<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly report pursuant to section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period Commission file number:
ended MARCH 31, 1995 814-97
-------------- --------------
ALLIED CAPITAL CORPORATION
---------------------------------------------------------
(exact name of Registrant as specified in its charter)
MARYLAND 53-0245085
- - - - - - - ----------------------------- -------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1666 K STREET, N.W.
SUITE 901
WASHINGTON, DC 20006
------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 331-1112
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
----- -----
On May 1, 1995 there were 6,162,998 shares outstanding of the Registrant's
common stock, $1 par value.
<PAGE>
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Position as of March 31,
1995 and December 31, 1994. . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Operations - For the Three Months
Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Net Assets - For the
Three Months Ended March 31, 1995 and 1994. . . . . . . . . . . 3
Consolidated Statement of Cash Flows - For the Three Months
Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 7
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 7
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands, except number of shares)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Investments at value:
Loans and debt securities. . . . . . . . . . . . $ 84,111 $ 84,949
Equity securities. . . . . . . . . . . . . . . . 26,269 28,225
Other investment assets. . . . . . . . . . . . . 1,861 1,852
-------- --------
Total investments . . . . . . . . . . . . . . 112,241 115,026
Cash and cash equivalents. . . . . . . . . . . . . 6,000 6,609
U.S. government securities . . . . . . . . . . . . 11,171 10,210
Other assets . . . . . . . . . . . . . . . . . . . 3,162 3,672
-------- --------
Total assets. . . . . . . . . . . . . . . . . $132,574 $135,517
-------- --------
-------- --------
Liabilities
Revolving line of credit . . . . . . . . . . . . . $ 1,325 $ 2,205
Debentures and notes payable . . . . . . . . . . . 74,800 74,800
Accrued interest payable . . . . . . . . . . . . . 2,002 1,393
Investment advisory fee payable. . . . . . . . . . 641 658
Dividends and distributions payable. . . . . . . . 58 3,910
Other liabilities. . . . . . . . . . . . . . . . . 1,790 1,564
-------- --------
Total liabilities . . . . . . . . . . . . . . 80,616 84,530
-------- --------
Redeemable preferred stock . . . . . . . . . . . . 1,000 1,000
-------- --------
Commitments and Contingencies
Shareholders' Equity
Preferred stock of wholly owned subsidiary,
$100 par value, 60,000 shares authorized,
issued and outstanding at 3/31/95 and
12/31/94. . . . . . . . . . . . . . . . . . . . 6,000 6,000
Common stock, $1 par value; 10,000,000 shares
authorized; 6,162,998 and 6,152,703 shares
issued and outstanding at 3/31/95
and 12/31/94. . . . . . . . . . . . . . . . . . 6,163 6,153
Additional paid-in capital . . . . . . . . . . . 41,072 40,960
Notes receivable from sale of common stock . . . (816) (816)
Net unrealized appreciation on investments . . . 2,285 1,110
Distributions in excess of accumulated earnings. (3,746) (3,420)
-------- --------
Total shareholders' equity . . . . . . . . . . 50,958 49,987
-------- --------
Total liabilities and shareholders' equity . . $132,574 $135,517
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
<PAGE>
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1995 1994
---------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Investment and other income:
Interest . . . . . . . . . . . . . . $ 3,142 $ 2,187
Dividends. . . . . . . . . . . . . . 346 407
Other income . . . . . . . . . . . . 61 --
-------- --------
Total investment and other income. 3,549 2,594
-------- --------
Expenses:
Interest expense . . . . . . . . . . 1,697 1,567
Investment advisory fee. . . . . . . 637 539
Legal and audit services . . . . . . 190 212
Other operating expenses . . . . . . 144 72
-------- --------
Total expenses . . . . . . . . . . 2,668 2,390
-------- --------
Net investment income. . . . . . . . . 881 204
Net realized gains on investments. . . 78 242
