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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 814-97
ALLIED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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MARYLAND 53-0245085
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., NINTH FLOOR 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
(TITLE OF CLASS)
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 period that 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K / /
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 22, 1996 was approximately
$77,268,993 based upon the average bid and asked price for the registrant's
common stock on that date. As of March 22, 1996 there were 6,891,836 shares of
the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 1995 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1996 are incorporated by reference
into Part III of this Report.
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PART I
ITEM 1. BUSINESS
Allied Capital Corporation (the "Company") was incorporated under the
laws of the District of Columbia in 1958 and was reorganized as a Maryland
corporation in 1991. It is a closed-end management investment company that
elected in 1991 to be regulated as a business development company ("BDC") under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Company
has two active wholly owned subsidiaries, Allied Investment Corporation
("Allied Investment") and Allied Capital Financial Corporation ("Allied
Financial"). Allied Investment and Allied Financial are Maryland corporations
registered under the 1940 Act as closed-end management investment companies.
Allied Investment is licensed by the U.S. Small Business Administration (the
"SBA") as a small business investment company under Section 301(c) of the Small
Business Investment Act of 1958 (an "SBIC"), and Allied Financial is licensed
by the SBA as a specialized small business investment company under Section
301(d) of the Small Business Investment Act of 1958 (an "SSBIC"). As described
below, the Company also has a significant ownership interest in Allied Capital
Lending Corporation ("Allied Lending"), a closed-end management investment
company that has elected to be regulated as a BDC and is an SBA-approved small
business lending company. Allied Capital Advisers, Inc. ("Advisers") serves as
the investment adviser to the Company under an investment advisory agreement.
The investment objective of the Company is to provide a high level of
current income and long-term growth in the value of its net assets by providing
debt, mezzanine, and equity financing primarily for small, privately owned
companies. This objective may be changed by the Board of Directors of the
Company without a "vote of a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Company. To achieve its investment objective,
the Company invests primarily in and lends primarily to small businesses, both
directly and through its wholly owned subsidiaries (unless otherwise indicated,
all further references herein to investments made by the Company include those
made by its subsidiaries). The investments made by the Company include
providing financing for growth, leveraged buyouts of such companies, for note
purchases and loan restructurings, and for special situations, such as
acquisitions, buyouts, recapitalizations, and bridge financings of such
companies.
The Company's investments generally take the form of loans with equity
features, such as warrants or conversion privileges, that entitle the Company
to acquire a portion of the equity in the entity in which the investment is
made. The typical maturity of such a loan made by the Company is seven years,
with interest-only payments in the early years and payments of both principal
and interest in the later years, although loan maturities and principal
amortization schedules vary. The Company also makes senior loans without
equity features. Loans generally bear interest at a fixed rate that the
Company believes is competitive in the venture capital marketplace. Current
income is derived primarily from interest earned on the loan element of the
Company's investments. Generally, long-term growth in net asset value and
realized capital gains, if any, from portfolio companies are achieved through
the equity obtained as a result of the Company's growth financing and leveraged
buyout activity. The Company seeks to structure its investments so that
approximately one-half of the potential return is earned in the form of monthly
or quarterly interest payments and the balance is derived from capital gains.
The Company's investments may be secured by the assets of the entity in which
the investment is made, which collateral interests may be subordinated in
certain instances to institutional lenders, such as banks. The Company makes
available significant managerial assistance to its portfolio companies.
Pending investment of its assets, the Company's funds are generally invested in
repurchase agreements fully collateralized by U.S. government securities.
The Company usually invests in privately held companies or small
public companies that are thinly-traded and generally lack access to capital.
These companies generally have been in business for at least one year, have a
commercially proven product or service, and seek capital to finance expansion
or ownership changes. The Company generally requires that the companies in
which it invests demonstrate sales growth, positive cash flow, and
profitability, although turnaround situations are also considered. The
Company's emphasis is on low- to medium-technology businesses, such as
broadcasting, manufacturing, environmental concerns, wholesale distribution,
commodities storage, and retail operations. The Company emphasizes the quality
of management of the companies in which it invests, and seeks experienced
entrepreneurs with a management track record, relevant industry experience, and
high integrity.
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Historically, all of the investments of the Company have been made in
domestic small businesses. However, the Company recently established a $20
million credit facility with the Overseas Private Investment Corporation
("OPIC"), pursuant to which it anticipates making investments in businesses
that engage, in whole or in part, in overseas operations, usually in countries
representing the world's emerging markets. OPIC is a self-sustaining federal
agency the purpose of which is to promote economic growth in developing
countries by encouraging U.S. private investment in those nations. Under OPIC
regulations, investments generally may be made only in companies that have some
affiliation with a U.S.-based business entity. The Company's first
OPIC-related investment was made in February 1996 and consisted of an
investment in a wireless communications company expanding operations into Latin
America; that investment involved borrowing $5 million from the OPIC credit
facility.
In January 1996, the Company registered 885,448 shares of its stock to
be offered in connection with a rights offering to its existing shareholders.
Pursuant to the rights offering, the Company issued to the common stockholders
at the close of business on January 22, 1996, (the "Record Date"), one
non-transferable subscription right ("Subscription Right") for each share held
which entitled each record date stockholder to subscribe for and purchase from
the Company up to one authorized, but theretofore unissued share of the
Company's common stock for each seven Subscription Rights held (the "Primary
Subscription"). Stockholders who fully exercised their Subscription Rights
were entitled to the additional privilege of subscribing for shares from the
offering not acquired by exercise of Subscription Rights (the
"Over-Subscription Privilege"). In addition, the Company increased the number
of shares subject to subscription by 15%, or 132,817 shares, for an aggregate
total of 1,018,265 shares available under the offering.
The subscription price per common share was $13.11, which equaled 95%
of the average of the last reported sale price of a share of common stock on
the Nasdaq National Market on February 27, 1996 (the expiration date of the
rights offering) and each of the four preceding business days. Stockholders
participating in the offering subscribed for 404,767 shares through the Primary
Subscription and 251,903 shares through the Oversubscription Privilege for a
total of 656,670 shares. The Company received net proceeds of $8.2 million
from the rights offering after estimated expenses of $458,000, including a 2.5%
commission paid to eligible broker/dealers on each share sold as a result of
their soliciting efforts. In the registration statement relating to the rights
offering, the Company retained the right to offer and sell any unsubscribed-for
shares through a subsequent offering. Any such subsequent offering may be made
only through the use of a prospectus included in a post-effective amendment to
the registration statement.
The Company's Operation as a BDC
As a BDC, the Company may not acquire any assets other than
"Qualifying Assets" unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the value of the Company's total assets (the
"70% test"). The principal categories of Qualifying Assets relevant to the
business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined to
include any issuer that (a) is organized and has its principal place
of business in the United States, (b) is not an investment company
other than an SBIC wholly owned by the BDC (the Company's investments
in and advances to Allied Investment and Allied Financial are
Qualifying Assets, but its investment in Allied Lending, which is
neither wholly owned nor an SBIC, is not) and (c) does not have any
class of publicly traded securities with respect to which a broker may
extend margin credit.
(2) Securities received in exchange for or distributed with respect to
securities described in (1) above, or pursuant to the exercise of
options, warrants or rights relating to such securities.
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act) maturing in one year
or less from the time of investment.
In addition, to treat securities described in (1) and (2) above as
Qualifying Assets for the purpose of the 70% test, a BDC must make available to
the issuer of those securities significant managerial assistance. Making
available significant managerial assistance means, among other things, (i) any
arrangement whereby the BDC, through its
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directors, officers or employees, offers to provide, and, if accepted, does
provide, significant guidance and counsel concerning the management, operations
or business objectives and policies of a portfolio company or (ii) in the case
of an SBIC, making loans to a portfolio company. Managerial assistance is made
available to the portfolio companies by the Company's directors and officers,
who are employees of Advisers, which manages the Company's investments. Each
portfolio company is assigned for monitoring purposes to an investment officer
and its principals are contacted and counseled if the portfolio company appears
to be encountering business or financial difficulties. The Company also
provides managerial assistance on a continuing basis to any portfolio company
that requests it, whether or not difficulties are perceived. The Company's
officers and directors are highly experienced in providing managerial
assistance to small businesses.
The Company may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
the Company. Since the Company made its BDC election, it has not in practice
made any substantial change in its structure or, on a consolidated basis, in
the nature of its business, except for the disposition of its ownership
interest in Allied Lending, as described below, which is not a change that
results in the Company ceasing to be a BDC. As a BDC, the Company is entitled
to borrow money and issue senior securities representing indebtedness as long
as senior securities representing indebtedness have asset coverage of at least
200%. This limitation is not applicable to classes of senior securities
representing indebtedness of the Company's SBIC and SSBIC subsidiaries.
Co-Investment with Allied Capital Corporation II, Allied Venture Partnership,
and Allied Technology Partnership
In accordance with the conditions of several exemptive orders of the
Securities and Exchange Commission (the "Commission") permitting co-investments
(the "Co-investment Guidelines"), most of the Company's acquisitions and
dispositions of investments are made in participation with Allied Capital
Corporation II ("Allied II"). In the past, the Company also acquired certain
investments in participation with Allied Venture Partnership ("Allied Venture")
and Allied Technology Partnership ("Allied Technology"), both private venture
capital partnerships managed by Advisers, neither of which is now making new
investments. Allied II is a closed-end management investment company that has
elected to be regulated as a BDC and for which Advisers serves as its
investment adviser. At December 31, 1995, Allied II had total consolidated
assets of $107,169,000, compared to the Company's total consolidated assets of
$148,268,000 at that date.
The Co-investment Guidelines generally provide that the Company and
its wholly owned subsidiaries must be offered the opportunity to invest in any
investment, other than in interim investments or marketable securities, that
would be suitable for Allied II or its wholly owned subsidiaries and the
Company to the extent proportionate to their respective consolidated total
assets. Securities purchased by the Company or its wholly owned subsidiaries
in a co-investment transaction with any of Allied II or its wholly owned
subsidiaries, Allied Venture or Allied Technology, will consist of the same
class of securities, will have the same registration rights, if any, and other
rights related thereto, and will be purchased for the same unit consideration.
Any such co-investment transaction must be approved by the Company's Board of
Directors, including a majority of its independent directors. The Company will
not make any investment in the securities of any issuers in which Allied II,
Allied Venture or Allied Technology, but not the Company, has previously
invested. The Co-investment Guidelines also provide that the Company will have
the opportunity to dispose of any securities in which the Company or its wholly
owned subsidiaries and any of Allied II or its wholly owned subsidiaries,
Allied Venture or Allied Technology, have invested in proportion to their
respective holdings of such securities, and that, in any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs.
Allied Investment
Allied Investment, as an SBIC, provides capital to privately owned
small businesses primarily through loans, generally with equity features, and,
to a lesser extent, through the purchase of common or convertible preferred
shares. Loans with equity features are generally evidenced by a note or
debenture that is convertible into common stock, requiring the holder to make a
choice, prior to the loan's maturity, between accepting repayment and
maintaining its equity position, or purchasing, frequently for a nominal
consideration, common stock of the issuer even after the loan is repaid.
Wherever possible, Allied Investment seeks collateral for its loans, but its
security interest is usually subordinated to the security interest of other
institutional lenders.
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As an SBIC, Allied Investment currently has the opportunity to sell to
the SBA subordinated debentures with a maturity of up to ten years up to an
aggregate principal amount determined by a formula which applies a multiple to
its private capital, but not in excess of $90 million (the "$90 million
limit"). The $90 million limit generally applies to all financial assistance
provided by the SBA to any licensee and its "associates," as that term is
defined in SBA regulations. For this purpose, Allied Investment and Allied
Financial would be deemed to be "associates" of one another and both may be
deemed to be "associates" of Allied Investment Corporation II ("Allied
Investment II"), which is also an SBIC and is a subsidiary of Allied II. As a
group, Allied Investment and Allied Financial have received $68,300,000 in
subordinated debenture and preferred stock investments from the SBA as of
December 31, 1995; as a result, this combined ability to apply for additional
leverage from the SBA will be limited to $21,700,000 due to the $90 million
limit. This combined ability to obtain additional leverage assumes that Allied
Investment II does not obtain any SBA leverage. The Company is unable to
predict the SBA's ability to meet demands for leverage on an ongoing basis, as
such funding may be affected if Congress reduces appropriations for the SBA,
which may compel the SBA to allocate leverage or to reduce the current limits
on available leverage. Therefore, there is no guaranty that Allied Investment
or Allied Financial will be able to obtain additional SBA leverage beyond what
is currently held.
Allied Investment provides managerial assistance to its portfolio
companies by arranging syndicated financings, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.
Allied Financial
Allied Financial, as an SSBIC, operates as a small business investment
company specializing in the financing of small businesses controlled by
socially or economically disadvantaged persons. To determine whether the
owners of a small business are socially or economically disadvantaged, the SBA
relies on a composite of factors. Business owners who are members of the
following groups, among others, are considered socially disadvantaged: African
Americans, Hispanic Americans, Native Americans and Asian Pacific Americans.
In determining whether the owners of a small business are economically
disadvantaged, consideration may be given to factors such as levels of income,
location (for instance, urban ghettos, depressed rural areas and areas of high
unemployment or underemployment), education level, physical or other special
handicap, inability to compete in the marketplace because of prevailing or past
restrictive practices or Vietnam-era service in the armed forces, or any other
factors that may have contributed to disadvantaged conditions.
An SSBIC may sell preferred stock or long-term subordinated debt to
the SBA in an amount of up to 200% of its private capital. Beginning with the
SBA's 1996 fiscal year commencing on October 1, 1995, Congress has discontinued
subsidized funding for the SBA's SSBIC program. Prior to this change, an SSBIC
was able to sell preferred stock and debentures which were issued with a rate
reduction or subsidy. Preferred stock sold to the SBA after November 1989 pays
dividends at an annual rate of four percent (4%) of par value and must be
redeemed within 15 years of issuance; preferred stock sold to the SBA before
November 1989 pays dividends at an annual rate of three percent (3%) of par
value and has no required redemption date. In addition to preferred stock, the
SBA had provided leverage to SSBICs at a reduced rate through the purchase or
guarantee of debentures. As of December 31, 1995, Allied Financial had
unsubsidized capital in the aggregate amount of $2,000,000 and subsidized
capital in the aggregate amount of $23,950,000, consisting of subordinated
debentures to the SBA in the amount of $16,950,000, 3% preferred stock of
$6,000,000 and 4% preferred stock of $1,000,000.
Allied Financial provides managerial assistance to its portfolio
companies by arranging syndicated financings, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.
The Company's Interest in Allied Lending
The Company owned 2,380,000 shares, or all of the outstanding capital
stock, of Allied Lending prior to consummation of the initial public offering
of Allied Lending's common stock in November 1993. As a result of that initial
public offering, the Company's ownership of Allied Lending's common stock was
reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding
at December 31, 1993. The Company has agreed to
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divest itself of all shares of Allied Lending by December 31, 1998 by public
offerings, private placements, distributions to the Company's stockholders or
otherwise. As part of this divestiture, the Company declared an extra
distribution in December 1994 and distributed in early January 1995 an
aggregate of 335,086 Allied Lending shares, which reduced its ownership of
Allied Lending to 1,244,914 shares, or 28% of the Allied Lending common stock
then outstanding.
Until 1995, the business of Allied Lending consisted solely of making
small business loans which are partially guaranteed under the SBA's 7(a) Loan
Program ("7(a) guaranteed loans"). Allied Lending has been an active non-bank
lender in the 7(a) Loan Program. Most of the loans made by Allied Lending
historically have been made for the purpose of allowing portfolio companies to
acquire real estate-related assets, such as factories, workshops, or retail
premises, or to refinance outstanding loans made to acquire such real estate; a
smaller proportion of such loans has been made for the purpose of allowing
portfolio companies to purchase or refinance machinery and equipment. Allied
Lending, pursuant to stockholder approval at a Special Meeting of Stockholders
on November 9, 1995, expanded its ability to make loans to include, in addition
to 7(a) guaranteed loans, loans that are made in conjunction with 7(a)
guaranteed loans, and loans pursuant to the SBA 504 program.
Investment Adviser
Advisers is the investment adviser to the Company pursuant to an
investment advisory agreement. In May 1995, the Company's stockholders
approved a new investment advisory agreement (the "current agreement"). The
current agreement will remain in effect from year to year as long as its
continuance is approved at least annually by the Board of Directors, including
a majority of the disinterested directors, or by the "vote of a majority of the
outstanding voting securities" (as defined in the 1940 Act), of the Company.
The current agreement may, however, be terminated at any time on (60) sixty
days' notice, without the payment of any penalty, by the Board of Directors or
by vote of a majority of the Company's outstanding voting securities, as so
defined, and will terminate automatically in the event of its assignment.
The terms of the current agreement are virtually identical to those of
the investment advisory agreement between the Company and Advisers that it
replaced (the "former agreement") except as to the calculation of the
investment advisory fee and to the extent clarifying changes were made
regarding the nature of professional or technical fees and expenses to be paid
by the Company. The terms of the current agreement regarding calculation of
the investment advisory fee are intended to reflect Advisers' practice of
generally imposing a significantly lower fee on the Company's cash and cash
equivalents and Interim Investments (i.e., U.S. government securities) than the
fee applicable to the Company's invested assets, which Advisers has
historically effected by waiving portions of the investment advisory fee
applicable to the Company's cash and cash equivalents and Interim Investments.
In the current agreement the provisions of the former agreement concerning the
transaction costs to acquire or dispose of an investment were clarified to
describe the nature of professional or technical fees and expenses to be paid
by the Company and to provide that those fees and expenses included items such
as credit reports, title searches, fees of accountants or industry-specific
technical experts, and transaction-specific travel expenses. The effect of
those clarifications and the replacement of the former agreement does not
result in the imposition of any new fee or expense to be paid by the Company or
its stockholders. Replacement of the former agreement with the current
agreement is expected to result in an advisory fee that is lower than that
provided under the former agreement (absent waiver by Advisers of any portion
of its fee) and approximately the same as that provided in recent practice when
Advisers waived a portion of its fee annually. The terms of the current
agreement are summarized below.
Pursuant to the current agreement, Advisers manages the investments of
the Company, subject to the supervision and control of the Board of Directors.
Specifically, Advisers identifies, evaluates, structures, closes, and monitors
the investments made by the Company. The Company will not make any investments
that have not been recommended by Advisers as long as the current agreement
remains in effect. Advisers has the authority to effect acquisitions and
dispositions of investments for the Company's account, subject to approval by
the Company's Board of Directors.
