<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period Commission file number:
ended March 31, 1998 0-22832
------------------ --------------------
ALLIED CAPITAL CORPORATION
------------------------------------------------------
(exact name of Registrant as specified in its charter)
MARYLAND 52-1081052
- - - - - - - - - - - - - ------------------------------ --------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1666 K STREET, NW
9TH FLOOR
WASHINGTON, DC 20006
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 331-1112
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- --- --- ---
On May 1, 1998 there were 52,121,610 shares outstanding of the Registrant's
common stock, $0.0001 par value.
<PAGE> 2
ALLIED CAPITAL CORPORATION
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . .1
Consolidated Statement of Operations - For the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statement of Changes in Net Assets - For the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statement of Cash Flows - For the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statement of Investments as of March 31,
1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
</TABLE>
<PAGE> 3
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------
1998 1997
----------- --------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Commercial mortgage loans (cost: 1998-$201,238;
1997-$447,016;)..................................... $201,349 $447,244
Mezzanine loans and debt securities (cost:
1998-$202,951; 1997-$181,184)....................... 185,316 167,842
Small Business Administration 7(a) loans (cost:
1998-$46,249; 1997-$41,103)......................... 45,867 40,709
Interest in securitization pool of commercial mortgage
loans (cost: 1998-$87,937; 1997-$0)................. 87,937 --
Equity interests in portfolio companies (cost:
1998-$19,289; 1997-$20,050)......................... 39,691 39,906
Other portfolio assets (cost: 1998-$4,342;
1997-$1,367)........................................ 4,295 1,320
-------- --------
Total portfolio at value.......................... 564,455 697,021
-------- --------
Cash and cash equivalents................................... 31,013 70,437
U.S. government securities.................................. 25,078 11,091
Other assets................................................ 32,164 29,226
-------- --------
Total assets...................................... $652,710 $807,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures and notes payable.......................... $ 99,243 $308,821
Revolving lines of credit............................. 103,000 38,842
Accounts payable and other liabilities................ 20,219 23,984
Dividends and distributions payable................... -- 9,068
-------- --------
222,462 380,715
-------- --------
Commitments and contingencies
Preferred stock issued to Small Business Administration..... 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 52,113,550 and 52,047,318 issued and
outstanding at March 31, 1998 and December 31, 1997,
respectively........................................ 5 5
Additional paid-in capital............................ 452,723 451,044
Common stock held in deferred compensation trust
(662,948 shares at March 31, 1998).................. (15,330) --
Notes receivable from sale of common stock............ (26,556) (29,611)
Net unrealized appreciation on portfolio.............. 2,025 1,301
Undistributed (distributions in excess of) earnings... 10,381 (2,679)
-------- --------
Total shareholders' equity........................ 423,248 420,060
-------- --------
Total liabilities and shareholders' equity........ $652,710 $807,775
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
(UNAUDITED)
<S> <C> <C>
Interest and related portfolio income:
Interest................................. $19,501 $19,630
Net premiums from loan dispositions...... 1,336 701
Net gain on securitization of commercial
mortgage loans......................... 14,812 --
Investment advisory fees and other
income................................. 1,248 1,068
------- -------
Total interest and related portfolio
income............................. 36,897 21,399
------- -------
Expenses:
Interest on indebtedness................. 4,598 5,788
Salaries and employee benefits........... 2,850 2,057
General and administrative............... 2,757 1,586
------- -------
Total operating expenses............. 10,205 9,431
------- -------
Formula and cut-off awards............... 1,772 --
------- -------
Portfolio income before realized and unrealized
gains........................................ 24,920 11,968
------- -------
Net realized and unrealized gains:
Net realized gains....................... 6,421 3,677
Net unrealized gains (losses)............ 724 (2,159)
------- -------
Total net realized and unrealized
gains.............................. 7,145 1,518
------- -------
Income before minority interests and income
taxes........................................ 32,065 13,486
Minority interests............................. -- 306
Income tax expense............................. -- 534
------- -------
Net increase in net assets resulting from
operations................................... $32,065 $12,646
======= =======
Basic earnings per common share................ $ 0.62 $ 0.27
======= =======
Diluted earnings per common share.............. $ 0.61 $ 0.27
======= =======
Weighted average common shares outstanding..... 51,814 46,938
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and
unrealized gains..................... $ 24,920 $ 11,968
Net realized gains..................... 6,421 3,677
Net unrealized gains (losses).......... 724 (2,159)
Minority interests and income tax
expense.............................. -- (840)
-------- --------
Net increase in net assets
resulting from operations....... 32,065 12,646
-------- --------
Shareholder distributions:
Portfolio income....................... (18,225) (14,346)
Preferred stock dividend............... (55) (55)
-------- --------
Net decrease in net assets
resulting from shareholder
distributions................... (18,280) (14,401)
-------- --------
Capital share transactions:
Net decrease in notes receivable
from sale of common stock............ 3,055 2,717
Issuance of common stock upon the
exercise of stock options............ -- 800
Issuance of common stock in lieu of
cash distributions................... 1,678 3,296
Purchase of common stock by deferred
compensation trust................... (15,330) --
Other.................................. -- (102)
-------- --------
Net (decrease) increase in net
assets resulting from capital
share transactions.............. (10,597) 6,711
-------- --------
Total increase in net assets................ 3,188 4,956
-------- --------
Net assets at beginning of period........... 420,060 402,134
-------- --------
Net assets at end of period................. $423,248 $407,090
======== ========
Net asset value per common share............ $ 8.23 $ 8.39
======== ========
Common shares outstanding at end of
period.................................... 51,451 48,541
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1997
(IN THOUSANDS) -------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting
from operations..................... $ 32,065 $12,646
Adjustments
Net unrealized (gains) losses....... (724) 2,159
Net gain on securitization of
commercial mortgage loans......... (14,812) --
Depreciation and amortization....... 173 106
Amortization of loan discounts and
fees.............................. (1,349) (2,086)
Deferred income taxes............... -- (10)
Minority interests.................. -- 306
Changes in other assets and
liabilities....................... (4,228) 4,400
--------- -------
Net cash provided by operating
activities..................... 11,125 17,521
--------- -------
Cash flows from investing activities:
Investments in small business
concerns............................ (107,506) (72,099)
Collections of investment principal.... 30,773 25,104
Proceeds from the sale of loans........ 9,706 6,425
Proceeds from securitization of
commercial mortgage loans........... 223,401 --
Net purchase of U.S. government
securities.......................... (13,987) --
Collections of notes receivable from
sale of common stock................ 3,055 2,919
Other investing activities............. (3,804) (327)
--------- -------
Net cash provided by (used in)
investing activities........... 141,638 (37,978)
--------- -------
Cash flows from financing activities:
Sale of common stock................... -- 500
Purchase of common stock by deferred
compensation trust.................. (15,330) --
Common dividends and distributions
paid................................ (16,547) (19,028)
Special undistributed earnings
distribution paid................... (8,848) --
Preferred stock dividends.............. (275) (220)
Net borrowings under (payments on)
debentures and notes payable........ (209,578) 37,183
Net borrowings under revolving lines
of credit........................... 64,158 8,614
Other financing activities............. (5,767) (361)
--------- -------
Net cash provided by (used in)
financing activities........... (192,187) 26,688
--------- -------
Net increase (decrease) in cash and cash
equivalents............................ (39,424) 6,231
Cash and cash equivalents at beginning of
period................................. 70,437 71,841
--------- -------
Cash and cash equivalents at end of
period................................. $ 31,013 $78,072
========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
MARCH 31, 1998
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
(UNAUDITED)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
<S> <C> <C> <C>
Acme Paging, L.P. Debt Securities $ 6,060 $ 6,060
Partnership Interests 1,456 2,600
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
AGPAL Broadcasting, Inc. Debt Securities 928 928
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Loans 1,485 1,485
Debt Securities 2,274 2,274
Warrants 125 125
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Arnold Moving Co., Inc. Loans 691 691
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ARS, Inc. Debt Securities 9,730 9,730
Warrants 171 171
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc.(1) Debt Securities 7,371 7,371
Warrants 227 340
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 1,458
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Calendar Broadcasting, Inc. Debt Securities 3,792 3,792
Warrants 150 150
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 359 359
Warrants 12 12
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
CeraTech Holdings Corporation Debt Securities 1,987 257
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,717 1,717
Common Stock (220 shares) 1 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Chungsan Corporation Loan 76 76
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Convenience Corporation of Loans 1,226 1,226
America Debt Securities 8,377 2,651
Series A Preferred Stock (27,408 shares) 337 --
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,443 3,443
Warrants -- 1,138
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Cosmetic Group USA, LLC Debt Securities 2,941 2,941
Options -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas 700 700
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 1,440
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc.(1) Warrants 350 536
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
MARCH 31, 1998
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
(UNAUDITED)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Directory Investment Corporation Common Stock (470 shares) $ -- $ 83
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (1,031 shares) -- 862
Series B Common Stock (188 shares) 235 157
Series C Common Stock (292 shares) 656 245
Series A Preferred Stock (214 shares) 307 192
Series B Preferred Stock (175 shares) 931 158
Series C Preferred Stock (58 shares) 58 52
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DMI Furniture, Inc.(1) Convertible Preferred Stock (199,920 shares) 500 1,068
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ECM Enterprises Loan 36 4
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 30 30
Debt Securities 1,875 428
Equity Interest -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Warrants -- 585
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 40 40
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Esquire Communications Ltd.(1) Warrants 6 1,492
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Everything Yogurt Loan 57 57
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Ex Terra Funding, LLC Loan 1,966 1,966
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,666 5,666
Company Warrants 280 280
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loan 200 200
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Gibson Guitar Corp. Debt Securities 14,602 14,602
Warrants 525 525
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Archery, Loans 1,390 1,390
LLC Convertible Debentures 2,248 2,242
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 3,600
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 8,659 8,659
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Han Hie Loan 516 516
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
H.B.N. Communications, Inc. Loan 255 255
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Herr-Voss Industries, Inc. Debt Securities 9,490 9,490
Common Stock (132,507 shares) 1,050 1,050
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Hotelevision, LLC Loan 250 250
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
In the Dough, Inc. Loan 2 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
IndeNet Corporation Debt Securities 8,913 8,913
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
MARCH 31, 1998
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
(UNAUDITED)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jeff & Chris Mufflers, Inc. Loan $ 120 $ 120
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,351 2,351
Warrants 74 74
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 4,645 4,645
Warrants 323 2,099
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Loans 793 793
Debt Securities 2,807 2,807
Warrants 348 2,350
Equity Interest 64 64
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,261 6,261
Warrants 96 96
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kjellberg's Incorporated Loan 3,146 3,146
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kurlancheek Loan 283 283
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,378 3,378
Common Stock (60,000 shares) 100 100
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 235 235
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 360 214
Warrants 200 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Magic Auto Loan 13 13
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Meigher Communications Loan 4,903 4,903
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MidSouth Data Systems, Inc. Debt Securities 7,554 7,554
Warrants 348 348
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Debt Securities 309 309
Options -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Mihadas Loan 289 289
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MLX/SinterMet Corp.(1) Common Stock (5,835 shares) 241 111
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 33 33
Debt Securities 1,822 219