-------- --------
Net investment income before net
unrealized appreciation on
investments . . . . . . . . . . . . . 959 446
Net unrealized appreciation on
investments . . . . . . . . . . . . . 1,175 306
-------- --------
Net increase in net assets resulting
from operations . . . . . . . . . . . $ 2,134 $ 752
-------- --------
-------- --------
Earnings per common share. . . . . . . $ 0.34 $ 0.11
-------- --------
-------- --------
Weighted average number of common
shares and common share equivalents
outstanding. . . . . . . . . . . . . . 6,154 6,156
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
<PAGE>
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income. . . . . . . . . . . . . . . . $ 881 $ 204
Net realized gains on investments. . . . . . . . . . 78 242
Net unrealized appreciation on investments . . . . . 1,175 306
-------- --------
Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . . . . . 2,134 752
Distributions:
Cash distributions to common shareholders. . . . . . (1,108) (1,227)
Stock distributions to common shareholders . . . . . (122) --
Accrued distributions to preferred shareholders. . . (55) (55)
Capital Share Transactions:
Common shares issued in lieu of cash distributions . 122 15
-------- --------
Net increase (decrease) in net assets. . . . . . . . . 971 (515)
Net assets at beginning of period. . . . . . . . . . . 49,987 52,185
-------- --------
Net assets at end of period. . . . . . . . . . . . . . 50,958 51,670
Preferred stock of wholly owned subsidiary . . . . . . 6,000 6,000
-------- --------
Net asset value available to common shareholders . . . $ 44,958 $ 45,670
-------- --------
-------- --------
Net asset value per common share . . . . . . . . . . . $ 7.29 $ 7.44
-------- --------
-------- --------
Common shares outstanding at end of period . . . . . . 6,163 6,134
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE>
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . . . . $ 2,134 $ 752
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash provided by operating activities:
Net unrealized appreciation on investments. . . . (1,175) (306)
Net realized gains on investments . . . . . . . . (78) (242)
Changes in assets and liabilities:
Other assets. . . . . . . . . . . . . . . . . . . 510 (51)
Accrued interest payable. . . . . . . . . . . . . 609 841
Investment advisory fee payable . . . . . . . . . (17) (11)
Other liabilities . . . . . . . . . . . . . . . . 226 260
------- -------
Net cash provided by operating activities. . . 2,209 1,243
------- -------
Cash Flows From Investing Activities:
Net (increase) decrease in investments. . . . . . 351 (6,433)
Net (purchase) redemption of U.S. government
securities . . . . . . . . . . . . . . . . . . . (961) 595
Payments on notes receivable. . . . . . . . . . . -- 15
------- -------
Net cash used in investing activities. . . . . (610) (5,823)
------- -------
Cash Flows From Financing Activities:
Common dividends and distributions paid . . . . . (1,108) (4,587)
Preferred stock dividends . . . . . . . . . . . . (220) (220)
Net repayments under revolving line of credit . . (880) --
------- -------
Net cash used in financing activities. . . . . (2,208) (4,807)
------- -------
Net decrease in cash and cash equivalents. . . . . . . (609) (9,387)
Cash and cash equivalents, beginning of period . . . . 6,609 24,358
------- -------
Cash and cash equivalents, end of period . . . . . . . $ 6,000 $14,971
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
NOTE 1. GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements of Allied Capital Corporation and subsidiaries (the
Company) contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the Company's consolidated financial
position as of March 31, 1995 and the results of operations, changes in net
assets, and cash flows for the periods indicated. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1994 Annual Report. The
results of operations for the three months ended March 31, 1995 are not
necessarily indicative of the operating results to be expected for the full
year. Certain reclassifications have been made to the 1994 condensed
financial statements in order to conform to the 1995 presentation.