The current agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers. The expenses paid by Advisers include the compensation of its
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officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments, legal and accounting fees, the fees
and expenses of the Company's independent directors and the fees of its
officer-directors, the costs of printing and mailing proxy statements and
reports to stockholders, costs associated with promoting the Company's stock,
and the fees and expenses of the Company's custodian and transfer agent. The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers. Advisers is entitled to retain
for its own account any fees paid by or for the account of any company,
including a portfolio company, for special investment banking or consulting
work performed for that company which is not related to such investment
transaction or management assistance. Advisers will report to the Board of
Directors not less often than quarterly all fees received by Advisers from any
source whatever and whether, in its opinion, any such fee is one that Advisers
is entitled to retain under the provisions of the current agreement. In the
event that any member of the Board of Directors should disagree, the matter
will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent Directors. If the Company uses the
services of attorneys or paraprofessionals on the staff of Advisers for the
Company's corporate purposes in lieu of outside counsel, the Company will
reimburse Advisers for such services at hourly rates calculated to cover the
cost of such services, as well as for incidental disbursements by Advisers in
connection with such services.
As compensation for its services to and the expenses paid for the
account of the Company, Advisers is paid quarterly, in arrears, a fee equal to
0.625% per quarter of the quarter-end value of the Company's consolidated total
assets, less the value of the shares of Allied Lending owned by the Company,
consolidated Interim Investments, cash and cash equivalents, plus 0.125% per
quarter of the quarter-end value of consolidated Interim Investments, cash and
cash equivalents. The current agreement provides specifically that the fee to
Advisers will not apply to the Company's investment in Allied Lending, as
required by the Commission's 1993 exemptive order permitting the spinoff of
Allied Lending. Such fees on an annual basis are approximately 2.5% of the
Company's consolidated total assets, less the Company's investment in Allied
Lending and consolidated Interim Investments, cash and cash equivalents, and
0.5% of the Company's consolidated Interim Investments, cash and cash
equivalents.
The fee to Advisers is substantially higher than that paid by most
investment companies because of the efforts and resources devoted by Advisers
to identifying, evaluating, structuring, closing, and monitoring the types of
private investments in which the Company specializes. The rate of compensation
paid by the Company to Advisers is substantially the same as that paid by
Allied II, with which Advisers has also negotiated a new investment advisory
agreement during 1995. The Company also understands that the fee to Advisers
provided for by the current agreement is not in excess of that frequently paid
by private investment funds engaged in similar types of investments. Such
private funds also typically allocate to management a substantial participation
in profits.
Employees
The Company has no employees, as all of its personnel are furnished by
Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any properties or other tangible
assets.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1996, as well as certain other
information with respect to those persons:
<TABLE>
<CAPTION>
Positions Currently
Held with the Principal Occupations
Name Age Company During Past Five Years
---- --- ---------------------- ----------------------
<S> <C> <C> <C>
David Gladstone 53 Chairman of the Board and Chief Employed by the Company or
Executive Officer Advisers since 1974; Chairman
and Chief Executive Officer of
Allied II, Allied Capital
Commercial Corporation
("Allied Commercial"), Allied
Lending and Advisers;
Director, President and Chief
Executive Officer of Business
Mortgage Investors, Inc.
("BMI") and Allied Capital
Mortgage Corporation ("Allied
Mortgage"); Director of The
Riggs National Corporation;
Trustee of The George
Washington University.
George C. Williams 69 Vice Chairman of Employed by the Company or
the Board Advisers since 1959; Vice
Chairman of Allied II, Allied
Commercial, Allied Lending and
Advisers; Chairman of BMI and
Allied Mortgage. He is the
father of G. Cabell Williams
III.
G. Cabell Williams III 41 President, and Chief Employed by the Company or
Operating Officer Advisers since 1981.
Executive Vice President of
Allied II, Allied Commercial,
Allied Lending, BMI and
Advisers; Director of
Environmental Enterprises
Assistance Fund. He is the
son of George C. Williams.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Jon A. DeLuca 33 Executive Vice President, Treasurer, Employed by Advisers since
and Chief Financial Officer 1994. Executive Vice
President, Treasurer and Chief
Financial Officer of Allied
II, Allied Commercial, Allied
Lending, BMI, Allied Mortgage,
and Advisers. Manager of
Entrepreneurial Services at
Coopers & Lybrand from 1986 to
1994.
William F. Dunbar 37 Executive Vice President Employed by the Company or
Advisers since 1987; President
and Chief Operating Officer of
Allied II; Executive Vice
President of Allied
Commercial, Allied Lending,
BMI and Advisers.
Thomas R. Salley 38 General Counsel and Secretary Employed by Advisers since
1988; General Counsel and
Secretary of Allied II, Allied
Lending, Allied Commercial,
BMI, Allied Mortgage and
Advisers.
Joan M. Sweeney 36 Executive Vice President Employed by Advisers since
1993; President and Chief
Operating Officer of Advisers;
Executive Vice President of
Allied II, Allied Commercial,
Allied Lending, BMI, and
Allied Mortgage; Senior
Manager at Ernst & Young from
1990 to 1993.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information in response to this Item is incorporated by reference to
the "Investor Information" section of, and to Notes 4 and 7 of the Notes to
Consolidated Financial Statements contained in, the Company's Annual Report to
Stockholders for the year ended December 31, 1995 (the "1995 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to
the table in the "Consolidated Comparison of Financial Highlights" section of
the 1995 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1995 Annual Report.
8
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to
the Consolidated Financial Statements, notes thereto and Report of Independent
Accountants thereon contained in the 1995 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to
the identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1996 Annual Meeting
of Stockholders, scheduled to be held on May 6, 1996 (the "1996 Proxy
Statement"). Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" included in Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Executive Officers and Directors,"
"Incentive Stock Options" and "Compensation of Directors" of the 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to
the subsection captioned "Beneficial Ownership of Common Stock" of the 1996
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to
the subsections captioned "Certain Transactions" of the 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
from the 1995 Annual Report:
Consolidated Balance Sheet at December 31, 1995 and 1994.
Consolidated Statement of Operations for the years ended December 31,
1995, 1994 and 1993.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1995, 1994 and 1993.
Consolidated Statement of Cash Flows for the years ended December 31,
1995, 1994 and 1993.
Consolidated Statement of Loans to and Investments in Small Business
Concerns at December 31, 1995.
Notes to Consolidated Financial Statements.
9
<PAGE> 11
B. Report of Independent Accountants with respect to the financial
statements listed in A. above is incorporated by reference from the
1995 Annual Report.
2. No financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.
3. The following exhibits are filed herewith or incorporated by
reference as set forth below:
(3)(A)(1) The Company's Articles of Incorporation.
(3)(B)(2) The Company's By-Laws.
(4)(A) Instruments Defining the Rights of Security holders. See
Exhibits 3(A) and 3(B).
(4)(D)(3) Note Agreement between the Company and certain subsidiaries and
Massachusetts Mutual Life Insurance Company, as amended, dated
April 30, 1992.
(4)(E)(2) Loan Agreement between the Company and Overseas Private
Investment Corporation, dated April 10, 1995.
(4)(F)(2) Unsecured Line of Credit Agreement between the Company and The
Riggs National Bank of Washington, DC dated December 18, 1995.
(10)(A)(4) Investment Advisory Agreement between the Company and Allied
Capital Advisers, Inc. approved by the Company's stockholders on
May 4, 1995.
(10)(B)(i)(5) Letter Agreement dated November 16, 1993 among Allied Capital
Lending Corporation, the Company and Lehman Brothers Inc.
(10)(B)(ii)(6) Tax Indemnification Agreement dated November 12, 1993 between
the Company and Allied Capital Lending Corporation.
(10)(C)(iii)(7) The Company's Dividend Reinvestment Plan.
(10)(E)(8) The Company's Incentive Stock Option Plan, as amended.
(11)* Statement re computation of per share earnings.
(13)(9)* 1995 Annual Report to Stockholders.
(21) Subsidiaries of the Company and jurisdiction of incorporation.
<TABLE>
<CAPTION>
<S> <C>
Allied Investment Corporation Maryland
Allied Capital Financial Corporation Maryland
Allied Development Corporation District of Columbia
</TABLE>
(23)* Consents of Matthews, Carter and Boyce, independent accountants.
(27)* Financial Data Schedule.
(28)* Financial statements as of and for the year ended December 31,
1995 of Allied Investment Corporation and Allied Capital
Financial Corporation, in the form filed with the Small Business
Administration.
- ---------------------------------
10
<PAGE> 12
* Filed herewith.
(1) Incorporated by reference to Exhibit D to the Company's definitive proxy
statement filed on April 11, 1991.
(2) Incorporated by reference to such Exhibit on Pre-Effective Amendment No. 2
filed with registration statement Form N-2 (File No. 33-64629) on January
24, 1996.
(3) Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1992.
Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii),
(4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9,
1993.
(4) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement relating to the meeting of its stockholders held on May 4, 1995.
(5) Incorporated by reference to an exhibit of the same number filed with the
Company's Form 8-K dated November 19, 1993.
(6) Incorporated by reference to an exhibit of the same number filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(7) Incorporated by reference to an exhibit of the same number filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1992.
(8) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement filed on March 30, 1994 with respect to an annual meeting of
stockholders held on May 5, 1994.
(9) Except to the extent that portions of this exhibit are incorporated herein
by reference, this document shall not be deemed to have been filed
pursuant to the Securities Exchange Act of 1934.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended December
31, 1995.
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 28, 1996.
/s/ DAVID GLADSTONE
-------------------------------------------------
David Gladstone
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ DAVID GLADSTONE Chairman and March 28, 1996
- ------------------------------------------------- Chief Executive Officer
David Gladstone (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Vice Chairman of the Board March 28, 1996
- -------------------------------------------------
George C. Williams
/s/ G. CABELL WILLIAMS III Director and President March 28, 1996
- ------------------------------------------------- and Chief Operating Officer
G. Cabell Williams III
/s/ T. MURRAY TOOMEY Director March 28, 1996
- -------------------------------------------------
T. Murray Toomey
/s/ JOSEPH A. CLORETY III Director March 28, 1996
- -------------------------------------------------
Joseph A. Clorety III
/s/ GUY T. STEUART II Director March 28, 1996
- -------------------------------------------------
Guy T. Steuart II
/s/ WARREN K. MONTOURI Director March 28, 1996
- -------------------------------------------------
Warren K. Montouri
/s/ MICHAEL I. GALLIE Director March 28, 1996
- -------------------------------------------------
Michael I. Gallie
/s/ JON A. DELUCA Executive Vice March 28, 1996
- ------------------------------------------------- President and Chief
Jon A. DeLuca Financial Officer
(Principal Financial
and Accounting Officer)
</TABLE>
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
(11) Statement re computation of per share earnings.
(13) 1995 Annual Report to Stockholders.
(23) Consents of Matthews, Carter and Boyce, independent accountants.
(27) Financial Data Schedule.
(28) Financial statements as of and for the year ended
December 31, 1995 of Allied Investment Corporation and
Allied Capital Financial Corporation, in the form filed with
the Small Business Administration.
</TABLE>
13
<PAGE> 1
Exhibit 11
Allied Capital Corporation and Subsidiaries
Computation of Earnings Per Common Share
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $15,317,000 $224,000 $20,406,000
Less: Dividends for Preferred Stock (220,000) (220,000) (220,000)
------------------------------------------------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders $15,097,000 $4,000 $20,186,000
================================================
Weighted average number of
common shares outstanding 6,169,211 6,132,159 6,108,809
Weighted average number of
shares issuable on exercise
of outstanding stock options 2,322 22,027 19,054
------------------------------------------------
Weighted average number of common shares and
common share equivalents outstanding 6,171,533 6,154,186 6,127,863
================================================
Earnings per Common Share $2.45 $0.00 $3.29
================================================
Fully Diluted Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $15,317,000 $224,000 $20,406,000
Less: Dividends for Preferred Stock (220,000) (220,000) (220,000)
------------------------------------------------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders $15,097,000 $4,000 $20,186,000
================================================
Weighted average number of
common shares and common share equivalents
outstanding as computed for
primary earnings per share 6,171,533 6,154,186 6,127,863
Weighted average of additional
shares issuable on exercise
of outstanding stock options 39,134 55 15,034
------------------------------------------------
Weighted average number of common
shares and common share
equivalents outstanding, as adjusted 6,210,667 6,154,241 6,142,897
================================================
Earnings per Common Share $2.43 $0.00 $3.29
================================================
</TABLE>
<PAGE> 1
EXHIBIT 13
Company Profile
- --------------------------------------------------------------------------------
Allied Capital Corporation
[PHOTO]
ALLIED CAPITAL CORPORATION is an investment company that has profited from
lending to and investing in small businesses for 37 years. The market demand
for small business finance is large with few providers, and the Company has
developed a specialty in this market niche. Allied Capital Corporation
provides investors with the unique opportunity to profit from our investment
experience and the ever-growing small business marketplace.
The Company operates much like a bank or finance company in its origination of
subordinated loans, and it frequently receives and profits from equity
interests in small businesses as well. Allied Capital Corporation provides a
unique advantage to stockholders when compared to traditional lending
institutions, because as an investment company, it pays no corporate taxes -
all of its profits pass directly to stockholders.
THE ALLIED CAPITAL COMPANIES
Allied Capital Corporation is one company in the Allied Capital complex of
public and private companies dedicated to financing the growth of small,
private businesses. With more than $650 million in combined total assets,
Allied Capital is a small business finance specialist and has financed
everything from equipment purchases, construction loans and commercial real
estate mortgages to management buyouts and acquisitions. Over the last 37
years, Allied Capital has invested in the growth of thousands of businesses
nationwide while providing substantial returns to its stockholders.
CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Letter To Our Stockholders 2
Portfolio Manager's Report 4
Management's Discussion And Analysis 10
Consolidated Comparison Of
Financial Highlights 13
Consolidated Financial Statements 14
Consolidated Statement Of Loans
To And Investments In Small
Business Concerns 20
Notes To The Consolidated
Financial Statements 22
Report Of Independent Accountants 29
Investment Officers 30
Directors And Officers 31
Investor Information 32
</TABLE>
Cover Photography: The Washington Monument by Carol M. Highsmith
<PAGE> 2
Financial Highlights
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31,
(in thousands, except per share amounts) 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments at Value $123,184 $ 115,026
Total Assets $148,268 $ 135,517
Total Debt and Redeemable Preferred Stock $ 83,800 $ 78,005
Shareholders' Equity $ 57,181 $ 49,987
Net Asset Value Available to Common Stockholders $ 51,181 $ 43,987
Net Increase in Net Assets Resulting from Operations $ 15,317 $ 224
Earnings Per Common Share $ 2.45 $ 0.00
Distributions Per Common Share $ 1.44 $ 1.40
Number of Common Shares Outstanding 6,198 6,153
- ---------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
[FIGURE 1]
A $10,000 investment in Allied Capital Corporation in 1960 at its initial
public offering, with all dividends reinvested, was worth $3,351,479 at the end
of 1995, a 17.5% average annual total return over the 36-year period.
<TABLE>
<CAPTION>
ALLIED CAPTIAL CORPORATION
I. $10,000 mountain investment chart
<S> <C>
1960 10,000
1961 8,864
1962 7,023
1963 5,150
1964 6,972
1965 13,144
1966 17,802
1967 15,221
1968 19,820
1969 31,944
1970 34,467
1971 25,943
1972 38,783
1973 163,525
1974 80,801
1975 66,405
1976 80,075
1977 126,311
1978 132,028
1979 139,134
1980 174,350
1981 200,072
1982 206,417
1983 408,997
1984 792,568
1985 688,709
1986 839,079
1987 1,450,600
1988 1,460,738
1989 2,051,958
1990 2,244,823
1991 2,217,343
1992 2,897,497
1993 2,699,319
1994 2,896,683
1995 3,351,479
</TABLE>
1
<PAGE> 3
Letter To Our Stockholders
- --------------------------------------------------------------------------------
Allied Capital Corporation
[PHOTO]: David Gladstone Chairman & Chief Executive Officer
It was a seller's market for most of 1995 and we at Allied Capital Corporation
did our best to capitalize on these market circumstances. In total, we
recognized more than $5 million in net realized gains on investments within our
portfolio. Moreover, at December 31, 1995 the Company still held $7.6 million
in net unrealized appreciation on its balance sheet.
Earnings for 1995, which totaled $2.45 per common share, were up significantly
from 1994. We were able to achieve our ongoing objective of increasing our
ordinary interest and dividend income. We increased our total investment
income by 16% over 1994, as our portfolio of investments produced more
recurring income throughout the year.
This year marked the nineteenth consecutive year that Allied Capital increased
the total distribution to stockholders. The Company paid a total of $1.44 per
share, a 3% increase over last year's total distributions. Concurrent with our
objective to increase the portfolio's investment income, we also distributed
more in the regular quarterly dividends paid. To this end, the board of
directors increased the quarterly dividend twice in 1995. At year-end, the
Company's regular quarterly dividend rate was $0.24 per share, a 20% increase
over the rate that was in place at the beginning of 1995. We paid an annual
extra distribution this year of $0.58 per share, which marked our thirty-third
consecutive year of paying an annual extra distribution.
Allied Capital Corporation's 1995 total return to stockholders of 15.7% was a
strong improvement over the Company's 1994 return, and reflects the increasing
strength of
TOTAL DISTRIBUTIONS PER COMMON SHARE
[FIGURE 2]
<TABLE>
<CAPTION>
II. Distributions Per Share for Last 15 Years (in dollars)
<S> <C>
1980 .35
1981 .44
1982 .51
1983 .59
1984 .68
1985 .77
1986 (9 mos) .73
1987 .92
1988 1.02
1989 1.15
1990 1.27
1991 1.30
1992 1.32
1993 1.35
1994 1.40
1995 1.44
</TABLE>
2
<PAGE> 4
- --------------------------------------------------------------------------------
the portfolio and our commitment to increasing dividends to stockholders. Over
the last fifteen years, the average annual total return has been 20.7%; since
our initial public offering in 1960, the Company has provided an average annual
total return of 17.5% to its stockholders. We are proud of our solid long-term
track record, and will continue to strive for superior returns for our
investors.
"This year marked the nineteenth consecutive year that Allied Capital increased
the total annual distributions to stockholders."
While we celebrated our strong performance this year, we also mourned the loss
of Allied Capital's dear friend and former chairman of the board, Curtis S.
Steuart, who passed away in May 1995. Mr. Steuart was a founding director of
the Company in 1958, and served as chairman of the board from 1966 until 1985.
He continued as a director on our board until 1987 when he retired. We are
grateful for the wisdom and guidance he provided to Allied Capital for so many
years, and we could not have succeeded without him. Mr. Steuart will be missed
by all of us at Allied Capital.
We look to 1996 for new challenges and further growth of our business. During
the first quarter we raised more than $8 million in new equity through a
one-for-seven non-transferable rights offering to our existing stockholders.
This new capital will allow the Company to make new investments, as well as to
leverage against these assets for future growth.