Common Stock (33,333 shares) -- --
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Radio City Mobil Home Park Loan 1,361 1,361
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Series D Convertible Preferred Stock (265,957 shares) 2,000 2,016
Inc.(1) Warrants -- 18
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Norman's Yogurt, Inc. Loan 23 23
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 432 432
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 95 95
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 7,482 7,482
Warrants 619 619
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 1,115 888
Warrants 77 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 10
<TABLE>
<CAPTION>
MARCH 31, 1998
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
(UNAUDITED)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PAL Liberty, Inc. Loan $ 320 $ 320
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 1,142
Warrants 4 542
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
David Peters Loan 169 55
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loans 107 107
Preferred Stock (276 shares) 160 175
Common Stock (36 shares) -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Pico Products, Inc.(1) Debt Securities 5,669 5,669
Common Stock (248,000 shares) 71 210
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Quality Software Products Holdings, Common Stock (94,479 shares) 901 874
PLC(1)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. Loans 281 281
Debt Securities 9,959 9,959
Common Stock (1,430 shares) -- 490
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Randhawa Brothers Enterprises, Inc. Loans 217 217
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
R-Tex Decoratives Company, Debt Securities 1,521 479
Inc. Warrants 58 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
R.L. Singletary Loan 108 108
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
SerpCo., Inc. Loan 182 182
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 398 322
Common Stock (6,208 shares) 22 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Loans 1,557 68
Inc. Debt Securities 4,262 1,486
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,573 129
Common Stock (910 shares) 57 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
University Village Mobile Homes Loan 146 146
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Vickar Industries, Inc. Loan 5,907 5,907
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Vidon, Inc. Loans 262 262
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Waterview Limited Partnership Option -- 3,050
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Weathertech Distributing Company, Inc. Loans 205 205
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
West Virginia Radio Corporation Debt Securities 932 932
of Clarksburg, Inc. Warrants 400 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
William R. Dye Loan 268 268
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Loans 720 720
Company Debt Securities 204 204
Warrants 24 24
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
WYCB Acquisition Corporation Loan 3,750 3,750
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Z-Spanish Radio Network, Inc. Loans 1,030 1,030
Warrants 6 2,462
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 11
<TABLE>
<CAPTION>
MARCH 31, 1998
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
(UNAUDITED)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total mezzanine loans and debt
securities and equity interests
in portfolio companies
(92 investments) $222,240 $225,007
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 12
<TABLE>
<CAPTION>
MARCH 31, 1998
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF INVESTMENTS) RATE RANGES INVESTMENTS COST VALUE
---------------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 4 $ 2,049 $ 1,861
7.00%- 8.99% 21 46,777 46,777
9.00%-10.99% 99 84,764 84,854
11.00%-12.99% 60 53,093 53,302
13.00%-14.99% 6 11,068 11,068
15.00% and above 1 3,487 3,487
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total commercial mortgage loans 191 $201,238 $201,349
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(a) LOANS
Up to 6.99% 10 $ 111 $ 111
7.00%- 8.99% 14 188 109
9.00%-10.99% 32 6,641 6,793
11.00%-12.99% 381 39,217 38,773
13.00%-14.99% 4 92 81
15.00% and above -- -- --
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total Small Business Administration
7(a) loans 441 $ 46,249 $ 45,867
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Interest in securitization pool of
commercial mortgage loans 1 $ 87,937 $ 87,937
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Other portfolio assets 8 $ 4,342 $ 4,295
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total portfolio at value 733 $562,006 $564,455
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 13
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
<S> <C> <C> <C>
Acme Paging, L.P. Debt Securities $ 5,993 $ 5,993
Partnership Interests 1,456 2,600
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
AGPAL Broadcasting, Inc. Debt Securities 928 928
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Loans 1,499 1,499
Debt Securities 2,250 2,250
Warrants 125 125
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Arnold Moving Co., Inc. Loans 713 713
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ARS, Inc. Debt Securities 9,723 9,723
Warrants 171 171
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc.(1) Debt Securities 7,355 7,355
Warrants 227 234
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 1,547
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Broadcast Holdings, Inc. Debt Securities 2,696 2,696
Warrants -- 1,054
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Calendar Broadcasting, Inc. Debt Securities 3,780 3,780
Warrants 144 144
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 365 365
Warrants 12 12
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
CeraTech Holdings Corporation Debt Securities 1,983 253
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,776 1,776
Common Stock (220 shares) 1 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Chungsan Corporation Loan 78 78
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Convenience Corporation of Loans 1,226 1,226
America Debt Securities 8,370 6,245
Series A Preferred Stock (22,797 shares) 265 --
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,440 3,440
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Debt Securities 3,140 3,140
Hungarian Quotas 700 700
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 1,440
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc.(1) Warrants 350 760
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- 83
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
<TABLE>
<CAPTION>
DECEMBER 31, 1997
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Directory Lending Corporation Series A Common Stock (1,031 shares) $ -- $ 862
Series B Common Stock (188 shares) 235 157
Series C Common Stock (292 shares) 656 245
Series A Preferred Stock (214 shares) 307 192
Series B Preferred Stock (175 shares) 931 158
Series C Preferred Stock (58 shares) 58 52
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
DMI Furniture, Inc.(1) Convertible Preferred Stock (199,920 shares) 500 982
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
ECM Enterprises Loan 36 4
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 30 30
Debt Securities 1,875 428
Equity Interest -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Warrants -- 585
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Esquire Communications Ltd.(1) Warrants 6 1,000
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Everything Yogurt Loan 65 65
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Ex Terra Funding, LLC Loan 1,960 1,960
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,653 5,653
Company Warrants 280 280
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loan 200 200
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Gibson Guitar Corp. Debt Securities 14,475 14,475
Warrants 525 525
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Archery, Loans 550 550
LLC Convertible Debentures 2,248 2,248
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 3,600
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 7,866 7,866
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Han Hie Loan 518 518
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
H.B.N. Communications, Inc. Loan 262 262
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Herr-Voss Industries, Inc. Debt Securities 9,500 9,500
Common Stock (132,507 shares) 1,050 1,050
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
HFC Acquisition Sub I, Inc. Loans 232 232
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
In the Dough, Inc. Loan 2 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Jeff & Chris Mufflers, Inc. Loan 128 128
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,343 2,343
Warrants 74 74
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 4,630 4,630
Warrants 323 2,099
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Loans 800 800
Debt Securities 2,784 2,784
Warrants 348 2,350
Equity Interest 40 40
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31, 1997
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kirkland's, Inc. Debt Securities $ 6,250 $ 6,250
Warrants 96 96
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kjellberg's Incorporated Loan 3,146 3,146
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Kurlancheek Loan 311 311
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Labor Ready, Inc.(1) Common Stock (247,863 shares) 1,477 4,308
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,370 3,370
Common Stock (60,000 shares) 100 100
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 235 235
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 360 214
Warrants 200 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Magic Auto Loan 17 17
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MidSouth Data Systems, Inc. Debt Securities 7,550 7,550
Warrants 348 348
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Debt Securities 326 326
Options -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Mihadas Loan 290 290
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
MLX/SinterMet Corp.(1) Common Stock (5,835 shares) 241 109
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 33 33
Debt Securities 1,822 219
Common Stock (33,333 shares) -- --
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Radio City Mobil Home Park Loan 1,361 1,361
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Series D Convertible Preferred Stock (265,957 shares) 2,000 2,000
Inc.(1) Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Norman's Yogurt, Inc. Loan 30 30
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 483 483
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 106 106
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 1,115 888
Warrants 77 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
OMA, Inc. Loans 1,931 1,931
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
PAL Liberty, Inc. Loan 323 323
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 1,405
Warrants 4 667
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
David Peters Loan 169 55
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loans 107 107
Preferred Stock (276 shares) 160 175
Common Stock (36 shares) -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31, 1997
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pico Products, Inc.(1) Debt Securities $ 5,669 $ 5,669
Common Stock (248,000 shares) 71 336
Warrants -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Quality Software Products Holdings, Common Stock (94,479 shares) 901 344
PLC(1)
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. Loans 341 341
Debt Securities 9,951 9,951
Common Stock (1,430 shares) -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Randhawa Brothers Enterprises, Inc. Loans 217 217
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
R-Tex Decoratives Company, Debt Securities 1,513 1,170
Inc. Warrants 58 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
R.L. Singletary Loan 112 112
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Saturn Chemicals, Inc. Loan -- --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
SerpCo., Inc. Loan 182 182
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 398 322
Common Stock (6,208 shares) 22 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Loans 1,557 68
Inc. Debt Securities 4,262 1,486
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,582 129
Common Stock (910 shares) 57 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
University Village Mobile Homes Loan 157 157
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Vidon, Inc. Loans 262 262
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Waterview Limited Partnership Option -- 3,050
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Weathertech Distributing Company, Inc. Loans 291 291
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
West Virginia Radio Corporation Debt Securities 962 962
of Clarksburg, Inc. Warrants 400 --
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
William R. Dye Loan 270 270
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Loans 720 720
Company Debt Securities 308 308
Warrants 24 24
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Z-Spanish Radio Network, Inc. Loans 11,636 11,636
Debt Securities 750 750
Warrants 6 6
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
Total mezzanine loans and debt
securities and equity interests
in portfolio companies
(89 investments) $201,234 $207,748
- - - - - - - - - - - - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, 1997
INTEREST NUMBER OF -------------------
RATE RANGES INVESTMENTS COST VALUE
(IN THOUSANDS, EXCEPT NUMBER OF INVESTMENTS) ---------------- ----------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 6 $ 6,129 $ 6,129
7.00%- 8.99% 49 108,313 108,313
9.00%-10.99% 156 259,203 259,221
11.00%-12.99% 72 61,681 61,891
13.00%-14.99% 7 8,196 8,196
15.00% and above 1 3,494 3,494
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total commercial mortgage loans 292 $447,016 $447,244
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(a) LOANS
Up to 6.99% 10 $ 111 $ 111
7.00%- 8.99% 16 192 107
9.00%-10.99% 24 2,636 2,673
11.00%-12.99% 378 38,072 37,739
13.00%-14.99% 4 92 79
15.00% and above -- -- --
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total Small Business Administration
7(a) loans 432 $ 41,103 $ 40,709
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Other portfolio assets 6 $ 1,367 $ 1,320
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
Total portfolio at value 819 $690,720 $697,021
- - - - - - - - - - - - - --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MERGER
On December 31, 1997, Allied Capital Corporation ("Allied I"), Allied
Capital Corporation II ("Allied II"), Allied Capital Commercial Corporation
("Allied Commercial"), and Allied Capital Advisers, Inc. ("Advisers"), merged
with and into Allied Capital Lending Corporation ("Allied Lending") (each a
"Predecessor Company" and collectively the "Predecessor Companies") pursuant to
an Agreement and Plan of Merger, dated as of August 14, 1997, as amended and
restated as of September 19, 1997 in a stock-for-stock exchange (the "Merger").
