<PAGE> 1
--------------------------------------------------------------------------------
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER:
0-22832
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
(State or Jurisdiction of
Incorporation or Organization)
52-1081052
(IRS Employer
Identification No.)
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, DC 20006
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
On November 3, 2000 there were 81,014,451 shares outstanding of the
Registrant's common stock, $0.0001 par value.
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<PAGE> 3
ALLIED CAPITAL CORPORATION
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30,
2000 (unaudited) and December 31, 1999............. 1
Consolidated Statement of Operations -- For the
Three and Nine Months Ended September 30, 2000 and
1999 (unaudited)................................... 2
Consolidated Statement of Changes in Net
Assets -- For the Nine Months Ended September 30,
2000 and 1999 (unaudited).......................... 3
Consolidated Statement of Cash Flows -- For the
Nine Months Ended September 30, 2000 and 1999
(unaudited)........................................ 4
Consolidated Statement of Investments as of
September 30, 2000 (unaudited) and December 31,
1999............................................... 5
Notes to Consolidated Financial Statements........ 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................. 47
Item 2. Changes in Securities and Use of Proceeds...... 47
Item 3. Defaults Upon Senior Securities................ 47
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 47
Item 5. Other Information.............................. 47
Item 6. Exhibits and Reports on Form 8-K............... 47
Signatures............................................. 51
</TABLE>
<PAGE> 4
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<PAGE> 5
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Private finance (cost: 2000-$963,648;
1999-$639,171)....................................... $ 967,521 $ 647,040
Commercial real estate finance (cost: 2000-$597,358;
1999-$522,022)....................................... 600,030 520,029
Small business finance (cost: 2000-$71,591;
1999-$61,708)........................................ 70,656 61,428
---------- ----------
Total portfolio at value.......................... 1,638,207 1,228,497
---------- ----------
Cash and cash equivalents................................... 26,194 18,155
Other assets................................................ 67,372 43,386
---------- ----------
Total assets...................................... $1,731,773 $1,290,038
========== ==========
Liabilities:
Notes payable and debentures.......................... $ 577,150 $ 487,350
Revolving credit facilities........................... 185,000 105,500
Accounts payable and other liabilities................ 29,294 22,675
---------- ----------
Total liabilities................................. 791,444 615,525
---------- ----------
Commitments and Contingencies
Preferred stock............................................. 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 81,014,284 and 65,930,360 issued and
outstanding at September 30, 2000 and December 31,
1999, respectively................................... 8 6
Additional paid-in capital............................ 954,576 699,149
Common stock held in deferred compensation trust
(259,983 shares and 516,779 shares at September 30,
2000 and December 31, 1999, respectively)............ (1,404) (6,218)
Notes receivable from sale of common stock............ (25,926) (29,461)
Net unrealized appreciation on portfolio.............. 4,250 4,517
Distributions in excess of earnings................... 1,825 (480)
---------- ----------
Total shareholders' equity........................ 933,329 667,513
---------- ----------
Total liabilities and shareholders' equity........ $1,731,773 $1,290,038
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 6
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and related portfolio income:
Interest........................................ $48,054 $31,577 $129,768 $84,419
Premiums from loan dispositions................. 2,909 4,700 10,752 9,032
Investment advisory fees and other income....... 5,029 1,721 9,334 5,411
------- ------- -------- -------
Total interest and related portfolio
income................................... 55,992 37,998 149,854 98,862
------- ------- -------- -------
Expenses:
Interest........................................ 15,054 9,766 41,645 24,173
Employee........................................ 4,949 4,192 14,709 11,303
Administrative.................................. 3,876 3,200 10,711 8,476
------- ------- -------- -------
Total operating expenses.................... 23,879 17,158 67,065 43,952
------- ------- -------- -------
Formula and cut-off awards...................... 1,394 1,567 4,797 5,188
------- ------- -------- -------
Portfolio income before net realized and unrealized
gains............................................... 30,719 19,273 77,992 49,722
------- ------- -------- -------
Net realized and unrealized gains:
Net realized gains.............................. 8,054 4,886 23,095 16,448
Net unrealized gains (losses)................... (2,324) 2,785 (267) 1,475
------- ------- -------- -------
Total net realized and unrealized gains..... 5,730 7,671 22,828 17,923
------- ------- -------- -------
Net increase in net assets resulting from
operations.......................................... $36,449 $26,944 $100,820 $67,645
======= ======= ======== =======
Basic earnings per common share....................... $ 0.48 $ 0.44 $ 1.43 $ 1.14
======= ======= ======== =======
Diluted earnings per common share..................... $ 0.48 $ 0.44 $ 1.42 $ 1.14
======= ======= ======== =======
Weighted average common shares outstanding -- basic... 75,502 61,042 70,604 59,077
======= ======= ======== =======
Weighted average common shares
outstanding -- diluted.............................. 76,133 61,458 70,777 59,239
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 7
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
(UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................. $ 77,992 $ 49,722
Net realized gains..................................... 23,095 16,448
Net unrealized gains (losses).......................... (267) 1,475
-------- --------
Net increase in net assets resulting from
operations..................................... 100,820 67,645
-------- --------
Shareholder distributions:
Common stock dividends................................. (98,617) (71,800)
Preferred stock dividends.............................. (165) (165)
-------- --------
Net decrease in net assets resulting from
shareholder distributions...................... (98,782) (71,965)
-------- --------
Capital share transactions:
Sale of common stock................................... 250,911 103,022
Net decrease (increase) in notes receivable from sale
of common stock....................................... 3,535 (3,540)
Issuance of common stock upon the exercise of stock
options............................................... 1,467 3,753
Issuance of common stock in lieu of cash
distributions......................................... 3,613 3,498
Net decrease in common stock held in deferred
compensation trust.................................... 4,814 6,303
Other.................................................. (562) --
-------- --------
Net increase in net assets resulting from capital
share transactions............................. 263,778 113,036
-------- --------
Total increase in net assets...................... $265,816 $108,716
-------- --------
Net assets at beginning of period........................... $667,513 $485,117
-------- --------
Net assets at end of period................................. $933,329 $593,833
======== ========
Net asset value per common share............................ $ 11.56 $ 9.58
======== ========
Common shares outstanding at end of period.................. 80,754 61,972
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 8
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $ 100,820 $ 67,645
Adjustments
Net unrealized (gains) losses.......................... 267 (1,475)
Depreciation and amortization.......................... 659 599
Amortization of loan discounts and fees................ (9,767) (6,195)
Changes in other assets and liabilities................ (8,712) (11,518)
--------- ---------
Net cash provided by operating activities............ 83,267 49,056
--------- ---------
Cash flows from investing activities:
Portfolio investments..................................... (675,379) (534,017)
Repayments of investment principal........................ 117,940 120,563
Proceeds from loan sales.................................. 151,834 120,871
Collections of notes receivable from sale of common
stock.................................................. 4,617 212
Other investing activities................................ 3,657 (2,738)
--------- ---------
Net cash used in investing activities................ (397,331) (295,109)
--------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 250,911 103,079
Common dividends and distributions paid................... (95,004) (70,003)
Preferred stock dividends paid............................ (165) (165)
Net borrowings under notes payable and debentures......... 89,800 165,500
Net borrowings under revolving lines of credit............ 79,500 38,000
Other financing activities................................ (2,939) (57)
--------- ---------
Net cash provided by financing activities............ 322,103 236,354
--------- ---------
Net increase (decrease) in cash and cash equivalents........ $ 8,039 $ (9,699)
--------- ---------
Cash and cash equivalents at beginning of period............ $ 18,155 $ 25,075
--------- ---------
Cash and cash equivalents at end of period.................. $ 26,194 $ 15,376
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 9
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Ability One Loans $ 9,951 $ 9,951
-----------------------------------------------------------------------------------------------------------
ACE Products, Inc. Loans 14,047 14,047
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,961 6,961
Limited Partnership Interest 1,456 --
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,343 9,343
Warrants 629 629
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 14,405 14,405
Equity Interest 1,500 3,347
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,227 12,227
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 15,630 15,630
-----------------------------------------------------------------------------------------------------------
Border Foods, Inc. Debt Securities 9,901 9,901
Series A Convertible Preferred Stock
(50,919 shares) 2,000 2,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cahill-Warnock Strategic Partners Fund Limited Partnership Interest 420 420
II, L.P.