Our overall objective remains to provide our stockholders with strong current
income and long-term capital appreciation through the development of our
portfolio of small business investments. We value your support and look
forward to reporting our results to you throughout the year.
All stockholders are cordially invited to attend the Annual Meeting of
Stockholders at 10:00 am on Monday, May 6, 1996 at the Strathmore Hall Arts
Center, 10701 Rockville Pike, North Bethesda, Maryland.
David Gladstone
Chairman of the Board
3
<PAGE> 5
Portfolio Manager's Report
- --------------------------------------------------------------------------------
Allied Capital Corporation
[PHOTO]: G. Cabell Williams, III President, Chief Operating Officer & Portfolio
Manager
Allied Capital's portfolio of small business investments benefited from the
significant overall opportunities in the public and private capital markets
this year. I am pleased to have this opportunity to share Allied Capital's
success stories for 1995.
An article published recently in the Private Equity Analyst stated that the
average transaction price paid during 1995 for a private company was at a
multiple of seven times the company's historical cash flow, a significant
increase from the average price paid in 1990 of only four times cash flow. We
took advantage of this environment of high earnings multiples and sold many of
our mature investments. We spent much of our efforts in 1995 meeting with
entrepreneurs and structuring our exit on those portfolio companies that we
believed had reached the peak of their pricing multiples.
During 1995, Allied Capital realized capital gains from the sale of eight
investments within the portfolio. The sale of our investment in ALLIED WASTE
INDUSTRIES, INC. provided a $1.5 million gain; GLOBAL SOFTWARE, INC. provided a
$753,000 gain; ENVIRCO CORPORATION provided a $1 million gain; WEATHERTECH
DISTRIBUTING COMPANY provided a $1 million gain; MAXTEC INTERNATIONAL
CORPORATION provided a $203,000 gain; and the sale of our interest in JACKSON
PRODUCTS, INC. produced a $327,000 gain. The sale of a portion of our
investment in GARDEN RIDGE CORPORATION, which completed its initial public
offering (IPO) in May 1995, provided a $2.3 million gain this year. In
September, we sold our equity investment in DOGLOO, INC., for a $1.8 million
gain. We retained our subordinated debentures in Dogloo, which should continue
to provide investment income during 1996.
We were extremely pleased with our successful exits from so many of our
portfolio investments. We realize, however, that we will incur losses on
investments from time to time. In 1995, we incurred a $2.2 million loss from
the sale of our investment in EDWARDS HEATING AND AIR CONDITIONING, an
investment that had been previously devalued in our portfolio. We also
continue to have some non-performing or sub-performing investments in the
portfolio that we are closely monitoring.
The strength of the capital markets in 1995 increased our opportunity for gains
from the sale of certain portfolio investments, but this strength also caused
us to restrain our investment activity. During times of inflated valuations,
we are particularly cautious in order to avoid paying too much for an
investment. We will not compromise Allied Capital's high investment standards,
and we will not make an investment when the return does not adequately
compensate us for our risk. When the competition for investments is heated, we
are not interested in playing simply to win at any price.
Competition in the investment field goes hand in hand with higher pricing
multiples. We continue to improve our strategies to be more competitive in
attracting new investment opportunities. Allied Capital has an advantage over
much of the investment community because there are very few lenders who provide
the services we do for our market niche. The small business appetite for
capital is huge, yet most traditional investors perceive a small business
credit as too much work for too few dollars and don't understand how to price
and
4
<PAGE> 6
structure the investment. We have the experience other investors lack in
understanding what an entrepreneur needs.
"We have the experience other investors lack in understanding what an
entrepreneur needs."
We dedicated considerable resources during 1995 to our marketing efforts in
order to clearly articulate our niche in the small business investing
community. We hope these efforts will result in an increase in the quality and
quantity of potential investment opportunities that we review.
We invested over $27 million during the year in small businesses in a variety
of industries. Although our investment niche is primarily private small
businesses, during 1995 we also found investment opportunities that were unique
and attractive in a few thinly traded public small businesses. Our new
investments were located throughout the United States. We believe each new
investment complements our existing portfolio and follows Allied Capital's
tradition of investing with superior entrepreneurs and in companies that have
strong cash flows, strong recurring revenues, and products that are well
established in their marketplaces.
In May 1995, Allied Capital provided buyout financing to KIRKER ENTERPRISES,
INC., the largest U.S. manufacturer of bulk nail enamel and a producer of
automobile coatings for the after market. Located in Paterson, New Jersey,
Kirker produces over a thousand colors and uses more than twenty-five different
formulas to supply nail enamel to the world's leading cosmetic companies. One
of the factors that attracted Allied Capital to this particular small business
is the industry's barriers to entry, which keep competition low. Over the past
45 years, Kirker has developed the technological capabilities required to
handle the complexities of the manufacturing process, and their product
innovations have made many of the formulas and the related manufacturing
processes proprietary. Kirker expects future growth from new domestic
customers, new product lines, acquisitions from within the industry and
international expansion. Allied Capital provided $2.3 million in subordinated
debentures, and received warrants to acquire, at a nominal exercise price, an
equity interest in the company.
[PHOTO]: nails being painted with Kirker polish
Located in Paterson, New Jersey, Kirker Enterprises, Inc. produces over a
thousand colors and uses more than twenty-five different formulas to supply
nail enamel to the world's leading cosmetic companies.
5
<PAGE> 7
Portfolio Manager's Report
- --------------------------------------------------------------------------------
Allied Capital Corporation
We provided Labor Ready, an industrial staffing service, with $2.7 million in
subordinated debentures and received warrants to purchase shares of the
company's common stock.
[PHOTO]: Labor Ready Worker
This year we invested in LABOR READY, INC., a successful participant in the
temporary staffing industry. Driven by employers' demands for flexible
staffing, the temporary personnel industry has experienced significant growth.
In particular, the industrial segment of the temporary staffing market in which
Labor Ready competes has doubled from approximately $4 billion in 1991 to $8.1
billion in 1994. Labor Ready, headquartered in Washington state, provides
short notice staffing of low-skilled and semi-skilled personnel for
manufacturing, construction and service businesses. The company operates
"dispatch halls" where customers phone in their personnel requests, and workers
meet to receive job assignments and return to be paid the same day. More than
100 locations are in operation in 26 states and Canada. We provided $2.7
million in subordinated debentures and received warrants to acquire shares of
the Company's common stock. With our investment, Labor Ready will finance the
costs incurred from the roll out of new locations.
EL DORADO COMMUNICATIONS, INC. is an Hispanic-owned and -oriented broadcast
company started in 1993. El Dorado currently owns three major-market FM
stations - two in Houston and one in Los Angeles - and operates an additional
nine Spanish stations under lease management agreements in Dallas, Houston and
Los Angeles. We believe these stations are poised to quickly become significant
players in their respective markets. El Dorado's Houston stations - KQQK and
KXTJ - command a 3.9% share of the Houston audience and rank number one and
number three respectively among Hispanic listeners. Allied Capital provided
$4.1 million in senior debt and received warrants to acquire a small portion of
El Dorado's equity.
Another exciting investment was in NOBEL EDUCATION DYNAMICS, INC., a for-profit
provider of child care and education services. Nobel operates 106 campuses in
12 states educating children from ages six weeks through the eighth
6
<PAGE> 8
- --------------------------------------------------------------------------------
grade. By serving middle-income working families that place a high value on
quality education, Nobel's mission is to be the leading provider of affordable
private education. Allied Capital provided $3 million to Nobel in exchange for
a subordinated note and preferred stock with warrants. The proceeds allowed
Nobel to improve existing operations, build new schools where demand is high,
and acquire existing schools and child care centers. Nobel, which is publicly
traded on Nasdaq under the symbol NEDI, increased its revenues by 29% and
pretax profits by 34% during the last year. We believe Nobel has an
outstanding management team, and we are excited about this company's future
potential.
"We believe each new investment complements our existing portfolio and follows
Allied Capital's tradition of investing with superior entrepreneurs and in
companies that have strong cash flows, strong recurring revenues, and products
that are well established in their marketplaces."
RADIO ONE OF ATLANTA, INC. was formed in 1995 to acquire the assets of WQUL-FM,
a newly upgraded 25-kilowatt radio station servicing the Atlanta market. The
company's management team has a long and successful track record in urban radio
in the Washington D.C. and Baltimore markets. This fact, combined with the
favorable economics of the Atlanta radio market, made this start-up station an
attractive investment opportunity for Allied Capital. In order to finance the
company's $6.6 million purchase of WQUL-FM, we provided $2.3 million in senior
and subordinated debt and received stock purchase warrants to acquire a portion
of the company's equity.
During 1994, the convenience store industry nationally experienced very strong
growth and profitability. Allied Capital saw the opportunity to invest in this
growth industry during 1995 by providing buyout financing for the second
[PHOTO]: Manufacturing plant
Investments in manufacturing companies account for 20% of our portfolio and
include Polyflex/B&L Holdings, CeraTech Holdings, Inc., Liberty Business Forms
& Systems, Inc., and Master Power, Inc.
7
<PAGE> 9
Portfolio Manager's Report
- --------------------------------------------------------------------------------
Allied Capital Corporation
largest 7-Eleven licensee in the United States, CONVENIENCE CORPORATION OF
AMERICA. Convenience Corporation of America operates 146 convenience stores in
twelve Midwestern states. The current management team has operated the company
for the last fifteen years and has remained in place after the recent buyout.
The company sees significant opportunities for this business through their
business plan, which includes installing franchised fast food kiosks in
suitable locations and further developing the franchise area by building and
acquiring additional stores. Allied Capital provided $4.2 million in
subordinated debentures and owns warrants to acquire an equity interest in the
business at a nominal exercise price.
The single largest investment in Allied Capital's portfolio continues to be our
investment in ALLIED CAPITAL LENDING CORPORATION (Allied Lending), our formerly
wholly owned subsidiary. We were pleased with the recovery of the market price
of Allied Lending shares during 1995 as well as the growth in the company's
dividends for the year. The stock market reacted harshly to the news in
December 1994 that the Small Business Administration (SBA) was to place a
$500,000 limit on the maximum size of an SBA guaranteed loan, and we began 1995
with a depreciated investment in Allied Lending's stock. The company performed
quite well in 1995, despite that regulatory hurdle, and we ended the year
recapturing our value. The SBA reversed its $500,000 loan size limit in 1995,
and Allied Lending is once again making $1 million government guaranteed loans.
The company has also expanded its investment objective to make other small
business loans in addition to those guaranteed by the SBA. We will divest our
holdings in this company by the end of 1998, as a condition of the order that
we received from the Securities and Exchange Commission in 1993 when we sold
the majority of our ownership to the public.
As we look forward to 1996 and beyond, our portfolio includes many other strong
investments that may provide future appreciation and capital gains. JUNE
BROADCASTING, INC. a 1993 investment, is currently under contract to be sold.
Similarly, GENOA LIME COMPANY, in which we made our investment eight years ago,
is currently considering offers to be sold. We held 61,241 shares of GARDEN
RIDGE CORPORATION at the end of 1995 which were sold in January 1996 for a gain
of $1.7
PORTFOLIO INDUSTRY BREAKDOWN
[FIGURE 3]
Retail-12%
Software-5%
Service-11%
Distribution-7%
Manufacturing-20%
Broadcasting-25%
Real Estate-8%
Registered Investment Company-12%
8
<PAGE> 10
- --------------------------------------------------------------------------------
million. GRANT BROADCASTING, MASTER POWER, INC., AMERICAN BARBECUE AND GRILL,
and TPGHOLDINGS, INC. are other portfolio companies that are doing well and may
provide us with capital gains in the future.
[PHOTO]: American Barbecue & Grill meal
American Barbecue and Grill, a 1994 investment for Allied Capital, operates a
chain of K.C. Masterpiece Barbeque & Grill restaurants. The same family that
developed the popular K.C. Masterpiece barbecue sauce product line continues to
use the proprietary product name.
Allied Capital now provides financing to companies that are expanding their
operations into emerging markets overseas. In April 1995, we entered into an
agreement to borrow up to $20 million from the Overseas Private Investment
Corporation (OPIC), and with this new debt capital we launched a new division,
Allied Capital International. In February of 1996, we closed our first
OPIC-related investment by providing $5 million to a U.S.-based wireless
communications company expanding operations into Latin America. Allied Capital
participated in the $30 million financing with several large equity investors.
We are excited about the growth opportunities that international financing can
provide for Allied Capital and hope to close at least one other OPIC-related
investment during 1996.
With hard work, we hope that 1996 will be as productive and profitable as 1995
was for Allied Capital and its stockholders. As always, we appreciate your
support.
9
<PAGE> 11
Management's Discussion And Analysis
- --------------------------------------------------------------------------------
Allied Capital Corporation
LIQUIDITY AND CAPITAL RESOURCES
Total investments increased by $8.2 million or 7.1% to $123.2 million at
December 31, 1995 from $115 million at December 31, 1994. The Company invested
$27.6 million in small business concerns in 1995, a 23% decline from the $35.7
million invested in 1994. This decline was a result of the market forces in
1995 which led us to be cautious in making new investments. The Company was
able to exit several mature investments in 1995 and had other investments pay
off early which contributed to total investment repayments of $28.4 million.
Exits and early pay offs resulted in net realized gains of $5.5 million.
Valuation changes in the portfolio resulted in net unrealized appreciation of
$6.5 million for the year ended December 31, 1995.
In September 1995, $7.5 million of the Company's outstanding subordinated
debentures held by the Small Business Administration (SBA) matured. The
Company issued $14 million of new subordinated debentures to the SBA on
September 27, 1995, and a portion of the proceeds from these new debentures
were used to repay the matured debentures. The remaining proceeds will be used
to invest in small business concerns.
The Company continues to have a forward commitment from the SBA of $1.3 million
which expires in August 1996; however, the Company must first submit an
application to draw on the committed funds and receive SBA approval of that
application.
Beginning with SBA's 1996 fiscal year commencing on October 1, 1995, Congress
discontinued subsidized funding for the SBA'sspecialized small business
investment company (SSBIC) program, in which Allied Capital Financial
Corporation (Allied Financial) participates. Prior to this change, an SSBIC
was able to sell preferred stock and debentures with a rate reduction or
subsidy to the SBA. In addition to low dividend preferred stock, the SBA
provided leverage to SSBICs at a reduced interest rate. While subsidized
funding is not available, Allied Financial will still be able to apply for SBA
leverage through the SBIC program, in which Allied Investment Corporation
(Allied Investment) participates.
The Company is unable to predict the SBA's ability to meet demands for leverage
on an ongoing basis. Such funding may be affected if Congress reduces
appropriations for the SBA, which may compel the SBA to allocate leverage or
reduce the current limits on available leverage. Therefore, there is no
guaranty that Allied Investment or Allied Financial will be able to obtain
additional SBA leverage beyond what is currently held.
In order to continue to fund its growth in investment activity, the Company
restructured one source of debt capital during the year, obtained a new credit
facility and, subsequent to year-end, raised additional equity capital.
Effective in September 1995, the Company restructured its $10 million revolving
line of credit to provide for a three-year term. The Company had available
$8.5 million under this line of credit at December 31, 1995. The Company
secured a new credit facility with the Overseas Private Investment Corporation
(OPIC) to borrow up to $20 million to provide financing for international
projects involving qualifying U.S. small businesses. This credit facility
expires at the earlier of borrowing $20 million or April 1998. There were no
outstanding borrowings under this facility as of December 31, 1995. As of
January 29, 1996, the Company had drawn down $5 million of this credit
facility. Finally, during the first quarter of 1996, the Company raised
approximately $8.2 million net of expenses in new common equity through a
one-for-seven non-transferable rights offering to the Company's stockholders of
record on January 22, 1996.
At December 31, 1995, outstanding commitments for future financings by the
Company were $5.4 million. Given the cash and cash equivalents available at
December 31, 1995, available credit facilities and the proceeds from the rights
offering, the Company believes that it has adequate capital to continue to
satisfy its operating needs, commitments and other future investment
opportunities that may arise throughout 1996.
RESULTS OF OPERATIONS
Comparison of 1995 and 1994.
Net increase in net assets resulting from operations was $15.3 million for the
year ended December 31, 1995 as compared to $224,000 for the same period in
1994. Earnings per common share increased to $2.45 per common share from a
breakeven level for the same period in 1994.
10
<PAGE> 12
Management's Discussion And Analysis
- --------------------------------------------------------------------------------
Allied Capital Corporation
As a business development company, the Company's portfolio consists primarily
of securities issued by small privately held companies. These types of
investments, by their nature, carry a high degree of business and financial
risk. The Company seeks to achieve a high level of current income from its
investments in these businesses to compensate for these risks. Total investment
income increased 16% from $12.2 million in 1994 to $14.1 million in 1995.
Interest income increased by $1.6 million or 15% to $12 million in 1995,
compared to $10.4 million in 1994, due to a net increase in loans and debt
securities outstanding. The Company also received a prepayment penalty on the
early pay off of an investment in the third quarter of 1995 totaling $60,000,
which is included in interest income. Dividends declined by $200,000 or 10.9%
to $1.5 million in 1995 compared to $1.7 million in 1994 primarily due to the
distribution of 335,086 shares of Allied Capital Lending Corporation (Allied
Lending) stock in January 1995. Other income consists primarily of $327,000 of
litigation costs incurred in prior periods, recovered during 1995, and $136,000
of income resulting from an equity participation in one portfolio company.
Total expenses increased 7% from $10.1 million in 1994 to $10.8 million in
1995. Interest expense grew due to the net increase in subordinated
debentures held by the SBA of $6.5 million in late September 1995 and a full
year of interest charges on the $7 million of similar debentures issued in
September 1994. Investment advisory fee expense increased due to the growth of
the Company's portfolio of investments and other assets upon which the
investment advisory fee is based. Legal and accounting fees in 1995 were down
from the prior year as the Company settled various legal matters in late 1994,
which required significant legal resources in that year.
Net realized gains on investments increased 62.8% to $5.5 million from $3.4
million for the years ended December 31, 1995 and 1994, respectively. The
increase in net realized gains resulted from the disposition or early pay off
of investments. Several mature investments were sold in 1995. Net realized
gains are unpredictable; however, the Company exits its portfolio investments
when it believes the realized gains can be maximized.
In December 1994, the SBA revised its 7(a) guaranteed loan program and
announced that it would place a loan size cap of $500,000 on the loans that it
would guarantee under this program. This is the program from which Allied
Lending generates a significant amount of its loan volume. As a result, the
market price of the Company's investment in Allied Lending declined to $10.38
per share at December 31, 1994. In mid-October 1995, federal legislation was
passed which removed the $500,000 loan size limit and restored 75% guarantees
on loans of up to $1 million. At December 31, 1995, the market price of Allied
Lending had increased to $13.25 per share, a 27.6% increase over the market
price at December 31, 1994.