Immediately following the Merger, Allied Lending changed its name to Allied
Capital Corporation ("ACC" or the "Company").
The Merger was effected through a conversion of each share of Predecessor
Company common stock into the number of shares of Allied Lending common stock
determined pursuant to the following exchange ratios: Allied I -- 1.07 shares;
Allied II -- 1.40 shares; Allied Commercial -- 1.60 shares; and Advisers -- 0.31
shares. Allied Lending's common stock outstanding prior to the Merger continues
to be outstanding, and was not converted or changed in the Merger. On December
31, 1997, subsequent to the exchange of shares, the Company had 52,047,318
shares outstanding.
The Merger was treated as a tax-free reorganization under Section 368
(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For
federal income tax purposes, the Predecessor Companies carried forward the
historical cost basis of their assets and liabilities to the surviving entity
(ACC). For financial reporting purposes, the Predecessor Companies also carried
forward the historical cost basis of their respective assets and liabilities at
the time the Merger was effected. The consolidated financial statements reflect
the operations of ACC with all periods presented restated as if the Predecessor
Companies had merged as of the beginning of the earliest period presented.
To facilitate the Merger, Allied Lending's charter was amended primarily to
effect: (a) an increase in the number of authorized shares of common stock, par
value one-tenth of one mil ($0.0001) per share, from 20,000,000 to 100,000,000
shares; and (b) a change in Allied Lending's name to "Allied Capital
Corporation."
Prior to the Merger, Allied I owned approximately 16 percent of Allied
Lending's total shares outstanding. These shares were distributed to the Allied
I shareholders in a dividend immediately prior to the Merger at a rate of
0.107448 shares of Allied Lending for each share of Allied I held on the record
date. For financial reporting purposes, Allied I's ownership of Allied Lending
has been eliminated for all periods presented.
NOTE 2. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
of the Company as of March 31, 1998 and the results of operations, changes in
net assets, and cash flows for the periods indicated. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 1997 Annual Report. The results of operations for the
three months ended March 31, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
The consolidated financial statements for the quarter ended March 31, 1997,
and the year ended December 31, 1997 have been restated to include the accounts
of the Predecessor Companies for all periods presented. The consolidated
financial statements include the accounts of the Company or its wholly owned or
majority owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have been made to
the 1997 balances to conform with the 1998 financial statement presentation.
16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO
The Company lends and invests in growing businesses through three primary
products: mezzanine loans and debt and equity securities, commercial mortgage
loans, and 7(a) loans.
MEZZANINE FINANCE
Mezzanine investments are generally structured as loans that carry a
relatively high fixed rate of interest, which may be combined with equity
features, such as conversion privileges, warrants or options to purchase a
portion of the portfolio company's equity at a nominal price. Such an investment
would typically have a maturity of five to ten years, with interest-only
payments in the early years and payments of both principal and interest in the
later years, although loan maturities and principal amortization schedules vary.
At March 31, 1998 and December 31, 1997, approximately 98 percent of the
Company's mezzanine loan portfolio was composed of fixed interest rate loans.
The weighted average yield on the mezzanine portfolio at March 31, 1998 and
December 31, 1997 equaled 13.2 percent and 12.6 percent, respectively. At March
31, 1998 and December 31, 1997, mezzanine loans and debt securities with a cost
basis of $25,674,000 and $13,661,000, respectively, were not accruing interest.
At March 31, 1998 and December 31, 1997, approximately 31 percent and 29
percent, 28 percent and 27 percent, 18 percent and 17 percent, 11 percent and 13
percent, and 7 percent and 8 percent of the Company's mezzanine portfolio was
located in the mid-atlantic, southeast, midwest, west, and northeast regions,
respectively. In addition, 5 percent and 6 percent, respectively, of the
mezzanine portfolio was located in other countries. Loans to businesses in the
industrial/manufacturing, broadcasting/communications, retail/wholesale, and
services industries equaled approximately 47 percent and 43 percent, 17 percent
and 26 percent, 13 percent and 15 percent, and 17 percent and 12 percent,
respectively, or 94 percent and 96 percent as of March 31, 1998 and December 31,
1997, respectively.
Equity investments consist primarily of securities issued by privately
owned companies and may be subject to restrictions on their resale or otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.
COMMERCIAL REAL ESTATE FINANCE
The commercial real estate portfolio contains loans that were originated by
the Company or were purchased from the Resolution Trust Corporation, the Federal
Deposit Insurance Corporation and other third party sellers including life
insurance companies and banks.
At March 31, 1998 and December 31, 1997, approximately 61 percent and 39
percent, and 73 percent and 27 percent of the Company's commercial mortgage loan
portfolio was composed of fixed and adjustable interest rate loans,
respectively. At March 31, 1998 and December 31, 1997, approximately 47 percent
and 38 percent, 12 percent and 18 percent, 19 percent and 18 percent, 14 percent
and 14 percent, and 8 percent and 12 percent of the Company's commercial real
estate portfolio was located in the mid-atlantic, midwest, west, southeast, and
northeast regions, respectively. In addition, commercial mortgage loans secured
by hospitality, office, retail, recreation and other properties equaled
approximately 28 percent and 33 percent, 41 percent and 31 percent, 11 percent
and 14 percent, 5 percent and 3 percent, and 15 percent and 19 percent,
respectively, of the Company's portfolio at March 31, 1998 and December 31,
1997, respectively.
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The weighted average yield on the real estate portfolio as of March 31,
1998 and December 31, 1997 equaled 11.9 percent and 11.4 percent, respectively.
As of March 31, 1998 and December 31, 1997, loans with a cost basis of
$6,202,000 and $11,987,000, respectively, were not accruing interest.
As of March 31, 1998 and December 31, 1997, unamortized discount related
to the real estate portfolio was $16,459,000 and $27,954,000, respectively.
Unamortized discounts are considered in determining the fair value and are
amortized into income over the life of the loan.
SMALL BUSINESS LENDING
The Company, through its wholly owned subsidiary, Allied SBLC participates
in the SBA's Section 7(a) Guaranteed Loan Program.
Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will
guarantee 80 percent of any qualified loan up to $100,000 regardless of
maturity, and 75 percent of any such loan over $100,000 regardless of maturity,
to a maximum guarantee of $750,000 for any one borrower. SBA regulations define
qualified small businesses generally as businesses with no more than $5 million
in annual sales and no more than 500 employees.
The Company charges interest on these loans at a variable rate, typically
1.75 percent to 2.75 percent above the prime rate, as published in The Wall
Street Journal or other financial newspaper, adjusted monthly. All loans are
payable in equal monthly installments of principal and interest from the date on
which the loan was made to its maturity. At March 31, 1998 and December 31,
1997, approximately 94 percent and 92 percent of the Company's portfolio of 7(a)
loans were variable interest rate loans.
As permitted by SBA regulations, the Company sells to investors, without
recourse, the guaranteed portion of its loans while retaining the right to
service 100 percent of such loans.
As of March 31, 1998 and December 31, 1997, 7(a) loans with a cost basis
of $3,984,000 and $4,346,000, respectively, were not accruing interest.
At March 31, 1998 and December 31, 1997, approximately 40 percent and 36
percent, 31 percent and 29 percent, 14 percent and 18 percent, 8 percent and 10
percent, and 7 percent and 7 percent of the Company's 7(a) loan portfolio was
located in the midwest, mid-atlantic, southeast, northeast, and west regions,
respectively. In addition, loans to businesses in the hospitality, automotive
services, broadcasting/communications, restaurant/food services,
industrial/manufacturing, services, and retail/wholesale industries equaled 32
percent and 25 percent, 23 percent and 21 percent, 6 percent and 10 percent, 8
percent and 9 percent, 8 percent and 7 percent, 4 percent and 6 percent, and 3
percent and 6 percent, respectively, or 84 percent and 84 percent of the
Company's portfolio as of March 31, 1998 and December 31, 1997.
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
INTEREST IN SECURITIZATION POOL OF COMMERCIAL MORTGAGE LOANS
On January 30, 1998, the Company in conjunction with Business Mortgage
Investors, Inc. ("BMI"), a private REIT managed by the Company, completed a $310
million asset securitization, whereby bonds totaling $239 million were sold in
three classes rated "AAA", "AA" and "A" by Standard & Poor's Rating Services and
Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of 97
commercial mortgage loans totaling $310 million to a special purpose,
bankruptcy remote entity which transferred the assets to a trust which issued
the bonds. The Company contributed approximately 95%, or $295 million, of the
total assets securitized, and received cash proceeds, net of costs of
approximately $223 million. The Company retained a trust certificate for its
residual interest (the "residual interest") in the loan pool sold, and will
receive interest income from this residual interest as well as receive the net
spread of the interest earned on the loans sold less the interest paid on the
bonds over the life of the bonds (the "residual securitization spread"). The
mortgage loan pool had an approximate weighted average stated interest rate of
9.6%. The three bond classes sold have an aggregate weighted average interest
rate of approximately 6.38%.
The Company accounted for the securitization in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." As a result,
the Company recorded a gain of approximately $14.8 million net of the costs of
the securitization and the cost of settlement of interest rate swaps. The gain
arises from the difference between the carrying amount of the loans and the fair
market value of the assets received--cash, residual securitization spread,
residual interest and a servicing asset. The value of the residual
securitization spread, $17.0 million, was determined based on the future
expected cash flows, assuming a constant prepayment rate for the mortgage loan
pool of 10%, discounted at 16%. The value of the residual interest was
determined to be $66.5 million and was based on the future expected cash flows
less projected losses of approximately $3.0 million. The projected losses were
based upon review of the portfolio sold and the underlying collateral values.
The weighted average loan to collateral value of the 97 loans sold was 68.3%.
The expected future cash flow from the residual interest was discounted at 9.6%.
The servicing asset was valued at 0.2 million a net servicing fee of 0.04%
and was discounted at a rate of 10%.
The Company will continue to earn interest income from the residual
interest, and will receive the actual net spread from the portion of the loans
sold represented by the bonds issued. As the net spread is received, a portion
will be allocated to interest income with the remainder applied to reduce the
carrying amount of the residual securitization spread. The residual interest and
the residual securitization spread will be valued each quarter using updated
prepayment and loss estimates.