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,550 2,550
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 285 285
Warrants 12 312
-----------------------------------------------------------------------------------------------------------
Colibri Holding Corporation Loans 3,722 3,722
Common Stock (3,362 shares) 1,250 1,250
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Component Hardware Group Debt Securities 10,188 10,188
Class A Preferred Stock (18,000 shares) 1,800 1,800
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,424 3,424
Warrants -- --
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,945 6,945
Debt Securities 4,951 4,951
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 10
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cosmetic Manufacturing Loan $ 870 $ 870
Resources, LLC Debt Securities 5,840 5,840
Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,690 9,690
Debt Securities 4,964 4,964
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CTT Holdings Loan 1,186 1,186
-----------------------------------------------------------------------------------------------------------
CyberRep.com Loan 1,014 1,014
Debt Securities 10,458 10,458
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 1
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 80 --
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,918 8,762
Company, Inc. Debt Securities 1,500 1,500
Warrants -- --
-----------------------------------------------------------------------------------------------------------
eCentury Capital Partners, L.P. Limited Partnership Interest 1,287 1,287
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
E-Talk Corporation Debt Securities 8,768 8,768
Warrants 1,157 1,157
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,866 15,866
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,795 5,795
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 14,864 14,864
Warrants 970 2,554
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 31,857 31,857
Communications, LLC Warrants 500 1,250
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,078 1,078
-----------------------------------------------------------------------------------------------------------
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 11
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Genoa Mine Acquisition Corporation Loan $ 110 $ 110
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 16,262 16,262
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 8,513 8,513
Debt Securities 3,839 3,839
Equity Interest 10,467 10,467
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Equity Interest 660 660
-----------------------------------------------------------------------------------------------------------
HealthASPex, Inc. Series A Convertible Preferred Stock
(189,568 shares) 640 640
Series A Preferred Stock
(225,112 shares) 760 760
Common Stock (1,036,700 shares) -- --
-----------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,954 9,954
Common Stock (300,000 shares) 3,000 3,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (310,000 shares) 310 310
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 6,314 6,314
Warrants 1,674 1,674
-----------------------------------------------------------------------------------------------------------
Intellirisk Management Corporation Loans 19,951 19,951
-----------------------------------------------------------------------------------------------------------
International Filler Corporation Debt Securities 21,636 21,636
Common Stock (1,029,068 shares) 5,483 5,483
Warrants 420 420
-----------------------------------------------------------------------------------------------------------
iSolve Incorporated Series A Preferred Stock (14,853 shares) 874 874
Common Stock (13,306 shares) 14 14
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,904 18,904
-----------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 1,948 1,948
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 2,598 2,598
Warrants 259 6,500
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 4,493
Equity Interest 4 11
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,342 6,342
Preferred Stock (917 shares) 412 412
Warrants 96 96
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,716 7,716
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 12
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Liberty-Pittsburgh Systems, Inc. Debt Securities $ 3,467 $ 3,467
Common Stock (64,535 shares) 142 142
-----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
-----------------------------------------------------------------------------------------------------------
Logic Bay Corporation Preferred Stock (1,131,222 shares) 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
-----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Loan 2,000 2,000
Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities -- --
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Mid-Atlantic Venture Fund IV, L.P. Limited Partnership Interest 1,801 1,801
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Grove Pharmaceuticals, Inc. Loan 15,192 15,192
Redeemable Convertible Preferred Stock
(106,947 shares) 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,088 14,088
Warrants 651 1,920
-----------------------------------------------------------------------------------------------------------
NETtel Communications, Inc. Debt Securities 13,455 13,455
Series A Convertible Preferred Stock (400
shares) 20 --
Series B Convertible
Preferred Stock (647 shares) 5,000 --
Series C Convertible
Preferred Stock (340,523 shares) 3,000 --
Series D Convertible Preferred Stock (2,270
shares) -- --
Warrants 500 --
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,551 9,551
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 500
-----------------------------------------------------------------------------------------------------------
North American Loans 1,390 811
Archery, LLC Convertible Debentures 2,056 1,804
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 359 359
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,984 10,984
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 13
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Onyx Television GmbH Common Stock (600,000 shares) $ 200 $ 200
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,996 13,996
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Debt Securities 12,452 12,452
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,840 23,840
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
Packaging Advantage Corporation Debt Securities 11,476 11,476
Common Stock (200,000 shares) 2,000 2,000
Warrants 963 963
-----------------------------------------------------------------------------------------------------------
PF.Net Communications, Inc. Debt Securities 11,500 11,500
Warrants 3,540 3,540
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,792 14,792
Redeemable Preferred
Stock (850 shares) 850 850
Convertible Preferred
Stock (97,411 shares) 150 150
Warrants 476 476
-----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 1,591
Common Stock (208,000 shares) 59 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,460 6,460
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,502 15,502
-----------------------------------------------------------------------------------------------------------
Proeducation GmbH Loan 40 40
-----------------------------------------------------------------------------------------------------------
Professional Paint, Inc. Debt Securities 20,000 20,000
Preferred Stock (15,000 shares) 15,000 15,000
Common Stock (110,000 shares) 69 69
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,947 3,947
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 10,268 10,268
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 --
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,432 8,432
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
Warrants 446 446
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 14
<TABLE>
<CAPTION>
PRIVATE FINANCE SEPTEMBER 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Southwest PCS, LLC Loan $ 7,500 $ 7,500
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,461 7,378
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 545 436
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
Startec Global Communications, Inc. Debt Securities 19,807 19,807
Common Stock (258,064 shares) 3,000 3,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Loan 207 207
Preferred Stock (1,116,902 shares) 4,536 4,536
Warrants 662 662
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,973 12,973
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,503 118
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,896 3,896
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,957 4,957
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Venturehouse Group, LLC Common Equity Interest 333 333
-----------------------------------------------------------------------------------------------------------
Walker Investment Fund, II, L.P. Limited Partnership Interest 600 600
-----------------------------------------------------------------------------------------------------------
Warn Industries Debt Securities 18,972 18,972
Warrants 1,429 1,429
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
Wilmar Industries, Inc. Debt Securities 33,666 33,666
Warrants 1,181 1,181
-----------------------------------------------------------------------------------------------------------
Wilshire Restaurant Group, Inc. Debt Securities 15,000 15,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,836 12,836
-----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 7,581 7,581
Equity Interests 1,700 1,700
Warrants 450 450
-----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,068 15,068
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 7,100
-----------------------------------------------------------------------------------------------------------
Total private finance (114 investments) $963,648 $967,521
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 15
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
INTEREST NUMBER OF -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
---------------------------------------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE (UNAUDITED)
Commercial Mortgage Loans Up to 6.99% 4 $ 977 $ 2,675
7.00%- 8.99% 10 29,751 31,851
9.00%-10.99% 19 21,985 21,873
11.00%-12.99% 47 34,174 34,306
13.00%-14.99% 14 14,134 14,135
15.00% and above 3 1,037 1,013
------------------------------------------------------------------------------------------------
Total commercial mortgage loans 97 $ 102,058 $ 105,853
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,953 $ 29,953
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,920 35,972
COMM 1999-1 5.7% 105,010 55,250 55,189
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,797 24,800
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,439 44,439
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,251 28,176
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,429 20,579
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,429 20,429
FUNB CMT, Series 1999-C4 6.5% 49,288 22,326 22,524
Heller Financial, HFCMC Series 2000 PH-1 6.8% 55,026 24,943 24,943
SBMS VII, Inc., Series 2000-NL1 7.2% 40,940 26,324 26,796
DLJ Commercial Mortgage Trust, Series 2000-CF1 7.0% 49,364 25,700 25,920
Deutsche Bank Alex. Brown, Series Comm 2000-C1 6.9% 51,452 24,593 24,385
LB-UBS Commercial Mortgage Trust, Series 2000-C4 6.9% 47,818 24,157 25,149
--------------------------------------------------------------------------------------------------
Total purchased CMBS $813,834 $ 407,511 $ 409,254
--------------------------------------------------------------------------------------------------
Residual CMBS $ 77,205 $ 77,205
Residual Interest Spread 4,213 2,713
Real Estate Owned 6,371 5,005
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 597,358 $ 600,030
--------------------------------------------------------------------------------------------------
Small business finance $ 71,591 $ 70,656
--------------------------------------------------------------------------------------------------
Total portfolio $1,632,597 $1,638,207
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 16
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,386 $ 13,386
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,618 6,618
Partnership Interest 1,456 2,100
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,905 9,905
Warrants -- --
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 13,370 13,370
Equity Interest 1,500 1,500
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,959 11,959
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 10,967 10,967
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,491 2,491
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 310 310
Warrants 12 212
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,460 3,460
Warrants -- 538