Distributions to common stockholders for 1995 of $8.9 million approximated the
net investment income before net unrealized appreciation (depreciation) on
investments. The distributions were comprised of taxable ordinary and capital
gain income.
Comparison of 1994 and 1993.
Net increase in net assets resulting from operations was $224,000 or breakeven
on a per common share basis, as compared to $20.4 million or $3.29 per common
share for the year ended December 31, 1993.
Due to the changes in the SBA's guaranteed loan program that were announced in
December of 1994, the market price of the Company's investment in Allied
Lending declined to $10.38 per share at December 31, 1994. At December 31,
1993, the market price for this stock was $15.75 per share. This decline in
market value at December 31, 1994 reduced 1994 income by $4.1 million or $0.66
per common share. During 1993, the Company had realized gains of approximately
$9 million and unrealized appreciation of approximately $15 million resulting
from the 1993 initial public offering of the stock of Allied Lending, formerly
a wholly owned subsidiary of the Company.
Investment income remained relatively constant in 1994, even though there was
significant growth in invested assets. This was primarily due to the fact that
1993 financial results included eleven months of Allied Lending's operations
while Allied Lending was a wholly owned subsidiary. Allied Lending's
operations contributed $3 million in interest income and premium
11
<PAGE> 13
Management's Discussion And Analysis
- --------------------------------------------------------------------------------
Allied Capital Corporation
income in 1993. In 1994, the Company received $1.7 million in dividend income
from its residual 36% interest in Allied Lending. As a result, the Company
replaced approximately $1.3 million in recurring investment income lost on the
sale of Allied Lending with income from increased investments in the Company's
portfolio.
Expenses also remained relatively constant in 1994 as compared to 1993.
Interest expense remained stable because the Company's new borrowings of $7
million from the SBA occurred late in 1994 and were at interest rates below the
level of other borrowings of the Company. The investment advisory fee stayed
constant even given the growth in invested assets as the Company was not
charged a fee on its investment of approximately $14.9 million in Allied
Lending, as was agreed to in conjunction with Allied Lending's 1993 initial
public offering. During 1993, the Company was charged an investment advisory
fee on the assets of Allied Lending for the approximate eleven months that it
was a wholly owned subsidiary. Legal and accounting fees and other operating
expenses remained constant in total; however, the Company continued to incur
legal expenses related to various matters.
For the year ended December 31, 1994, net investment income before net
unrealized appreciation (depreciation) on investments, which includes ordinary
investment income and net realized capital gains, was $5.5 million or $0.90 per
common share, a 33% decrease from $8.2 million or $1.34 per common share in
1993. Realized gains of $3.4 million in 1994 were below expectations, again
primarily due to the unexpected decline in the market value of Allied Lending
stock.
During the fourth quarter of 1994, the Company chose to distribute shares of
Allied Lending to its stockholders rather than sell those shares at depressed
prices. The gain that was recognized on this transaction reflects the
decreased market value at the end of the year, and as a result, depressed the
Company's net investment income before net unrealized appreciation
(depreciation) on investments.
Distributions to stockholders for 1994 were $1.40 per common share and were
comprised of $1.23 in taxable ordinary and capital gain income and $0.17 per
common share in a return of capital. The Company's taxable income of $1.23 per
common share differed significantly from its net investment income before net
unrealized appreciation (depreciation) on investments of $0.90 per common share
due to timing differences in the recognition of income for tax purposes versus
financial reporting purposes. The $0.17 per common share return of capital was
an unexpected result, again due to the decline in value of Allied Lending stock
and its effect on the gain recognition from dividends.
12
<PAGE> 14
Consolidated Comparison Of Financial Highlights
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total tax distributions $ 8,894 $ 8,595 $ 8,239 $ 8,027 $ 7,830
Ordinary income per common share $ 0.40 $ 0.31 $ - $ 0.45 $ 0.66
Net capital gains per common share 1.04 0.92 1.35 0.87 0.39
Return of capital per common share - 0.17 - - 0.25
------------------------------------------------------------------
Total tax distributions per common share $ 1.44 $ 1.40 $ 1.35 $ 1.32 $ 1.30
OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Total investment income $ 14,126 $ 12,216 $ 12,384 $ 11,335 $ 13,292
Per common share $ 2.29 $ 1.99 $ 2.02 $ 1.85 $ 2.18
Net investment income $ 3,332 $ 2,126 $ 2,300 $ 3,055 $ 4,138
Per common share $ 0.54 $ 0.35 $ 0.38 $ 0.50 $ 0.68
Net realized gains on investments $ 5,526 $ 3,394 $ 5,943 $ 4,507 $ 2,834
Net unrealized appreciation
(depreciation) on investments $ 6,459 $ (5,296) $ 12,163 $ 694 $ (1,840)
Net realized gains and unrealized appreciation
(depreciation) on investments $ 11,985 $ (1,902) $ 18,106 $ 5,201 $ 994
Per common share $ 1.94 $ (0.31) $ 2.95 $ 0.85 $ 0.16
Net increase in net assets resulting
from operations $ 15,317 $ 224 $ 20,406 $ 8,256 $ 5,132
Per common share $ 2.48 $ 0.04 $ 3.33 $ 1.35 $ 0.84
Preferred stock dividends $ 220 $ 220 $ 220 $ 220 $ 220
Per common share $ 0.03 $ 0.04 $ 0.04 $ 0.03 $ 0.03
Net increase in net assets resulting from
operations available to common stockholders $ 15,097 $ 4 $ 20,186 $ 8,036 $ 4,912
Per common share $ 2.45 $ 0.00 $ 3.29 $ 1.32 $ 0.81
Weighted average number of common shares
and common share equivalents outstanding 6,172 6,154 6,128 6,111 6,085
FINANCIAL POSITION
- ---------------------------------------------------------------------------------------------------------------------------
Investments at value $123,184 $ 115,026 $ 94,630 $ 78,470 $ 73,480
Investments at cost $115,615 $ 111,058 $ 88,224 $ 84,227 $ 79,931
Total assets $148,268 $ 135,517 $ 134,606 $ 124,823 $104,283
Total debt and redeemable preferred stock $ 83,800 $ 78,005 $ 70,800 $ 70,800 $ 53,561
Shareholders' equity $ 57,181 $ 49,987 $ 58,185 $ 45,991 $ 44,814
Net asset value available to
common stockholders $ 51,181 $ 43,987 $ 52,185 $ 39,991 $ 38,814
Per common share $ 8.26 $ 7.15 $ 8.54 $ 6.57 $ 6.44
Per common share market value at end of year $ 13.63 $ 13.13 $ 14.75 $ 14.50 $ 17.50
Common shares outstanding at
end of year 6,198 6,153 6,109 6,090 6,024
</TABLE>
13
<PAGE> 15
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at Value:
Loans and debt securities (cost: 1995 - $98,119; 1994 - $92,705) $ 90,377 $ 84,949
Equity securities (cost: 1995 - $15,039; 1994 - $15,083) 31,600 28,225
Other investment assets (cost: 1995 - $2,457; 1994 - $3,270) 1,207 1,852
---------------------------
Total investments 123,184 115,026
Cash and cash equivalents 22,743 6,609
U.S. government securities - 10,210
Other assets 2,341 3,672
---------------------------
Total assets $ 148,268 $ 135,517
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving line of credit $ 1,500 $ 2,205
Debentures and notes payable 81,300 74,800
Dividends and distributions payable 3,808 3,910
Accrued interest payable 1,469 1,393
Investment advisory fee payable 722 658
Other liabilities 1,288 1,564
---------------------------
90,087 84,530
---------------------------
Redeemable preferred stock 1,000 1,000
---------------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock of wholly owned subsidiary, $100 par value,
200,000 shares authorized; 60,000 shares issued and
outstanding at December 31, 1995 and 1994 6,000 6,000
Common Stock, $1 par value, 10,000,000 shares authorized;
6,198,138 and 6,152,703 shares issued and
outstanding at December 31, 1995 and 1994 6,198 6,153
Additional paid-in capital 41,491 40,960
Notes receivable from sale of common stock (401) (816)
Net unrealized appreciation on investments 7,569 1,110
Distributions in excess of accumulated earnings (3,676) (3,420)
---------------------------
Total shareholders' equity 57,181 49,987
---------------------------
Total liabilities and shareholders' equity $ 148,268 $ 135,517
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 16
Consolidated Statement Of Operations
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $ 11,957 $ 10,401 $ 10,100
Dividends 1,556 1,746 170
Premium income - - 1,973
Other income 613 69 141
-----------------------------------------
Total investment income 14,126 12,216 12,384
-----------------------------------------
Expenses:
Interest expense 6,735 6,333 6,346
Investment advisory fee 2,799 2,356 2,285
Legal and accounting fees 654 977 1,109
Other operating expenses 606 424 344
-----------------------------------------
Total expenses 10,794 10,090 10,084
-----------------------------------------
Net investment income 3,332 2,126 2,300
Net realized gains on investments 5,526 3,394 5,943
Net investment income before net unrealized appreciation
(depreciation) on investments 8,858 5,520 8,243
Net unrealized appreciation (depreciation) on investments 6,459 (5,296) 12,163
-----------------------------------------
Net increase in net assets resulting from operations $ 15,317 $ 224 $ 20,406
=========================================
Earnings per common share $ 2.45 $ 0.00 $ 3.29
=========================================
Weighted average number of common shares
and common share equivalents outstanding 6,172 6,154 6,128
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 17
Consolidated Statement Of Changes In Net Assets
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income $ 3,332 $ 2,126 $ 2,300
Net realized gains on investments 5,526 3,394 5,943
Net unrealized appreciation (depreciation) on investments 6,459 (5,296) 12,163
-----------------------------------------
Net increase in net assets resulting from operations 15,317 224 20,406
-----------------------------------------
Distributions to Stockholders from:
Net investment income (2,110) (705) -
Excess of net investment income (355) (1,216) -
Net capital gains (6,429) (4,595) (8,239)
Excess of net capital gains - (1,035) -
Return of capital (tax) - (1,044) -
Preferred stock dividends (220) (220) (220)
-----------------------------------------
Net decrease in net assets resulting
from distributions to stockholders (9,114) (8,815) (8,459)
-----------------------------------------
Capital Share Transactions:
Net (increase) decrease in notes receivable
from sale of common stock 415 (50) 46
Issuance of common shares upon the exercise of stock options - 200 201
Issuance of common shares in lieu of cash distributions 576 243 -
-----------------------------------------
Net increase in net assets resulting
from capital share transactions 991 393 247
-----------------------------------------
Total increase (decrease) in net assets 7,194 (8,198) 12,194
Net assets at beginning of year 49,987 58,185 45,991
Net assets at end of year 57,181 49,987 58,185
Preferred stock of wholly owned subsidiary (6,000) (6,000) (6,000)
-----------------------------------------
Net asset value available to common stockholders $ 51,181 $ 43,987 $ 52,185
=========================================
Net asset value per common share $ 8.26 $ 7.15 $ 8.54
=========================================
Common shares outstanding at end of year 6,198 6,153 6,109
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
Consolidated Statement Of Cash Flows
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations $ 15,317 $ 224 $ 20,406
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized (appreciation) depreciation on investments (6,459) 5,296 (12,163)
Write-off of investments 3,337 2,006 3,321
Net realized gains on investments (8,863) (5,400) (9,264)
Interest - (1,159) -
Amortization of loan discounts (728) (409) (195)
Changes in assets and liabilities:
Other assets 1,331 (255) 697
Accrued interest payable 76 110 27
Investment advisory fee payable 64 249 (125)
Other liabilities (276) 1,215 (2,192)
-----------------------------------------
Net cash provided by operating activities 3,799 1,877 512
-----------------------------------------
Cash Flows from Investing Activities:
Investments in small business concerns (27,551) (35,748) (23,753)
Purchase of U.S. government securities (14,957) (37,448) (18,375)
Payments on loans and debt securities and other investment assets 19,111 12,504 15,557
Net proceeds from sale of equity securities 9,268 2,677 11,709
Redemption of U.S. government securities 25,208 39,281 6,173
Payments on notes receivable from sale of common stock 415 150 247
-----------------------------------------
Net cash provided by (used in) investing activities 11,494 (18,584) (8,442)
-----------------------------------------
Cash Flows from Financing Activities:
Common dividends and distributions paid (4,734) (8,027) (8,046)
Preferred stock dividends (220) (220) (220)
Proceeds from issuance of long-term debt 14,000 7,000 -
Payments on long term debt (7,500) (2,000) -
Borrowings under revolving line of credit 6,964 2,205 -
Payments on revolving line of credit (7,669) - -
-----------------------------------------
Net cash provided by (used in) financing activities 841 (1,042) (8,266)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 16,134 (17,749) (16,196)
Cash and cash equivalents, beginning of year 6,609 24,358 40,554
-----------------------------------------
Cash and cash equivalents, end of year $ 22,743 $ 6,609 $ 24,358
=========================================
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of common shares upon the exercise of stock options $ - $ 200 $ 201
Issuance of common shares in lieu of cash distributions $ 576 $ 243 $ -
Issuance of Allied Capital Lending Corporation shares
in lieu of cash distributions $ 3,686 $ - $ -
Interest paid $ 6,659 $ 6,223 $ 6,319
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
Consolidated Statement Of Loans To And Investments In Small Business Concerns
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $ 930 $ 930
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
ALLIED CAPITAL LENDING CORPORATION (MD) (1,3) Common Stock (1,244,914 shares) 2,974 14,565
(registered investment company)
- --------------------------------------------------------------------------------------------------------------------------------
AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 2,134 2,134
(restaurants) Warrants 71 71
- --------------------------------------------------------------------------------------------------------------------------------
ARNOLD MOVING COMPANY, INC. (KY) Loans and Debt Securities 299 303
(moving/storage firm) Warrants 11 85
- --------------------------------------------------------------------------------------------------------------------------------
ASW HOLDING CORPORATION (IL) Loans and Debt Securities 832 832
(steel wool manufacturer) Warrants 53 53
- --------------------------------------------------------------------------------------------------------------------------------
BELLEFONTE LIME CO. (PA) (3) Common Stock (2,869 shares) 16 800
(mineral quarry & production)
- --------------------------------------------------------------------------------------------------------------------------------
CELEBRITIES, INC. (FL) Loans and Debt Securities 409 409
(radio station) Warrants 12 12
- --------------------------------------------------------------------------------------------------------------------------------
CENTENNIAL MEDIA CORP. (CO) (2,3) Loans and Debt Securities 2,078 725
(telephone directories) Common Stock (1,803 shares) 948 0
- --------------------------------------------------------------------------------------------------------------------------------
CERATECH HOLDINGS, INC. (IL) Loans and Debt Securities 1,180 1,180
(ceramic plate manufacturer) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,091 1,091
(direct marketer of woodcrafts) Common Stock (117 shares) 0 0
- --------------------------------------------------------------------------------------------------------------------------------
CITIPOSTAL, INC. (NY) Convertible Preferred Stock Series B (30,500 shares) 289 0
(courier network) Common Stock (74 shares) 70 0
- --------------------------------------------------------------------------------------------------------------------------------
COAST GAS, INC. (CA) Loans and Debt Securities 2,172 2,172
(natural gas liquids distributor) Warrants 124 124
- --------------------------------------------------------------------------------------------------------------------------------
CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (127,940 shares) 180 0
(med./dent. consumer info. service)
- --------------------------------------------------------------------------------------------------------------------------------
CONVENIENCE CORPORATION OF AMERICA (NE) Loans and Debt Securities 4,200 4,200
(convenience stores) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
CONTEMPORARY MEDIA, INC. (ID) Loans and Debt Securities 581 581
(radio stations) Warrants 204 204
- --------------------------------------------------------------------------------------------------------------------------------
DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 2,313 2,313
(circuit board manufacturer) Warrants 133 133
- --------------------------------------------------------------------------------------------------------------------------------
DEVLIEG-BULLARD, INC. (CT) (1) Warrants 207 231
(tool manufacturer)
- --------------------------------------------------------------------------------------------------------------------------------
DMI FURNITURE, INC. (KY) (1) Convertible Preferred Stock (399,840 shares) 500 412
(furniture manufacturer)
- --------------------------------------------------------------------------------------------------------------------------------
EL DORADO COMMUNICATIONS, INC. (CA) Loans and Debt Securities 4,060 4,060
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
ENVIROPLAN, INC. (NJ) (2) Loans and Debt Securities 2,449 1,680
(emissions monitoring systems) Warrants 120 0
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Unrestricted security
18
<PAGE> 20
Consolidated Statement Of Loans To And Investments In Small Business Concerns
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
ESQUIRE COMMUNICATIONS, LTD. (NY) (1) Loans and Debt Securities $ 2,398 $ 2,398
(court reporting services) Warrants 3 3
- --------------------------------------------------------------------------------------------------------------------------------
FOUNTAINHEAD TECHNOLOGIES,INC. (RI) Loans and Debt Securities 1,578 1,578
(non-chlorine water purification systems) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
GARDEN RIDGE CORPORATION (TX) (1) Common Stock (61,241 shares) 374 1,892
(home decorating and craft products) Warrants 112 2,108
- --------------------------------------------------------------------------------------------------------------------------------
GATEWAY HEALTHCARE CORPORATION (VA) Loans and Debt Securities 853 853
(medical supplies distributor) Convertible Preferred Stock (4,225 shares) 497 42
Warrants 2 0
- --------------------------------------------------------------------------------------------------------------------------------
GENOA MINE ACQUISITION CORP. (OH) (3) Capital Stock (20 shares) 44 800
(limestone mining)
- --------------------------------------------------------------------------------------------------------------------------------
GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,074 1,074
(television stations) Warrants 78 963
- --------------------------------------------------------------------------------------------------------------------------------
INNOTECH, INC. (VA) Warrants 29 0
(bifocal lens manufacturer)
- --------------------------------------------------------------------------------------------------------------------------------
JUNE BROADCASTING, INC. (NJ) Warrants 58 2,006
(radio stations)
- --------------------------------------------------------------------------------------------------------------------------------
KIRKER ENTERPRISES, INC. (NJ) Loans and Debt Securities 2,138 2,138
(nail enamel manufacturer) Warrants 203 203
- --------------------------------------------------------------------------------------------------------------------------------
LABOR READY, INC. (WA) (1) Loans and Debt Securities 2,343 2,650
(temporary labor services) Warrants 315 49
- --------------------------------------------------------------------------------------------------------------------------------
LIBERTY BUSINESS FORMS & SYSTEMS, INC. (NY) Loans and Debt Securities 1,938 1,938
(inventory control tags and forms) Warrants 57 57
- --------------------------------------------------------------------------------------------------------------------------------
LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 400
(real estate mortgages) Warrants 200 0
- --------------------------------------------------------------------------------------------------------------------------------
MASTER POWER, INC. (MD) Loans and Debt Securities 205 205
(power tool manufacturer) Preferred Stock (44,516 shares) 6 213
Warrants 4 124
- --------------------------------------------------------------------------------------------------------------------------------
MIDVIEW ASSOCIATES, L.P. (VA) Loans and Debt Securities 271 271
(residential land development) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
MILL-IT STRIPING, INC. (FL) Loans and Debt Securities 125 125
(highway paint striping) Warrants 125 0
- --------------------------------------------------------------------------------------------------------------------------------
MLX/SINTERMET CORP. (GA) (1,4) Common Stock (5,835 shares-MLX) 241 58
(friction materials manufacturer)
- --------------------------------------------------------------------------------------------------------------------------------
NOBEL EDUCATION DYNAMICS, INC. (PA) (1) Loans and Debt Securities 2,250 2,250
(educational services) Preferred Stock (99,734 shares) 750 431
Warrants 0 501
- --------------------------------------------------------------------------------------------------------------------------------
OLD MILL HOLDINGS, INC. (PA) (2) Loans and Debt Securities 657 458
(custom embroidered apparel) Warrants 45 0
- --------------------------------------------------------------------------------------------------------------------------------
PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100
(video stores)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Unrestricted security
19
<PAGE> 21
Consolidated Statement Of Loans To And Investments In Small Business Concerns
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMPANY'S NAME (STATE) DECEMBER 31, 1995
(TYPE OF BUSINESS) INVESTMENTS COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
PIATL HOLDINGS, INC. (NJ) (3) Loans and Debt Securities $ 116 $ 116
(environmental consulting) Preferred Stock (355 shares) 266 93
Common Stock (35 shares) 1 0