NOTE 2. DISTRIBUTIONS
The Company's Board of Directors declared a first quarter dividend
equivalent to $0.20 per share payable on March 31, 1995 to shareholders of
record on March 17, 1995. In connection with this dividend, the Company paid
cash of $1,108,000 and distributed new shares of common stock with a value of
$122,000 for a total dividend of $1,230,000.
The Company owned all of the outstanding capital stock of Allied Capital
Lending Corporation ("Allied Lending") prior to consummation of the initial
public offering of Allied Lending shares in November 1993. As a result of
that initial public offering, the Company's ownership of Allied Lending
shares was reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares
outstanding at December 31, 1993. The Company has agreed that it would
divest itself of all shares of Allied Lending by December 31, 1998 by public
offerings, private placements, distributions to the Company's shareholders or
otherwise. The Company declared an extra dividend in December of 1994 and
distributed on January 6, 1995 an aggregate of 335,086 Allied Lending shares,
which reduced its ownership of Allied Lending shares to 1,244,914 shares, or
28.5% of the Allied Lending shares then outstanding.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Loans. The Company had loan commitments outstanding of $7.2 million at
March 31, 1995 to various existing and prospective portfolio companies.
Litigation. The Company is a party to a number of lawsuits in connection
with loans it has made to small businesses. In the opinion of the Company's
management, none of these proceedings are material in relation to the
Company's consolidated financial position.
NOTE 4. SUBSEQUENT EVENT
On April 10, 1995, the Company entered into a loan agreement with
Overseas Private Investment Corporation under which it may borrow up to $20
million to provide financing for international projects involving qualifying
U.S. small businesses. Loans made under this agreement bear interest at the
U.S. Treasury Rate plus .5%, and have a ten year maturity from the date of
disbursement. The loan agreement expires on the earlier of the first date on
which the amount of the loan(s) equal $20 million or April 10, 1998.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Total investments decreased by $2.8 million or 2.4% from $115 million at
December 31, 1994 to $112 million at March 31, 1995. This decrease was
primarily due to new investments of approximately $6 million less $9.8
million in repayments and the distribution of 335,086 shares of Allied
Lending to the Company's shareholders on January 6, 1995, and an increase in
unrealized appreciation of $1.2 million. Cash and cash equivalents and U.S.
government securities increased from $16.8 million at December 31, 1994 to
$17.2 million at March 31, 1995. The small increase in cash and cash
equivalents and government securities resulted from total repayments of
investments exceeding new investments made, net of the effect of dividends
paid to shareholders during the three months ended March 31, 1995.
Subsequent to the close of the first quarter of 1995, the Company
secured a credit facility with the Oversees Private Investment Corporation
for up to $20 million in financing for international projects involving small
businesses. Given the availability of this facility and current cash and
government securities available at March 31, 1995, the Company believes that
it has adequate capital to continue to meet its new investment objectives
throughout the year. The Company continues to explore obtaining additional
investment capital from the Small Business Administration and private lenders
as well.
RESULTS OF OPERATIONS
Net increase in net assets resulting from operations was $2,134,000 and
$752,000 for the three months ended March 31, 1995 and 1994, respectively.
The 1995 increase was primarily due to a significant increase in investment
and other income of $955,000 and an increase in unrealized appreciation of
$869,000 for the three months ended March 31, 1995 as compared to the
corresponding period in 1994. Investment and other income increased because
of a significant increase in investments in loans and debt securities during
1994. Unrealized appreciation increased as shown in the Portfolio Changes
section below.
PORTFOLIO CHANGES
The following represents portfolio investment balances in the Company as
of March 31, 1995 that have changed in appreciation or depreciation by more
than 10% as compared to the appreciation or depreciation as of December 31,
1994.