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,957 6,957
Debt Securities 4,942 4,942
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,817 5,817
Resources, LLC Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,298 9,298
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CyberRep.com Debt Securities 3,694 3,694
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 --
-----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 29
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- --
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 17
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Drilltec Patents & Technologies Loan $ 10,911 $ 8,755
Company, Inc. Debt Securities 786 786
Warrants -- --
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,825 15,825
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,753 5,753
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 12,053 12,053
Warrants 970 970
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,740 30,740
Communications, LLC Options -- 750
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,328 1,328
Common Stock (41,644 shares) 214 81
-----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 108 108
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,742 15,742
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,526 2,526
Debt Securities 1,733 1,733
Equity Interest 6,867 6,867
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 840
Archery, LLC Convertible Debentures 2,248 2,008
-----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Debt Securities 5,200 5,200
Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,177 9,177
Warrants -- 2,500
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (1,000,000 shares) 1,000 1,000
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 7,841 7,841
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,174 18,174
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 18
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
JRI Industries, Inc. Debt Securities $ 2,134 $ 2,134
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 3,502 3,502
Warrants 324 4,100
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,318 6,318
Warrants 96 600
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,665 7,665
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,439 3,439
Common Stock (64,535 shares) 142 142
-----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
-----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
-----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities 3,793 3,793
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,938 2,938
-----------------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, LLC Loan 11,109 11,109
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 7 7
Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 13,989 13,989
Warrants 651 651
-----------------------------------------------------------------------------------------------------------
Net-Tel Communications, Inc. Debt Securities 9,426 9,426
Series B Convertible
Preferred Stock (647 shares) 5,000 5,000
Warrants 500 500
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,492 9,492
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 575
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 384 384
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,922 10,922
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,896 13,896
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,802 23,802
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 19
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Panera Bread Company (1) Warrants $ 227 $ 271
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,388 14,388
Redeemable Preferred
Stock (850 shares) 850 850
Convertible Preferred
Stock (97,411 shares) 150 150
Warrants 476 476
-----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 2,591
Common Stock (208,000 shares) 59 3
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,395 6,395
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,031 15,031
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,940 3,940
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,978 9,978
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 136
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,140 8,140
Warrants 446 446
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,364 6,364
Options 1,000 2,000
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 469 360
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Preferred Stock (1,116,902 shares) 3,108 3,108
Warrants 662 662
Options -- --
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,674 11,674
Options 266 266
-----------------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 13,863 13,863
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,528 135
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,886 3,886
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,938 4,938
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Wildwood Designs, Inc. Loan 1,167 1,167
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 20
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Wilton Industries, Inc. Loan $ 12,390 $ 12,390
-----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 8,000 8,000
Equity Interests 1,700 1,700
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,113 15,113
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 4,100
-----------------------------------------------------------------------------------------------------------
Total private finance (91 investments) $639,171 $647,040
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, 1999
INTEREST NUMBER OF -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
---------------------------------------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE
Commercial Mortgage Loans Up to 6.99% 5 $ 1,422 $ 1,422
7.00%- 8.99% 15 71,619 71,595
9.00%-10.99% 41 39,415 39,623
11.00%-12.99% 30 25,016 25,175
13.00%-14.99% 12 15,207 15,230
15.00% and above 3 1,088 1,064
------------------------------------------------------------------------------------------------
Total commercial mortgage loans 106 $ 153,767 $ 154,109
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,141 $ 29,141
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,453 35,453
COMM 1999-1 5.7% 105,010 54,166 54,166
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,505 24,505
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,288 44,288
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,115 28,115
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,054 20,054
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,121 20,121
FUNB CMT, Series 1999-C4 6.5% 49,288 21,851 21,851
--------------------------------------------------------------------------------------------------
Total purchased CMBS $569,234 $ 277,694 $ 277,694
--------------------------------------------------------------------------------------------------
Residual CMBS $ 76,374 $ 76,374
Residual Interest Spread 6,882 5,382
Real Estate Owned 7,305 6,470
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 522,022 $ 520,029
--------------------------------------------------------------------------------------------------
Small business finance $ 61,708 $ 61,428
--------------------------------------------------------------------------------------------------
Total portfolio $1,222,901 $1,228,497
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 22
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation has two wholly owned subsidiaries that have
also elected to be regulated as BDCs. Allied Investment Corporation ("Allied
Investment") is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company ("SBIC"). Allied Capital SBLC Corporation
("Allied SBLC") is licensed by the Small Business Administration ("SBA") as a
Small Business Lending Company and is a participant in the SBA Section 7(a)
Guaranteed Loan Program. In addition, the Company has a real estate investment
trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT") and several single-
member limited liability companies established primarily to hold real estate
properties.
Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company."
The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests primarily
in private, small and middle-market companies in a variety of industries and in
diverse geographic locations in the United States.
NOTE 2. BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial results
of the Company included herein contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of September 30, 2000 and December 31, 1999 and for the nine
months ended September 30, 2000 and 1999 and the results of operations, changes
in net assets, and cash flows for these periods. 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, 1999 Annual Report. The results of operations for the
nine months ended September 30, 2000 are not necessarily indicative of the
operating results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the 1999 balances to conform with the 2000 financial statement presentation.
In October 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities -- a Replacement of FASB Statement No. 125", which requires new
disclosures about securitizations and retained interests in securitized
financial assets and revises the criteria involving qualifying special purpose
entities. These new disclosure requirements are to be provided for fiscal years
ending after December 15, 2000. The revisions related to special purpose
entities are to be applied prospectively to transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001.
18
<PAGE> 23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO
The Company's investment operations are conducted in three primary areas:
private finance, commercial real estate finance, and small business finance.
PRIVATE FINANCE
At September 30, 2000 and December 31, 1999, the private finance portfolio
consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans and debt securities......... $833,286 $814,346 14.6% $578,570 $559,746 14.2%
Equity interests.................. 130,362 153,175 60,601 87,294
-------- -------- -------- --------
Total................... $963,648 $967,521 $639,171 $647,040
======== ======== ======== ========
</TABLE>
Private finance investments are generally structured as loans and debt
securities that carry a relatively high fixed rate of interest, which may be
combined with equity features, such as conversion privileges, or warrants or
options to purchase a portion of the portfolio company's equity at a nominal
price.
Debt securities 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 debt maturities and principal amortization
schedules vary.
Equity interests consist primarily of securities issued by privately owned
companies and may be subject to restrictions on their resale or otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.
At September 30, 2000 and December 31, 1999, approximately 98% of the
Company's private finance loan portfolio was composed of fixed interest rate
loans. At September 30, 2000 and December 31, 1999, loans and debt securities
with a value of $51,982,000 and $34,560,000, respectively, were not accruing
interest.
The geographic and industry compositions of the private finance portfolio
at September 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 27% 26%
Mid-Atlantic................................................ 25 23
West........................................................ 23 11
Southeast................................................... 16 27
Northeast................................................... 7 9
International............................................... 2 4
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
19
<PAGE> 24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INDUSTRY
Business Services........................................... 32% 32%
Consumer Products........................................... 25 19
Industrial Products......................................... 12 12
Telecommunications.......................................... 7 5
Retail...................................................... 7 8
Broadcasting/Cable.......................................... 6 11
Education................................................... 4 5
Other....................................................... 7 8
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
COMMERCIAL REAL ESTATE FINANCE
At September 30, 2000 and December 31, 1999, the commercial real estate
finance portfolio consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans..................... $102,058 $105,853 9.7% $153,767 $154,109 9.4%
CMBS...................... 488,929 489,172 13.9% 360,950 359,450 13.5%
REO....................... 6,371 5,005 7,305 6,470
-------- -------- -------- --------
Total.............. $597,358 $600,030 $522,022 $520,029
======== ======== ======== ========
</TABLE>
LOANS
The commercial mortgage loan portfolio contains loans that were originated
by the Company or were purchased from third-party sellers.
