxable income earned in 2008 for distribution to shareholders
in 2009. We expect that we will generally be required to pay a
4% excise tax on the excess of 98% of our taxable income for
2008 over the amount of actual distributions from
101
such taxable income in 2008. For the three months ended
March 31, 2008, we have recorded an excise tax of
$2.3 million. Excise taxes are accrued based upon estimated
excess taxable income as estimated taxable income is earned,
therefore, the excise tax accrued to date in 2008 may be
adjusted as appropriate in the remainder of 2008 to reflect
changes in our estimate of the carry over amount and additional
excise tax may be accrued during the remainder of 2008 as
additional excess taxable income is earned, if any. Our ability
to earn the estimated annual taxable income for 2008 depends on
many factors, including our ability to make new investments at
attractive yields, the level of repayments in the portfolio, the
realization of gains or losses from portfolio exits, and the
level of operating expenses incurred. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Risk
Factors.”
In addition, we currently estimate that we have cumulative
deferred taxable income related to installment sale gains of
approximately $234.5 million as of December 31, 2007. These
gains have been recognized for financial reporting purposes in
the respective years they were realized, but will be deferred
for tax purposes until the notes or other amounts received from
the sale of the related investments are collected in cash. The
installment sale gains for 2007 are estimates and will not be
finally determined until we file our 2007 tax return in
September 2008. See “Other Matters —
Regulated Investment Company Status” above.
To the extent that installment sale gains are deferred for
recognition in taxable income, we pay interest to the Internal
Revenue Service. Installment-related interest expense for the
three months ended March 31, 2008 and 2007, was
$1.9 million and $0.3 million, respectively. This
interest is included in interest expense in our Consolidated
Statement of Operations. See “— Results of
Operations” above.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008, and December 31, 2007, our cash,
U.S. Treasury bills, investments in money market and other
securities, total assets, total debt outstanding, total
shareholders’ equity, debt to equity ratio and asset
coverage for senior indebtedness were as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Cash, U.S. Treasury bills and investments in money market and
other securities (including U.S. treasury bills, money
market and other securities: 2008-$120.4; 2007-$201.2)
|
$ | 201.6 | $ | 204.8 | ||||
|
Total assets
|
$ | 5,082.2 | $ | 5,214.6 | ||||
|
Total debt outstanding
|
$ | 2,191.6 | $ | 2,289.5 | ||||
|
Total shareholders’ equity
|
$ | 2,828.4 | $ | 2,771.8 | ||||
|
Debt to equity ratio
|
0.77 | 0.83 | ||||||
|
Asset coverage
ratio(1)
|
229 | % | 221 | % | ||||
| (1) | As a business development company, we are generally required to maintain a minimum ratio of 200% of total assets to total borrowings. |
Cash generated from the portfolio includes cash flow from net
investment income and net realized gains and principal
collections related to investment repayments or sales. Cash flow
provided by our operating activities before new investment
activity for the three months ended March 31, 2008 and
2007, was as follows:
| ($ in millions) | 2008 | 2007 | ||||||
|
Net cash provided by operating activities
|
$ | 111.3 | $ | 19.4 | ||||
|
Add: portfolio investments funded
|
275.1 | 170.2 | ||||||
|
Total cash provided by operating activities before new
investments
|
$ | 386.4 | $ | 189.6 | ||||
In addition to the net cash flow provided by our operating
activities before funding investments, we have sources of
liquidity through our cash, U.S. Treasury bills, investments in
money market and other securities and revolving line of credit
as discussed below.
102
At March 31, 2008, and December 31, 2007, the value
and yield of the cash, U.S. Treasury bills, investments in money
market and other securities were as follows:
| 2008 | 2007 | |||||||||||||||
| ($ in millions) | Value | Yield | Value | Yield | ||||||||||||
|
U.S. Treasury
bills(1)
|
$ | 120.0 | 1.6 | % | — | — | ||||||||||
|
Money market securities
|
0.4 | 3.2 | % | 201.2 | 4.6 | % | ||||||||||
|
Cash
|
81.2 | 1.5 | % | 3.6 | 2.9 | % | ||||||||||
|
Total
|
$ | 201.6 | 1.5 | % | $ | 204.8 | 4.6 | % | ||||||||
| (1) | The Treasury bills matured in April 2008. We reinvested the proceeds from the matured Treasury bills in short-term Treasury bills of $100 million and cash of $20 million. |
We maintain this pool of liquid assets within our balance sheet
given that our investment portfolio is primarily composed of
private, illiquid assets for which there is no readily available
market. We assess the amount held in and the composition of
these investments throughout the year. As the capital markets
became increasingly uncertain in March 2008, we moved our
liquidity portfolio entirely into cash and very short-term
treasuries.
We invest 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 securities. We place our cash with financial
institutions and, at times, cash held in checking accounts in
financial institutions may be in excess of the Federal Deposit
Insurance Corporation insured limit.
We employ an asset-liability management approach that focuses on
matching the estimated maturities of our investment portfolio to
the estimated maturities of our borrowings. We use our revolving
line of credit facility as a means to finance our business
pending long-term financing in the form of debt or equity
capital, which may or may not result in temporary differences in
the matching of estimated maturities. We evaluate our interest
rate exposure on an ongoing basis. Generally, we seek to fund
our primarily fixed-rate debt portfolio and our equity portfolio
with fixed-rate debt or equity capital. To the extent deemed
necessary, we may hedge variable and short-term interest rate
exposure through interest rate swaps or other techniques.
During the three months ended March 31, 2008 and 2007, and
the year ended December 31, 2007, we sold new equity of
$170.9 million, $93.8 million, and
$171.3 million, respectively, in public offerings. In
addition, shareholders’ equity increased through capital
share transactions by $3.9 million, $5.8 million, and
$31.5 million through the exercise of stock options, the
collection of notes receivable from the sale of common stock,
and the issuance of shares through our dividend reinvestment
plan for the three months ended March 31, 2008 and 2007,
and the year ended December 31, 2007, respectively. In
addition, shareholders’ equity increased by
$26.4 million during the three months ended March 31,
2008, as a result of the distribution of the common stock held
in deferred compensation trusts. See Note 8, “Employee
Compensation Plans” from our Notes to Consolidated
Financial Statements included in Item 1.
We generally target a debt to equity ratio ranging between
0.50:1.00 to 0.70:1.00 because we believe that it is prudent to
operate with a larger equity capital base and less leverage. At
March 31, 2008, our debt to equity ratio net of cash,
U.S. Treasury bills and other securities was 0.70:1.00. In
April 2008, we completed a public offering of
3.2 million shares of common stock for net proceeds, after
the underwriting discount and estimated offering expenses, of
$56.3 million.