<TABLE>
<CAPTION>
Appreciation (Depreciation)
----------------------------------
Portfolio Company March 31, 1995 December 31, 1994 $ Change Percent Change
- - - - - - - ------------------ -------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Allied Capital Lending Corporation $9,525,000 $8,246,000 $1,279,000 15.5%
DMI Furniture 114,634 75,770 38,864 51.3%
June Broadcasting, Inc. 781,927 524,327 257,600 49.1%
West Virginia Radio Corporation (200,000) (122,113) (77,887) (63.8%)
Pizza Shops (645,000) (181,000) (464,000) (256.4%)
<FN>
* Percentage not applicable as zero balance at December 31, 1994.
</TABLE>
6
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The individual owners of six Spa Lady-licensed borrowers filed suit in 1994
in the Circuit Court of Fairfax County, Virginia, against Allied Capital
Investment Corporation, Allied Venture Partnership and two other parties,
seeking compensatory, punitive and treble damages totalling approximately
$8,988,000 on the basis of alleged conspiracy to injure the plaintiff's
businesses and tortious interference with regard to unsuccessful workouts of
their loans, which resulted in foreclosure on certain subject health spas.
That action was dismissed in October 1994, and a similar case filed in 1994
by the six corporate borrowers was dismissed in January 1995, which dismissal
has been appealed by those plaintiffs. The Company believes that these
claims have no merit.
ITEM 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the Registrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
During 1994, in the course of a review of certain regulatory matters, the
Company determined that the board of directors of the Company was composed of
a lesser percentage of non-interested directors than required by relevant
provisions of the Investment Company Act of 1940 (the "1940 Act").
Specifically, certain non-officer directors of the Company owned stock of
Allied Capital Advisers, Inc. ("Advisers"), and one non-officer director had
a material business relationship with Advisers. Actions were taken promptly
to bring the board of directors into compliance with the relevant provisions
of the 1940 Act. A committee of non-interested directors of the Company and
Allied Capital Corporation II was formed to review this matter. At its own
initiative, Advisers also undertook an audit of compliance with securities
laws as they relate to the Company. The Company currently does not believe
that this situation will have a material adverse effect on the operations of
the Company or on its financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1995.
7
<PAGE>
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)
/s/ Jon A. DeLuca
---------------------------
Date: May 12, 1995 Jon A. DeLuca
Senior Vice President and
Chief Financial Officer
8
<PAGE>
Allied Capital Corporation and Subsidiaries
Exhibit 11 Computation of Earnings Per Common Share
Form 10-Q
March 31, 1995
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Primary Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations. . . . . . . . . . . . . . . . . $2,134,000 $ 752,000
Less: Dividends for Preferred Stock. . . . . . . . . (55,000) (55,000)
---------- ----------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders. . . . . . . . . . . . . . . $2,079,000 $ 697,000
---------- ----------
---------- ----------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . 6,152,817 6,118,680
Weighted average number of common
shares issuable on exercise
of outstanding stock options . . . . . . . . . . 876 37,078
---------- ----------
Weighted average number of common shares
and common share equivalents outstanding . . . . 6,153,693 6,155,758
---------- ----------
---------- ----------
Earnings per Common Share . . . . . . . . . . . . . . $ 0.34 $ 0.11
---------- ----------
---------- ----------
Fully Diluted Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations. . . . . . . . . . . . . . . . . $2,134,000 $ 752,000
Less: Dividends for Preferred Stock. . . . . . . . . (55,000) (55,000)
---------- ----------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders. . . . . . . . . . . . . . . $2,079,000 $ 697,000
---------- ----------
---------- ----------
Weighted average number of common
shares and common share equivalents
outstanding as computed for
primary earnings per share . . . . . . . . . . . 6,153,693 6,155,758
Weighted average of additional
shares issuable on exercise
of outstanding stock options . . . . . . . . . . - -
---------- ----------
Weighted average number of common
shares and common share equivalents
outstanding, as adjusted . . . . . . . . . . . . 6,153,693 6,155,758
---------- ----------
Earnings per Common Share . . . . . . . . . . . . . . $ 0.34 $ 0.11
---------- ----------
---------- ----------
</TABLE>