At September 30, 2000 and December 31, 1999, approximately 71% and 29% and
81% and 19%, of the Company's commercial mortgage loan portfolio was composed of
fixed and adjustable interest rate loans, respectively. As of September 30, 2000
and December 31, 1999, loans with a value of $11,472,000 and $8,334,000,
respectively, were not accruing interest.
The geographic composition and the property types securing the commercial
mortgage loan portfolio at September 30, 2000 and December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Southeast................................................... 36% 31%
Mid-Atlantic................................................ 23 32
West........................................................ 20 25
Midwest..................................................... 15 9
Northeast................................................... 6 3
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
20
<PAGE> 25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
PROPERTY TYPE
Hospitality................................................. 33% 42%
Office...................................................... 29 24
Retail...................................................... 18 11
Recreation.................................................. 9 8
Other....................................................... 11 15
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
CMBS
At September 30, 2000 and December 31,1999, the CMBS portfolio consisted of
the following:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
COST VALUE COST VALUE
(IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Purchased CMBS.......................... $407,511 $409,254 $277,694 $277,694
Residual CMBS........................... 77,205 77,205 76,374 76,374
Residual interest spread................ 4,213 2,713 6,882 5,382
-------- -------- -------- --------
Total......................... $488,929 $489,172 $360,950 $359,450
======== ======== ======== ========
</TABLE>
PURCHASED CMBS. The Company has Purchased CMBS bonds with a face amount of
$813,834,000 and a cost of $407,511,000, with the difference representing
original issue discount. As of September 30, 2000 and December 31, 1999, the
estimated yield to maturity on the Purchased CMBS was approximately 14.7% and
14.6%, respectively. The Company's yield on its Purchased CMBS is based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples include the timing and magnitude of
credit losses on the mortgage loans underlying the Purchased CMBS that are a
result of the general condition of the real estate market (including competition
for tenants and their related credit quality) and changes in market rental
rates. At September 30, 2000 and December 31, 1999, the yield on the Purchased
CMBS portfolio was computed assuming a 1% loss estimate for its entire
underlying collateral mortgage pool. As these uncertainties and contingencies
are difficult to predict and are subject to future events which may alter these
assumptions, no assurance can be given that the anticipated yields to maturity
will be achieved.
The non-investment grade and unrated tranches of the Purchased CMBS bonds
are junior in priority for payment of principal to the more senior tranches of
the related commercial securitization. Cash flow from the underlying mortgages
generally is allocated first to the senior tranches, with the most senior
tranches having a priority right to the cash flow. Then, any remaining cash flow
is allocated, generally, among the other tranches in order of their relative
seniority. To the extent there are defaults and unrecoverable losses on the
underlying mortgages resulting in reduced cash flows, the subordinate tranche
will bear this loss first.
21
<PAGE> 26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The underlying rating classes of the Purchased CMBS is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------------------- --------------------------------
PERCENTAGE PERCENTAGE
COST VALUE OF TOTAL COST VALUE OF TOTAL
(IN THOUSANDS) -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BB+................... $ 8,608 $ 8,968 2.2% $ -- $ -- -- %
BB.................... 66,850 68,233 16.7 41,091 41,091 14.8
BB-................... 66,594 66,594 16.3 46,692 46,692 16.8
B+.................... 59,396 59,396 14.5 41,765 41,765 15.0
B..................... 89,230 89,230 21.8 64,830 64,830 23.4
B-.................... 56,156 56,156 13.7 40,995 40,995 14.8
CCC................... 7,812 7,812 1.9 6,506 6,506 2.3
Unrated............... 52,865 52,865 12.9 35,815 35,815 12.9
-------- -------- ----- -------- -------- -----
Total....... $407,511 $409,254 100.0% $277,694 $277,694 100.0%
======== ======== ===== ======== ======== =====
</TABLE>
As of September 30, 2000, the BB+ and BB rated classes of the Purchased
CMBS were classified by the Company as held for sale, and therefore, have been
valued at the market price at which the Company would expect to sell these
securities. All other classes of Purchased CMBS were classified as held for
investment at September 30, 2000.
RESIDUAL CMBS AND RESIDUAL INTEREST SPREAD. The Residual CMBS primarily
consists of a retained interest from a post-Merger asset securitization whereby
bonds were sold in three classes rated "AAA," "AA" and "A."
The Company sold $295 million of loans, and received cash proceeds, net of
costs, of approximately $223 million. The Company retained a trust certificate
for its residual interest in the loan pool sold, and will receive interest
income from this Residual CMBS as well as the Residual Interest Spread from the
interest earned on the loans sold less the interest paid on the bonds over the
life of the bonds.
As of September 30, 2000 and December 31, 1999, the mortgage loan pool had
an approximate weighted average stated interest rate of 9.3%. The three bond
classes sold had an aggregate weighted average interest rate of 6.5% as of
September 30, 2000 and December 31, 1999. The value of the Residual CMBS was
determined using a discount rate equal to the average interest rate of the
underlying mortgage loans. The value of the residual interest spread was
determined based on a constant prepayment rate of 7% and a discount rate of 14%.
22
<PAGE> 27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS at September 30, 2000 and December 31,
1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
West........................................................ 31% 32%
Mid-Atlantic................................................ 23 23
Midwest..................................................... 22 21
Southeast................................................... 19 20
Northeast................................................... 5 4
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Retail...................................................... 32% 33%
Housing..................................................... 30 29
Office...................................................... 21 20
Hospitality................................................. 8 9
Other....................................................... 9 9
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
SMALL BUSINESS FINANCE
At September 30, 2000 and December 31, 1999, the small business finance
portfolio consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----------------- -----------------
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
7(a) loans.................................. $45,590 $44,689 $43,246 $43,000
Residual interest in loans sold............. 8,050 8,050 4,036 4,036
Residual interest spread.................... 16,729 16,729 14,046 14,046
REO......................................... 1,222 1,188 380 346
------- ------- ------- -------
Total............................. $71,591 $70,656 $61,708 $61,428
======= ======= ======= =======
</TABLE>
The Company, through its wholly owned subsidiary, Allied SBLC, participates
in the SBA's Section 7(a) Guaranteed Loan Program ("7(a) loans").
Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will
guarantee 80% of any qualified loan up to $100,000 regardless of maturity, and
75% 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 or no more than 500 employees.
The Company charges interest on the 7(a) loans at a variable rate,
typically 1.75% to 2.75% 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.
23
<PAGE> 28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
As permitted by SBA regulations, the Company sells to investors, without
recourse, 100% of the guaranteed portion of its 7(a) loans while retaining the
right to service 100% of such loans. Additionally, the Company sells up to a 90%
interest in the unguaranteed portion of its 7(a) loans through a structured
finance agreement with a commercial paper conduit.
In 1999, the Company sold $36,387,000 of the unguaranteed portion of 7(a)
loans into the facility. The Company received $35,500,000 in proceeds and
retained a subordinated interest valued at $4,036,000. The Company recognized a
premium from the loan sale of $4,106,000, which includes the value of the
retained residual interest spread.
As of September 30, 2000 and December 31, 1999, 7(a) loans with a value of
$6,556,000 and $5,562,000, respectively, were not accruing interest.
As of September 30, 2000 and December 31, 1999, 7(a) loans include a
balance of $9,327,000 and $7,667,000, respectively, that is guaranteed by the
SBA.
NOTE 4. DEBT
At September 30, 2000 and December 31, 1999, the Company had the following
debt:
<TABLE>
<CAPTION>
2000 1999
--------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable............ $ 419,000 $419,000 $419,000 $419,000
SBA debentures............................... 98,450 77,450 74,650 62,650
Auction rate reset note...................... 75,000 75,000 -- --
OPIC loan.................................... 5,700 5,700 5,700 5,700
---------- -------- -------- --------
Total notes payable and debentures... 598,150 577,150 499,350 487,350
---------- -------- -------- --------
Revolving credit facilities:
Revolving line of credit..................... 417,500 185,000 340,000 82,000
Master loan and security agreement........... 100,000 -- 100,000 23,500
---------- -------- -------- --------
Total revolving credit facilities.... 517,500 185,000 440,000 105,500
---------- -------- -------- --------
Total........................................ $1,115,650 $762,150 $939,350 $592,850
========== ======== ======== ========
</TABLE>
NOTES PAYABLE AND DEBENTURES
UNSECURED LONG-TERM NOTES PAYABLE. In June 1998, May 1999 and November
1999, the Company issued unsecured long-term notes to private institutional
investors. The notes require semi-annual interest payments until maturity and
have terms of five or seven years. The weighted average interest rate on the
notes was 7.6% at September 30, 2000 and December 31, 1999. The notes may be
prepaid in whole or in part together with an interest premium, as stipulated in
the note agreement.