103
At March 31, 2008, and December 31, 2007, we had
outstanding debt as follows:
| 2008 | 2007 | |||||||||||||||||||||||
|
Annual |
Annual |
|||||||||||||||||||||||
|
Facility |
Amount |
Interest |
Facility |
Amount |
Interest |
|||||||||||||||||||
| ($ in millions) | Amount | Outstanding | Cost(1) | Amount | Outstanding | Cost(1) | ||||||||||||||||||
|
Notes payable and debentures:
|
||||||||||||||||||||||||
|
Privately issued unsecured notes payable
|
$ | 1,042.8 | $1,042.8 | 6.1% | $ | 1,042.2 | $ | 1,042.2 | 6.1% | |||||||||||||||
|
Publicly issued unsecured notes payable
|
880.0 | 880.0 | 6.7% | 880.0 | 880.0 | 6.7% | ||||||||||||||||||
|
Total notes payable and debentures
|
1,922.8 | 1,922.8 | 6.4% | 1,922.2 | 1,922.2 | 6.4% | ||||||||||||||||||
|
Revolving line of credit
|
922.5 | 268.8 | (4) | 3.8% | (2) | 922.5 | 367.3 | 5.9% | (2) | |||||||||||||||
|
Total debt
|
$ | 2,845.3 | $2,191.6 | 6.2% | (3) | $ | 2,844.7 | $ | 2,289.5 | 6.5% | (3) | |||||||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus the annual amortization of commitment fees, other facility fees and the amortization of debt financing costs that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date. |
| (2) | The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest rate payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $3.7 million at both March 31, 2008, and December 31, 2007. |
| (3) | The annual interest cost for total debt includes the annual cost of commitment fees and the amortization of debt financing costs on the revolving line of credit and other facility fees regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date. |
| (4) | On April 9, 2008, we entered into a three-year unsecured revolving line of credit with total commitments of $632.5 million, which replaced our previous line of credit. Under this new revolving line of credit, in addition to the current interest rate payable, the annual costs of commitment fees, other facility fees and amortization of debt financing costs will be approximately $6.7 million. See discussion below. |
Privately Issued Unsecured
Notes Payable. We have privately issued
unsecured long-term notes to institutional investors, primarily
insurance companies. The notes have five- or seven-year
maturities and fixed rates of interest. The notes generally
require payment of interest only semi-annually, and all
principal is due upon maturity. At March 31, 2008, the notes had
maturities from May 2008 to May 2013. The notes may be
prepaid in whole or in part, together with an interest premium,
as stipulated in the note agreements.
We have issued five-year unsecured long-term notes denominated
in Euros and Sterling for a total U.S. dollar equivalent of
$15.2 million. The notes have fixed interest rates and have
substantially the same terms as our other unsecured notes. The
Euro notes require annual interest payments and the Sterling
notes require semi-annual interest payments until maturity.
These notes mature in March 2009. Simultaneous with issuing
the notes, we entered into a cross currency swap with a
financial institution which fixed our interest and principal
payments in U.S. dollars for the life of the debt.
Publicly Issued Unsecured Notes
Payable. At March 31, 2008, we had
outstanding publicly issued unsecured notes as follows:
| ($ in millions) | Amount | Maturity Date | ||||||
|
6.625% Notes due 2011
|
$ | 400.0 | July 15, 2011 | |||||
|
6.000% Notes due 2012
|
250.0 | April 1, 2012 | ||||||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||||||
|
Total
|
$ | 880.0 | ||||||
The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require
payment of interest only semi-annually, and all principal is due
upon maturity. We have the option to redeem these notes in whole
or in part, together with a redemption premium, as stipulated in
the notes.
On March 28, 2007, we completed the issuance of $200.0 million
of 6.875% Notes due 2047 for net proceeds of
$193.0 million. In April 2007, we issued additional notes,
through an over-allotment option, totaling $30.0 million
for net proceeds of $29.1 million. Net proceeds are net of
underwriting discounts and estimated offering expenses. The
notes are listed on the New York Stock Exchange under the
trading symbol AFC.
104
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. We may redeem
these notes in whole or in part at any time or from time to time
on or after April 15, 2012, at par and upon the occurrence
of certain tax events as stipulated in the notes.
Revolving Line of Credit. At
December 31, 2007, we had an unsecured revolving line of
credit with a committed amount of $922.5 million that was
scheduled to expire on September 30, 2008. On April 9,
2008, we entered into a three-year unsecured revolving line of
credit with total commitments of $632.5 million, with Bank
of America, N.A., as a lender and as administrative agent, and
the other lenders thereunder, which replaced our previous
revolving line of credit. We may obtain additional commitments
up to a total committed facility of $1.5 billion, subject
to customary conditions. The revolving line of credit expires
on April 11, 2011.
At our option, borrowings under the revolving line of credit
effective April 9, 2008, generally bear interest at a rate
per annum equal to (i) LIBOR (for the period selected by us)
plus 2.00% or (ii) the higher of the Federal Funds rate
plus 0.50% or the Bank of America N.A. prime rate. The
revolving line of credit requires the payment of an annual
commitment fee equal to 0.50% of the committed amount (whether
used or unused). The revolving line of credit generally requires
payments of interest at the end of each LIBOR interest period,
but no less frequently than quarterly, on LIBOR-based loans, and
monthly payments of interest on other loans. All principal is
due upon maturity.
The annual cost of commitment fees, other facility fees and
amortization of debt financing costs prior to entering into the
new three-year facility in April 2008, was $3.7 million at
March 31, 2008. Subsequent to entering into the new
facility in April 2008, the annual cost of commitment fees,
other facility fees and amortization of debt financing costs
will be approximately $6.7 million.
At April 9, 2008, there was $210.8 million outstanding
on our unsecured revolving line of credit. The amount available
under the line at April 9, 2008, was $325.4 million,
net of amounts committed for standby letters of credit of
$96.3 million. Net repayments on the revolving line of
credit for the three months ended March 31, 2008, were
$98.5 million.
Covenant Compliance. We have various
financial and operating covenants required by the revolving line
of credit and the privately issued unsecured notes payable
outstanding at March 31, 2008. These covenants require us
to maintain certain financial ratios, including asset coverage,
debt to equity and interest coverage, and a minimum net worth.
These credit facilities provide for customary events of default,
including, but not limited to, payment defaults, breach of
representations or covenants, cross-defaults, bankruptcy events,
failure to pay judgments, attachment of our assets, change of
control and the issuance of an order of dissolution. Certain of
these events of default are subject to notice and cure periods
or materiality thresholds. Our credit facilities limit our
ability to declare dividends if we default under certain
provisions. As of March 31, 2008, we were in compliance
with these covenants. The financial and operating covenants
under the new revolving line of credit are substantially similar
to the previous facility.
We have certain financial and operating covenants that are
required by the publicly issued unsecured notes payable,
including that we will maintain a minimum ratio of 200% of total
assets to total borrowings, as required by the Investment
Company Act of 1940, as amended, while these notes are
outstanding. At March 31, 2008, we were in compliance with
these covenants.
105
Contractual Obligations. The following
table shows our significant contractual obligations for the
repayment of debt and payment of other contractual obligations
as of March 31, 2008.
| Payments Due By Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) | Total | 2008 | 2009 | 2010 | 2011 | 2012 | 2012 | |||||||||||||||||||||
|
Unsecured notes payable
|
$ | 1,922.8 | $ | 153.0 | $ | 270.3 | $ | 408.0 | $ | 472.5 | $ | 339.0 | $ | 280.0 | ||||||||||||||
|
Revolving line of
credit(1)
|
268.8 | 268.8 | — | — | — | — | — | |||||||||||||||||||||
|
Operating leases
|
19.1 | 3.3 | 4.6 | 4.5 | 1.8 | 1.8 | 3.1 | |||||||||||||||||||||
|
Total contractual obligations
|
$ | 2,210.7 | $ | 425.1 | $ | 274.9 | $ | 412.5 | $ | 474.3 | $ | 340.8 | $ | 283.1 | ||||||||||||||
| (1) | At March 31, 2008, $268.8 million was borrowed on the revolving line of credit and $96.3 million of standby letters of credit were issued under the credit facility. In April 2008, we entered into a new unsecured revolving line of credit, which replaced the previous revolving line of credit, with total commitments of $632.5 million. See “Revolving Line of Credit” above. |
Off-Balance
Sheet Arrangements
In the ordinary course of business, we have issued guarantees
and have extended standby letters of credit through financial
intermediaries on behalf of certain portfolio companies. We have
generally issued guarantees of debt and lease obligations. Under
these arrangements, we would be required to make payments to
third-party beneficiaries if the portfolio companies were to
default on their related payment obligations. The following
table shows our guarantees and standby letters of credit that
may have the effect of creating, increasing, or accelerating our
liabilities as of March 31, 2008.