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT
At March 31, 1998 and December 31, 1997, the Company had the following
available credit facilities:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- -------------------
1998 1997
------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
-------- -------- -------- --------
(Unaudited)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable and debentures:
Master repurchase
agreement................ $250,000 $ 8,243 $250,000 $202,705
Master loan and security
agreement................ 250,000 9,000 250,000 23,116
Senior note payable........ 20,000 20,000 20,000 20,000
OPIC loan.................. 8,700 8,700 20,000 8,700
SBA debentures............. 53,300 53,300 54,300 54,300
-------- -------- -------- --------
Total notes payable
and debentures...... 582,000 99,243 594,300 308,821
-------- -------- -------- --------
Revolving lines of credit....... 200,000 103,000 80,000 38,842
-------- -------- -------- --------
Total debt............ $782,000 $202,243 $674,300 $347,663
======== ======== ======== ========
</TABLE>
MASTER REPURCHASE AGREEMENT
The Company and BMI can borrow up to $250,000,000, of which $100,000,000 is
committed, through repurchase agreements using its commercial mortgage loans as
collateral. The Company pledges commercial mortgage loans as collateral for the
facility such that the amount borrowed is approximately equal to 75 percent to
80 percent of the value of the collateral pledged. The terms of the master
repurchase agreement require interest only payments with all principal due at
maturity. The master repurchase agreement bears interest at the one-month London
Inter Bank Offered Rate ("LIBOR") plus 1.13 percent, or 6.8 percent at March
31, 1998 and December 31, 1997. The facility requires an annual commitment fee
equal to 0.25% of the committed amount. The average debt outstanding under the
master repurchase agreement for the three months ended March 31, 1998 and the
year ended December 31, 1997 was $70,504,000 and $166,362,000, respectively. The
maximum amount borrowed under this facility was $202,705,000 and $209,591,000
during the three months ended March 31, 1998 and the year ended December 31,
1997, respectively. The weighted average interest rate for this facility during
the three months ended March 31, 1998 and the year ended December 31, 1997 was
6.8% and 6.6%, respectively. The master repurchase agreement matures on January
31, 1999.
MASTER LOAN AND SECURITY AGREEMENT
During 1997, the Company, again in conjunction with BMI, established a
facility to borrow up to $250,000,000, of which $100,000,000 is committed, using
its commercial mortgage loans as collateral under the agreement. At March 31,
1998 and December 31, 1997, the Company's recorded investment in these loans
pledged as collateral totaled $13,165,000 and $29,193,000, which approximated
their market value. The agreement generally requires interest only payments with
all principal due at maturity. The agreement bears interest at the one-month
LIBOR plus 1.0 percent, or 6.7 percent, at March 31, 1998 and December 31, 1997.
The facility requires an annual commitment fee equal to 0.75% of the committed
amount. The average debt outstanding under this facility for the three months
ended March 31, 1998 and the year ended December 31, 1997 was $7,378,000 and
$17,899,000, respectively. The maximum amount borrowed under this facility was
$23,116,000 during the three months ended March 31, 1998 and the year ended
December 31, 1997. The weighted average interest rate for this facility during
the three months ended March 31, 1998 and the year ended December 31, 1997 was
6.6% and 6.7%, respectively. The agreement matures on August 21, 1998.
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
SENIOR NOTE PAYABLE
The Company has a $20,000,000 unsecured senior note payable to an insurance
company. This note bears interest at a fixed rate of 9.15 percent, payable
semi-annually. The note is scheduled to mature over a five-year period
commencing in 1998 with annual principal payments of $4,000,000. The senior note
payable is subject to a prepayment penalty if paid prior to maturity.
OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) LOAN
The Company has a loan agreement with OPIC 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 5 percent of
the return generated by the OPIC-related investments in excess of 7 percent.
There are no required principal payments until the OPIC loans mature in January
2006.
SBA DEBENTURES
At March 31, 1998,the Company had debentures totaling $53,300,000 payable
to the SBA at interest rates ranging from 6.87 percent to 9.80 percent, with
scheduled maturity dates as follows: 1998 -- $5,650,000; 1999 -- $0; 2000 --
$17,300,000; 2001 -- $9,350,000; 2002 -- $0; and $21,000,000 thereafter. At
December 31, 1997, the Company had outstanding debentures totaling $54,300,000
at interest rates ranging from 6.87 percent to 9.80 percent. The debentures
require semi-annual interest-only payments with all principal due upon maturity.
The SBA debentures are subject to prepayment penalties if paid prior to
maturity.
REVOLVING LINES OF CREDIT
Subsequent to the Merger, the Company repaid all of its previous unsecured
revolving lines of credit and entered into a new $200,000,000 unsecured
revolving line of credit. The new facility bears interest at LIBOR plus 1.25
percent or 6.95 percent at March 31, 1998, and requires a commitment fee equal
to 0.2 percent of the committed amount, and a facility fee equal to 0.15 percent
of the initial commitment. The new line expires June 30, 1999. The new line of
credit requires monthly payments of interest and all principal is due upon its
expiration. The amount borrowed is based upon a borrowing base formula generally
equal to 50 percent of the Company's portfolio investments not securing other
credit facilities.
At December 31, 1997, the Company had several revolving lines of credit
totaling $80,000,000 under which the Company had outstanding borrowings totaling
$38,842,000. At December 31, 1996, the Company had several revolving lines of
credit totaling $110,000,000 under which the Company had outstanding borrowings
totaling $45,099,000. The lines of credit charged interest at rates ranging from
LIBOR plus 1.35 percent to 2.5 percent. At December 31, 1997 and 1996 the
weighted average interest rate on the facilities was 7.7 percent and 7.8
percent, respectively.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
The lines required various commitment and other fees equal to 0.39 percent of
the outstanding borrowings at December 31, 1997.
The average debt outstanding on the revolving lines of credit was
$64,347,000 and $30,033,000 for the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively. The maximum amount borrowed under
these facilities was $103,000,000 and $45,759,000 during the same periods,
respectively. The weighted average interest rate for these facilities during the
three months ended March 31, 1998 and the year ended December 31, 1997 was 7.0
percent and 8.1 percent, respectively.
NOTE 5. SHAREHOLDERS' EQUITY
On January 8, 1998, the Company's compensation committee granted a total
of 3,415,446 options to officers of the Company under the Company's stock option
plan ("ACC Plan"). The options awarded to officers were generally non-qualified
stock options that vest over a five-year period from the grant date. The stock
options granted had an exercise price equal to $21.38 per share. At March 31,
1998, options for 610,330 shares were exercisable into common stock. No options
were exercised or canceled during the three months ended March 31, 1998. There
were no options granted pursuant to the ACC Plan as of December 31, 1997.
The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sales prices reported for the
Company's common stock for the five days on which trading in the shares takes
place immediately prior to the dividend payment date. For the three months
ended March 31, 1998, the Company issued 66,232 shares at an average price of
$25.33 per share.
NOTE 6. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
PER COMMON
INCOME SHARES SHARE AMOUNT
-------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (Unaudited)
Net increase in net assets resulting from operations... $32,065
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $32,010
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,814 $0.62
=====
Options outstanding to officers........................ 294
------
DILUTED EARNINGS PER COMMON SHARE...................... 52,108 $0.61
====== =====
FOR THE THREE MONTHS ENDED MARCH 31, 1997 (Unaudited)
Net increase in net assets resulting from operations... $12,646
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $12,591
=======
BASIC EARNINGS PER COMMON SHARE........................ 46,938 $0.27
=====
Options outstanding to officers........................ 575
------
DILUTED EARNINGS PER COMMON SHARE...................... 47,513 $0.27
====== =====
</TABLE>
Basic earnings per common share was computed by dividing the net increase
in net assets resulting from operations, after deducting preferred stock
dividends, by the weighted average number of common shares outstanding each
period.
Diluted earnings per common share was computed by dividing the net increase
in net assets resulting from operations, after deducting preferred stock
dividends, by the weighted average number of common shares outstanding plus
common shares issuable upon assumed exercise of stock options outstanding each
period.
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award
is computed for each unvested option as of the Merger date. The Cut-off Award
is equal to the difference between the market price on August 14, 1997 (the
Merger announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award is payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the appreciated value in unvested options at the Merger
announcement date, in order to set the foundation to balance option awards upon
the Merger. The Cut-off Award approximates $2.9 million in the aggregate and
will be expensed as the Cut-off Award vests. For the three months ended March
31, 1998, $189,000 of the Cut-off Award vested and $256,000 was forfeited.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-Merger. In the aggregate, the Formula Award equaled 6
percent of the difference between an amount equal to the combined aggregated
market capitalizations of the Predecessor Companies as of the close of the
market on the day before the Merger date (December 30, 1997), less an amount
equal to the combined aggregate market capitalizations of the Predecessor
Companies as of the close of the market on the Merger announcement date (August
14, 1997). Advisers' compensation committee allocated the Formula Award to
individual officers on December 30, 1997. The amount of the Formula Award as
computed at December 30, 1997 approximated $19 million. For the three month
period ended March 31, 1998, the Company funded the Deferred Compensation Plan
("DC Plan") with approximately $19 million in cash in connection with the
Formula Award. The Trustee of the DC Plan will use those funds to acquire the
Company's stock in the open market. As of March 31, 1998, the Trustee had
purchased 662,948 shares of the Company's stock with an aggregate cost of
$15,330,000. The purchase of these shares has been reflected in shareholders'
equity. The Formula Award will vest equally in three installments on December
31, 1998, 1999 and 2000; provided, however, that such Formula Award vests
immediately upon a change in control of the Company. The Formula Award will be
expensed in each year in which it vests. Formula Award expense for the three
months ended March 31, 1998 was $1,583,000.
NOTE 8. INTEREST RATE SWAPS
The Company uses interest rate swap agreements to protect against
fluctuation in interest costs on its variable rate short-term credit facilities.
Amounts paid or received on the settlement of interest rate swap agreements are
recognized as an adjustment to interest expense. In January 1998, the Company
settled its interest rate swap agreements in connection with the asset
securitization transaction which resulted in a loss of $5,767,000 which has been
recorded against the gain on the securitization of commercial mortgage loans in
the first quarter of 1998. As of December 31, 1997, the Company had interest
swap agreements with an aggregate notional amount of $145,000,000. Pursuant to
the swap agreements, the Company paid a weighted average fixed rate equal to 6.8
percent and received payments with a weighted average variable rate equal to the
30-day LIBOR. The swap agreements had a remaining weighted average maturity of
approximately four years from December 31, 1997. As of December 31, 1997, the
Company recorded an estimated unrealized loss of $5,000,000 related to the swap
agreements in connection with the January 1998 asset securitization transaction.