- --------------------------------------------------------------------------------------------------------------------------------
POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 480 480
(plastic bag manufacturer) Warrants 28 374
- --------------------------------------------------------------------------------------------------------------------------------
PROVIDENTIAL CORPORATION (CA) Common Stock (52,794 shares) 1,000 211
(shared appreciation reverse mortgages)
- --------------------------------------------------------------------------------------------------------------------------------
QUALITY SOFTWARE PRODUCTS HOLDINGS, PLC (UK) (1) Common Stock (52,908 shares) 504 484
(accounting software)
- --------------------------------------------------------------------------------------------------------------------------------
RADIO ONE OF ATLANTA, INC. (GA) Loans and Debt Securities 2,342 2,342
(radio stations) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 850 850
(decorative ribbon manufacturer) Warrants 32 0
- --------------------------------------------------------------------------------------------------------------------------------
SPA LENDING CORPORATION (DC) (3) Preferred Stock Series A (5,578 shares) 398 398
(health spas) Preferred Stock Series B (8,755 shares) 506 37
Preferred Stock Series C (14,092 shares) 1,680 0
Common Stock (6,208 shares) 413 0
- --------------------------------------------------------------------------------------------------------------------------------
SUNSTATES REFRIGERATED SERVICES, INC. (GA) (2,3) Loans and Debt Securities 2,796 1,530
(cold food storage) Preferred Stock (43,884 shares) 194 0
Common Stock (16,630 shares) 145 0
- --------------------------------------------------------------------------------------------------------------------------------
TACO TICO, INC. (KS) (2) Loans and Debt Securities 1,137 154
(Mexican fast food restaurant) Warrants 28 0
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FOAM, INC. (CT) (2,3) Loans and Debt Securities 1,744 237
(packaging systems) Common Stock (910 shares) 57 0
- --------------------------------------------------------------------------------------------------------------------------------
TPG HOLDINGS,INC. (TX) Loans and Debt Securities 1,614 1,614
(commercial banking software development) Warrants 13 2,120
- --------------------------------------------------------------------------------------------------------------------------------
VISU-COM, INC. (MD) (3) Loans and Debt Securities 2,250 1,250
(visual communications products) Preferred Stock (22,425 shares) 54 0
Common Stock (135 shares) 223 0
- --------------------------------------------------------------------------------------------------------------------------------
WBIV, INC. (CA) Loans and Debt Securities 399 399
(radio station) Warrants 0 0
- --------------------------------------------------------------------------------------------------------------------------------
WEST VIRGINIA RADIO CORPORATION (WV) Loans and Debt Securities 571 571
(radio station) Warrants 200 0
- --------------------------------------------------------------------------------------------------------------------------------
WILLIAMS BROTHERS LUMBER COMPANY (GA) Loans and Debt Securities 602 602
(builders' supply yards) Warrants 15 1,614
- --------------------------------------------------------------------------------------------------------------------------------
WINCAPP BROADCASTING, INC. (PA) Loans and Debt Securities 695 695
(radio station) Warrants 23 23
- --------------------------------------------------------------------------------------------------------------------------------
Z-SPANISH RADIO NETWORK (CA) Loans and Debt Securities 2,984 2,984
(radio stations) Warrants 3 3
- --------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $ 74,912 $ 84,369
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Unrestricted security
20
<PAGE> 22
Consolidated Statement Of Loans To And Investments In Small Business Concerns
- --------------------------------------------------------------------------------
Allied Capital Corporation
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
INDUSTRY (NUMBER OF LOANS) COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of loans)
LOANS WITH NO EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounting Services (1 loan) $ 177 $ 177
- --------------------------------------------------------------------------------------------------------------------------------
Adult Care Facilities (2 loans) 1,935 1,935
- --------------------------------------------------------------------------------------------------------------------------------
Auto Repair Shops (10 loans) 1,446 1,446
- --------------------------------------------------------------------------------------------------------------------------------
Chemical Manufacturer (1 loan) 5 5
- --------------------------------------------------------------------------------------------------------------------------------
Clean Room Equipment Manufacturer (1 loan) 66 0
- --------------------------------------------------------------------------------------------------------------------------------
Computer Hardware Developer (1 loan) 159 25
- --------------------------------------------------------------------------------------------------------------------------------
Doughnut Shops (4 loans) 633 633
- --------------------------------------------------------------------------------------------------------------------------------
Drycleaners (3 loans) 528 528
- --------------------------------------------------------------------------------------------------------------------------------
Federal Government Contractors (1 loan) 207 103
- --------------------------------------------------------------------------------------------------------------------------------
Fried Chicken Restaurants (2 loans) 1,401 1,401
- --------------------------------------------------------------------------------------------------------------------------------
Grocery Store (1 loan) 169 169
- --------------------------------------------------------------------------------------------------------------------------------
Heating Contractor (1 loan) 256 256
- --------------------------------------------------------------------------------------------------------------------------------
Hotels/Motels (6 loans) 8,503 8,107
- --------------------------------------------------------------------------------------------------------------------------------
HVAC Distributor (1 loan) 522 522
- --------------------------------------------------------------------------------------------------------------------------------
Limestone Mining (1 loan) 799 1,204
- --------------------------------------------------------------------------------------------------------------------------------
Liquor Store (1 loan) 530 530
- --------------------------------------------------------------------------------------------------------------------------------
Orthopedic Equipment (1 loan) 610 610
- --------------------------------------------------------------------------------------------------------------------------------
Pet Products Manufacturer (1 loan) 3,393 3,393
- --------------------------------------------------------------------------------------------------------------------------------
Physical Rehabilitation Facility (1 loan) 340 224
- --------------------------------------------------------------------------------------------------------------------------------
Pizza Shops (23 loans) 1,186 497
- --------------------------------------------------------------------------------------------------------------------------------
Radio Stations (10 loans) 10,666 10,666
- --------------------------------------------------------------------------------------------------------------------------------
Retail Shop (1 loan) 447 1,024
- --------------------------------------------------------------------------------------------------------------------------------
Small Appliances Distributor (1 loan) 250 250
- --------------------------------------------------------------------------------------------------------------------------------
Sporting Goods Manufacturer (1 loan) 2,248 2,248
- --------------------------------------------------------------------------------------------------------------------------------
Television Station (1 loan) 125 125
- --------------------------------------------------------------------------------------------------------------------------------
Television Directory (1 loan) 1,000 1,000
- --------------------------------------------------------------------------------------------------------------------------------
Travel Agency (1 loan) 138 23
- --------------------------------------------------------------------------------------------------------------------------------
Wholesale Food Distributor (1 loan) 232 232
- --------------------------------------------------------------------------------------------------------------------------------
Yogurt Shops (3 loans) 276 276
- --------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $ 38,247 $ 37,609
- --------------------------------------------------------------------------------------------------------------------------------
Other Investment Assets (A) 1,651 401
- --------------------------------------------------------------------------------------------------------------------------------
Pledged Repurchase Agreements 805 805
- --------------------------------------------------------------------------------------------------------------------------------
SUBTOTAL $ 2,456 $ 1,206
- --------------------------------------------------------------------------------------------------------------------------------
GRAND TOTAL $ 115,615 $ 123,184
================================================================================================================================
</TABLE>
(A) Non-income producing
21
<PAGE> 23
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Capital Corporation (the Company) is a closed-end
management investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940 (1940 Act). The
Company seeks to achieve a high level of current income by providing debt,
mezzanine and equity financing primarily for small privately owned growth
companies, and through long-term growth on the value of its net assets. The
Company has two wholly owned, regulated investment company subsidiaries, Allied
Investment Corporation (Allied Investment) and Allied Capital Financial
Corporation (Allied Financial). Allied Investment and Allied Financial are
licensed under the Small Business Investment Act of 1958 as a Small Business
Investment Company (SBIC) and a Specialized Small Business Investment Company
(SSBIC), respectively.
The Company has an investment advisory agreement with Allied Capital Advisers,
Inc. (Advisers) whereby Advisers manages the investments of the Company subject
to the supervision and control of the Company's board of directors. Certain
directors and officers of Advisers are also directors and officers of the
Company.
Co-investments. Investments made by the Company are made in participation with
a separately organized public closed-end management investment company and two
private venture capital partnerships, which are also managed by the Company's
investment adviser, in accordance with various exemptive orders issued to the
Company by the Securities and Exchange Commission (Commission) permitting
co-investments.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany balances and transactions.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors.
Loans and debt securities, which are not publicly traded, and warrants and
stocks for which there is no public market are valued based on collateral, the
ability to make payments, the earnings of the investee and other pertinent
factors. The values assigned are considered to be amounts which could be
realized in the normal course of business or from an orderly sale or other
disposition of the investments. In the normal course of business, loans and
debt securities are held to maturity, and the amount realized, in addition to
interest, is the face value, which may equal or exceed cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
U.S. government securities, cash and cash equivalents are carried at cost which
approximates fair value.
Interest and Dividend Income. Interest income is recorded on the accrual basis
to the extent that such amounts are expected to be collected. Original issue
discount is amortized into interest income using the effective interest method.
Dividend income is recognized on the ex-dividend date.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are accounted for on the trade date and
are measured by the difference between the proceeds of sale and the cost basis
of the investment without regard to unrealized appreciation or depreciation
previously recognized, and includes investments written off during the year,
net of recoveries. Unrealized appreciation or depreciation reflects the
difference between cost and value.
Distributions to Stockholders. Distributions to stockholders are recorded on
the ex-dividend date.
Federal Income Taxes. The Company and its wholly owned subsidiaries'
objectives are to comply with the requirements of the Internal Revenue Code
that are applicable to regulated investment companies. The Company and its
wholly owned subsidiaries annually distribute all of their taxable income to
their stockholder(s); therefore, a federal income tax provision is not
required.
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company and its wholly owned
subsidiaries intend to continue to annually distribute all of their taxable
income.
Dividends declared by the Company in December that are payable to stockholders
of record on a specified date in such month, but is paid during January of the
following year, is treated as if the dividends were received by the stockholder
on December 31 of the year declared.
Earnings Per Common Share. Earnings are defined as the net investment income,
net realized gains on investments and net unrealized appreciation or
depreciation on investments and are reduced by the preferred stock dividend
requirements. The computation of earnings per common share is based
22
<PAGE> 24
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
on the weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents included in the
computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in years where there are earnings.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date. At December 31, cash and cash
equivalents consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands) 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Cash $ 802 $ 4,707
Repurchase agreements 21,941 1,902
-------------------------
Total $ 22,743 $ 6,609
=========================
- --------------------------------------------------------------
</TABLE>
On December 31, 1995, the Company had purchased $21,941,000 of overnight
repurchase agreements collateralized by U.S. government securities under
agreements to resell on January 2, 1996. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
instead held for the Company by the bank.
Incentive Stock Option Plan. Statement of Financial Accounting Standards No.
123, issued in October 1995, established new accounting standards for
stock-based compensation plans and is effective for fiscal years beginning
after December 15, 1995. This new standard will have no material impact on the
Company's financial statements.
Reclassifications. Certain reclassifications have been made to the 1994 and
1993 financial statements to conform with the 1995 financial statement
presentation.
NOTE 2. INVESTMENTS
The loans and debt securities included in investments are at annual stated
interest rates ranging from approximately zero percent to 17 percent, and are
generally payable in installments with final maturities from six months to
twenty-seven years from date of issue. At December 31, 1995 and 1994, loans
and debt securities with a cost basis of $13,084,000 and $10,123,000,
respectively, were not accruing interest.
The investments of the Company and its subsidiaries consist primarily of
securities issued by privately held companies. A majority of the securities
held by the Company are subject to restrictions on their resale or are
otherwise illiquid and cannot be sold to the public without registration under
the Securities Act of 1933. In connection with the Company's investments in
securities of publicly traded companies, the securities held with the following
companies are subject to restrictions on their sale: Allied Capital Lending
Corporation (1,090,000 shares are restricted); DeVlieg-Bullard, Inc.; DMI
Furniture, Inc.; Esquire Communications, Ltd.; Garden Ridge Corporation; Labor
Ready, Inc.; Nobel Education Dynamics, Inc.; and Quality Software Products
Holdings, PLC. All of the Company's equity securities are non-income producing
except for its investments in Allied Capital Lending Corporation (Allied
Lending) and DMI Furniture, Inc. Dividends from Allied Lending were
$1,519,000, $1,706,000 and $126,400 for 1995, 1994 and 1993, respectively.
The following industries represent five percent or more of the total value of
the investments outstanding at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Hotels and motels 7% 7%
Manufacturing 20% 27%
Broadcasting 25% 18%
Registered investment company 12% 13%
Software 5% 5%
- --------------------------------------------------------------
</TABLE>
23
<PAGE> 25
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
At December 31, 1995 and 1994, the net unrealized appreciation (depreciation)
for all securities based on cost for federal income tax purposes was as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Aggregate gross unrealized
appreciation in which there is an
excess of value over cost $ 23,925 $ 14,036
Aggregate gross unrealized
depreciation in which there is
an excess of cost over value (18,257) (15,191)
-------------------------------
Net unrealized appreciation
(depreciation) $ 5,668 $ (1,155)
===============================
- -------------------------------------------------------------------------
</TABLE>
The aggregate cost of securities at December 31, 1995 and 1994 for federal
income tax purposes was $117,516,000 and $113,323,000, respectively.
NOTE 3. INVESTMENT ADVISORY AGREEMENT
The Company has an investment advisory agreement with Advisers that is approved
at least annually by the board of directors or by vote of the holders of a
majority of the outstanding shares of the Company. The agreement may be
terminated at any time on sixty days' notice, without penalty, by the Company's
board of directors or by vote of the holders of a majority of the Company's
outstanding common shares and will terminate automatically in the event of its
assignment.
The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation
of the Company's officers and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses that
are paid by the Company include the Company's share of transaction costs
incident to the acquisition and disposition of investments, legal and
accounting fees, the fees and expenses of the Company's independent directors
and the fees of its officer-directors, the costs of printing and mailing proxy
statements and reports to stockholders, costs associated with promoting the
Company's stock, and the fees and expenses of the Company's custodian and
transfer agent. The Company is also required to pay expenses associated with
litigation and other extraordinary or non-recurring expenses, as well as
expenses of required and optional insurance and bonding. All fees paid by or
for the account of an actual or prospective portfolio company in connection
with an investment transaction in which the Company participates are treated as
commitment fees or management fees and are received by the Company, pro rata to
its participation in such transaction, rather than by Advisers. Advisers is
entitled to retain for its own account any fees paid by or for the account of a
company, including a portfolio company, for special investment banking or
consulting work performed for that company which is not related to such
investment transaction or management assistance. As compensation for its
services to and the expenses paid for the account of the Company, Advisers is
paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a
fee was paid equal to 0.625 percent per quarter of the quarter-end value of the
Company's consolidated total assets, less the value of the shares of Allied
Lending owned by the Company, interim investments (i.e., U.S. government
securities) and cash and cash equivalents, plus 0.125 percent per quarter of
the quarter-end value of consolidated interim investments, cash and cash
equivalents. These fees on an annual basis approximate 2.5 percent on
consolidated invested assets and 0.5 percent on consolidated interim
investments, cash and cash equivalents. In the first quarter of 1995, and in
1994 and 1993, Advisers was entitled to a fee equal to 0.625 percent per
quarter of the quarter-end value of the Company's consolidated total assets,
less the value of the shares of Allied Lending owned by the Company (subsequent
to Allied Lending's public offering in November 1993) and consolidated cash and
cash equivalents in excess of $2,000,000 in working capital.
24
<PAGE> 26
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared and the Company paid a $0.24 per
common share dividend for the fourth quarter, a $0.22 per common share dividend
for the third quarter and a $0.20 per common share dividend each for the first
and second quarters of 1995. The Company's board of directors also declared an
extra distribution in the fourth quarter of $0.58 per common share, which was
paid to stockholders on January 31, 1996, for a total distribution in 1995
equal to $1.44 per common share.
The components of the dividends and distributions of taxable income declared by
the board of directors for 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994 1993
PER Per Per
AMOUNT SHARE Amount Share Amount Share
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary income $ 2,465 $ 0.40 $ 1,921 $ 0.31 $ - $ -
Long-term capital gains 6,429 1.04 5,630 0.92 8,239 1.35
Return of capital (tax) - - 1,044 0.17 - -
--------------------------------------------------------------------------------
Totals distributions $ 8,894 $ 1.44 $ 8,595 $ 1.40 $ 8,239 $ 1.35
================================================================================
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The 1995 distributions of $1.44 per common share were comprised of cash
payments and issuance of the Company's common shares pursuant to the Company's
dividend reinvestment plan in the amounts of $1.28 and $0.16, respectively.
The 1994 distributions of $1.40 per common share were comprised of cash
payments, issuance of the Company's common shares pursuant to the Company's
dividend reinvestment plan, and the distribution of shares of Allied Lending in
the amounts of $0.76, $0.04, and $0.60, respectively. The 1993 distributions
of $1.35 per common share were paid in cash. Amounts represent the total of
the quarterly dividends and the year-end extra distribution declared by the
Company based on the actual common shares outstanding on the record date for
each dividend paid.