| Amount of Commitment Expiration Per Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) | Total | 2008 | 2009 | 2010 | 2011 | 2012 | 2012 | |||||||||||||||||||||
|
Guarantees
|
$ | 394.0 | $ | 0.3 | $ | 387.3 | $ | — | $ | 4.4 | $ | 0.1 | $ | 1.9 | ||||||||||||||
|
Standby letters of
credit(1)
|
96.3 | 96.3 | — | — | — | — | — | |||||||||||||||||||||
|
Total
commitments(2)
|
$ | 490.3 | $ | 96.6 | $ | 387.3 | $ | — | $ | 4.4 | $ | 0.1 | $ | 1.9 | ||||||||||||||
| (1) | Standby letters of credit are issued under our revolving line of credit that expires in September 2008. Therefore, unless a standby letter of credit is set to expire at an earlier date, we have assumed that the standby letters of credit will expire contemporaneously with the expiration of our line of credit that was in effect at March 31, 2008, which was scheduled to expire in September 2008. In April 2008, we entered into a new three-year revolving line of credit that expires in April 2011. |
| (2) | Our most significant commitments relate to our investment in Ciena Capital LLC (Ciena), which commitments totaled $444.3 million at March 31, 2008. At March 31, 2008, the principal components of these guarantees included a guarantee of 100% of the outstanding total obligations on Ciena’s revolving line of credit, which matures in March 2009, for a total guaranteed amount of $384.8 million and standby letters of credit issued totaling $59.5 million in connection with term securitizations completed by Ciena. See “— Private Finance, Ciena Capital LLC” above for further discussion. |
In addition, we had outstanding commitments to fund investments
totaling $885.3 million at March 31, 2008, including
$845.3 million related to private finance investments and
$40.0 million related to commercial real estate finance
investments. Outstanding commitments related to private finance
investments included $493.5 million to the Unitranche Fund
LLC, which we believe will be funded over a two to three year
period as investments are funded by the Unitranche Fund. See
“— Portfolio and Investment Activity —
Outstanding Commitments” above. We intend to fund these
commitments and prospective investment opportunities with
existing cash, through cash flow from operations before new
investments, through borrowings under our line of credit or
other long-term debt agreements, or through the sale or issuance
of new equity capital.
CRITICAL
ACCOUNTING POLICIES
The consolidated financial statements are based on the selection
and application of critical accounting policies, which require
management to make significant estimates and assumptions.
Critical accounting policies are those that
106
are both important to the
presentation of our financial condition and results of
operations and require management’s most difficult,
complex, or subjective judgments. Our critical accounting
policies are those applicable to the valuation of investments,
certain revenue recognition matters and certain tax matters as
discussed below.
Valuation of Portfolio
Investments. We, as a BDC, have invested in
illiquid securities including debt and equity securities of
portfolio companies, CLO bonds and preferred shares/income
notes, CDO bonds and investment funds. Our investments may be
subject to certain restrictions on resale and generally have no
established trading market. We value substantially all of our
investments at fair value as determined in good faith by the
Board of Directors in accordance with our valuation policy and
the provisions of the Investment Company Act of 1940 and FASB
Statement No. 157, Fair Value Measurements
(SFAS 157 or the Statement). We determine fair value to
be the price that would be received for an investment in a
current sale, which assumes an orderly transaction between
market participants on the measurement date. Our valuation
policy considers the fact that no ready market exists for
substantially all of the securities in which it invests and that
fair value for its investments must typically be determined
using unobservable inputs. Our valuation policy is intended to
provide a consistent basis for determining the fair value of the
portfolio.
We adopted SFAS 157 on a prospective basis in the first
quarter of 2008. In accordance with the Statement, we have
considered our principal market, or the market in which we exit
our portfolio investments with the greatest volume and level of
activity. SFAS 157 requires us to assume that the portfolio
investment is assumed to be sold in the principal market to
market participants, or in the absence of a principal market,
the most advantageous market, which may be a hypothetical
market. Market participants are defined as buyers and sellers in
the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact.
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition (M&A)
market as the principal market generally through a sale or
recapitalization of the portfolio company. We believe that the
in-use premise of value (as defined in SFAS 157), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, we will continue to use the enterprise
value methodology to determine the fair value of these
investments under SFAS 157. Enterprise value means the
entire value of the company to a market participant, including
the sum of the values of debt and equity securities used to
capitalize the enterprise at a point in time. Enterprise value
is determined using various factors, including cash flow from
operations of the portfolio company, multiples at which private
companies are bought and sold, and other pertinent factors, such
as recent offers to purchase a portfolio company, recent
transactions involving the purchase or sale of the portfolio
company’s equity securities, liquidation events, or other
events. We allocate the enterprise value to these securities in
order of the legal priority of the securities.
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into our principal market (the M&A market). As a
result, in accordance with SFAS 157, we are required to
determine the fair value of these investments assuming a sale of
the individual investment in a hypothetical market to a
hypothetical market participant (the in-exchange premise of
value). We continue to perform an enterprise value analysis for
the investments in this category to assess the credit risk of
the loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. The yield analysis
considers changes in interest rates and changes in leverage
levels of the loan or debt security as compared to current
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. If there is deterioration in credit quality or a
loan or debt security is in workout status, we may consider
other factors in determining the fair value of
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a loan or debt security, including
the value attributable to the loan or debt security from the
enterprise value of the portfolio company or the proceeds that
would be received in a liquidation analysis.
The value of our equity investments in private debt and equity
funds are generally valued at the fund’s net asset value,
unless other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO bonds and preferred shares/income
notes and CDO bonds (CLO/CDO Assets) is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment and loss assumptions based on historical
experience and projected performance, economic factors, the
characteristics of the underlying cash flow, and comparable
yields for similar bonds and preferred shares/income notes, when
available. We recognize unrealized appreciation or depreciation
on our CLO/CDO Assets as comparable yields in the market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool. We determine the fair value of our CLO/CDO
Assets on an individual
security-by-security
basis.
We will record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and will record unrealized appreciation when we
determine that the fair value is greater than its cost basis.
The impact on our consolidated financial statements for periods
subsequent to the period of adoption cannot be determined at
this time as it will be influenced by the estimates of fair
value for those periods, the number and amount of investments we
originate, acquire or exit, and the effect of any additional
guidance or any changes in the interpretation of this statement.
See “— Results of Operations — Change
in Unrealized Appreciation or Depreciation” above for more
discussion on portfolio valuation.
Net Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation. Realized gains
or losses are measured by the difference between the net
proceeds from the repayment or sale and the cost basis of the
investment without regard to unrealized appreciation or
depreciation previously recognized, and include investments
charged off during the year, net of recoveries. Net change in
unrealized appreciation or depreciation primarily reflects the
change in portfolio investment values during the reporting
period, including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation or depreciation also
reflects the change in the value of U.S. Treasury bills and
depreciation on accrued interest and dividends receivable and
other assets where collection is doubtful.
Interest and Dividend Income. Interest
income is recorded on an accrual basis to the extent that such
amounts are expected to be collected. For loans and debt
securities with contractual payment-in-kind interest, which
represents contractual interest accrued and added to the loan
balance that generally becomes due at maturity, we will not
accrue payment-in-kind interest if the portfolio company
valuation indicates that the payment-in-kind interest is not
collectible. In general, interest is not accrued on loans and
debt securities if we have doubt about interest collection or
where the enterprise value of the portfolio company may not
support further accrual.
When we receive nominal cost warrants or free equity securities
(nominal cost equity), we allocate our cost basis in our
investment between debt securities and nominal cost equity at
the time of origination. At that time, the original issue
discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost
basis in the related debt securities. Loans in workout status do
not accrue interest. In addition, interest may not accrue on
loans or debt securities to portfolio companies that are more
than 50% owned by us depending on such company’s capital
requirements. Loan origination fees, original issue discount,
and market discount are capitalized and then amortized into
interest income using a method that approximates the effective
interest method. Upon the prepayment of a loan or debt security,
any unamortized loan origination fees are recorded as interest
income and any unamortized original issue discount or market
discount is recorded as a realized gain.