SBA DEBENTURES. At September 30, 2000 and December 31, 1999, the Company
had debentures payable to the SBA with terms of ten years and at interest rates
ranging from 6.9% to 9.6%. 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.
24
<PAGE> 29
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
AUCTION RATE RESET NOTE. On August 31, 2000, the Company completed a
private placement of a $75 million Auction Rate Reset Senior Note Series A. The
note matures on December 2, 2002 and bears interest at the London Interbank
Offer Rate ("LIBOR") plus 175 basis points which adjusts quarterly. Interest is
due quarterly and the Company, at its option, may pay or defer such interest
payments.
As a means to repay the note, the Company has entered into an agreement to
issue $75 million of debt, equity or other securities in one or more public or
private transactions, or prepay the note, on or before August 31, 2002. If the
note is prepaid, the Company will pay a fee equal to 0.5% of the aggregate
amount of the note outstanding.
SCHEDULED MATURITIES. Scheduled future maturities of notes payable and
debentures at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 11,100
2001........................................................ 9,350
2002........................................................ 75,000
2003........................................................ 140,000
2004........................................................ 221,000
Thereafter.................................................. 120,700
--------
Total............................................. $577,150
========
</TABLE>
REVOLVING CREDIT FACILITIES
REVOLVING LINE OF CREDIT. The Company has an unsecured revolving line of
credit for $417,500,000. The facility may be expanded up to $500,000,000. The
facility bears interest at LIBOR plus 1.25% and adjusts at the beginning of each
new interest period, usually every thirty days. The interest rates were 7.9% and
7.7% at September 30, 2000 and December 31, 1999, respectively, and the facility
requires a commitment fee equal to 0.25% of the committed amount. The line
expires in May 2002. The line of credit requires monthly interest payments and
all principal is due upon its expiration.
MASTER LOAN AND SECURITY AGREEMENT. The Company had a facility to borrow
up to $100,000,000, using certain commercial mortgage loans as collateral. The
Company pledged commercial mortgage loans as collateral for the facility such
that the amount borrowed is approximately equal to 80% of the value of the
collateral pledged. The agreement generally required interest-only payments with
all principal due at maturity. The agreement charged interest at the one-month
LIBOR plus 1.0%, adjusted daily, or 7.6% and 6.8% at September 30, 2000 and
December 31, 1999, respectively. The agreement matured on October 27, 2000 and
was not renewed.
The average debt outstanding on the revolving credit facilities was
$179,312,000 and $123,860,000 for the nine months ended September 30, 2000 and
for the year ended December 31, 1999, respectively. The maximum amount borrowed
under these facilities and the weighted average interest rate for the nine
months ended September 30, 2000 and for the year ended December 31, 1999, were
$257,000,000 and $199,392,000, and 7.6% and 6.5%, respectively.
25
<PAGE> 30
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SHAREHOLDERS' EQUITY
Sale of common stock for the nine months ended September 30, 2000 and the
year ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Number of common shares..................................... 14,812 8,659
Gross proceeds.............................................. $263,460 $172,539
Less costs including underwriting fees...................... (12,549) (8,270)
-------- --------
Net proceeds.............................................. $250,911 $164,269
======== ========
</TABLE>
The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sale prices reported for the
Company's common stock for the five consecutive days immediately prior to the
dividend payment date.
Dividend reinvestment plan activity for the nine months ended September 30,
2000 and for the year ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------
<S> <C> <C>
Shares issued............................................... 199 233
Average price per share..................................... $18.18 $19.43
</TABLE>
NOTE 6. EARNINGS PER COMMON SHARE
Earnings per common share for the nine months ended September 30, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------
<S> <C> <C>
Net increase in net assets resulting from operations........ $100,820 $67,645
Less preferred stock dividends.............................. (165) (165)
-------- -------
Income available to common shareholders..................... $100,655 $67,480
======== =======
Weighted average basic shares outstanding................... 70,604 59,077
Options outstanding to officers............................. 173 162
-------- -------
Weighted average diluted shares outstanding................. 70,777 59,239
======== =======
BASIC EARNINGS PER COMMON SHARE............................. $ 1.43 $ 1.14
======== =======
DILUTED EARNINGS PER COMMON SHARE........................... $ 1.42 $ 1.14
======== =======
</TABLE>
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
26
<PAGE> 31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CUT-OFF AWARD AND FORMULA AWARD, CONTINUED
(the "Cut-off Award"). The Cut-off Award was computed for each unvested option
as of the Merger date. The Cut-off Award was equal to the difference between the
market price on August 14, 1997 (the Merger announcement date) of the shares of
stock underlying the option less the exercise price of the option. The Cut-off
Award was payable for each unvested option upon the future vesting date of that
option. The Cut-off Award was designed to cap the appreciated value in unvested
options at the Merger announcement date, in order to set the foundation to
balance option awards upon the Merger. The Cut-off Award approximated $2.9
million in the aggregate and has been expensed as the Cut-off Award vests. For
the nine months ended September 30, 2000 and the year ended December 31, 1999,
$535,000 and $532,000, respectively, of the Cut-off Award vested.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6%
of the difference between an amount equal to the combined aggregated market
capitalizations of the Predecessor Companies as of the close of the market on
the day before the Merger date (December 30, 1997), less an amount equal to the
combined aggregate market capitalizations of Allied Lending and the Predecessor
Companies as of the close of the market on the Merger announcement date.
Advisers' compensation committee allocated the Formula Award to individual
officers on December 30, 1997. The amount of the Formula Award as computed at
December 30, 1997 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust under the deferred compensation plan and was used to
purchase shares of the Company's stock (included in common stock held in
deferred compensation trust). The Formula Award vests 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 has been expensed in each year in which it vests. For the nine
months ended September 30, 2000 and for the year ended December 31, 1999,
$4,262,000 and $6,221,000, respectively, was expensed as a result of the Formula
Award. For the nine months ended September 30, 2000 and for the year ended
December 31, 1999, the liability related to the Formula Award was $4,854,000 and
$6,221,000, respectively, and has been included in common stock held in deferred
compensation trust. Vested Formula Awards are distributable to recipients at the
Company's discretion, however, sale of the Company's stock by the recipients is
restricted. Unvested Formula Awards are forfeited upon a recipient's separation
from service and the related Company stock is retired. For the nine months ended
September 30, 2000 and for the year ended December 31, 1999, $563,000 and
$61,000, respectively, of the Formula Award was forfeited.
On January 3, 2000 and January 4, 1999, the Company distributed shares of
the Company's common stock with a value of $4,274,000 and $4,062,000,
respectively, representing the portion of the Formula Award that vested during
the respective previous year.
NOTE 8. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $1.36 per
common share dividend or $98,617,000 for the nine months ended September 30,
2000.
NOTE 9. SUBSEQUENT EVENTS
On October 24, 2000, the Company closed on $125 million of five-year
unsecured long-term debt, financed primarily by insurance companies. The
five-year notes were priced at 8.54% and have
27
<PAGE> 32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. SUBSEQUENT EVENTS, CONTINUED
substantially the same terms as the Company's existing long-term debt. The
proceeds from this debt were used to repay borrowings from the revolving line of
credit.
On October 31, 2000, the Company entered into a definitive merger agreement
in order to acquire BLC Financial Services Inc. ("BLC") in a stock for stock
exchange. The transaction will create an independently managed, private
portfolio company. The Company also plans to merge its small business finance
portfolio and Allied Capital Express operations into the new portfolio company.
To effect the transaction, the Company will issue approximately 4.2 million
shares of common stock, and BLC shareholders will receive a fixed exchange ratio
of 0.180 shares of Company common stock for each share of BLC stock in a
tax-free exchange. In addition, in a separate transaction, the Company intends
to acquire a corporate shareholder of BLC for approximately $9.1 million in
cash. The Company filed a registration statement on Form N-14 with the SEC on
November 6, 2000 to register the shares to be issued in this transaction.