The estimated unrealized loss was subsequently reversed upon consummation of the
securitization.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $0.35 per
common share dividend, or $18,225,000, for the first quarter of 1998.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is party to certain lawsuits in connection with its business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, management does not expect that these proceedings will have a
material effect upon the financial condition of the Company.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included herein. This Management's
Discussion and Analysis contains certain forward-looking statements. These
statements include the plans and objectives of management for future operations
and financial objectives, loan portfolio growth and availability of funds. These
forward-looking statements are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors that could cause
actual results and conditions to differ materially from those projected in these
forward-looking statements are set forth below in the Investment Considerations
section. Other factors that could cause actual results to differ materially
include the uncertainties of economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
included herein are reasonable, any of the assumptions could be inaccurate and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Therefore, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
The Merger was treated as a tax-free reorganization under Section 368
(a)(1)(A) of the Code. For federal income tax purposes, the Predecessor
Companies carried forward the historical cost basis of their assets and
liabilities to the surviving entity (Allied Capital Corporation). For financial
reporting purposes, the Predecessor Companies also carried forward the
historical cost basis of their respective assets and liabilities at the time the
Merger was effected. For financial reporting purposes, Allied I's ownership of
Allied Lending has been eliminated for all periods presented. The financial
information reflects the operations of the Company with all periods restated as
if the Predecessor Companies had merged as of the beginning of the earliest
period presented.
OVERVIEW
The Company's primary business is investing in and lending to private small
and medium-sized businesses in three areas: mezzanine finance, commercial real
estate finance, and 7(a) lending. In addition, the Company earns advisory fees
from the management of private investment funds.
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gain income earned on
these three investment types after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
paid on a loan, the amortization of loan origination points and the amortization
of any market discount arising from purchased loans. The level of interest
income is directly related to the balance of the investment portfolio multiplied
by the effective yield on the portfolio. The Company's ability to generate
interest income is dependent on economic, regulatory and competitive factors
that influence interest rates, loan originations, and the Company's ability to
secure financing for its investment activities. The Company's financial results
on a quarterly basis may fluctuate significantly due to the timing of gain
recognition and the timing of securitization transactions among other factors.
As a result, squarterly financial information may not be indicative of annual
results.
The Company's portfolio is managed in three parts: mezzanine loans, debt
securities and equity interests; commercial mortgage loans; and 7(a) loans.
The total portfolio at value was $564.5 million and $697.0 million at March
31, 1998 and December 31, 1997, respectively. During the quarter ended March
31, 1998 the Company completed an asset securitization of approximately $295
million in commercial mortgage loans, and as a result, the portfolio decreased
by 19% from December 31, 1997 to March 31, 1998. See "-- Results of Operations
- - - - - - - - - - - - - -- Comparison of Three Months Ended March 31, 1998 and 1997." A summary of the
composition of the Company's total assets, including its loan portfolios at
March 31, 1998 and December 31, 1997 is shown in the following table:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
ASSET COMPOSITION 1998 1997
----------------- ------------ -----------------
<S> <C> <C>
Commercial mortgage loans(1)................................ 44% 56%
Mezzanine investments....................................... 35 25
7(a) loans.................................................. 7 5
Cash and other assets....................................... 14 14
--- ---
100% 100%
=== ===
</TABLE>
- - - - - - - - - - - - - ---------------
(1) Includes residual interests in a securitized pool of mortgage loans and real
estate investments.
25
<PAGE> 28
Mezzanine loans, debt securities and equity interests were $225.0 million
and $207.7 million at March 31, 1998 and December 31, 1997, respectively. The
effective yield on the mezzanine portfolio was 13.2% and 12.6% at March 31, 1998
and December 31, 1997, respectively. Mezzanine loan originations were $37.8
million and $6.6 million for the quarters ended March 31, 1998 and 1997,
respectively. Mezzanine loan repayments were $13.8 million and $10.8 million,
respectively, for the quarters ended March 31, 1998 and 1997. During 1997,
mezzanine loan repayments and sales of equity interests were approximately equal
to originations, which kept the level of the portfolio relatively constant.
Prior to the Merger, mezzanine loan originations were made through Allied I
and Allied II, which originated small ($2 million - $10 million) mezzanine loans
in order to maintain appropriate portfolio diversity for regulated investment
company purposes. Pursuant to the terms of a Commission exemptive order, Allied
I and Allied II loan originations were made pursuant to a co-investment formula,
based on relative total assets, which required identical terms for each loan
originated. As a result, Allied I and Allied II were unable to originate larger
loans or price loans based on their own capital structures. These inefficiencies
limited the ability of Allied I and Allied II to compete effectively in the
marketplace.
Subsequent to the Merger, the Company's larger overall portfolio size
enables it to compete for larger mezzanine loans while maintaining adequate
diversity within the portfolio. As a result, the Company is actively pursuing
mezzanine loans in sizes ranging from $5 million to $25 million. The Company
also is able to price its mezzanine loans using a single capital structure,
which should enable the Company to price its loans more competitively. The
Company believes that these post-Merger strategies will enable the Company to
increase mezzanine loan originations in 1998.
Commercial mortgage loans were $201.3 million and $447.2 million at March
31, 1998 and December 31, 1997, respectively. The commercial mortgage loan
portfolio declined by 55% during the first quarter of 1998 due to the sale
through securitization of approximately $295 million in commercial mortgage
loans. See "-- Results of Operations -- Comparison of Three Months Ended March
31, 1998 and 1997." The Company added to its commercial mortgage loan portfolio
during the first quarter of 1998 through the origination of new loans and
investments totaling $53.9 million and decreased its portfolio due to repayments
of loans totaling $16.3 million. Commercial mortgage loan originations and
repayments were $58.9 million and $12.1 million, respectively, for the first
quarter of 1997. The commercial mortgage loan portfolio increased by 20% for the
year ended December 31, 1997. Commercial mortgage loan originations were $249.0
million for 1997. Commercial mortgage loan originations grew by 41% in 1997.
Commercial mortgage loan repayments were $154.5 million for 1997.
The Company experienced a high rate of commercial mortgage loan repayments
in 1997 as many loans that had been purchased in earlier years and originated
without substantial prepayment prohibitions were repaid due to a favorable
interest rate environment. The Company now generally originates its commercial
real estate loans to require prepayment premiums, which generally take the form
of a fixed percentage of the loan amount that declines as the loan matures.
The weighted average current stated interest rate on the commercial real
estate portfolio at March 31, 1998 and December 31, 1997 was 9.9% and 9.6%,
respectively. The weighted yield on the commercial real estate portfolio was
11.9% and 11.4% at March 31, 1998 and December 31, 1997, respectively.
The effective yield on the commercial mortgage loan portfolio is higher
than the stated interest rate due to the amortization of market discount on
purchased loans. At March 31, 1998, and December 31, 1997, unamortized market
and original issue discount was $16.4 million and $28.0 million, respectively.
The Company generally prices its commercial mortgage loans based on a fixed
spread over comparable U.S. Treasury rates given the term of the loan. During
1997, interest rates on U.S. Treasury bonds declined significantly, and the
spreads charged by commercial real estate lenders in the marketplace narrowed.
As a result, the Company's pricing was affected. Because of the Company's
defined niche as an enterprise value real estate lender, however, ACC has
experienced only a minimal decline in the overall interest rates on loans
originated in 1997 and for the first quarter of 1998. Commercial mortgage loans
originated during the first quarter of 1998 had a weighted average stated
interest rate of 9.2%. Commercial mortgage loans originated in 1997 had a
weighted average stated interest rate of 9.6%.
26
<PAGE> 29
The Company will continue to aggressively originate commercial mortgage
loans but may increasingly sell loans that are originated at interest rates that
do not meet the Company's overall portfolio strategy.
The 7(a) loan portfolio was $45.9 million and $40.7 million at March 31,
1998 and December 31, 1997, respectively. 7(a) loan originations were $15.7
million and $6.6 million for the quarters ended March 31, 1998 and 1997,
respectively. Sales of the guaranteed portions of 7(a) loan originations were
$9.7 million and $6.4 million in the first quarters of 1998 and 1997,
respectively. 7(a) loans are originated with variable interest rates priced at
spreads ranging from 1.75% to 2.75% over the prime lending rate.
Prior to the Merger, 7(a) loan originations were conducted through Allied
Lending, which had a consolidated equity base of approximately $40 million.
Because of its relatively small equity base, the Company's cost of debt capital
was expensive and required the Company to price its 7(a) loans at a level that
was, in many cases, above market. Because of the Company's increased equity
base, ACC has reevaluated its pricing strategy and can offer 7(a) loans at lower
prices, and believes that this should increase loan origination activity in
1998. Also, effective January 1, 1998, the Company is no longer required to hold
the guaranteed portion of its 7(a) loans originated for 90 days before selling,
which also lowers its costs associated with this loan origination program.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net increase in net assets resulting from operations ("NIA") was $32.1
million, or $0.62 per share, and $12.6 million, or $0.27 per share, for the
three months ended March 31, 1998 and 1997, respectively. NIA results from total
interest and related portfolio income earned, less total expenses incurred, plus
net realized and unrealized gains or losses. The NIA for the three months ended
March 31, 1998 also includes a gain of $14.8 million, or $0.29 per share,
resulting from a commercial mortgage loan securitization transaction that was
completed in January 1998.
On January 30, 1998, the Company, in conjunction with Business Mortgage
Investors, Inc.("BMI"), a private REIT managed by the Company, completed a $310
million asset securitization, whereby bonds totaling $239 million were sold in
three classes rated "AAA", "AA" and "A" by Standard & Poor's Ratings Services
and Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of
97 commercial mortgage loans totaling $310 million to a special purpose,
bankruptcy remote entity which transferred the assets to a trust which issued
the bonds. The Company contributed approximately 95%, or $295 million, of the
total assets securitized, and received cash proceeds, net of costs, of
approximately $223 million. The Company retained a trust certificate for its
residual interest (the "residual interest") in the loan pool sold, and will
receive interest income from this residual interest as well as receive the net
spread of the interest earned on the loans sold less the interest paid on the
bonds over the life of the bonds (the "residual securitization spread"). The
mortgage loan pool had an approximate weighted average stated interest rate of
9.6%. The three bond classes sold have an aggregate weighted average interest
rate of approximately 6.38%.
The Company accounted for the securitization in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." As a result,
the Company recorded a gain of approximately $14.8 million net of the costs of
the securitization and the cost of settlement of interest rate swaps. The gain
arises from the difference between the carrying amount of the loans and the fair
market value of the assets received -- cash, residual securitization spread,
residual interest and a servicing asset. The value of the residual
securitization spread, $17.0 million, was determined based on the future
expected cash flows, assuming a constant prepayment rate for the mortgage loan
pool of 10%, discounted at 16%. The value of the residual interest was
determined to be
27
<PAGE> 30
$66.5 million and was based on the future expected cash flows less projected
losses of approximately $3.0 million. The projected losses were based upon the
attributes of the portfolio sold and the underlying collateral values. The
weighted average loan to collateral value of the 97 loans sold was 68.3%. The
expected future cash flow from the residual interest was discounted at 9.6%. The
servicing asset was valued at $0.2 million, assuming a net servicing fee of
0.04%, and was discounted at a rate of 10%.