108
We recognize interest income on the CLO preferred shares/income
notes using the effective interest method, based on the
anticipated yield that is determined using the estimated cash
flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows
due to changes in prepayments and/or re-investments, credit
losses or asset pricing. Changes in estimated yield are
recognized as an adjustment to the estimated yield over the
remaining life of the preferred shares/income notes from the
date the estimated yield was changed. CLO and CDO bonds have
stated interest rates. The weighted average yield on the CLO/CDO
Assets is calculated as the (a) annual stated interest or
the effective interest yield on the accruing bonds or the
effective yield on the preferred shares/income notes, divided by
(b) CLO/CDO Assets at value. The weighted average yields
are computed as of the balance sheet date.
Fee Income. Fee income includes fees
for loan prepayment premiums, guarantees, commitments, and
services rendered by us to portfolio companies and other third
parties such as diligence, structuring, transaction services,
management and consulting services, and other services. Loan
prepayment premiums are recognized at the time of prepayment.
Guaranty and commitment fees are generally recognized as income
over the related period of the guaranty or commitment,
respectively. Diligence, structuring, and transaction services
fees are generally recognized as income when services are
rendered or when the related transactions are completed.
Management, consulting and other services fees, including fund
management fees, are generally recognized as income as the
services are rendered. Fees are not accrued if the Company has
doubt about collection of those fees.
Federal and State Income Taxes and Excise
Tax. We intend to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies (RIC) and real estate investment
trusts (REIT). We and any of our subsidiaries that qualify as a
RIC or a REIT intend to distribute or retain through a deemed
distribution all of our annual taxable income to shareholders;
therefore, we have made no provision for income taxes for these
entities.
If we do not distribute at least 98% of our annual taxable
income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our
annual taxable income exceeds the distributions from such
taxable income for the year. To the extent that we determine
that our estimated current year annual taxable income will be in
excess of estimated current year dividend distributions from
such taxable income, we accrue excise taxes, if any, on
estimated excess taxable income as taxable income is earned
using an annual effective excise tax rate. The annual effective
excise tax rate is determined by dividing the estimated annual
excise tax by the estimated annual taxable income.
Income taxes for AC Corp are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Recent Accounting Pronouncements. In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We have adopted this statement on a prospective basis
beginning in the quarter ended March 31, 2008. Adoption of
this statement did not have a material effect on our
consolidated financial statements for the period ended
March 31, 2008. However, the impact on our consolidated
financial statements for periods subsequent to the period of
adoption cannot be determined at this time as it will be
influenced by the estimates of fair value for those periods, the
number and amount of investments we originate, acquire or exit,
and the effect of any additional guidance or any changes in the
interpretation of this statement.
109
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
There has been no material change in quantitative or qualitative
disclosures about market risk since December 31, 2007.
Item 4. Controls
and Procedures
(a) As of the end of the period covered by this quarterly
report on
Form 10-Q,
the Company’s chief executive officer and chief financial
officer conducted an evaluation of the Company’s disclosure
controls and procedures (as defined in
Rules 13a-15
and 15d-15
of the Securities Exchange Act of 1934). Based upon this
evaluation, the Company’s chief executive officer and chief
financial officer concluded that the Company’s disclosure
controls and procedures are effective to allow timely decisions
regarding required disclosure of any material information
relating to the Company that is required to be disclosed by the
Company in the reports it files or submits under the Securities
Exchange Act of 1934.
(b) There have been no changes in the Company’s
internal control over financial reporting that occurred during
the quarter ended March 31, 2008, that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
110
PART II.
OTHER INFORMATION
Item 1. Legal
Proceedings
On June 23, 2004, we were notified by the SEC that they
were conducting an informal investigation of us. The
investigation related to the valuation of securities in our
private finance portfolio and other matters. On June 20,
2007, we announced that we entered into a settlement with the
SEC that resolved the SEC’s informal investigation. As part
of the settlement and without admitting or denying the
SEC’s allegations, we agreed to the entry of an
administrative order. In the order the SEC alleged that, between
June 30, 2001, and March 31, 2003, we did not maintain
books, records and accounts which, in reasonable detail,
supported or accurately and fairly reflected valuations of
certain securities in our private finance portfolio and, as a
result, did not meet certain recordkeeping and internal controls
provisions of the federal securities laws. In the administrative
order, the SEC ordered us to continue to maintain certain of our
current valuation-related controls. Specifically, for a period
of two years, we have undertaken to: (1) continue to employ
a Chief Valuation Officer, or a similarly structured
officer-level employee, to oversee our quarterly valuation
processes; and (2) continue to employ third-party valuation
consultants to assist in our quarterly valuation processes.
On December 22, 2004, we received letters from the U.S.
Attorney for the District of Columbia requesting the
preservation and production of information regarding us and
Business Loan Express, LLC (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating to
matters similar to those investigated by and settled with the
SEC as discussed above. We produced materials in response to the
requests from the U.S. Attorney’s office and certain
current and former employees were interviewed by the U.S.
Attorney’s Office. We have voluntarily cooperated with the
investigation.
In late December 2006, we received a subpoena from the U.S.
Attorney for the District of Columbia requesting, among other
things, the production of records regarding the use of private
investigators by us or our agents. The Board established a
committee, which was advised by its own counsel, to review this
matter. In the course of gathering documents responsive to the
subpoena, we became aware that an agent of Allied Capital
obtained what were represented to be telephone records of David
Einhorn and which purport to be records of calls from Greenlight
Capital during a period of time in 2005. Also, while we were
gathering documents responsive to the subpoena, allegations were
made that our management had authorized the acquisition of these
records and that management was subsequently advised that these
records had been obtained. Our management has stated that these
allegations are not true. We have cooperated fully with the
inquiry by the U.S. Attorney’s Office.
On February 13, 2007, Rena Nadoff filed a shareholder
derivative action in the Superior Court of the District of
Columbia, captioned Rena Nadoff v. Walton, et al., CA 001060-07,
seeking unspecified compensatory and other damages, as well as
equitable relief on behalf of Allied Capital Corporation. The
complaint was summarily dismissed in July 2007. The complaint
alleged breach of fiduciary duty by the Board of Directors
arising from internal control failures and mismanagement of
Business Loan Express, LLC, an Allied Capital portfolio company.
On October 5, 2007, Rena Nadoff sent a letter to our Board
of Directors with substantially the same claims and a request
that the Board of Directors investigate the claims and take
appropriate action. The Board of Directors has established a
committee, which is advised by its own counsel, to review the
matter.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
our portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. We believe the lawsuit is without merit, and we
intend to defend the lawsuit vigorously. On September 13,
2007, we filed a motion to dismiss the lawsuit. The motion is
pending.
111
In addition to the above matters, we are party to certain
lawsuits in the normal course of business.
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, we do not
expect these matters will materially affect our financial
condition or results of operations; however, there can be no
assurance whether any pending legal proceedings will have a
material adverse effect on our financial condition or results of
operations in any future reporting period.
Item 1A.
Risk Factors.
Investing in Allied Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective.
Our portfolio of investments is illiquid. We
generally acquire our investments directly from the issuer in
privately negotiated transactions. The majority of the
investments in our portfolio are subject to certain restrictions
on resale or otherwise have no established trading market. We
typically exit our investments when the portfolio company has a
liquidity event such as a sale, recapitalization, or initial
public offering of the company. The illiquidity of our
investments may adversely affect our ability to dispose of debt
and equity securities at times when we may need to or when it
may be otherwise advantageous for us to liquidate such
investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the
proceeds of such liquidation could be significantly less than
the current value of such investments.