The Company will own approximately 95% of the portfolio company upon
completion of the transaction. Certain officers, directors and existing
shareholders of BLC will retain approximately 5% ownership. The Company's
investment is structured to provide a current return through interest, dividends
and fee income, and the investment will include debt, preferred stock and common
stock. In addition, the Company believes there is opportunity to add value to
the new portfolio company and to position its investment for future capital
gain. Necessary approvals to complete the transaction include an affirmative
vote of BLC shareholders, as well as regulatory approval by the SBA. The
transaction is expected to close by December 31, 2000.
28
<PAGE> 33
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included herein and in the Company's
annual report on Form 10-K. This Management's Discussion and Analysis contains
certain forward-looking statements. These statements include the plans and
objectives of management for future operations and financial objectives, loan
portfolio growth and availability of funds. These forward-looking statements are
subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are
set forth below in the Investment Considerations section. Other factors that
could cause actual results to differ materially include the uncertainties of
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements included herein are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate. Therefore, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
OVERVIEW
The Company provides private investment capital to private and undervalued
public companies in a variety of different industries and in diverse geographic
locations. Our lending and investment activity is focused in three areas:
- Private finance
- Commercial real estate finance, and
- Small business loans originated for sale under our Allied Capital Express
brand name.
The Company's portfolio composition at September 30, 2000 and December 31,
1999 was as follows:
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Private Finance............................................. 59% 53%
Commercial Real Estate Finance.............................. 37% 42%
Small Business Finance...................................... 4% 5%
</TABLE>
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gains earned on the
Company's investment portfolio after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
earned on a loan and the amortization of loan origination points and discounts.
The level of interest income is directly related to the balance of the
investment portfolio multiplied by the weighted average yield on the portfolio.
The Company's ability to generate interest income is dependent on economic,
regulatory and competitive factors that influence interest rates and loan
originations, and the Company's ability to secure financing for its investment
activities.
29
<PAGE> 34
PORTFOLIO AND INVESTMENT ACTIVITY
Total portfolio investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $1,638.2 $1,228.5
Yield................................................ 13.9% 13.0%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, FOR THE YEAR
--------------- --------------- ENDED DECEMBER 31,
2000 1999 2000 1999 1999
------ ------ ------ ------ ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments................. $237.8 $191.5 $640.2 $534.0 $751.9
Repayments...................... $ 59.1 $ 48.7 $117.9 $120.6 $145.7
Sales........................... $ 34.7 $ 52.9 $151.8 $120.9 $198.4
</TABLE>
PRIVATE FINANCE
Private finance investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $967.5 $647.0
Yield................................................ 14.6% 14.2%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, FOR THE YEAR
--------------- --------------- ENDED DECEMBER 31,
2000 1999 2000 1999 1999
------ ------ ------ ------ ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments................. $148.5 $110.4 $387.6 $237.6 $346.7
Repayments...................... $ 49.6 $ 38.3 $ 88.8 $ 86.5 $ 87.5
</TABLE>
The private finance portfolio increased 50% from December 31, 1999 to
September 30, 2000 and 67% during the year ended December 31, 1999. The
Company's increasing capital base has enabled it to make larger private finance
investments, supporting the increase in originations for 2000 and 1999. During
the three months ended September 30, 2000, the Company originated 10 investments
with an average investment size of $14.0 million and a weighted average current
yield on loans and debt securities of 15.7%. Investments during the third
quarter of 2000 included an investment in Wilmar Industries, Inc. for $33.7
million. As a part of this transaction, Wilmar repaid in full the $30 million
investment that the Company provided in May 2000. During the nine months ended
September 30, 2000, the Company originated 26 investments with an average
investment size of $14.0 million and a weighted average current yield on loans
and debt securities of 15.3%. During 1999, the Company originated 27 investments
with an average investment size of $12.4 million and a weighted average current
yield on loans and debt securities of 13.6%. The current yield on the private
finance portfolio will fluctuate over time depending on the equity "kicker" or
warrants received with each financing. Private finance investments are generally
structured such that equity kickers may provide an additional investment return
of up to 10%.
During the second quarter of 2000, the Company began an initiative to
invest in and strategically partner with select private equity funds focused on
investments in technology and the new economy. The strategy for these fund
investments is to provide solid investment returns and build strategic
30
<PAGE> 35
relationships with the fund managers and their portfolio companies. The Company
believes that it will have opportunities to co-invest with the funds as well as
finance their portfolio companies as they mature.
The Company believes that the fund investment strategy is an excellent
means of participating in technology investing through a diverse pooled
investment portfolio. The fund concept allows the Company to participate in a
pooled investment return without exposure to the risk of any single technology
investment. During 2000, the Company committed a total of $41.2 million to seven
private equity funds. The committed amount is expected to be invested over the
next three years. The Company has funded $4.4 million of this commitment during
the nine months ended September 30, 2000.
COMMERCIAL REAL ESTATE FINANCE
Commercial real estate finance investment activity and yields were as
follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $600.0 $520.0
Yield................................................ 13.2% 12.3%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31,
------------- --------------- ------------------
2000 1999 2000 1999 1999
----- ----- ------ ------ ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments................... $52.6 $46.4 $143.7 $216.2 $288.7
Repayments........................ $ 6.5 $ 9.2 $ 20.8 $ 20.0 $ 51.5
Sales............................. $ 1.6 $27.7 $ 53.1 $ 60.6 $ 86.1
</TABLE>
The commercial real estate finance portfolio increased 15% from December
31, 1999 to September 30, 2000 and increased 46.5% for the year ended December
31, 1999. During 1999, the Company began to migrate its portfolio from
investments in lower yielding commercial mortgage loans to higher yielding real
estate investments.
During 1998, the Company reduced its commercial mortgage loan origination
activity for its own portfolio due to declining interest rates and began to sell
its loans to other lenders. Then, beginning in the fourth quarter of 1998, the
Company began to take advantage of a unique market opportunity to acquire
non-investment grade commercial mortgage-backed securities ("CMBS") at
significant discounts from the face amount of the bonds. Turmoil in the CMBS
market created a lack of liquidity for the traditional buyers of non-investment
grade bonds. As a result, yields on these collateralized bonds increased, thus
providing an attractive investment opportunity. The Company believes that CMBS
is an attractive asset class because of the yields that can be earned on a
security that is fully secured by commercial mortgage loans. The Company
opportunistically purchased CMBS throughout 1999, and has continued to do so
during 2000. However, the Company has begun to curtail its CMBS investment
activity to maintain a balanced portfolio and does not currently expect to
purchase additional CMBS during the fourth quarter of 2000. In addition, during
the third quarter of 2000, the Company decided to begin to liquidate its
portfolio of BB+ and BB rated bonds.
31
<PAGE> 36
The underlying pool of approximately 2,600 loans that are collateral for
our CMBS had underwritten loan to value ("LTV") and debt service coverage ratios
("DSCR") as follows.
<TABLE>
<CAPTION>
LOAN TO VALUE RANGES $ %
-------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
Less than 60%............................................... $ 1,544.5 12%
60 - 65%.................................................... 961.9 8%
65 - 70%.................................................... 2,051.8 16%
70 - 75%.................................................... 4,247.2 33%
75 - 80%.................................................... 3,727.8 29%
Greater than 80%............................................ 214.2 2%
--------- ---
$12,747.4 100%
========= ===
Weighted average LTV........................................ 70.1%
</TABLE>
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
1.00 - 1.25................................................. $ 3,178.3 25%
1.26 - 1.50................................................. 7,174.7 56%
1.51 - 1.75................................................. 1,487.9 12%
1.76 - 2.00................................................. 440.6 3%
Greater than 2.00........................................... 465.9 4%
--------- ---
$12,747.4 100%
========= ===
Weighted average DSCR....................................... 1.40
</TABLE>
The increase in the commercial real estate portfolio during 2000 and 1999
was primarily due to the purchase of CMBS. The Company purchases CMBS at
significant discounts from the face amount of the bonds. During the third
quarter of 2000, the Company purchased $48.8 million in CMBS with a face value
of $101.3 million and a weighted average yield to maturity of 15.0% after
assuming a 1% loss rate on the underlying collateral mortgage pool. During the
nine months ended September 30, 2000 the Company purchased $124.3 million in
CMBS with a face value of $244.6 million and a weighted average yield to
maturity of 14.7% after assuming a 1% loss rate on the underlying collateral
mortgage pool. In 1999, the Company purchased $245.9 million in CMBS with a face
value of $507.9 million and a weighted average yield to maturity of 14.6% after
assuming a 1% loss rate on the underlying collateral mortgage pool. At September
30, 2000, the face value of the entire purchased CMBS portfolio was $813.8
million, our cost of acquiring the securities was $405.4 million and our
unamortized discount was $406.3 million. The yield on the purchased CMBS
portfolio was 14.7% as of September 30, 2000.