The Company will continue to earn interest income from the residual
interest, and will receive the actual net spread from the portion of the loans
sold represented by the bonds issued. As the net spread is received, a portion
will be allocated to interest income with the remainder applied to reduce the
carrying amount of the residual securitization spread. The residual interest and
the residual securitization spread will be valued each quarter using updated
prepayment, interest rate and loss estimates.
The Company believes that it will continue to use asset securitization as a
means to enhance its returns on assets as well as increase its liquidity. The
Company expects to complete an asset securitization transaction no more
frequently than annually.
Interest income totaled $19.5 million and $19.6 million for the three
months ended March 31, 1998 and 1997, respectively. Interest income appears
relatively constant on a quarter to quarter comparison because of the assets
sold through securitization. The Company's average portfolio was approximately
$631 million and approximately $628 million during the quarters ended March 31,
1998 and 1997, respectively. The weighted average yield on the total loan
portfolio at March 31, 1998 and 1997 remained relatively constant at
approximately 12.4%. On a proforma basis, had the Company retained the 97 loans
that were securitized, interest income would have been approximately $3.0
million higher during the quarter ended March 31, 1998, for a quarterly increase
of approximately 15%. The Company originated loans totaling $107.5 million in
the first quarter of 1998 as compared to $72.1 million during the first quarter
of 1997, and received repayments on its loan portfolio totaling $30.8 million
and $25.1 million for the quarters ended March 31, 1998 and 1997, respectively.
Net premiums from loan dispositions were $1.3 million and $0.7 million for
the three months ended March 31, 1998 and 1997, respectively. Net premiums from
loan dispositions include premiums on the sale of the guaranteed portion of the
Company's 7(a) loans into the secondary market of $0.8 million and $0.4 million
for the quarters ended March 31, 1998 and 1997, respectively. The premiums
result from the Company's sale of 7(a) loans totaling $9.5 million and $4.9
million for the quarters ended March 31, 1998 and 1997, respectively. Also
included in net premiums from loan dispositions were premiums, resulting from
the early repayment of loans, totaling $0.5 million and $0.3 million for the
three months ended March 31, 1998 and 1997, respectively.
Investment advisory fees and other income were $1.2 million and $1.1
million for the three months ended March 31, 1998 and 1997, respectively.
Investment advisory fees totaled $0.5 million and $0.3 million for the quarters
ended March 31, 1998 and 1997, respectively. Three of the Company's private
managed funds are no longer making new investments and are actively distributing
fund assets to their investors. In January 1998, however, the Company entered
into a new agreement with Kreditanstalt fur Wiederaufbau (KfW), the state-owned
public development bank of Germany, to manage a fund of approximately DM 160
million (approximately $87 million at March 31, 1998). Advisory fees increased
as new fees from the German fund offset the decline in fees from liquidating
funds.
Total operating expenses were $10.2 million and $9.4 million for the three
months ended March 31, 1998 and 1997, respectively, an increase of 8.5%.
Operating expenses include interest on indebtedness, salaries and employee
benefits, and other general and administrative expenses.
Interest expense on indebtedness totaled $4.6 million and $5.8 million for
the three months ended March 31, 1998 and 1997, respectively. The decrease in
interest expense is the result of the Company repaying amounts outstanding under
its short-term credit facilities with the proceeds received from the
securitization. Average outstanding indebtedness for the quarters ended March
31, 1998 and 1997 was $246 million and $298 million, respectively. The weighted
average interest rate for the Company's combined indebtedness at March 31, 1998
was 7.6%, as compared to 7.4 % at March 31, 1997.
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<PAGE> 31
Salaries and employee benefits totaled $2.9 million and $2.1 million for
the three months ended March 31, 1998 and 1997, respectively. At March 31, 1998
and 1997, total employees were 90 and 70, respectively. The increase in salaries
and benefits reflects the increase in total employees, combined with wage
increases, and the experience level of employees hired. The Company was an
active recruiter in 1997 for experienced investment and operational personnel
and the Company continues to actively recruit and hire new professionals to
support anticipated portfolio growth.
General and administrative expenses include the lease for the Company's
headquarters in Washington, DC, leases established in 1997 for the Company's new
offices in Chicago and San Francisco, travel costs, stock record expenses, legal
and accounting fees, directors' fees and various other expenses. General and
administrative expenses totaled $2.8 million and $1.6 million, respectively, for
the three months ended March 31, 1998 and 1997. The approximate $1.2 million
increase was partially due to certain post-Merger integration expenses incurred
in the first quarter of 1998, totaling $0.2 million. These expenses included
primarily the costs of legal and accounting advice as well as the use of certain
outside consultants. The remaining increase in general and administrative
expenses results from continued growth of the Company, combined with differences
that result from the timing of expenses recognized in 1997. The first quarter of
1997 incurred a relatively low level of expense when compared to an expected
average quarterly expense based upon total 1997 actual expenses. 1997 general
and administrative expenses in total were $9.0 million, which would imply an
average estimated 1997 quarterly expense of $2.2 million.
During the first quarter of 1998, the Company began to expense a portion of
the formula and cut-off awards that were established in connection with the
Merger. Prior to the Merger, each of the Predecessor Companies had a stock
option plan (the "Old Plans"). In preparation for the Merger, the Compensation
Committees of the Predecessor Companies determined that the Old Plans should be
terminated upon the Merger, so that the new merged Company would be able to
develop a new incentive compensation plan for all officers and directors with a
single equity security. The existence of the Old Plans had resulted in certain
inequities in option grants among the various officers of the Predecessor
Companies simply because of the differences in the underlying equity securities.
To balance stock option awards among the employees, and to account for the
deviations caused by the existence of five plans supported by five different
publicly traded stocks, Advisers developed two special awards to be granted in
lieu of options under the Old Plans that would be foregone upon the cancellation
of the Old Plans.
Cut-Off Award. The first award established a cut-off dollar amount as of
the date of the announcement of the Merger (August 14, 1997) that would be
computed for all outstanding, but unvested options that would be canceled as of
the date of the Merger. The cut-off award was designed to cap the appreciated
value in unvested options at the Merger announcement date in order to set the
foundation to balance option awards upon the Merger. The cut-off award was
designed to be equal to the difference between the market prices of the shares
of stock underlying the canceled option under the Old Plans at August 14, 1997,
less the exercise prices of the options. The cut-off award was computed to be
$2.9 million in the aggregate and will be payable for each canceled option as
the canceled options would have vested. The cut-off award will only be payable
if the award recipient is employed by the Company on a future vesting date. The
cut-off award that will vest in 1998 will total $0.8 million, and approximately
one quarter of this amount, or $0.2 million, has been expensed in the first
quarter of 1998.
Formula Award. The formula award was designed to compensate officers from
the point when their unvested options would cease to appreciate in value
pursuant to the mechanics of the cut-off award (i.e., August 14, 1997) up until
the time in which they would be able to receive option awards in the Company
after the Merger became effective. In the aggregate, the formula award equaled
six percent of the difference between the combined aggregate market
capitalizations of the Predecessor Companies as of the close of the market on
December 30, 1997, and the combined aggregate market capitalizations of the
Predecessor Companies on August 14, 1997.
The formula award was designed as a long-term incentive compensation
program that would replace canceled stock options and would balance share
ownership among key officers for past and prospective service.
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<PAGE> 32
The terms of the formula award require that the award be contributed to the
Company's deferred compensation plan, and be used to purchase shares of the
Company in the open market. The formula award will vest over a three-year
period, on the anniversary date of the Merger, beginning on December 31, 1998.
In the aggregate, the market capitalizations of the Predecessor Companies
increased by approximately $319 million from August 14, 1997 to December 30,
1997, and the total formula award was computed to be approximately $19 million.
Assuming all officers who received a formula award remain with the Company over
the vesting period, the Company will expense the formula award during 1998, 1999
and 2000 in an annual amount of approximately $6.4 million. The Company recorded
approximately one-fourth of the annual formula award expense of $1.6 million
during the first quarter of 1998.
The total expense recorded as a result of the cut-off and formula awards
during the first quarter of 1998 was $1.8 million or $0.03 per share.
Net realized gains were $6.4 million and $3.7 million for the three months
ended March 31, 1998 and 1997, respectively. The net gains resulted from the
sale of equity securities associated with certain mezzanine loans and the
realization of unamortized discount resulting from the payoff of mezzanine and
commercial mortgage loans, offset by losses on investments. Realized gains
totaled $6.4 million and $4.5 million for the quarters ended March 31, 1998 and
1997, respectively. There were no realized losses during the quarter ended March
31, 1998, and realized losses totaled $0.8 million for the quarter ended March
31, 1997. Net realized gains during the first quarter of 1998 were largely due
to the sale of securities of two portfolio companies, Labor Ready, Inc. and
Broadcast Holdings, Inc. Gains resulting from investments in these two companies
totaled $6.1 million.
The Company recorded net unrealized gains of $0.7 million for the three
months ended March 31, 1998 representing an increase in the board of directors'
valuation of the Company's assets over their aggregate cost as compared to the
prior period and the effect of valuation of interest rate swap agreements. At
March 31, 1998, net unrealized appreciation in the portfolio totaled $2.0
million, and was composed of unrealized appreciation of $25.1 million resulting
from appreciated equity interests in portfolio companies, and unrealized
depreciation of $23.1 million resulting from under-performing loans in the
portfolio. At March 31, 1998, $13.7 million of loans at value in the portfolio
were greater than 120 days delinquent, and $18.7 million of loans at value were
not accruing interest.
The Company incurred income tax expense of $0.5 million for three months
ended March 31, 1997, which resulted from the operations of Advisers, prior to
the Merger. It is the Company's current intention to distribute all of its
taxable income, and therefore no provision for income taxes has been made for
the quarter ended March 31, 1998.
The weighted average shares outstanding used to compute basic earnings per
share for the quarter ended March 31, 1998 were 51.8 million as compared to 46.9
million for the quarter ended March 31, 1997. The increase in weighted average
shares is primarily due to the exercise of stock options and new shares issued
in conjunction with the exchange of shares pursuant to the Merger. Total shares
outstanding at March 31, 1998 were 51.5 million. The weighted average shares
and the total shares outstanding are reduced by the approximately 663,000
shares held in the Company's deferred compensation plan resulting from the
formula award.