Investing in private companies involves a high degree of
risk. Our portfolio primarily consists of
long-term loans to and investments in middle market private
companies. Investments in private businesses involve a high
degree of business and financial risk, which can result in
substantial losses for us in those investments 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 our investment
decisions. If we are unable to identify all material information
about these companies, among other factors, we may fail to
receive the expected return on our investment or lose some or
all of the money invested in these companies. In addition, these
businesses may have shorter operating histories, narrower
product lines, smaller market shares and less experienced
management than their competition and may be more vulnerable to
customer preferences, market conditions, loss of key personnel,
or economic downturns, which may adversely affect the return on,
or the recovery of, our investment in such businesses. As an
investor, we are subject to the risk that a portfolio company
may make a business decision that does not serve our interest,
which could decrease the value of our investment. Deterioration
in a portfolio company’s financial condition and prospects
may be accompanied by deterioration in the collateral for a
loan, if any.
Substantially all of our portfolio investments, which are
generally illiquid, are recorded at fair value as determined in
good faith by our Board of Directors and, as a result, there is
uncertainty regarding the value of our portfolio
investments. At March 31, 2008, portfolio
investments recorded at fair value were 91% of our total assets.
Pursuant to the requirements of the 1940 Act, we value
substantially all of our investments at fair value as determined
in good faith by our Board of Directors on a quarterly basis.
Since there is typically no market quotation in an active market
for the investments in our portfolio, our Board of Directors
determines in good faith the fair value of these investments
pursuant to a valuation policy and a consistently applied
valuation process.
There is no single approach for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. In
determining fair value in good faith, we generally obtain
financial and other information from portfolio companies, which
may represent unaudited, projected or proforma financial
information. 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 on a quarterly basis. We will record unrealized
depreciation on investments when we determine that the fair
value of a security is less than its cost basis, and unrealized
appreciation when we determine that the fair value of a security
is greater than its cost basis. Without a market quotation in an
active market and because of the inherent uncertainty of
112
valuation, the fair value of our
investments determined in good faith by the Board of Directors
may differ significantly from the values that would have been
used had a ready market existed for the investments, and the
differences could be material. Our net asset value could be
affected if our determination of the fair value of our
investments is materially different than the value that we
ultimately realize.
We adjust quarterly the valuation of our portfolio to reflect
the Board of Directors’ determination of the fair value of
each investment in our portfolio. Any changes in fair value are
recorded in our statement of operations as net change in
unrealized appreciation or depreciation.
Beginning in the quarter ended March 31, 2008, we adopted
the provisions of FASB Statement No. 157, Fair Value
Measurements, on a prospective basis. Adoption of this
statement did not have a material effect on our consolidated
financial statements for the first quarter of 2008. However, the
impact on our consolidated financial statements in the periods
subsequent to the period of adoption cannot be determined at
this time as it will be influenced by the estimates of fair
value for those periods, the number and amount of investments we
originate, acquire or exit and the effect of any additional
guidance or any changes in the interpretation of this statement.
See Note 2, “Summary of Significant Accounting
Policies” from our Notes to the Consolidated Financial
Statements included in Item 1.
Economic recessions or downturns could impair our portfolio
companies and harm our operating results. Many of
the companies in which we have made or will make investments may
be susceptible to economic slowdowns or recessions. An economic
slowdown may affect the ability of a company to repay our loans
or engage in a liquidity event such as a sale, recapitalization,
or initial public offering. Our nonperforming assets are likely
to increase and the value of our portfolio is likely to decrease
during these periods. Adverse economic conditions also may
decrease the value of any collateral securing some of our loans.
These conditions could lead to financial losses in our portfolio
and a decrease in our revenues, net income, and assets.
Our business of making private equity investments and
positioning them for liquidity events also may be affected by
current and future market conditions. The absence of an active
senior lending environment or a slowdown in middle market merger
and acquisition activity may slow the amount of private equity
investment activity generally. As a result, the pace of our
investment activity may slow. In addition, significant changes
in the capital markets could have a negative effect on the
valuations of our investments, and on the potential for
liquidity events involving such investments. This could affect
the timing of exit events in our portfolio, reduce the level of
net realized gains from exit events in a given year, and could
negatively affect the amount of gains or losses upon exit.
Our borrowers may default on their payments, which may have a
negative effect on our financial performance. We
make long-term loans and invest in equity securities primarily
in private middle market companies, which may involve a higher
degree of repayment risk. We primarily invest in companies that
may have limited financial resources, may be highly leveraged
and 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. A
portfolio company’s failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans or
foreclosure on its secured assets, which could trigger cross
defaults under other agreements and jeopardize our portfolio
company’s ability to meet its obligations under the loans
or debt securities that we hold. In addition, our portfolio
companies may have, or may be permitted to incur, other debt
that ranks senior to or equally with our securities. This means
that payments on such senior-ranking securities may have to be
made before we receive any payments on our subordinated loans or
debt securities. Deterioration in a borrower’s financial
condition and prospects may be accompanied by deterioration in
any related collateral and may have a negative effect on our
financial results.
Our private finance investments may not produce current
returns or capital gains. Our private finance
portfolio includes loans and debt securities that require the
payment of interest currently and equity securities such as
conversion rights, warrants, or options, minority equity
co-investments,
or more significant equity investments in
113
the case of buyout transactions.
Our private finance debt investments are generally structured to
generate interest income from the time they are made and our
equity investments may also produce a realized gain. We cannot
be sure that our portfolio will generate a current return or
capital gains.
Our financial results could be negatively affected if a
significant portfolio investment fails to perform as
expected. Our total investment in companies may
be significant individually or in the aggregate. As a result, if
a significant investment in one or more companies fails to
perform as expected, our financial results could be more
negatively affected and the magnitude of the loss could be more
significant than if we had made smaller investments in more
companies.
At March 31, 2008, our investment in Ciena Capital LLC
(Ciena) totaled $327.8 million at cost and
$29.3 million at value, after the effect of unrealized
depreciation of $298.5 million. In addition, we have an
unconditional guarantee of 100% of the total obligations under
Ciena’s revolving credit facility that totaled
$384.8 million at March 31, 2008. The guarantee can be
called by the lenders in the event of default. In addition, we
have issued performance guarantees in connection with two
non-recourse warehouse facilities. Ciena focuses on loan
products that provide financing to commercial real estate owners
and operators. Ciena relies on the asset-backed securitization
market to finance its loan origination activity. That financing
source continues to be unreliable in the current capital
markets, and as a result, Ciena has substantially curtailed loan
origination activity. Ciena continues to reposition its
business; however, there is an inherent risk in repositioning
the business and we continue to work with Ciena on
restructuring. Our financial results could be negatively
affected if Ciena defaults on its revolving line of credit or is
not able to reposition its business.
Ciena is a participant in the SBA’s 7(a) Guaranteed Loan
Program and its wholly-owned subsidiary is licensed by the SBA
as a Small Business Lending Company (SBLC). The Office of the
Inspector General of the SBA (OIG) and the United States Secret
Service are conducting ongoing investigations of allegedly
fraudulently obtained SBA-guaranteed loans issued by Ciena. As
an SBA lender, Ciena is also subject to other SBA and OIG
audits, investigations, and reviews. In addition, the Office of
the Inspector General of the U.S. Department of Agriculture
is conducting an investigation of Ciena’s lending practices
under the Business and Industry Loan program. The OIG and the
U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. These investigations, audits, and reviews are
ongoing. These investigations, audits, and reviews have had and
may continue to have a material adverse impact on Ciena and, as
a result, could negatively affect our financial results. See
“Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations — Private Finance, Ciena Capital LLC,
and — Valuation of Ciena Capital LLC”.
We borrow money, which magnifies the potential for gain or
loss on amounts invested and may increase the risk of investing
in us. 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. We borrow from and issue senior debt securities to
banks, insurance companies, and other lenders or investors.