The following represents a reconciliation from taxable income to income for
financial reporting purposes for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxable income $ 9,114 $ 7,771 $ 8,459
Market discount amortization - (807) -
Net realized gains (losses) 185 (1,049) -
Net unrealized appreciation
(depreciation) on investments 6,459 (5,296) 12,163
Other (441) (395) (216)
------------------------------------------------
Financial statement income 15,317 224 20,406
Preferred stock dividends (220) (220) (220)
------------------------------------------------
Amount available for
common stockholders $ 15,097 $ 4 $ 20,186
================================================
- --------------------------------------------------------------------------------------------
</TABLE>
Under the 1940 Act, the Company is not permitted to make distributions to
stockholders unless it meets certain asset coverage requirements with respect
to money borrowed and senior securities issued. The Company is in compliance
with these requirements.
The Company's wholly owned subsidiaries annually distribute all of their
taxable income to the Company. In order to make such distributions, the
subsidiaries must meet the minimum capital requirements as set forth by the
SBA. The subsidiaries are in compliance with these requirements.
NOTE 5. DEBT
Line of Credit. The Company has a revolving line of credit agreement with a
bank under which it may borrow up to $10,000,000, which bears interest at the
one-month LIBOR rate plus 2.5 percent per annum, payable monthly, and expires
September 30, 1998. As of December 31, 1995 and 1994, the Company was paying
interest at 8.219 percent and 7.088 percent per annum, respectively, on its
outstanding borrowings. The Company must pay an annual commitment fee of
$12,500 and a quarterly facility fee of 0.125 percent per annum on the unused
portion of the line of credit. As of December 31, 1995, the Company had
available $8,500,000 under the revolving line of credit agreement.
Senior Notes. The Company has $20,000,000 of senior notes outstanding to an
insurance company. These notes bear interest at a rate of 9.15 percent per
annum, payable semi-annually. The senior notes are scheduled to mature over a
five-year period commencing in 1998 through 2002 with annual principal payments
of $4,000,000.
25
<PAGE> 27
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
Subordinated Debentures. Subordinated debentures are payable to the Small
Business Administration (SBA) and represent amounts due to the SBA as a result
of borrowings made pursuant to the Small Business Investment Act of 1958. The
debentures require semi-annual interest payments at various interest rates with
the entire principal balance due at maturity. Principal payments required on
these debentures at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in thousands)
YEAR ENDING INTEREST
DECEMBER 31, AMOUNT RATES
- ------------------------------------------------------------------
<S> <C> <C>
1996 $ - -
1997 7,000 7.950% - 10.350%
1998 6,650 8.875% - 9.800%
1999 - -
2000 17,300 8.700% - 9.600%
Thereafter 30,350 6.875% - 9.080%
--------
Total $ 61,300
========
- ------------------------------------------------------------------
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
Overseas Private Investment Corporation (OPIC) Loan. On April 10, 1995, the
Company entered into a loan agreement with OPIC under which the Company may
borrow up to $20,000,000 (loan commitment) to provide financing for
international projects involving qualifying U.S. small businesses. Loans under
this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the
applicable period of the borrowing. In addition, OPIC is entitled to receive
from the Company a contingent fee at maturity of the loan equal to five percent
of the return generated by the OPIC-related investments in excess of seven
percent. There are no required principal payments until the OPICloans mature
ten years from the date of the first disbursement under the loan agreement.
The loan commitment expires on the earlier of the first date on which the
amount of the loans equal $20,000,000 or April 10, 1998. At December 31, 1995,
there were no outstanding borrowings under the loan agreement.
NOTE 6. PREFERRED STOCK
As of December 31, 1995, Allied Financial, one of the Company's subsidiaries,
had outstanding a total of 60,000 shares of $100 par value, 3 percent
cumulative preferred stock and 10,000 shares of $100 par value, 4 percent
redeemable cumulative preferred stock issued to the SBA pursuant to Section
303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent
cumulative preferred stock does not have a required redemption date. Allied
Financial has the option to redeem in whole or in part the preferred stock by
paying the SBA the par value of such securities and any dividends accumulated
and unpaid to the date of redemption. The 4 percent redeemable cumulative
preferred stock has a required redemption date of June 4, 2005.
NOTE 7. SHAREHOLDERS' EQUITY
During 1994, the Company paid $1,044,000 in distributions that represented a
return of capital for tax purposes. This has been charged to additional paid-in
capital.
The Company has a dividend reinvestment plan (the Plan). Stockholders of
record may enroll in the Plan at any time. The Company may instruct the stock
transfer agent to buy shares in the open market or to issue new shares. When
the Company issues new shares, the price is equal to the average of the closing
sales prices reported for the shares for the five days on which trading in the
shares takes place on and immediately prior to the dividend payment date.
During 1995, the Company issued 45,435 shares at an average price of $12.72 per
share. During 1994, the Company issued 18,512 shares at an average price of
$13.09 per share.
The Company has an incentive stock option plan (the ISO plan) which allows the
granting of options to the Company's officers. Under the ISO plan as amended,
a maximum of 1,350,000 options may be granted at a price not less than the
market value on the date of the grant and may be exercisable over a ten year
period. In May 1994, the ISO plan was amended to permit grants to non-officer
directors. The Company's stockholders approved a one-time grant of options to
each member of the board of directors who is not an employee of the investment
adviser to purchase 10,000 shares of the Company's common stock and such grants
were subject to Commission approval. Such approval was granted by the
Commission on December 26, 1995 and the options were granted at the current
market price as of that date.
Holders of ten percent or more of the Company's stock must exercise their
options within a five-year period.
Officers of the Company may borrow from the Company the funds necessary to
exercise vested stock options. The loans have varying terms not exceeding ten
years and generally bear interest at the applicable Federal interest rate in
effect at the date of issue.
26
<PAGE> 28
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
A summary of the activity in the plan is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at January 1, 701,473 686,847 496,285
Options granted 332,800 50,000 336,101
Options exercised - (25,382) (19,169)
Options canceled (194,886) (9,992) (126,370)
-----------------------------------------------------------
Options outstanding at December 31, 839,387 701,473 686,847
===========================================================
Options available for grant 162,136 300,050 3,967
Options exercisable 602,824 521,487 422,362
-----------------------------------------------------------
Option prices per share:
Granted $ 12.38 - 13.63 $ 14.13 $ 13.00
Exercised - $ 7.34 - 8.53 $ 9.00 - 12.00
Canceled $ 12.05 - 16.50 $ 14.00 - 16.50 $ 14.00 - 18.00
-----------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $5,433,000 at December 31, 1995.
At December 31, 1995, the Company had standby letters of credit and third party
guarantees outstanding totaling $1,300,000. The conditional commitments under
the letters of credit have been issued by a financial institution on behalf of
the Company to guarantee performance of certain portfolio companies to third
parties. Repurchase agreements of $805,000 have been used as collateral for
the letters of credit.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
Allied Lending, formerly a wholly owned subsidiary, originates certain loans
which are 70 to 90 percent guaranteed by the SBA. Allied Lending then sells
the guaranteed portion of these loans in the secondary market. The Internal
Revenue Service may assert that these types of transactions subjected Allied
Lending to a liability for income taxes of up to $845,000 for the year ended
December 31, 1992. The Company has agreed to indemnify Allied Lending for this
potential liability. Management believes that the Company has valid defenses
for the position that such transactions do not subject Allied Lending to a
liability for additional income taxes.
NOTE 9. CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries place their cash in financial institutions
and, at times, cash held in checking accounts may be in excess of the FDIC
insurance limit.
NOTE 10. SUBSEQUENT EVENTS
The Company issued to the common stockholders at the close of business on
January 22, 1996, the record date, non-transferable subscription rights that
entitled record date stockholders to subscribe for and purchase from the
Company up to one authorized, but heretofore unissued share of the Company's
common stock for each seven subscription rights held. The Company offered a
total of 885,448 shares of common stock pursuant to this offer. Stockholders
who fully exercised their subscription rights were entitled to the additional
privilege of subscribing for shares from the offering not acquired by exercise
of subscription rights. In addition, the Company increased the number of
shares subject to subscription by 15 percent, or 132,817 shares, for an
aggregate total of 1,018,265 shares available under the offering.
The subscription price per common share was $13.11, which equaled 95 percent of
the average of the last reported sale price of a share of common stock on the
Nasdaq National Market on February 27, 1996 (the expiration date) and each of
the four preceding business days. Stockholders participating in the offering
subscribed for 404,767 shares through the primary subscription and 251,903
shares through the oversubscription privilege for a total of 656,670 shares.
The Company received net proceeds of $8,200,000
27
<PAGE> 29
Notes To Consolidated Financial Statements
- --------------------------------------------------------------------------------
Allied Capital Corporation
from the rights offering after estimated expenses of $458,000, including a 2.5
percent commission paid to eligible broker/dealers on each share sold as a
result of their soliciting efforts. The Company will attempt to sell the
remaining 361,595 registered shares to other investors under similar terms
during 1996.
NOTE 11. DISPOSITION OF SUBSIDIARY
The Company owned all of the outstanding capital stock of 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
approximately 36 percent of the Allied Lending shares outstanding at December
31, 1993. The Company will divest itself of all shares of Allied Lending by
December 31, 1998 by public offerings, private placements, distributions to the
Company's stockholders or otherwise. The Company declared an extra dividend in
December 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 approximately 28 percent of the Allied Lending shares then
outstanding.
- --------------------------------------------------------------------------------
NOTE 12. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995
QTR 1 QTR 2 QTR 3 QTR 4
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $ 3,549 $ 3,229 $ 3,564 $ 3,784
Net investment income $ 881 $ 504 $ 899 $ 1,048
Net increase in net assets resulting from operations $ 2,134 $ 7,196 $ 3,089 $ 2,898
Preferred stock dividends $ 55 $ 55 $ 55 $ 55
Net increase in net assets resulting from
operations available to common stockholders $ 2,079 $ 7,141 $ 3,034 $ 2,843
Per common share $ 0.34 $ 1.16 $ 0.49 $ 0.46
--------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1994
Qtr 1 Qtr 2 Qtr 3 Qtr 4
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $ 2,594 $ 2,507 $ 2,718 $ 4,397
Net investment income $ 204 $ 131 $ 518 $ 1,273
Net increase (decrease) in net assets
resulting from operations $ 752 $ 2,641 $ (55) $ (3,114)
Preferred stock dividends $ 55 $ 55 $ 55 $ 55
Net increase (decrease) in net assets resulting from
operations available to common stockholders $ 697 $ 2,586 $ (110) $ (3,169)
Per common share $ 0.11 $ 0.42 $ (0.02) $ (0.52)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly amounts for 1994 have been reclassified to conform with
classifications used in the financial statements for 1995.
28
<PAGE> 30
Report Of Independent Accountants
- --------------------------------------------------------------------------------
Allied Capital Corporation
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALLIED CAPITAL CORPORATION
We have audited the consolidated balance sheet of Allied Capital Corporation
and its wholly owned subsidiaries as of December 31, 1995 and 1994, including
the consolidated statement of loans to and investments in small business
concerns as of December 31, 1995, and the related consolidated statements of
operations, changes in net assets and cash flows for each of the three years in
the period ended December 31, 1995, and the selected per share data presented
as financial highlights for each of the five years in the period ended December
31, 1995. These financial statements and per share data are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and per share data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and per
share data are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the examination or confirmation of
securities owned at December 31, 1995 and 1994. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data referred
to above present fairly, in all material respects, the financial position of
Allied Capital Corporation and its wholly owned subsidiaries as of December 31,
1995 and 1994, and the consolidated results of their operations, changes in net
assets and cash flows for each of the three years in the period ended December
31, 1995, and the selected per share data for each of the five years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As explained in Note 1, the consolidated financial statements include
securities valued at $123,184,000 as of December 31, 1995 and $115,026,000 as
of December 31, 1994, (83 percent and 85 percent, respectively, of total
assets) whose values have been estimated by the Board of Directors in the
absence of readily ascertainable market values. We have reviewed the
procedures used by the Board of Directors in arriving at its estimate of value
of such securities and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the securities existed, and the differences could
be material.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
February 2, 1996
29
<PAGE> 31
Investment Officers
- --------------------------------------------------------------------------------
Allied Capital Corporation
[PHOTO]
Philip A. McNeill
Senior Vice President
[PHOTO]
Susan Gallagher
Senior Vice President
[PHOTO]
Carr T. Preston
Senior Vice President
[PHOTO]
Thomas H. Westbrook
Senior Vice President
[PHOTO]
George Stelljes III
Senior Vice President
[PHOTO]
Richard E. Fearon, Jr.
Vice President
[PHOTO]
Gay S. Truscott
Vice President
[PHOTO]
Erik A. Scott
Vice President
[PHOTO]
Robert M. Monk
Assistant Vice President
[PHOTO]
Donnel K. Pullum
Assistant Vice President
30
<PAGE> 32
Directors And Officers
- --------------------------------------------------------------------------------
Allied Capital Corporation
DIRECTORS
David Gladstone(1)
Chairman of the Board &
Chief Executive Officer
George C. Williams(1)
Vice Chairman of the Board
G. Cabell Williams III
President & Chief Operating Officer
Joseph A. Clorety III(2,3)
President, Clorety and Company, Inc.
(registered investment adviser)
Michael I. Gallie(1,2)
Principal, The Millennium Group
(financial & management consulting firm)
Warren K. Montouri(2,3)
Investor
Guy T. Steuart II(1,3)
President, Steuart Investment Company
T. Murray Toomey(1)
Attorney at Law
OFFICERS
David Gladstone
Chairman of the Board
George C. Williams
Vice Chairman of the Board
G. Cabell Williams III
President & Chief Operating Officer
William F. Dunbar
Executive Vice President
Katherine C. Marien
Executive Vice President
John M. Scheurer
Executive Vice President
Joan M. Sweeney
Executive Vice President
Thomas R. Salley
General Counsel & Secretary
Tricia B. Daniels
Senior Vice President
Jon A. DeLuca
Senior Vice President, Treasurer &
Chief Financial Officer
Susan Gallagher
Senior Vice President
Philip A. McNeill
Senior Vice President
Carr T. Preston
Senior Vice President
George Stelljes III
Senior Vice President
Thomas H. Westbrook
Senior Vice President
Richard E. Fearon, Jr.
Vice President
Erik A. Scott
Vice President
Suzanne V. Sparrow
Vice President, Investor Relations
Gay S. Truscott
Vice President
Penni F. Roll
Controller & Assistant Treasurer
Kelly A. Anderson
Corporate Controller & Assistant Treasurer
Robert M. Monk
Assistant Vice President
Donnel K. Pullum
Assistant Vice President
Arthur S. Cooper
Assistant Secretary
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
31
<PAGE> 33
Investor Information
- --------------------------------------------------------------------------------
Allied Capital Corporation
CORPORATE HEADQUARTERS
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Tel: (202) 331-1112
Fax: (202) 659-2053
TRANSFER AGENT & REGISTRAR
Information on transferring securities, replacing a lost or stolen certificate,
or processing a change of address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
DIVIDEND REINVESTMENT PLAN
For the benefit of our stockholders, the Company provides a dividend
reinvestment plan. All communication regarding this service should be directed
to the Company's transfer agent and registrar who also serves as the plan
administrator.
STOCK MARKET LISTING
Nasdaq National Market
Symbol: ALLC
CUSIP Number: 019 033 109
ANNUAL MEETING OF STOCKHOLDERS
The 1996 Annual Meeting of Stockholders will be held at 10:00 a.m. on Monday,
May 6, 1996 at Strathmore Hall Arts Center, 10701 Rockville Pike, North
Bethesda, Maryland. All stockholders are welcome to attend.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1995, as filed with the Securities and Exchange Commission, will be sent at
no charge to any stockholder upon request to the Investor Relations Department
at the Company's corporate headquarters.
INDEPENDENT ACCOUNTANTS
Matthews, Carter and Boyce
McLean, VA
NUMBER OF STOCKHOLDERS
As of December 31, 1995, there were approximately 1,700 stockholders of record.
The Company estimates there were 6,700 beneficial stockholders.
INVESTMENT ADVISER
Allied Capital Advisers,Inc.
Washington, DC
Shares of the investment adviser are traded on Nasdaq National Market under the
symbol ALLA.
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO STOCKHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1995 and 1994 and the distributions per
share. The quotations represent interdealer quotations and do not include
markups, markdowns or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994
DISTRIBUTIONS Distributions
HIGH LOW PER SHARE High Low Per Share
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 13.50 $ 11.50 $ 0.20 $ 14.00 $ 12.25 $ 0.20
Second Quarter $ 12.00 $ 11.13 $ 0.20 $ 14.25 $ 13.25 $ 0.20
Third Quarter $ 13.75 $ 11.25 $ 0.22 $ 14.50 $ 13.25 $ 0.20
Fourth Quarter $ 14.25 $ 12.25 $ 0.24 $ 15.50 $ 12.75 $ 0.20
Annual Extra Distribution $ 0.58 $ 0.60
------- -------
Total Distributions $ 1.44 $ 1.40
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in the registration statement on Form S-8 File No. 33-78394, of our report
dated February 2, 1996 incorporated by reference in Allied Capital
Corporation's Form 10-K for the year ended December 31, 1995 and to all
references to our Firm included in such registration statement.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 22, 1996
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation by reference
in this Form 10-K of our report dated February 2, 1996 included in Allied
Capital Corporation's Annual Report to stockholders. It should be noted that we
have not audited any financial statements of the company subsequent to December
31, 1995 or performed any audit procedures subsequent to the date of our
report.
MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 115,615
<INVESTMENTS-AT-VALUE> 123,184
<RECEIVABLES> 0
<ASSETS-OTHER> 2,341
<OTHER-ITEMS-ASSETS> 22,743
<TOTAL-ASSETS> 148,268
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 81,300
<OTHER-ITEMS-LIABILITIES> 9,787
<TOTAL-LIABILITIES> 91,087
<SENIOR-EQUITY> 12,198
<PAID-IN-CAPITAL-COMMON> 41,090
<SHARES-COMMON-STOCK> 6,198
<SHARES-COMMON-PRIOR> 6,153
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (3,676)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,569
<NET-ASSETS> 57,181
<DIVIDEND-INCOME> 1,556
<INTEREST-INCOME> 11,957
<OTHER-INCOME> 613
<EXPENSES-NET> 10,794
<NET-INVESTMENT-INCOME> 3,332
<REALIZED-GAINS-CURRENT> 5,526
<APPREC-INCREASE-CURRENT> 6,459
<NET-CHANGE-FROM-OPS> 15,317
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,685
<DISTRIBUTIONS-OF-GAINS> 6,429
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 45,435
<NET-CHANGE-IN-ASSETS> 7,194
<ACCUMULATED-NII-PRIOR> (3,420)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 1,216
<OVERDIST-NET-GAINS-PRIOR> 1,035
<GROSS-ADVISORY-FEES> 2,799
<INTEREST-EXPENSE> 6,735
<GROSS-EXPENSE> 10,794
<AVERAGE-NET-ASSETS> 53,584
<PER-SHARE-NAV-BEGIN> 7.15
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 1.94
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 1.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.26
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 79,903
<AVG-DEBT-PER-SHARE> 12.89
</TABLE>
<PAGE> 1
EXHIBIT 28
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Investment Corporation 03/04-0003
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, NW - 9th Floor
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1081051
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/95
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
A B C
---------------
5 3 1
A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION
2 = $1 MILLION TO LESS THAN $2 MILLION
3 = $2 MILLION TO LESS THAN $5 MILLION
4 = $5 MILLION TO LESS THAN $10 MILLION
5 = $10 MILLION OR MORE
B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"):
1 = AT LEAST 50% OWNED BY BANK OR BHC
2 = AT LEAST 10% AND LESS THAN 50% OWNED BY
BANK OR BHC
OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK
OR BHC):
3 = PUBLICLY OWNED
4 = PRIVATELY OWNED
OWNED BY NON-FINANCIAL CORPORATION:
5 = PUBLICLY OWNED
6 = PRIVATELY OWNED
OWNED BY INDIVIDUALS:
7 = PUBLICLY OWNED
8 = PRIVATELY OWNED
OWNED BY PARTNERSHIP
9 = PUBLICLY OWNED
10 = PRIVATELY OWNED
C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED
2 = NON-DIVERSIFIED (SIC CODE____)
NOTE: Public reporting burden for this collection of information is estimated
to average 17 hours per response, including time for reviewing instructions,
searching existing data sources, gathering and maintaining the data needed, and
completing and reviewing the form. Send comments regarding this burden
estimate or any other aspect of this collection of information, including
suggestions for reducing this burden, to: Chief, Administrative Information
Branch, U.S. Small Business Administration, Washington, DC 20416, and to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503.
SBA Form 468.1 (1-95) Previous editions obsolete Page 1C
<PAGE> 2
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
ASSETS COST DEPRECIATION APPRECIATION VALUE(1)
------ -----------------------------------------------------------
LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4)
- ---------------------
<S> <C> <C> <C> <C>
Portfolio Securities:
1 Loans 7,234,712 234,087 404,702 7,405,327
------------ ----------- ----------- ------------
2 Debt Securities 44,051,046 5,566,152 311,853 38,796,747
------------ ----------- ----------- ------------
3 Equity Securities 7,410,691 5,202,822 6,449,118 8,656,987
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 58,696,449 11,003,061 7,165,673 54,859,061
------------ ----------- ----------- ------------
Assets Acquired in Liquidation of Portfolio Securities:
5 Receivables from Sale of Assets Acquired 0 0 0 0
------------ ----------- ----------- ------------
6 Assets Acquired 312,232 145,481 0 166,751
------------ ----------- ----------- ------------
7 TOTAL ASSETS ACQUIRED 312,232 145,481 0 166,751
------------ ----------- ----------- ------------
8 Operating Concerns Acquired 0 0 0 0
------------ ----------- ----------- ------------
9 Notes and Other Securities Received 1,058,352 86,437 0 971,915
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 60,067,033 11,234,979 7,165,673 55,997,727
------------ ----------- ----------- ------------
11 Less Current Maturities 2,130,882
------------
12 Loans and Investments Net of Current Maturities 53,866,845
------------
Investment in 301(d) Licensee (2):
13 Name ___________________________________ 0
------------
License No. ________________
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 12,697,158
-----------
15 Invested Idle Funds 0 12,697,158
----------- -----------
16 Interest and Dividends Receivable 757,557
-----------
17 Notes and Accounts Receivable 206,922
-----------
18 Receivables from Parent or Other Associates 67,812
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 358,317 673,974
----------- -----------
20 Current Maturities of Portfolio Securities 2,130,882
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 2,130,882
----------- -----------
24 Other (specify) Cash Collateral account 291,335
-------------------------- -----------
25 Other (specify) _________________________ 0 15,793,349
----------- ------------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
------------ -----------
27 Other (specify) Loan Fees Unamortized 746,864
-------------------------- -----------
28 Other (specify) Prepaid Expenses & other 18,886 765,750
-------------------------- ----------- ------------
29 TOTAL ASSETS $70,425,944
------------
</TABLE>
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized
Depreciation + Unrealized Appreciation = Value)
(2) A note to item 13 should include percent owned, cost basis and changes
resulting from equity method of accounting.
SBA Form 468.1 (1-95) Previous editions obsolete Page 2C
<PAGE> 3
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
-----------------------
LONG-TERM DEBT (Net of Current Maturities)
- ------------------------------------------
30 Notes and Debentures Payable to or
Guaranteed by SBA 42,350,000
-----------
31 Notes and Debentures Payable to Others 2,833,333 45,183,333
----------- ------------
CURRENT LIABILITIES
- -------------------
32 Accounts Payable and Accrued Expenses 40,543
-----------
33 Due to Parent or Other Associates 161,396
-----------
34 Accrued Interest Payable 886,918
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 0
-----------
b. Current Maturities of Line 31 0 0
----------- -----------
37 Distributions Payable 1,833,519
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) _________________________ 0
-----------
40 Other(specify) _________________________ 0 2,922,376
----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 486,224
-----------
42 Other(specify) _________________________ 0
-----------
43 Other(specify) _________________________ 0 486,224
----------- ------------
44 TOTAL LIABILITIES 48,591,933
------------
REDEEMABLE SECURITIES (guaranteed or purchased by SBA)
- ------------------------------------------------------
45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 0
-----------
b. Cumulative Undeclared 4% Dividends 0 0
----------- -----------
46 TOTAL REDEEMABLE SECURITIES 0
------------
CAPITAL
- -------
47 Capital stock 56
------------
48 Paid-in Surplus 16,198,920 16,198,976
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 16,198,976
-----------
51 3% Preferred Stock Purchased by SBA 0
-----------
52 Unrealized Gain (Loss) on Securities Held -4,069,306
-----------
53 Non-Cash Gains/Income 1,580,357
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 8,123,984
------------
c. Total (54a plus 54b) 8,123,984
-----------
55 Undistributed Realized Earnings (53 plus 54c) 9,704,341
-----------
56 Total 21,834,011
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 21,834,011
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $70,425,944
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 4
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 5,739,030
----------
2 Dividend Income 37,522
----------
3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0
----------
4 Income (Loss) from Investment in Section 301(d) Licensee 0
----------
5 Fees for Management Services 0
----------
6 Processing and Other Fees 20,209
----------
7 Interest on Invested Idle Funds 391,594
----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 9,297
----------
10 GROSS INVESTMENT INCOME 6,197,652
-----------
EXPENSES
- --------
11 Interest Expense 3,700,160
----------
12 Commitment Fees 0
----------
13 Other Financial Cost 0
----------
14 Officers' Compensation and Benefits 0
----------
15 Employee Compensation and Benefits 0
----------
16 Investment Advisory and Management Services 0
----------
17 Directors' and Stockholders' Meetings 0
----------
18 Advertising and Promotion 0
----------
19 Appraisal and Investigation 0
----------
20 Communication 0
----------
21 Travel 19,506
----------
22 Cost of Space Occupied 0
----------
23 Depreciation and Amortization 0
----------
24 Insurance 1,473
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 2,683
----------
27 Provision for Losses on Receivables (excluding loans receivable) 224,568
----------
28 Legal Fees 150,201
----------
29 Audit and Examination Fees 5,785
----------
30 Miscellaneous Expenses (attach schedule) 170,167
----------
31 TOTAL EXPENSES 4,274,543
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 1,923,109
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 504,500
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 2,427,609
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $2,427,609
-----------
37 Extraordinary Item ____________________ 0
-----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $2,427,609
-----------
</TABLE>
(1)Include CHARGE-OFFS (full or partial) of loans and investments which
represent realized losses. DO NOT INCLUDE valuation adjustments classified
as unrealized appreciation or depreciation. Provide supporting detail for
all realized gains and losses on page 14C of this form.
SBA Form 468.1 (1-95) Previous editions obsolete Page 4C
<PAGE> 5
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 1 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 4,887,981
----------
2 Dividends Received from Portfolio Concerns 37,522
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 298,157
----------
5 Interest on Invested Idle Funds 347,597
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 268,499
----------
CASH OUTFLOWS:
8 Interest Paid 3,966,519
----------
9 Commitment Fees and Other Financial Costs 0
----------
10 Investment Advisory and Management Fees 0
----------
11 Officers, Directors and Employees Compensation and Benefits 0
----------
12 Operating Expenditures (excluding compensation and benefits) 333,473
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 0
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,539,764
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 4,017,622
----------
17 Returns of Capital Received from Portfolio Concerns 0
----------
18 Net Proceeds from Disposition of Portfolio Securities 11,063,726
----------
19 Liquidation of Idle Funds Investments 6,894,274
----------
20 Other (Specify) $ rcvd for MEC receivable 187,672
------------------------- ----------
Cash Outflows:
21 Purchase of Portfolio Securities 600,223
----------
22 Loans to Portfolio Concerns 17,332,678
----------
23 Idle Funds Investments 5,427,147
----------
24 Other (Specify) __________________________ 0
----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -1,196,754
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 12,000,000
----------
27 Proceeds from Sale of 41 Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 0
----------
29 Proceeds from Sale of Stock 4,300,000
----------
30 Other (Specify) __________________________ 0
----------
Cash Outflows:
31 Principal Payments on SBA-Guaranteed Debentures 5,500,000
----------
32 Principal Payments on Non-SBA Borrowing 0
----------
33 Redemption of 4% Preferred Stock 0
----------
34 Redemption of 3% Preferred Stock 0
----------
35 Redemption of Stock (excluding 3% and 4% Preferred) 0
----------
36 Dividends Paid 1,468,994
----------
37 Other (Specify) __________________________ 0
----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 6
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 2 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,331,006
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,674,016
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,023,142
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $12,697,158
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 2,427,609
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 0
----------
44 Provision for Losses on Accounts Receivable 224,568
----------
45 Provision for Deferred Income Taxes 0
----------
46 (Income) Loss from Investments in Partnerships/Flow-through
Entities (excluding income received in cash) 0
----------
47 Realized (Gains) Losses on Investments -504,500
----------
48 Other (Specify) Amort of OID, Cl Pt, Proc -478,817
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -378,448
----------
50 (Increase) Decrease in Other Current Assets -116,897
----------
51 Increase (Decrease) in Accounts Payable 98,895
----------
52 Increase (Decrease) in Accrued Interest Payable 96,057
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities 171,297
----------
56 Other (Specify) ________________________ 0
----------
57 Other (Specify) ________________________ 0
----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,539,764
----------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities is
required. See FASB Statement No. 95, paragraph 32.
SBA Form 468.1 (1-95) Previous editions obsolete Page 6C
<PAGE> 7
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Capital Financial Corporation 03/03-5163
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, NW 9th Floor
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1278855
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/95
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
A B C
5 3 1
A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION
2 = $1 MILLION TO LESS THAN $2 MILLION
3 = $2 MILLION TO LESS THAN $5 MILLION
4 = $5 MILLION TO LESS THAN $10 MILLION
5 = $10 MILLION OR MORE
B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"):
1 = AT LEAST 50% OWNED BY BANK OR BHC
2 = AT LEAST 10% AND LESS THAN 50% OWNED BY BANK
OR BHC
OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK
OR BHC):
3 = PUBLICLY OWNED
4 = PRIVATELY OWNED
OWNED BY NON-FINANCIAL CORPORATION:
5 = PUBLICLY OWNED
6 = PRIVATELY OWNED
OWNED BY INDIVIDUALS:
7 = PUBLICLY OWNED
8 = PRIVATELY OWNED
OWNED BY PARTNERSHIP
9 = PUBLICLY OWNED
10 = PRIVATELY OWNED
C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED
2 = NON-DIVERSIFIED (SIC CODE ____)
NOTE: Public reporting burden for this collection of information is estimated
to average 17 hours per response, including time for reviewing instructions,
searching existing data sources, gathering and maintaining the data needed, and
completing and reviewing the form. Send comments regarding this burden
estimate or any other aspect of this collection of information, including
suggestions for reducing this burden, to: Chief, Administrative Information
Branch, U.S. Small Business Administration, Washington, DC 20416, and to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503.
SBA Form 468.1 (1-95) Previous editions obsolete Page 1C
<PAGE> 8
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
ASSETS COST DEPRECIATION APPRECIATION VALUE(1)
------ -----------------------------------------------------------
LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4)
- ---------------------
<S> <C> <C> <C> <C>
Portfolio Securities:
1 Loans 20,121,111 823,182 0 19,297,929
------------ ----------- ----------- ------------
2 Debt Securities 12,742,416 103,456 0 12,638,960
------------ ----------- ----------- ------------
3 Equity Securities 522,628 262,532 2,274,767 2,534,863
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 33,386,155 1,189,170 2,274,767 34,471,752
------------ ----------- ----------- ------------
Assets Acquired in Liquidation of Portfolio Securities:
5 Receivables from Sale of Assets Acquired 0 0 0 0
------------ ----------- ----------- ------------
6 Assets Acquired 520,904 293,404 0 227,500
------------ ----------- ----------- ------------
7 TOTAL ASSETS ACQUIRED 520,904 293,404 0 227,500
------------ ----------- ----------- ------------
8 Operating Concerns Acquired 0 0 0 0
------------ ----------- ----------- ------------
9 Notes and Other Securities Received 0 0 0 0
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 33,907,059 1,482,574 2,274,767 34,699,252
------------ ----------- ----------- ------------
11 Less Current Maturities 3,844,118
------------
12 Loans and Investments Net of Current Maturities 30,855,134
------------
Investment in 301(d) Licensee (2):
13 Name ________________________________________________ 0
------------
License No. ____________________
CURRENT ASSETS
- --------------
14 Cash and Cash Equivalents 9,357,901
-----------
15 Invested Idle Funds 0 9,357,901
----------- -----------
16 Interest and Dividends Receivable 647,268
-----------
17 Notes and Accounts Receivable 474
-----------
18 Receivables from Parent or Other Associates 25,000
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 193,781 478,961
----------- -----------
20 Current Maturities of Portfolio Securities 3,844,118
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 3,844,118
----------- -----------
24 Other (specify) _______________________ 0
-----------
25 Other (specify) _______________________ 0 13,680,980
----------- ------------
OTHER ASSETS
- ------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
----------- -----------
27 Other (specify) Loan Fees Unamortized 164,381
-------------------------- -----------
28 Other (specify) Prepaid Expenses & Other 82,625 247,006
-------------------------- ----------- ------------
29 TOTAL ASSETS $44,783,120
------------
</TABLE>
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized
Depreciation + Unrealized Appreciation = Value)
(2) A note to item 13 should include percent owned, cost basis and changes
resulting from equity method of accounting.
SBA Form 468.1 (1-95) Previous editions obsolete Page 2C
<PAGE> 9
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
------------------------
LONG-TERM DEBT (Net of Current Maturities)
- ------------------------------------------
30 Notes and Debentures Payable to or
Guaranteed by SBA 18,950,000
-----------
31 Notes and Debentures Payable to Others 2,166,667 21,116,667
----------- ------------
CURRENT LIABILITIES
- -------------------
32 Accounts Payable and Accrued Expenses 3
-----------
33 Due to Parent or Other Associates 74,905
-----------
34 Accrued Interest Payable 291,142
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 0
-----------
b. Current Maturities of Line 31 0 0
----------- -----------
37 Distributions Payable 3,617,166
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) _________________________ 0
-----------
40 Other(specify) _________________________ 0 3,983,216
----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 287,954
-----------
42 Other(specify) _________________________ 0
-----------
43 Other(specify) _________________________ 0 287,954
----------- ------------
44 TOTAL LIABILITIES 25,387,837
------------
REDEEMABLE SECURITIES (guaranteed or purchased by SBA)
- ------------------------------------------------------
45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 1,000,000
-----------
b. Cumulative Undeclared 4% Dividends 0 1,000,000
----------- -----------
46 TOTAL REDEEMABLE SECURITIES 1,000,000
------------
CAPITAL
- -------
47 Capital Stock 0
------------
48 Paid-in Surplus 9,623,681 9,623,681
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 9,623,681
-----------
51 3% Preferred Stock Purchased by SBA 6,000,000
-----------
52 Unrealized Gain (Loss) on Securities Held 792,193
-----------
53 Non-Cash Gains/Income 57,804
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 1,921,605
------------
c. Total (54a plus 54b) 1,921,605
-----------
55 Undistributed Realized Earnings (53 plus 54c) 1,979,409
-----------
56 Total 18,395,283
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 18,395,283
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $44,783,120
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 10
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/95
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 3,946,407
-----------
2 Dividend Income 0
-----------
3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0
-----------
4 Income (Loss) from Investment in Section 301(d) Licensee 0
-----------
5 Fees for Management Services 0
-----------
6 Processing and Other Fees 14,043
-----------
7 Interest on Invested Idle Funds 519,361
-----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of __________0 Expenses) 0
-----------
9 Other Income 103,550
-----------
10 GROSS INVESTMENT INCOME 4,583,361
-----------
EXPENSES
--------
11 Interest Expense 1,627,141
-----------
12 Commitment Fees 0
-----------
13 Other Financial Cost 0
-----------
14 Officers' Compensation and Benefits 0
-----------
15 Employee Compensation and Benefits 0
-----------
16 Investment Advisory and Management Services 0
-----------
17 Directors' and Stockholders' Meetings 0
-----------
18 Advertising and Promotion 0
-----------
19 Appraisal and Investigation 0
-----------
20 Communication 0
-----------
21 Travel 0
-----------
22 Cost of Space Occupied 0
-----------
23 Depreciation and Amortization 0
-----------
24 Insurance 933
-----------
25 Payroll Taxes 0
-----------
26 Other Taxes (excluding income taxes) 2,211
-----------
27 Provision for Losses on Receivables (excluding loans receivable) 92,626
-----------
28 Legal Fees 114,304
-----------
29 Audit and Examination Fees 4,490
-----------
30 Miscellaneous Expenses (attach schedule) 20,873
-----------
31 TOTAL EXPENSES 1,862,578
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,720,783
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 802,848
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 3,523,631
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $3,523,631
-----------
37 Extraordinary Item __________________ 0
-----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $3,523,631
-----------
</TABLE>
(1) Include CHARGE-OFFS (full or partial) of loans and investments which
represent realized losses. DO NOT INCLUDE valuation adjustments classified
as unrealized appreciation or depreciation. Provide supporting detail for
all realized gains and losses on page 14C of this form.