In January 1998, the Company granted 3.4 million new stock options to
certain of the Company's officers. The shares under option have been included in
the calculation of weighted average shares used to compute diluted earnings per
share.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND U.S. GOVERNMENT SECURITIES
At March 31, 1998, the Company had $56.1 million in cash and government
securities. ACC invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short term repurchase
agreements fully collateralized by such securities.
Prior to the Merger, certain of the Predecessor Companies had excess cash
resources while other of the Predecessor Companies were borrowers on credit
facilities. Subsequent to the Merger, the Company has used
30
<PAGE> 33
excess cash for new investments and in its operations; however, the Company
continues to maintain excess cash in its SBIC and SSBIC subsidiaries. This cash
may not be withdrawn from the subsidiaries because it supports the long-term
borrowings of those subsidiaries, and such borrowings carry substantial
prepayment penalties. The cash has not been invested due to a lack of quality
investment opportunities, primarily for the SSBIC subsidiary. The Company has
been working with the SBA to restructure its SBIC and SSBIC licensees so that
the excess cash may be effectively used, and the Company recently received
permission to begin financing SBIC eligible investments in its SSBIC subsidiary.
The Company is continuing its restructuring efforts and plans to merge its SBIC
and SSBIC subsidiaries into a single SBIC. There can be no assurance that this
restructuring will be achieved.
INDEBTEDNESS
The Company had outstanding indebtedness at March 31, 1998 as follows:
<TABLE>
<CAPTION>
AMOUNT ANNUAL
CLASS OUTSTANDING INTEREST RATE(1)
----- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Debentures and notes payable:
Master repurchase agreement................... $ 8,243 7.01%
Master loan and security agreement............ 9,000 6.84
Senior unsecured notes........................ 28,700 8.57
SBA debentures................................ 53,300 8.36
-------- ----
Total debentures and notes payable....... $ 99,243 8.17%
======== ====
Revolving line of credit........................... $103,000 7.11%
======== ====
</TABLE>
- - - - - - - - - - - - - ---------------
(1) The annual interest rate includes the cost of commitment fees and other
facility fees.
Master Repurchase Agreement. The Company and BMI are co-borrowers under a
master repurchase agreement whereby the two entities can borrow up to $250
million of which $100 million is committed, through repurchase agreements using
commercial mortgage loans as collateral. The Company pledges commercial mortgage
loans as collateral for the facility such that the amount borrowed is
approximately equal to 75% to 80% of the value of the collateral pledged. The
terms of the master repurchase agreement require interest-only payments with all
principal due at maturity. The master repurchase agreement bears interest at
one-month London Inter Bank Offered Rate ("LIBOR") plus 1.13% and requires an
annual commitment fee of 0.25% of the amount committed. The master repurchase
agreement matures on January 31, 1999.
Master Loan and Security Agreement. The Company, again in conjunction with
BMI, has a facility to borrow up to $250 million, of which $100 million is
committed, using its commercial mortgage loans as collateral. The agreement
generally requires interest-only payments with all principal due at maturity.
The agreement bears interest at one-month LIBOR plus 1.0% and requires an annual
commitment fee of 0.15% of the amount committed. The facility matures on August
21, 1998.
Senior Unsecured Notes. The Company has a $20 million unsecured senior
note payable to an insurance company. The note is scheduled to mature over a
five-year period commencing in 1998 with annual principal payments of $4
million. The note has a stated interest rate of 9.15% and is subject to
prepayment penalty if paid prior to maturity. In conjunction with the proposed
issuance of the unsecured long-term notes described below, the Company
anticipates that these senior notes will be restructured during the second
quarter of 1998. The Company also has senior notes payable to the Overseas
Private Investment Corporation totaling $8.7 million at March 31, 1998.
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<PAGE> 34
SBA Debentures. The Company, through Allied Investment and Allied
Financial, has debentures totaling $53.3 million payable to the SBA, at interest
rates ranging from 6.87% to 9.80% with scheduled maturity dates as follows:
1998 -- $5.7 million; 1999 -- $0; 2000 -- $17.3 million; 2001 -- $9.4 million;
2002 -- $0; and $21.0 million thereafter. The debentures require semi-annual
interest-only payments with all principal due upon maturity. During 1997,
Congress increased the maximum leverage available to an SBIC to $101.0 million,
and the Company intends to continue to borrow under the SBIC program as the
situation warrants.
Revolving Line of Credit. The Company has a $200 million unsecured
revolving line of credit. The facility bears interest at LIBOR plus 1.25% and
requires a commitment fee equal to 0.2% of the committed unused amount. The
facility also has a facility fee equal to 0.15% of the initial commitment. The
18-month line of credit requires monthly payments of interest, and all principal
is due upon maturity. The amount that may be borrowed is based upon a borrowing
base formula generally equal to 50% of the Company's portfolio investments not
securing other credit facilities. The Company is in the process of restructuring
this facility in conjunction with the proposed issuance of the unsecured
long-term notes discussed below.
Unsecured Long-term Notes. The Company is in the process of negotiating
$180 million in unsecured long-term notes with private institutional lenders,
primarily insurance companies. The proposed terms of the notes include five and
seven year maturities, priced at approximately 7.15%. The notes require payment
of interest semiannually, and all principal is due upon maturity. The Company
plans to issue the notes during the second quarter of 1998; however, there is no
assurance that the Company will be able to complete the issuance of the notes.
FUTURE DEBT OR EQUITY OFFERINGS
The Company plans to secure additional debt and equity capital, and has
filed a registration statement to register 5.75 million shares in order to raise
additional equity capital for continued investment in growing businesses.
Because the Company is a RIC, it distributes substantially all of its income and
requires external capital for growth. Because the Company is a BDC, it is
limited in the amount of debt capital it may use to fund its growth, since it is
generally required to maintain a ratio of 200% of total assets to total
borrowings. See "Certain Government Regulations." The Company anticipates that
if the offering is completed, the proceeds generated, together with other
sources of capital, will be sufficient to fund the anticipated growth in the
Company's operations through 1999.
The Company's cash flow from operations was $11.1 million for the quarter
ended March 31, 1998. The Company plans to maintain a strategy of financing its
operations, dividend requirements and future investments with cash from
operations, long-term debt, asset securitizations or through use of its equity
capital. The Company will utilize its short-term credit facilities only as a
means to bridge to long-term financing. The Company hedges variable and
short-term interest rate exposure through interest rate swaps, treasury locks
and other techniques. The Company believes that it has access to capital
sufficient to fund its ongoing investment and operating activities, and from
which to pay dividends.
FINANCIAL OBJECTIVES
The Company has set forth certain financial objectives that it intends to
use in allocating its resources and in selecting new investment opportunities.
Management's goal is to increase NIA annually by 15% to 20% and to result in a
ratio of NIA to average shareholders' equity of 18%. Management believes that
the Company will be able to achieve these goals over the next three to five
years. Factors that may impede the achievement of these objectives include those
described under "Investment Considerations" and also include other factors such
as changes in the economy, competitive and market conditions, and future
business decisions.
YEAR 2000
The Company has reviewed its exposure to the risks associated with the Year
2000 issue, and has determined that there is no material risk of business
interruption as a result of errors or inefficiencies in the Company's internal
computer systems. The Company exclusively uses purchased software and has been
32
<PAGE> 35
informed by its vendors that the software will be Year 2000 compatible;
however, there is no assurance that such software will indeed address all Year
2000 compatibility issues. The Company is currently assessing the risk that its
portfolio companies may have regarding this issue. For all new loans
originated, the Company includes in its credit review a Year 2000 compatibility
assessment, and will monitor particular portfolio companies as needed.
NEW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information," respectively, were issued in June 1997. SFAS 130 requires
that certain financial activity typically disclosed in shareholders' equity be
reported in the financial statements as an adjustment to net income in
determining comprehensive income. SFAS 131 requires the reporting of selected
segmented information in quarterly and annual reports. SFAS No. 130 did not
materially impact the Company's financial statements, and the Company does not
anticipate any material financial impact from the implementation of SFAS 131.
INVESTMENT CONSIDERATIONS
RISKS OF DEFAULT
ACC invests in and lends to small businesses. Loans to small businesses
involve a high risk of default and generally are not rated by any nationally
recognized statistical rating organization. Small businesses usually have
narrower product lines and smaller market shares than larger companies and
therefore may be more vulnerable to competitors' actions and market conditions,
as well as general economic downturns. These businesses typically depend for
their success on the management talents and efforts of one person or a small
group of persons whose death, disability or resignation would adversely affect
the business. Because these businesses frequently have highly leveraged capital
structures, reduced cash flows resulting from adverse competitive developments,
a shift in customer preferences or an economic downturn can severely affect the
return on, or the recovery of, the Company's investments in such businesses. The
Company recently has begun originating larger loans, and as a result, any
individual event of default may have a more significant impact on the Company or
its operations.
LOSS OF PASS-THROUGH TAX TREATMENT
The Company qualifies as a regulated investment company ("RIC") under
Subchapter M of the Code and, provided it meets certain requirements under the
Code, qualifies for pass-through tax treatment. The Company would cease to
qualify for pass-through tax treatment if it is unable to comply with the
diversification or distribution requirements contained in Subchapter M of the
Code, or if it ceases to qualify as a BDC under the 1940 Act. The Company also
could be subject to a 4% excise tax (and, in certain cases, corporate level
income tax) if it fails to make certain distributions. The lack of Subchapter M
tax treatment could have a material adverse effect on the total return, if any,
obtainable from an investment in the Company.
COMPETITION
Many entities and individuals compete for investments similar to those made
by the Company, some of whom have greater resources than ACC. Increased
competition would make it more difficult for the Company to purchase or
originate loans at attractive prices. As a result of this competition, ACC may
from time to time be precluded from making otherwise attractive investments on
terms considered to be prudent in light of the risks assumed.
LONG-TERM CHARACTER OF INVESTMENTS
It is generally expected that mezzanine loans will yield a current return
from the time they are made, but also will produce a realized gain, if any, from
an accompanying equity feature after approximately three to eight years. There
can be no assurance that either a current return or capital gains will actually
be achieved.
ILLIQUIDITY OF INVESTMENTS
The Company acquires securities directly from issuers in private
transactions, and the major portion of such investments ordinarily is subject to
restrictions on resale or is otherwise illiquid. In particular, there is usually
no established trading market in which such securities could be sold. In
addition, securities generally cannot be sold to the public without registration
under the Securities Act, which involves delay, uncertainty and expense.
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<PAGE> 36
GOVERNMENT REGULATIONS
The Company is subject to regulation by the Commission and the SBA. In
addition, the Company's business may be significantly impacted by changes in the
laws or regulations that govern BDCs, RICs, real estate investment trusts
("REITs"), small business investment companies ("SBICs"), specialized small
business investment companies ("SSBICs") and small business lending companies
("SBLCs"). Laws and regulations may be changed from time to time and the
interpretations of the relevant law and regulations also are subject to change.