Holders of these senior securities have fixed dollar claims on
our consolidated assets that are superior to the claims of our
common shareholders. If the value of our consolidated assets
increases, then leveraging would cause the net asset value
attributable to our 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. We and, indirectly, our
stockholders will bear the cost associated with our leverage
activity. Our revolving line of credit and notes payable contain
financial and operating covenants that could restrict our
business activities, including our ability to declare dividends
if we default under certain provisions. Breach of any of those
covenants could cause a default under those instruments. Such a
default, if not cured or waived, could have a material adverse
effect on us.
114
At March 31, 2008, we had $2.2 billion of outstanding
indebtedness bearing a weighted average annual interest cost of
6.2% and a debt to equity ratio of 0.77 to 1.00. We may incur
additional debt in the future. If our portfolio of investments
fails to produce adequate returns, we may be unable to make
interest or principal payments on our indebtedness when they are
due. In order for us to cover annual interest payments on
indebtedness, we must achieve annual returns on our assets of at
least 2.7% as of March 31, 2008, which returns were
achieved.
We may not borrow money unless we maintain asset coverage for
indebtedness of at least 200%, which may affect returns to
shareholders. Under the 1940 Act and the
covenants applicable to our public debt, we must maintain asset
coverage for total borrowings 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, insurance companies or other lenders or
investors 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, 2008, our asset coverage for senior indebtedness
was 229%.
Changes in interest rates may affect our cost of capital and
net investment income. Because we borrow money to
make investments, our net investment 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 net investment
income. In periods of rising interest rates, our cost of funds
would increase, which would reduce our net investment income. We
use a combination of long-term and short-term borrowings and
equity capital to finance our investing activities. We utilize
our revolving line of credit 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. We have analyzed the potential impact
of changes in interest rates on interest income net of interest
expense.
Assuming that the balance sheet as of March 31, 2008, were
to remain constant and no actions were taken to alter the
existing interest rate sensitivity, a hypothetical immediate 1%
change in interest rates would have affected net income by
approximately 1% over a one year horizon. Although management
believes that this measure is indicative of our sensitivity to
interest rate changes, it does not adjust for potential changes
in credit quality, size and composition of the assets on the
balance sheet and other business developments that could affect
net increase in net assets resulting from operations, or net
income. Accordingly, no assurances can be given that actual
results would not differ materially from the potential outcome
simulated by this estimate.
We will continue to need additional capital to grow because
we must distribute our income. We will continue
to need capital to fund growth in our investments. Historically,
we have borrowed from financial institutions or other investors
and have issued debt and equity securities to grow our
portfolio. A reduction in the availability of new debt or equity
capital could limit our ability to grow. We must distribute at
least 90% of our investment company taxable ordinary income (as
defined in the Code), which excludes realized net long-term
capital gains, to our shareholders to maintain our eligibility
for the tax benefits available to regulated investment
companies. As a result, such earnings will not be available to
fund investment originations. In addition, as a business
development company, we (i) 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 and (ii) may only issue new equity capital at
a price, net of discounts and commissions, above our net asset
value unless we have received shareholder approval. We intend to
continue to borrow from financial institutions or other
investors and issue additional debt and 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 our debt
securities or common stock.
Loss of regulated investment company tax treatment would
substantially reduce net assets and income available for debt
service and dividends. We have operated so as to
qualify as a regulated investment company under
Subchapter M of the Code. If we meet source of income,
asset diversification, and distribution requirements,
115
we generally will not be subject to corporate-level income
taxation on income we timely distribute to our stockholders as
dividends. We would cease to qualify for such tax treatment if
we were unable to comply with these requirements. In addition,
we may have difficulty meeting the requirement to make
distributions to our stockholders because in certain cases we
may recognize income before or without receiving cash
representing such income. If we fail to qualify as a regulated
investment company, we will have to pay corporate-level taxes on
all of our income whether or not we distribute it, which would
substantially reduce the amount of income available for debt
service and distributions to our stockholders. Even if we
qualify as a regulated investment company, we generally will be
subject to a corporate-level income tax on the income we do not
distribute. If we do not distribute at least 98% of our annual
taxable income in the year earned, we generally will be required
to pay an excise tax on amounts carried over and distributed to
shareholders in the next year equal to 4% of the amount by which
98% of our annual taxable income exceeds the distributions from
such income for the current year.
There is a risk that our common stockholders may not receive
dividends or distributions. We intend to make
distributions on a quarterly basis to our stockholders. We may
not be able to achieve operating results that will allow us to
make distributions at a specific level or to increase the amount
of these distributions from time to time. In addition, due to
the asset coverage test applicable to us as a business
development company, we may be limited in our ability to make
distributions. Also, certain of our credit facilities limit our
ability to declare dividends if we default under certain
provisions. If we do not distribute a certain percentage of our
income annually, we will suffer adverse tax consequences,
including possible loss of the tax benefits available to us as a
regulated investment company. In addition, in accordance with
U.S. generally accepted accounting principles and tax
regulations, we include in income certain amounts that we have
not yet received in cash, such as contractual payment-in-kind
interest, which represents contractual interest added to the
loan balance that becomes due at the end of the loan term, or
the accrual of original issue discount. The increases in loan
balances as a result of contractual payment-in-kind arrangements
are included in income in advance of receiving cash payment and
are separately included in the change in accrued or reinvested
interest and dividends in our consolidated statement of cash
flows. Since we may recognize income before or without receiving
cash representing such income, we may have difficulty meeting
the requirement to distribute at least 90% of our investment
company taxable income to obtain tax benefits as a regulated
investment company.
We operate in a competitive market for investment
opportunities. We compete for investments with a
large number of private equity funds and mezzanine funds, other
business development companies, investment banks, other equity
and non-equity based investment funds, and other sources of
financing, including specialty finance companies and traditional
financial services companies such as commercial banks. Some of
our competitors may 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.
There are potential conflicts of interest between us and the
funds managed by us. Certain of our officers
serve or may serve in an investment management capacity to funds
managed by us. As a result, investment professionals may
allocate such time and attention as is deemed appropriate and
necessary to carry out the operations of the managed funds. In
this respect, they may experience diversions of their attention
from us and potential conflicts of interest between their work
for us and their work for the managed funds in the event that
the interests of the managed funds run counter to our interests.
Although managed funds may have a different primary investment
objective than we do, the managed funds may, from time to time,
invest in the same or similar asset classes that we target.
These investments may be made at the direction of the same
individuals acting in their capacity on behalf of us and the
managed funds. As a result, there may be conflicts in the
allocation of investment opportunities between us and the
managed funds. In the future, we may not be given the
opportunity to participate in investments made by investment
funds managed by us or one of our affiliates. See
“Management’s Discussion and Analysis and Results of
Operations — Managed Funds” below.
We have sold assets to certain managed funds and, as part of our
investment strategy, we may offer to sell additional assets to
managed funds or we may purchase assets from managed funds.
While assets may be sold or
116
purchased at prices that are consistent with those that could be
obtained from third parties in the marketplace, there is an
inherent conflict of interest in such transactions between us
and funds we manage.
Our business depends on our key personnel. We
depend on the continued services of our executive officers and
other key management personnel. If we were to lose any of these
officers or other management personnel, such a loss could result
in inefficiencies in our operations and lost business
opportunities, which could have a negative effect on our
business.
Changes in the law or regulations that govern us could have a
material impact on us or our operations. We are
regulated by the SEC. In addition, changes in the laws or
regulations that govern business development companies,
regulated investment companies, asset managers, and real estate
investment trusts may significantly affect our business. There
are proposals being considered by the current administration to
change the regulation of financial institutions that may affect,
possibly adversely, investment managers or investment funds. Any
change in the law or regulations that govern our business could
have a material impact on us or our 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, which may have a material effect on our
operations.