The Company has been liquidating much of its whole commercial mortgage loan
portfolio so that it can redeploy the proceeds into higher yielding assets and
for the three months ended September 30, 2000, the Company sold $1.6 million of
commercial mortgage loans. For the nine months ended September 30, 2000, the
Company sold $53.1 million of commercial mortgage loans. At September 30, 2000,
the Company's whole commercial loan portfolio had been reduced to $105.9 million
from $154.1 million at December 31, 1999. During 1999, the Company sold $86.1
million of commercial mortgage loans.
SMALL BUSINESS FINANCE
During the second quarter of 1999, the Company combined its whole
commercial real estate loan origination activity with its SBA 7(a) lending
activity in order to increase its loans originated for sale
32
<PAGE> 37
business under the Allied Capital Express brand name. Through Allied Capital
Express, the Company provides small business and commercial real estate loans up
to $3 million. The majority of the loans originated in this area are originated
for sale, generally at premiums of up to 10% of the loan amount.
Allied Capital Express loan activity and yields were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
2000 1999
---------------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $70.7 $61.4
Yield................................................ 12.3% 11.5%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- -------------- ------------------
2000 1999 2000 1999 1999
----- ----- ------ ----- ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments..................... $36.7 $34.7 $109.0 $80.2 $116.5
Repayments.......................... $ 3.0 $ 1.2 $ 8.3 $ 9.9 $ 6.7
Sales............................... $33.1 $25.2 $ 98.8 $60.3 $112.3
</TABLE>
Allied Capital Express loan origination activity for 2000 and 1999
increased due to the opening of new regional office locations and from
opportunities created by our Internet site launched in the fall of 1999. Loans
in the Allied Capital Express program are originated for sale; therefore, the
increase in loan sales is the result of the increase in originations. In
addition, beginning in 1999, the Company began to sell 90% of the unguaranteed
portion of SBA 7(a) loans through a structured finance agreement with a
commercial paper conduit. Allied Capital Express targets small commercial real
estate loans that are, in many cases, originated in conjunction with SBA 7(a)
loans. SBA 7(a) loans are originated with variable interest rates priced at
spreads ranging from 1.75% to 2.75% over the prime lending rate.
On October 31, 2000, the Company entered into a definitive merger agreement
in order to acquire BLC Financial Services Inc. ("BLC") in a stock for stock
exchange. The transaction will create an independently managed, private
portfolio company. The Company also plans to merge its small business finance
portfolio and Allied Capital Express operations into the new portfolio company.
To effect the transaction, the Company will issue approximately 4.2 million
shares of common stock, and BLC shareholders will receive a fixed exchange ratio
of 0.18 shares of Company common stock for each share of BLC stock in a tax-free
exchange. In addition, in a separate transaction, the Company intends to acquire
a corporate shareholder of BLC for approximately $9.1 million in cash. The
Company filed a registration statement on Form N-14 with the SEC on November 6,
2000 to register the shares to be issued in this transaction.
The Company will own approximately 95% of the portfolio company upon
completion of the transaction. Management will retain approximately 5%
ownership. The Company's investment is structured to provide a current return
through interest, dividends and fee income, and the investment will include
debt, preferred stock and common stock. In addition, the Company believes there
is opportunity to add value to the new portfolio company and to position its
investment for future capital gain. Necessary approvals to complete the
transaction include an affirmative vote of BLC shareholders, as well as
regulatory approval by the SBA. The transaction is expected to close by December
31, 2000.
33
<PAGE> 38
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The following table summarizes Allied Capital's operating results for the
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest............................................... $129,768 $84,419 $45,349 54%
Premiums from loan dispositions........................ 10,752 9,032 1,720 19%
Investment advisory fees and other income.............. 9,334 5,411 3,923 73%
-------- ------- ------- -----
Total interest and related portfolio income.... 149,854 98,862 50,992 52%
-------- ------- ------- -----
EXPENSES
Interest............................................... 41,645 24,173 17,472 72%
Employee............................................... 14,709 11,303 3,406 30%
Administrative......................................... 10,711 8,476 2,235 26%
-------- ------- ------- -----
Total operating expenses....................... 67,065 43,952 23,113 53%
-------- ------- ------- -----
Formula and cut-off awards............................. 4,797 5,188 (391) (8%)
-------- ------- ------- -----
Portfolio income before net realized and
unrealized gains............................ 77,992 49,722 28,270 57%
-------- ------- ------- -----
NET REALIZED AND UNREALIZED GAINS
Net realized gains..................................... 23,095 16,448 6,647 40%
Net unrealized gains (losses).......................... (267) 1,475 (1,742) (118%)
-------- ------- ------- -----
Total net realized and unrealized gains........ 22,828 17,923 4,905 27%
-------- ------- ------- -----
Net increase in net assets resulting from operations..... $100,820 $67,645 $33,175 49%
======== ======= ======= =====
Diluted earnings per share............................... $ 1.42 $ 1.14 $ 0.28 25%
======== ======= ======= =====
Weighted average shares outstanding - diluted............ 70,777 59,239 11,538 19%
</TABLE>
Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses.
Total interest and related portfolio income increased for the nine months
ended September 30, 2000 by 52% as compared to the nine months ended September
30, 1999. Total interest and related portfolio income is primarily a function of
the level of interest income earned and the balance of portfolio assets. In
addition, total interest and related portfolio income includes premiums from
loan dispositions, prepayment premiums, and investment advisory fees and other
income.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income................. $149.9 $98.9
Per share................................................... $ 2.11 $1.67
</TABLE>
34
<PAGE> 39
The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 44% to $1,485.0 million at September 30, 2000 from $1,033.6 million
at September 30, 1999. The weighted average yield on the interest bearing
investments in the portfolio at September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
AT
SEPTEMBER 30,
--------------
2000 1999
----- -----
<S> <C> <C>
Private Finance............................................. 14.6% 14.0%
Commercial Real Estate Finance.............................. 13.2% 11.8%
Small Business Finance...................................... 12.3% 10.9%
Total Portfolio............................................. 13.9% 12.6%
</TABLE>
Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $8.7 million and $5.2 million for the nine months ended September 30,
2000 and 1999, respectively. This premium income results primarily from the
premium paid by purchasers of loans originated through Allied Capital Express,
less the origination commissions associated with the loans sold. The Company
sold $98.8 million and $60.3 million of loans originated through Allied Capital
Express during the nine months ended September 30, 2000 and 1999, respectively.
The Company also sold commercial mortgage loans totaling $53.1 million and $60.6
million for the nine months ended September 30, 2000 and 1999, respectively.
Prepayment premiums were $2.1 million, and $3.8 million for the nine months
ended September 30, 2000 and 1999, respectively. While the scheduled maturities
of private finance and commercial real estate loans range from five to ten
years, it is not unusual for the Company's borrowers to refinance or pay off
their debts to the Company ahead of schedule. Because the Company seeks to
finance primarily seasoned, performing companies, such companies at times can
secure lower cost financing as their balance sheets strengthen, or as more
favorable interest rates become available. Therefore, the Company generally
structures its loans to require a prepayment premium for the first three to five
years of the loan.
Our operating expenses include interest, employee and administrative
expenses. The Company's largest expense is interest on indebtedness. The
fluctuations in interest expense during the nine months ended September 30, 2000
and 1999 are attributable to changes in the level of borrowings by the Company
and its subsidiaries under various notes payable and debentures and revolving
credit facilities. The Company's borrowing activity and weighted average
interest cost, including fees and closing costs, were as follows:
<TABLE>
<CAPTION>
AT AND FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt...................................... $762.2 $537.9
Average Outstanding Debt.................................... $684.3 $414.1
Weighted Average Cost....................................... 8.1% 7.4%
BDC Asset Coverage*......................................... 236% 223%
</TABLE>
-------------------------
* As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.