Any change in the laws or regulations that govern the Company could have a
material impact on the Company or its operations.
INTEREST RATE RISK
The Company's income is materially dependent upon the "spread" between the
rate at which it borrows funds and the rate at which it loans these funds. The
Company anticipates using a combination of long-term and short-term borrowings
to finance its lending activities and engaging in interest rate risk management
techniques. At March 31, 1998, the Company's net interest spread was 4.8% (480
basis points), which represents the weighted average yield of the combined
portfolio less the weighted average cost of funds. There can be no assurance
that the Company will maintain this net interest spread or that a significant
change in market interest rates will not have a material adverse effect on the
Company's profitability.
LIMITED INFORMATION
Consistent with its operation as a BDC, the Company's portfolio is expected
to consist primarily of securities issued by small and developing privately held
companies. There is generally little or no publicly available information about
such companies, and the Company must rely on the diligence of its officers and
directors to obtain the information necessary for the Company's decision to
invest in them.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company could experience fluctuations in quarterly operating results
due to a number of factors including, among others, the completion of a
securitization transaction in a particular calendar quarter, the interest rates
on the securities issued in connection with its securitization transactions,
variations in the volume of loans originated by the Company, variations in and
the timing of the recognition of realized and unrealized gains, the degree to
which the Company encounters competition in its markets and general economic
conditions. As a result of these factors, results for any one quarter should not
be relied upon as being indicative of performance in future quarters.
RISKS OF LEVERAGE
ACC borrows funds from, and issues senior debt securities to, banks and
other lenders. Lenders of these senior securities have fixed dollar claims on
the Company's consolidated assets which are superior to the claims of the
Company's shareholders. Leverage magnifies the potential for gain and loss on
amounts invested and, therefore, increases the risks associated with an
investment in the Company's securities. If the value of the Company's
consolidated assets increases, then such leveraging techniques would cause the
net asset value attributable to the Company's Common Stock to increase more
sharply than it would have had the techniques not been utilized. Conversely, a
decrease in the value of the Company's consolidated assets would cause net asset
value to decline more sharply than it otherwise would if the amounts had not
been borrowed. Similarly, any increase in the Company's consolidated income in
excess of consolidated interest payable on the borrowed funds would cause its
net income to increase more than it would without the leverage, while any
decrease in its consolidated income would cause net income to decline more
sharply than it would have had the funds not been borrowed. Such a decline could
negatively affect the Company's ability to make Common Stock dividend payments,
and, if asset coverage for a class of senior security representing indebtedness
declines to less than 200%, the Company may be required to sell a portion of its
investments when it is disadvantageous to
34
<PAGE> 37
do so. Leverage is generally considered a speculative investment technique. As
of March 31, 1998, the Company's debt as a percentage of total liabilities and
shareholders' equity was 31.0%. The ability of the Company to achieve its
investment objective may depend in part on its continued ability to maintain a
leveraged capital structure by borrowing from banks or other lenders on
favorable terms, and there can be no assurance that such leverage can be
maintained.
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<PAGE> 38
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits. 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 consolidated financial position of the Company.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - - - - - - - - - - - - ------- -----------
<S> <C>
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(ii)(2) Articles of Merger.
3(iii)(3) Bylaws.
4.1(10) Specimen certificate of the Company's Common Stock, par
value $0.0001, the rights of holders of which are defined in
Exhibits 3(i), 3(ii) and 3(iii).
4.2(4) Form of debenture between certain subsidiaries of ACC and
the U.S. Small Business Administration.
10.1(10) Amended and Restated Credit Agreement dated as of April 20,
1998 (the "1998 Credit Agreement") between the Company,
Allied Capital REIT, Inc., and Allied Capital SBLC
Corporation, as Borrowers, each of the financial
institutions initially a signatory thereto, as Lenders, and
BankBoston, N.A., as disbursing agent, First Union National
Bank, as syndication agent and Riggs Bank N.A., as managing
agent and NationsBank of Texas, N.A., as Co-Agent.
10.2(5) Note Agreement between Allied I and certain subsidiaries and
Massachusetts Mutual Life Insurance Company, as amended,
dated April 30, 1992. The Company has received confirmation
of the assignment of Note Agreement from Allied I to the
Company.
10.3(6) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
10.4(3) Amended and Restated Master Repurchase Agreement dated March
22, 1996 among Allied Commercial, BMI and Merrill Lynch
Mortgage Capital Inc. Letter evidencing the assignment of
this facility to the Company dated November 6, 1997.
10.5(3) Master Loan & Security Agreement dated August 21, 1997 among
Allied Commercial, BMI and Morgan Stanley Mortgage Capital,
Inc.
10.6(10) Sale and Servicing Agreement dated, as of January 1, 1998,
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and Allied Capital Corporation and
LaSalle National Bank and ABN AMRO Bank N.V.
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - - - - - - - - - - - - ------- -----------
<S> <C>
10.7(10) Indenture dated as of January 1, 1998, between the Allied
Capital Commercial Mortgage Trust 1998-1 and LaSalle
National Bank.
10.8(10) Amended and Restated Trust Agreement, dated January 1, 1998
between Allied Capital CMT, LaSalle National Bank Inc. and
Wilmington Trust Company.
10.9(10) Guaranty dated as of January 1, 1998 by Allied Capital
Corporation.
10.10(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
10.11(3) Deferred Compensation Plan, as amended January 1, 1998.
10.12(9) Stock Option Plan.
10.13(7) Investment Management Agreement among Advisers, Mitchell
Hutchins Institutional Investors Inc. and BMI, dated January
4, 1993 (the "MH Management Agreement"). Assignment of the
MH Agreement from Mitchell Hutchins Institutional Investors
Inc. to Siguler Guff & Company LLC on August 8, 1995. Waiver
dated December 31, 1997 evidencing assignment of MH
Management Agreement from Advisers to the Company.
10.14(7) Agreement between the Company and Mitchell Hutchins
Institutional Investors Inc., dated January 4, 1993 ("MH
Agreement") Assignment of MH Agreement from Mitchell
Hutchins Institutional Investors, Inc. to Siguler Guff &
Company LLC on August 8, 1995. Assignment of MH Management
Agreement from Advisers to the Company on December 31, 1997.
Consent to assign MH Agreement to the Company.
10.15(8) Lease Agreement between 1620 K Street Associates Limited
Partnership and Advisers dated February 17, 1993 (the "1620
K Street Lease Agreement"). Assignment of Lease and
Landlord's consent to Assignment dated January 5, 1998
evidencing assignment of the 1620 K Street Lease Agreement
from Advisers to the Company.
10.16(3) Form of Regional Associate Agreement.
10.17(3) Dividend Reinvestment Plan.
11 Statement regarding computation of per share earnings is
incorporated by reference to Note 6 to the Company's Notes to the
Consolidated Financial Statements filed herein as Item 1.
27* Financial Data Schedule
</TABLE>
- - - - - - - - - - - - - ---------------
<TABLE>
<S> <C>
* Filed herewith.
(1) Incorporated by reference to Exhibit 3(i) with Allied
Lending's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-22832).
(2) Incorporated by reference from Appendix B to the Company's
registration statement on Form N-14 filed on the Company's
behalf with the Commission on September 26, 1997 (File No.
333-36459).
(3) Incorporated by reference to the exhibit of the same name
filed with the Company's report on Form 10-K for the year
ended December 31, 1997 (File No. 0-22832).
(4) Incorporated by reference to Exhibit 4.2 filed with Allied
I's Annual Report on Form 10-K for the year ended December
31, 1996 (File No. 811-00907).
</TABLE>
37
<PAGE> 40
<TABLE>
<S> <C>
(5) Incorporated by reference to Exhibit (4)(D)(i) filed with Allied I'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 Allied I's Form 8-K filed on December 9, 1993 (File No. 811-00907).
(6) Incorporated by reference to Exhibit 10.2 of Allied I's Pre-Effective Amendment No. 2 filed with the
registration statement on Form N-2 on January 24, 1996 (File No. 33-64629). Assignment to the Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (File No. 0-22832).
(7) Agreement incorporated by reference to the exhibit of the same name to Advisers' Report on Form 10-K for the
year ended December 31, 1992. Assignment to the Company is incorporated by reference to the exhibit of the
same name filed with Advisers' Report on Form 10-K for the year ended December 31, 1995. (File No. 0-18826).
Waiver and consent to assign to the Company for each agreement is incorporated by reference to the exhibit of
the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File
No. 0-22832).
(8) Incorporated by reference to an exhibit of the same name filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (File No. 0-22832). Incorporated by reference to the exhibit of the same
name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
0-22832).
(9) Incorporated by reference to Exhibit 4 of the Allied Capital Corporation Stock Option Plan registration
statement on Form S-8, filed on behalf of such Plan on February 3, 1998 (File No. 333-45525).
(10) Incorporated by reference to exhibit of the same description to the Company's registration statement on Form N-2
filed on the Company's behalf with the Commission on May 6, 1998.
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
March 31, 1998.
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALLIED CAPITAL CORPORATION
--------------------------
(Registrant)
Dated: May 5, 1998 /s/ Jon A. DeLuca
----------------- -----------------------------
Principal and Chief Financial
Officer
39
<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 FLOW AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 562,006
<INVESTMENTS-AT-VALUE> 564,455
<RECEIVABLES> 0
<ASSETS-OTHER> 32,164
<OTHER-ITEMS-ASSETS> 56,091
<TOTAL-ASSETS> 652,710
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 99,243
<OTHER-ITEMS-LIABILITIES> 123,219
<TOTAL-LIABILITIES> 222,462
<SENIOR-EQUITY> 5
<PAID-IN-CAPITAL-COMMON> 452,723
<SHARES-COMMON-STOCK> 52,114
<SHARES-COMMON-PRIOR> 52,047
<ACCUMULATED-NII-CURRENT> 10,381
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,025
<NET-ASSETS> 423,248
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,501
<OTHER-INCOME> 17,396
<EXPENSES-NET> 11,977
<NET-INVESTMENT-INCOME> 24,920
<REALIZED-GAINS-CURRENT> 6,421
<APPREC-INCREASE-CURRENT> 724
<NET-CHANGE-FROM-OPS> 32,065
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,280
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 663
<SHARES-REINVESTED> 66
<NET-CHANGE-IN-ASSETS> 3,188
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2,679
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 537
<INTEREST-EXPENSE> 4,598
<GROSS-EXPENSE> 11,977
<AVERAGE-NET-ASSETS> 421,654
<PER-SHARE-NAV-BEGIN> 8.39
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> 0.35
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.23
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 274,953
<AVG-DEBT-PER-SHARE> 5.34
</TABLE>