Failure to invest a sufficient portion of our assets in
qualifying assets could preclude us from investing in accordance
with our current business strategy. As a business
development company, we may not acquire any assets other than
“qualifying assets” unless, at the time of and after
giving effect to such acquisition, at least 70% of our total
assets are qualifying assets. Therefore, we may be precluded
from investing in what we believe are attractive investments if
such investments are not qualifying assets for purposes of the
1940 Act. If we do not invest a sufficient portion of our assets
in qualifying assets, we could lose our status as a business
development company, which would have a material adverse effect
on our business, financial condition and results of operations.
Similarly, these rules could prevent us from making additional
investments in existing portfolio companies, which could result
in the dilution of our position, or could require us to dispose
of investments at inopportune times in order to comply with the
1940 Act. If we were forced to sell nonqualifying investments in
the portfolio for compliance purposes, the proceeds from such
sale could be significantly less than the current value of such
investments.
Results may fluctuate and may not be indicative of future
performance. Our operating results may fluctuate
and, therefore, you should not rely on current or historical
period results to be indicative of our performance in future
reporting periods. Factors that could cause operating results to
fluctuate include, but are not limited to, variations in the
investment origination volume and fee income earned, changes in
the accrual status of our loans and debt securities, variations
in timing of prepayments, variations in and the timing of the
recognition of net realized gains or losses and changes in
unrealized appreciation or depreciation, the level of our
expenses, the degree to which we encounter competition in our
markets, and general economic conditions.
Our common stock price may be volatile. The
trading price of our common stock may fluctuate substantially.
The price of the common stock may be higher or lower than the
price paid by stockholders, depending on many factors, some of
which are beyond our control and may not be directly related to
our operating performance. These factors include, but are not
limited to, the following:
| • | price and volume fluctuations in the overall stock market from time to time; | |
| • | significant volatility in the market price and trading volume of securities of business development companies or other financial services companies; | |
| • | volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity anticipation securities, or LEAPs, or short trading positions; | |
| • | changes in laws or regulatory policies or tax guidelines with respect to business development companies or regulated investment companies; |
117
| • | actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; | |
| • | general economic conditions and trends; | |
| • | loss of a major funding source; or | |
| • | departures of key personnel. |
The trading market or market value of our publicly issued
debt securities may be volatile. Our publicly
issued debt securities may or may not have an established
trading market. We cannot assure that a trading market for our
publicly issued debt securities will ever develop or be
maintained if developed. In addition to our creditworthiness,
many factors may materially adversely affect the trading market
for, and market value of, our publicly issued debt securities.
These factors include, but are not limited to, the following:
| • | the time remaining to the maturity of these debt securities; | |
| • | the outstanding principal amount of debt securities with terms identical to these debt securities; | |
| • | the supply of debt securities trading in the secondary market, if any; | |
| • | the redemption or repayment features, if any, of these debt securities; | |
| • | the level, direction and volatility of market interest rates generally; and | |
| • | market rates of interest higher or lower than rates borne by the debt securities. |
There also may be a limited number of buyers for our debt
securities. This too may materially adversely affect the market
value of the debt securities or the trading market for the debt
securities.
Our credit ratings may not reflect all risks of an investment
in the debt securities. Our credit ratings are an
assessment of our ability to pay our obligations. Consequently,
real or anticipated changes in our credit ratings will generally
affect the market value of the publicly issued debt securities.
Our credit ratings, however, may not reflect the potential
impact of risks related to market conditions generally or other
factors discussed above on the market value of, or trading
market for, the publicly issued debt securities.
Terms relating to redemption may materially adversely affect
the return on the debt securities. If our debt
securities are redeemable at our option, we may choose to redeem
the debt securities at times when prevailing interest rates are
lower than the interest rate paid on the debt securities. In
addition, if the debt securities are subject to mandatory
redemption, we may be required to redeem the debt securities at
times when prevailing interest rates are lower than the interest
rate paid on the debt securities. In this circumstance, a holder
of the debt securities may not be able to reinvest the
redemption proceeds in a comparable security at an effective
interest rate as high as the debt securities being redeemed.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2008, we issued a
total of 192,482 shares of common stock under our dividend
reinvestment plan pursuant to an exemption from the registration
requirements of the Securities Act of 1933. The aggregate
offering price for the shares of common stock sold under the
dividend reinvestment plan was approximately $3.8 million.
118
Issuer
Purchases of Equity Securities
The following table provides information for the quarter ended
March 31, 2008, regarding shares of our common stock that
were purchased under The Allied Capital Corporation
Non-Qualified Deferred Compensation Plan I and The 2005 Allied
Capital Corporation Non-Qualified Deferred Compensation
Plan I (DCPs I) and The Allied Capital Corporation
Non-Qualified Deferred Compensation Plan II and The 2005 Allied
Capital Corporation Non-Qualified Deferred Compensation
Plan II (DCPs II), which are administered by a
third-party trustee. The administrator of the DCPs I and
DCPs II was the Compensation Committee of our Board of
Directors.
|
Total Number |
Weighted Average |
|||||||
|
of Shares |
Price Paid |
|||||||
| Purchased | Per Share | |||||||
|
DCPs
I(1)
|
||||||||
|
1/1/2008 – 1/31/2008
|
173 | $ | 22.17 | |||||
|
2/1/2008 – 2/29/2008
|
— | — | ||||||
|
3/1/2008 – 3/31/2008
|
— | — | ||||||
|
DCPs
II(2)
|
||||||||
|
1/1/2008 – 1/31/2008
|
42,354 | $ | 22.17 | |||||
|
2/1/2008 – 2/29/2008
|
— | — | ||||||
|
3/1/2008 – 3/31/2008
|
— | — | ||||||
|
Total
|
42,527 | $ | 22.17 | |||||
| (1) | The DCPs I are unfunded plans, as defined by the Code, that provide for the deferral of compensation by our directors, employees, and consultants. In addition, we made contributions to DCPs I on compensation deemed ineligible for a 401(k) contribution. Our directors, employees, or consultants were eligible to participate in the plan at such time and for such period as designated by the Board of Directors. The DCPs I were administered through a trust by a third-party trustee, and we funded this plan through cash contributions. Directors were able to choose to defer directors’ fees through the DCPs I, and to invest such deferred income in shares of our common stock. To the extent a director elected to invest in our common stock, the trustee of the DCPs I were required to use such deferred directors’ fees to purchase shares of our common stock in the market. |
| (2) | We have a long-term incentive compensation program whereby we will generally determine an individual performance award (IPA) for certain officers annually at the beginning of each year. The Compensation Committee may adjust the IPAs as needed, or make new awards as new officers are hired. In conjunction with the program, we instituted the DCP II plans, which were unfunded plans as defined by the Code that were administered through a trust by a third-party trustee. The IPAs were deposited in the trust in four equal installments, generally on a quarterly basis in the form of cash and the DCPs II required the trustee to use the cash to purchase shares of our common stock in the market. See discussion below on the termination of the deferred compensation arrangements. For 2008, the Compensation Committee has determined that the IPAs will be paid in cash in two equal installments during the year to eligible officers, as long as the recipient remains employed by us. |
On December 14, 2007, our Board of Directors made a
determination that it was in Allied Capital’s best interest
to terminate our deferred compensation plans. The Board of
Directors’ decision was primarily in response to increased
complexity resulting from recent changes in the regulation of
deferred compensation arrangements. The accounts under these
plans were distributed to participants on March 18, 2008,
the termination and distribution date, in accordance with the
transition rule for payment elections under Section 409A of
the Code. Distributions from the plans were made in cash or
shares of our common stock, net of required withholding taxes.
See Note 8, “Employee Compensation Plans” to our
consolidated financial statements included in Item 1 for
further detail.
Item 3. Defaults
Upon Senior Securities
Not applicable.
Item 4. Submission
of Matters to a Vote of Security Holders
None.
119
Item 5. Other
Information
None.