SBA Form 468.1 (1-95) Previous editions obsolete Page 4C
<PAGE> 11
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 1 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 3,664,779
-----------
2 Dividends Received from Portfolio Concerns 0
-----------
3 Other Returns on Capital Received from Portfolio Concerns 0
-----------
4 Management Services and Other Fees Received 100,800
-----------
5 Interest on Invested Idle Funds 731,857
-----------
6 Cash Received from Assets Acquired in Liquidation 0
-----------
7 Other Operating Cash Receipts 103,550
-----------
CASH OUTFLOWS:
8 Interest Paid 1,711,002
-----------
9 Commitment Fees and Other Financial Costs 0
-----------
10 Investment Advisory and Management Fees 0
-----------
11 Officers, Directors and Employees Compensation and Benefits 0
-----------
12 Operating Expenditures (excluding compensation and benefits) 165,115
-----------
13 Income Taxes Paid 0
-----------
14 Other Operating Cash Disbursements 52,917
-----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,671,952
-----------
INVESTING ACTIVITIES:
---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 4,317,440
-----------
17 Returns of Capital Received from Portfolio Concerns 0
-----------
18 Net Proceeds from Disposition of Portfolio Securities 1,496,897
-----------
19 Liquidation of Idle Funds Investments 19,848,098
-----------
20 Other (Specify) __________________________ 0
-----------
Cash Outflows:
21 Purchase of Portfolio Securities 111
-----------
22 Loans to Portfolio Concerns 10,639,222
-----------
23 Idle Funds Investments 7,223,983
-----------
24 Other (Specify) __________________________ 0
-----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,799,119
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 2,000,000
-----------
27 Proceeds from Sale of 4% Preferred Stock 0
-----------
28 Proceeds from Non-SBA Borrowing 0
-----------
29 Proceeds from Sale of Stock 650,000
-----------
30 Other (Specify) _________________________ 0
-----------
Cash Outflows:
31 Principal Payments on SBA-Guaranteed Debentures 2,000,000
-----------
32 Principal Payments on Non-SBA Borrowing 0
-----------
33 Redemption of 4% Preferred Stock 0
-----------
34 Redemption of 3% Preferred Stock 0
-----------
35 Redemption of Stock (excluding 3% and 4% Preferred) 0
-----------
36 Dividends Paid 1,695,258
-----------
37 Other (Specify) _________________________ 0
-----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 12
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/95
(page 2 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -1,045,258
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,425,813
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -67,912
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $9,357,901
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 3,523,631
Adjustments to Reconcile Net Income (Loss) to Net -----------
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 0
-----------
44 Provision for Losses on Accounts Receivable 92,626
-----------
45 Provision for Deferred Income Taxes 0
-----------
46 (Income) Loss from Investments in Partnerships/Flow-through
Entities (excluding income received in cash) 0
-----------
47 Realized (Gains) Losses on Investments -802,848
-----------
48 Other (Specify) Amort of OID,CL Pts& Proc -185,609
Changes in Operating Assets and Liabilities -----------
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -50,929
-----------
50 (Increase) Decrease in Other Current Assets -96,890
-----------
51 Increase (Decrease) in Accounts Payable -30,406
-----------
52 Increase (Decrease) in Accrued Interest Payable -17,739
-----------
53 Increase (Decrease) in Accrued Taxes Payable 0
-----------
54 Increase (Decrease) in Dividends Payable 0
-----------
55 Increase (Decrease) in Other Current Liabilities 240,115
-----------
56 Other (Specify) __________________________ 0
-----------
57 Other (Specify) __________________________ 0
-----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $2,671,951
-----------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities is
required. See FASB Statement No. 95, paragraph 32.
SBA Form 468.1 (1-95) Previous editions obsolete Page 6C
<PAGE> 13
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Investment Corporation (the Company), a wholly owned
subsidiary of Allied Capital Corporation (Parent), is a closed-end management
investment company under the Investment Company Act of 1940. The Company is
licensed under the Small Business Investment Act of 1958 as a Small Business
Investment Company (SBIC). The Company seeks to achieve a high level of
current income by providing debt, mezzanine and equity financing for small
privately owned growth companies, and through long-term growth on the value of
its net assets.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of
business, loans and debt securities are held to maturity, and the amount
realized, in addition to interest, is the face value, which may equal or exceed
cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
Interest and Dividend Income. Interest income is recorded on the accrual basis
to the extent that such amounts are expected to be collected. When collection
of interest is in doubt, interest is not accrued or a reserve is established.
Original issue discount is amortized into interest income using the effective
interest method. Dividend income is recognized on the ex-dividend date.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are accounted for on the trade date and
are measured by the difference between the proceeds of sale and the cost basis
of the investment without regard to unrealized appreciation or depreciation
previously recognized, and includes investments written off during the year,
net of recoveries. Unrealized appreciation or depreciation reflects the
difference between cost and value.
Distributions to the Parent. Distributions to the Parent are recorded on the
ex-dividend date.
Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to the Parent; therefore, a federal income tax provision is not
required.
In addition, no provision for deferred income taxes has been made for the
unrealized
<PAGE> 14
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
appreciation on investments since the Company intends to continue to annually
distribute all of its taxable income.
Dividends declared by the Company in December, but paid during January of the
following year, are treated as if the dividends were received by the Parent on
December 31 of the year declared.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date.
NOTE 2. INVESTMENTS
The loans and debt securities included in investments are at annual stated
interest rates ranging from approximately zero percent to 17 percent, and are
generally payable in installments with final maturities from four months to
fifteen years from date of issue.
The following loans and debt securities had accrued interest that was fully
reserved, or were not accruing interest at December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
DATE INTEREST RESERVED AT
ACCRUAL NET DECEMBER 31, 1995
PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2)
------------------ --------------- ---- ------------------
<S> <C> <C>
ACCRUED INTEREST FULLY RESERVED:
Enviroplan, Inc. $ 519,137 $ 37,838
Enviroplan, Inc. 1,929,773 122,876
Sunstates 956,552 79,950
Sunstates 15,315 1,914
Centennial Media 400,000 33,158
------------ -------------
Total $ 3,820,777 $ 275,736
</TABLE>
<PAGE> 15
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
DATE INTEREST RESERVED AT
ACCRUAL NET DECEMBER 31, 1995
PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2)
------------------ --------------- ---- ------------------
<S> <C> <C> <C>
INTEREST NOT ACCRUED:
Denver Directory (3) 9/8/89 $ 187,500 $ 70,860
Denver Directory (3) 9/27/90 175,834 96,889
Colorado Directory (3) 1/3/86 323,000 79,053
Centennial Media (3) 2/22/89 10,170 4,663
Centennial Media (3) 8/16/93 175,000 41,417
Centennial Media (3) 6/1/93 252,510 55,160
Colorado Directory (3) 8/28/88 69,000 16,378
Centennial Media (3) 10/11/93 150,000 32,500
Denver Directory (3) 12/21/90 187,500 38,854
Centennial Media (3) 5/6/93 57,000 18,126
Colorado Directories (3) 11/28/88 90,000 46,858
Centennial Media (3) 9/1/94 400,000 80,339
Love Mortgage 12/31/95 107,284 20,546
Love Mortgage 12/31/95 402,414 51,068
Medifit 11/1/94 339,909 204,452
Old Mill 9/22/95 542,533 31,417
Old Mill 9/22/95 114,893 6,552
Sequoia Pizza 2/8/95 85,751 35,107
Total Foam 7/1/93 239,853 95,000
</TABLE>
<PAGE> 16
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
DATE INTEREST RESERVED AT
ACCRUAL NET DECEMBER 31, 1995
PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2)
------------------ --------------- ---- ------------------
<S> <C> <C> <C>
Total Foam 7/1/93 241,880 95,000
Total Foam 7/1/93 36,000 13,680
Total Foam 7/1/93 174,388 34,395
Total Foam 7/1/93 239,198 95,000
Total Foam 7/1/93 250,000 90,788
Total Foam 7/1/93 250,000 95,000
Total Foam 7/1/93 119,764 45,510
Total Foam 7/1/93 193,095 76,000
------------ ---------------
Total $ 5,414,476 $ 1,570,612
============ ===============
</TABLE>
(1) Date shown only for loans and debt securities not accruing interest.
(2) From date interest accrual discontinued.
(3) These notes were purchased at various times at a discount to improve the
company's lien position in this investment. No payments have been received on
these notes since purchased even though the borrowers are still required to
make payments under the note agreements.
NOTE 3. INVESTMENT ADVISORY SERVICES
The Company's investments are managed by Allied Capital Advisers, Inc.
("Advisers"), an independent publicly traded registered investment adviser.
Certain officers of the Company are also officers in Advisers. Pursuant to an
advisory agreement with the Parent, Advisers manages the day-to-day activities
of the Parent and its wholly owned subsidiaries. The Company pays all operating
expenses, except those specifically required to be borne by Advisers. The
expenses paid by Advisers include the compensation of the Company's officers and
the cost of office space, equipment and other personnel required for the
Company's day-to-day operations. In exchange, Advisers is reimbursed for its
costs incurred in connection with the above through an
<PAGE> 17
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
investment advisory fee paid by the Parent. The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments and legal and accounting fees. The
Company is required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers. Advisers is entitled to retain
for its own account any fees paid by or for the account of a company, including
a portfolio company, for special investment banking or consulting work
performed for that company which is not related to such investment transaction
or management assistance.
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared a dividend of $1,833,519 for the year
ended December 31, 1995, which was paid January 29, 1996. This represented all
of the Company's taxable income. Pursuant to SBA regulations, retained
earnings available for distribution at December 31, 1995 were insufficient to
pay this dividend, which resulted in an excess distribution of $3,110,995 which
was charged against paid-in surplus in January 1996. As a result of this
charge against paid-in surplus, the Company's capital was reduced to a level
below the minimum capital required by the SBA to meet leverage ratios. The
Parent purchased additional stock in the Company at a cost of $1,700,000 to
increase leveragable capital to a level above the minimum required on February
8, 1996.
NOTE 5. DEBT
Senior Notes. The Company has $2,833,333 of senior notes outstanding to an
insurance company. These notes bear interest at a rate of 9.15 percent per
annum, payable semi-annually. The senior notes are scheduled to mature over a
five-year period commencing in 1998 through 2002 with annual principal payments
of $566,667.
Subordinated Debentures. Subordinated debentures are payable to the Small
Business Administration (SBA) and represent amounts due to the SBA as a result
of borrowings made pursuant to the Small Business Investment Act of 1958. The
debentures require semi-annual interest payments at various interest rates with
the entire principal balance due at maturity. Principal payments required on
these debentures at December 31, 1995 were as follows:
<PAGE> 18
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR AMOUNTS INTEREST RATES
---- ------- --------------
<S> <C> <C>
1996 --- ---
1997 5,000,000 7.950% - 10.350%
1998 4,650,000 9.625% - 9.800%
1999 --- ---
2000 7,700,000 8.700% - 9.600%
thereafter 25,000,000 6.875% - 9.080%
-----------
$ 42,350,000
============
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $117,614 at December 31, 1995.
At December 31, 1995, the Company had standby letters of credit and third party
guarantees outstanding totaling $748,656. The conditional commitments under
the letters of credit have been issued by a financial institution on behalf of
the Company to guarantee performance of certain portfolio companies to third
parties. Repurchase agreements of $291,335 have been used as collateral for
the letters of credit.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
NOTE 7. CONCENTRATIONS OF CREDIT RISK
The Company places its cash in financial institutions and, at times, cash held
in checking accounts may be in excess of the FDIC insurance limit.
<PAGE> 19
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Capital Financial Corporation (the Company), a wholly
owned subsidiary of Allied Capital Corporation (Parent), is a closed-end
management investment company under the Investment Company Act of 1940. The
Company is licensed under the Small Business Investment Act of 1958 as a Small
Business Investment Company (SBIC). The Company seeks to achieve a high level
of current income by providing debt, mezzanine and equity financing for small
privately owned growth companies, and through long-term growth on the value of
its net assets.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of
business, loans and debt securities are held to maturity, and the amount
realized, in addition to interest, is the face value, which may equal or exceed
cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
Interest Income. Interest income is recorded on the accrual basis to the
extent that such amounts are expected to be collected. When collection of
interest is in doubt, interest is not accrued or a reserve is established.
Original issue discount is amortized into interest income using the effective
interest method.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are accounted for on the trade date and
are measured by the difference between the proceeds of sale and the cost basis
of the investment without regard to unrealized appreciation or depreciation
previously recognized, and includes investments written off during the year,
net of recoveries. Unrealized appreciation or depreciation reflects the
difference between cost and value.
Distributions to the Parent. Distributions to the Parent are recorded on the
ex-dividend date.
Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to the Parent; therefore, a federal income tax provision is not
required.
<PAGE> 20
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company intends to continue to
annually distribute all of its taxable income.
Dividends declared by the Company in December, but paid during January of the
following year, are treated as if the dividends were received by the Parent on
December 31 of the year declared.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date.
NOTE 2. INVESTMENTS
The loans and debt securities included in investments are at annual stated
interest rates ranging from approximately zero percent to 16 percent, and are
generally payable in installments with final maturities from four months to
twenty-five years from date of issue. The following loans and debt securities
had accrued interest that was fully reserved, or were not accruing interest at
December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
RESERVED AT
DATE INTEREST DECEMBER 31,
ACCRUAL 1995 OR NOT
PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRUED INTEREST FULLY RESERVED:
CSG Holdings $ 72,917 $ 10,620
CSG Holdings 134,000 19,542
Pact Broadcasting 219,104 9,186
Benfield Services 363,161 19,734
Dye, William 220,700 47,486
ECM Enterprises 35,957 411
Family Investments 137,614 28,318
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
RESERVED AT
DATE INTEREST DECEMBER 31,
ACCRUAL 1995 OR NOT
PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In the Dough 67,398 842
Jochum, Timothy 29,377 3,120
Oak Park 28,620 3,808
Patriotic Pizza 86,607 15,016
Randhawa Brothers 105,933 10,601
Randhawa Brothers 121,109 17,606
Randhawa Brothers 95,968 7,492
-----------------------------------
Total $ 1,718,465 $ 193,782
===================================
INTEREST NOT ACCRUED:
Caltim Pizza 2/8/95 $ 19,621 $ 140
Hot Ones 10/1/95 37,057 13,896
In the Dough 4/11/94 47,768 18,411
North Haledon 8/1/95 18,798 648
Santa Barbara 7/1/90 130,112 111,134
SerpCo, Inc. 7/1/90 188,164 110,511
Benfield Services 7/27/95 363,161 20,950
Dye, William 8/1/95 220,700 11,997
ECM Enterprises 2/8/95 35,957 2,737
Family Investments 2/8/95 137,614 16,876
In the Dough 4/11/94 67,398 17,256
Jochum, Timothy 8/1/95 29,377 1,060
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST
RESERVED AT
DATE INTEREST DECEMBER 31,
ACCRUAL 1995 OR NOT
PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oak Park 2/8/95 28,620 2,868
Patriotic Pizza 8/1/95 86,607 10,945
Randhawa Brothers 2/8/95 105,933 13,217
Randhawa Brothers 2/8/95 121,109 14,500
Randhawa Brothers 2/8/95 95,968 11,592
Love Mortgage 12/31/95 178,851 22,266
Love Mortgage 12/31/95 47,682 9,562
-------------------------------------
Total $ 1,960,497 $ 410,566
=====================================
</TABLE>
(1) Date shown only for loans and debt securities not accruing interest.
(2) From date interest accrual discontinued.
NOTE 3. INVESTMENT ADVISORY SERVICES
The Company's investments are managed by Allied Capital Advisers, Inc.
("Advisers"), an independent publicly traded registered investment adviser.
Certain officers of the Company are also officers in Advisers. Pursuant to an
advisory agreement with the Parent, Advisers manages the day-to-day activities
of the Parent and its wholly owned subsidiaries. The Company pays all
operating expenses, except those specifically required to be borne by Advisers.
The expenses paid by Advisers include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. In exchange, Advisers is reimbursed
for its costs incurred in connection with the above through an investment
advisory fee paid by the Parent. The expenses that are paid by the Company
include the Company's share of transaction costs incident to the acquisition
and disposition of investments and legal and accounting fees. The Company is
required to pay expenses associated with litigation and other extraordinary or
non-recurring expenses, as well as expenses of required and optional insurance
and bonding. All fees paid by or for the account of an actual or prospective
portfolio company in connection with an investment transaction in which the
Company participates are treated as commitment fees or management fees and are
<PAGE> 23
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
received by the Company, pro rata to its participation in such transaction,
rather than by Advisers. Advisers is entitled to retain for its own account
any fees paid by or for the account of a company, including a portfolio
company, for special investment banking or consulting work performed for that
company which is not related to such investment transaction or management
assistance.
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared a common stock dividend of $3,397,165
and a preferred stock dividend of $220,000 for the year ended December 31,
1995, which were paid January 29, 1996. Both dividends combined represented
all of the Company's taxable income. Pursuant to SBA regulations, retained
earnings available for distribution at December 31, 1995 were sufficient to pay
these dividends.
NOTE 5. DEBT
Senior Notes. The Company has $2,166,667 of senior notes outstanding to an
insurance company. These notes bear interest at a rate of 9.15 percent per
annum, payable semi-annually. The senior notes are scheduled to mature over a
five-year period commencing in 1998 through 2002 with annual principal payments
of $433,333.
Subordinated Debentures. Subordinated debentures are payable to the Small
Business Administration (SBA) and represent amounts due to the SBA as a result
of borrowings made pursuant to the Small Business Investment Act of 1958. The
debentures require semi-annual interest payments at various interest rates with
the entire principal balance due at maturity. Principal payments required on
these debentures at December 31, 1995 were as follows:
<PAGE> 24
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR AMOUNTS INTEREST RATES
---- ------- --------------
<S> <C> <C>
1996 --- ---
1997 2,000,000 8.500%
1998 2,000,000 8.875% - 9.000%
1999 --- ---
2000 9,600,000 8.700% - 8.875%
thereafter 5,350,000 6.875% - 9.080%
----------
$18,950,000
==========
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
NOTE 6. PREFERRED STOCK
As of December 31, 1995, the Company had outstanding a total of 60,000 shares
of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of
$100 par value, 4 percent redeemable cumulative preferred stock issued to the
SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as
amended. The 3 percent cumulative preferred stock does not have a required
redemption date. The Company has the option to redeem in whole or in part the
preferred stock by paying the SBA the par value of such securities and any
dividends accumulated and unpaid to the date of redemption. The 4 percent
redeemable cumulative preferred stock has a required redemption date of June 4,
2005.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $50,214 at December 31, 1995.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
NOTE 8. CONCENTRATIONS OF CREDIT RISK
The Company places its cash in financial institutions and, at times, cash held
in checking accounts may be in excess of the FDIC insurance limit.