Item 6. Exhibits
(a) List of Exhibits
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
3.1
|
Restated Articles of Incorporation. (Incorporated by reference to Exhibit a.2 filed with Allied Capital’s Post-Effective Amendment No. 1 to registration statement on Form N-2 (File No. 333-141847) filed on June 1, 2007). | |||
|
3.2
|
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.1. filed with Allied Capital’s Form 8-K on July 30, 2007). | |||
|
4.1
|
Specimen Certificate of Allied Capital’s Common Stock, par value $0.0001 per share. (Incorporated by reference to Exhibit d. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
|
4.3
|
Form of Note under the Indenture relating to the issuance of debt securities. (Contained in Exhibit 4.4). (Incorporated by reference to Exhibit d.1 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.4
|
Indenture by and between Allied Capital Corporation and The Bank of New York, dated June 16, 2006. (Incorporated by reference to Exhibit d.2 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.5
|
Statement of Eligibility of Trustee on Form T-1. (Incorporated by reference to Exhibit d.3 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
4.6
|
Form of First Supplemental Indenture by and between Allied Capital Corporation and the Bank of New York, dated as of July 25, 2006. (Incorporated by reference to Exhibit d.4 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
|
4.7
|
Form of 6.625% Note due 2011. (Incorporated by reference to Exhibit d.5 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
|
4.8
|
Form of Second Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of December 8, 2006. (Incorporated by reference to Exhibit d.6 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.9
|
Form of 6.000% Notes due 2012. (Incorporated by reference to Exhibit d.7 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.10
|
Form of Third Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of March 28, 2007. (Incorporated by reference to Exhibit d.8 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
|
4.11
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
|
4.11(a)
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9(a) filed with Allied Capital’s Post-Effective Amendment No. 4 to the registration statement on Form N-2/A (File No. 333-133755) filed on April 2, 2007). | |||
|
10.1
|
Dividend Reinvestment Plan, as amended. (Incorporated by reference to Exhibit e. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-87862) filed on May 8, 2002). | |||
|
10.2
|
Credit Agreement, dated April 9, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on April 10, 2008). | |||
120
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.3
|
Note Agreement, dated October 13, 2005. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on October 14, 2005). | |||
|
10.3(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of October 13, 2005. (Incorporated by reference to Exhibit f.3(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.4
|
Note Agreement, dated May 1, 2006. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on May 1, 2006). | |||
|
10.4(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 1, 2006. (Incorporated by reference to Exhibit f.11(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.15
|
Second Amended and Restated Control Investor Guaranty, dated as of January 30, 2008, between Allied Capital and CitiBank, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on February 5, 2008). | |||
|
10.17
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
|
10.17(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated January 20, 2006. (Incorporated by reference to Exhibit 10.17(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.17(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated December 14, 2007. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.18
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
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10.18(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated January 20, 2006. (Incorporated by reference to Exhibit 10.18(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.18(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated December 14, 2007. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.19
|
Amended Stock Option Plan. (Incorporated by reference to Appendix B of Allied Capital’s definitive proxy statement for Allied Capital’s 2007 Annual Meeting of Stockholders filed on April 3, 2007). | |||
|
10.20(a)
|
Allied Capital Corporation 401(k) Plan, dated September 1, 1999. (Incorporated by reference to Exhibit 4.4 filed with Allied Capital’s registration statement on Form S-8 (File No. 333-88681) filed on October 8, 1999). | |||
|
10.20(b)
|
Amendment to Allied Capital Corporation 401(k) Plan, dated April 15, 2004. (Incorporated by reference to Exhibit 10.20(b) filed with Allied Capital’s Form 10-Q for the period ended June 30, 2004). | |||
|
10.20(c)
|
Amendment to Allied Capital Corporation 401(k) plan, dated November 1, 2005. (Incorporated by reference to Exhibit 10.20(c) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2005). | |||
|
10.20(d)
|
Amendment to Allied Capital Corporation 401(k) plan, dated April 21, 2006. (Incorporated by reference to Exhibit i.4(c) filed with Allied Capital’s Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
10.20(e)
|
Amendment to Allied Capital Corporation 401(k) plan, adopted December 18, 2006. (Incorporated by reference to Exhibit 10.20(e) filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.20(f)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(f) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
|
10.20(g)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(g) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
121
|
Exhibit |
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Number
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Description
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|||
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10.20(h)
|
Amendment to Allied Capital Corporation 401(k) plan, dated September 14, 2007, with an effective date of January 1, 2008. (Incorporated by reference to Exhibit 10.20(h) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2007). | |||
|
10.21
|
Employment Agreement, dated January 1, 2004, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.21(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.22
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.22 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.22(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.23
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.23(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.3 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.25
|
Form of Custody Agreement with Riggs Bank N.A., which was assumed by PNC Bank through merger. (Incorporated by reference to Exhibit j.1 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
|
10.26
|
Custodian Agreement with Chevy Chase Trust. (Incorporated by reference to Exhibit 10.26 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.27
|
Custodian Agreement with Bank of America. (Incorporated by reference to Exhibit 10.27 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.28
|
Code of Ethics. (Incorporated by reference to Exhibit 10.28 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.29
|
Custodian Agreement with Union Bank of California. (Incorporated by reference to Exhibit 10.29 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.30
|
Custodian Agreement with M&T Bank. (Incorporated by reference to Exhibit 10.30 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.31
|
Note Agreement, dated as of May 14, 2003. (Incorporated by reference to Exhibit 10.31 filed with Allied Capital’s Form 10-Q for the quarter ended March 31, 2003). | |||
|
10.31(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 14, 2003. (Incorporated by reference to Exhibit f.19(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.32*
|
Custodian Agreement with Branch Banking and Trust Company. | |||
|
10.37
|
Form of Indemnification Agreement between Allied Capital and its directors and certain officers. (Incorporated by reference to Exhibit 10.37 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.38
|
Note Agreement, dated as of March 25, 2004. (Incorporated by reference to Exhibit 10.38 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2004.) | |||
|
10.38(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of March 25, 2004. (Incorporated by reference to Exhibit f.25(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.39
|
Note Agreement, dated as of November 15, 2004. (Incorporated by reference to Exhibit 99.1 filed with Allied Capital’s current report on Form 8-K filed on November 18, 2004.) | |||
122
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.39(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of November 15, 2004. (Incorporated by reference to Exhibit f.26(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.40
|
Real Estate Securities Purchase Agreement. (Incorporated by reference to Exhibit 2.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.41
|
Platform Assets Purchase Agreement. (Incorporated by reference to Exhibit 2.2 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.42
|
Transition Services Agreement. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
11
|
Statement regarding computation of per share earnings is included in Note 7 to Allied Capital’s Notes to the Consolidated Financial Statements. | |||
|
15*
|
Letter regarding unaudited interim financial information. | |||
|
21
|
Subsidiaries of Allied Capital and jurisdiction of incorporation/organization: | |||
| A.C. Corporation | Delaware | |||
| Allied Capital REIT, Inc. | Maryland | |||
| Allied Capital Holdings, LLC | Delaware | |||
| Allied Investment Holdings, LLC | Delaware | |||
| Allied Capital Beteiligungsberatung GmbH (inactive) | Germany | |||
|
31.1*
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.2*
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
32.1*
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.2*
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
| * | Filed herewith. |
123
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 12, 2008
|
/s/ William
L. Walton William L. Walton Chairman and Chief Executive Officer |
|
|
/s/ Penni
F. Roll Penni F. Roll Chief Financial Officer |
124
EXHIBIT
INDEX
|
Exhibit |
||||
|
Number
|
Description
|
|||
| 10 | .32 | Custodian Agreement with Branch Banking and Trust Company. | ||
| 15 | Letter regarding Unaudited Interim Financial Information. | |||
| 31 | .1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 32 | .1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
125