35
<PAGE> 40
Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects the increase
in total employees, combined with wage increases and the experience level of
employees hired. Total employees were 136 and 124 at September 30, 2000 and
1999, respectively. The Company has been an active recruiter for experienced
investment and operational personnel, and the Company will continue to actively
recruit and hire new professionals throughout 2000 to support anticipated
portfolio growth.
Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses for the nine months ended September 30, 2000 as compared to the nine
months ended September 30, 1999 was primarily the result of increases in costs
associated with the growth of the Company and new regional offices.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance and
commercial mortgage loans, offset by losses on investments.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains.............................................. $24.7 $21.6
Realized Losses............................................. (1.6) (5.2)
----- -----
Net Realized Gains.......................................... $23.1 $16.4
===== =====
Net Unrealized Gains (Losses)............................... $(0.3) $ 1.5
===== =====
</TABLE>
Realized gains of $24.7 million for the nine months ended September 30,
2000, resulted primarily from transactions involving seven portfolio companies,
Southwest PCS, L.P. ($11.5 million), Grant Television, Inc. ($5.4 million),
Julius Koch USA, Inc. ($1.7 million), Wilmar Industries, Inc. ($1.2 million),
Hotelevision ($1.0 million), FTI Consulting, Inc. ($0.7 million) and Panera
Bread Co. ($0.7 million). During the second quarter of 2000, the Company had the
opportunity to sell its equity interest in Southwest PCS, L.P. ("SWPCS") to
SWPCS's parent company. The Company sold its equity interest in exchange for two
notes totaling $12.5 million. The first note was a short-term full recourse note
for $5.0 million, bearing interest at a rate of 15% per annum. This first note
was repaid on September 30, 2000. The second note was a two-year full recourse
note for $7.5 million, bearing interest at 15% per annum. The second note is
secured by the equity interest sold by the Company. The Company reversed
previously recorded unrealized appreciation of $6.2 million when these gains
were realized. Realized gains for the nine months ended September 30, 1999 of
$21.6 million resulted primarily from transactions involving three portfolio
companies. The Company reversed previously recorded unrealized appreciation of
$8.3 million when these 1999 gains were realized.
Realized losses of $1.6 million and $5.2 million for the nine months ended
September 30, 2000 and 1999, respectively, resulted from the liquidation of
certain portfolio investments. Losses realized for the nine months ended
September 30, 2000 and 1999 had been recognized in NIA over time as unrealized
depreciation when the Company determined that the respective portfolio
security's value had become impaired. Thus, the Company reversed previously
recorded unrealized depreciation totaling $1.3 million and $4.7 million when the
related losses were realized for the nine months ended September 30, 2000 and
1999, respectively.
36
<PAGE> 41
Net unrealized losses of $0.3 million and net unrealized gains of $1.5
million for the nine months ended September 30, 2000 and 1999, respectively,
consisted of valuation changes resulting from the Board of Directors' valuation
of the Company's assets and the effect of reversals of unrealized appreciation
or depreciation resulting from realized gains or losses. During the third
quarter of 2000, a portfolio company, NETtel Communications, Inc. ("NETtel")
filed for bankruptcy protection. The Company has a $22 million senior debt and
preferred stock investment in NETtel. Due to the portfolio company's current
situation, in the third quarter the Company decreased the value of its principal
investment in NETtel by recording unrealized depreciation of $8.5 million,
reversed previously recorded unrealized appreciation of $1.4 million and placed
the senior debt on non-accrual status. At September 30, 2000, net unrealized
appreciation in the portfolio totaled $4.3 million and was composed of
unrealized appreciation of $44.0 million, resulting primarily from appreciated
equity interests in portfolio companies, and unrealized depreciation of $39.7
million, resulting primarily from underperforming loan and equity interests in
the portfolio. At September 30, 1999, net unrealized appreciation in the
portfolio totaled $3.9 million and was composed of unrealized appreciation of
$31.8 million and unrealized depreciation of $27.9 million.
Net realized and unrealized gains can vary substantially on a quarterly
basis. Therefore, quarterly net realized and unrealized gains should not be
annualized to predict expected annual results.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value.
At September 30, 2000, the Company's portfolio was graded as follows:
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1...................................................... $ 156.0 9.5%
2...................................................... 1,362.6 83.2%
3...................................................... 40.0 2.4%
4...................................................... 54.2 3.3%
5...................................................... 25.4 1.6%
-------- ------
$1,638.2 100.0%
======== ======
</TABLE>
Included in the Grade 5 portfolio at September 30, 2000 are private finance
investments totaling $18.1 million at value, or 1.1% of the Company's total
portfolio based on the valuation of the Board of Directors. The value of these
Grade 5 private finance investments has been reduced from an aggregate cost of
$48.0 million in order to reflect the Company's estimate of the net realizable
value of these investments upon disposition. This reduction in value has been
recorded as unrealized depreciation over several years in the Company's
earnings. The Company continues to follow its historical practices of working
with a troubled portfolio company in order to recover the maximum amount of the
Company's investment, but records unrealized depreciation for the expected full
amount of the potential loss when such exposure is identified. Grade 5 private
finance investments at December 31, 1999, 1998 and 1997 totaled $12.6 million,
$6.4 million and $12.9 million at value, or 1.0%, 0.8% and 1.8% of the Company's
total portfolio, respectively.
37
<PAGE> 42
At September 30, 2000, the credit quality of the Company's CMBS portfolio
remained strong, with less than 0.2% in delinquencies. The yield used to accrue
interest on this portfolio assumes a 1% loss rate on the entire underlying
collateral mortgage pool.
For the total investment portfolio, loans greater than 120 days delinquent
were $51.7 million at value at September 30, 2000, or 3.2% of the total
portfolio. Included in this category are loans valued at $13.5 million that are
fully secured by real estate. Loans greater than 120 days delinquent generally
do not accrue interest. Loans greater than 120 days delinquent at December 31,
1999 were $18.6 million at value, or 1.5% of the total portfolio, which included
$11.7 million that were fully secured by real estate. Because we are a provider
of long-term privately negotiated investment capital, it is not atypical for us
to defer payment of principal or interest from time to time. As a result, the
amount of our portfolio that is greater than 120 days delinquent may vary from
quarter to quarter. The terms of our private finance agreements frequently
provide an opportunity for our portfolio companies to restructure their debt and
equity capital. During such restructuring, we may not receive or accrue interest
or dividend payments. We price our investment portfolio to provide adequate
current returns for our shareholders assuming that a portion of the portfolio at
any time may not be accruing interest currently. We also price our investments
for a total return including current interest or dividends plus capital gains
from the sale of equity securities. Therefore, the amount of loans greater than
120 days delinquent is not necessarily an indication of future principal loss or
loss of anticipated investment return. The Company's portfolio grading system is
used as a means to assess loss of investment return (Grade 4 assets) or loss of
investment principal (Grade 5 assets).
The Company has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). As long as the Company qualifies as a RIC, the Company is not taxed on
its investment company taxable income or realized capital gains, to the extent
that such income or gains are distributed, or deemed to be distributed, to
shareholders on a timely basis. Annual tax distributions may differ from NIA for
the fiscal year due to timing differences in the recognition of income and
expenses, returns of capital and net unrealized appreciation or depreciation,
which are not included in taxable income.
In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest, gains from the
sale of securities and other specified types of income; (2) meet investment
diversification requirements as defined in the Code; and (3) distribute annually
to shareholders at least 90% of its investment company taxable ordinary income.
The Company intends to take all steps necessary to continue to meet the RIC
qualifications. However, there can be no assurance that the Company will
continue to elect or qualify for such treatment in future years.
The weighted average common shares outstanding used to compute basic
earnings per share were 70.6 million and 59.1 million for the nine months ended
September 30, 2000 and 1999, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 70.8 million and 59.2 million for the nine months ended
September 30, 2000 and 1999, respectively.
38
<PAGE> 43
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The following table summarizes Allied Capital's operating results for the
three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest............................................... $ 48,054 $31,577 $16,477 52%
Premiums from loan dispositions........................ 2,909 4,700 (1,791) (38%)
Investment advisory fees and other income.............. 5,029 1,721 3,308 192%
-------- ------- ------- -----
Total interest and related portfolio income.... 55,992 37,998 17,994 47%
-------- ------- ------- -----
EXPENSES
Interest............................................... 15,054 9,766 5,288 54%
Employee............................................... 4,949 4,192 757 18%
Administrative......................................... 3,876 3,200 676 21%
-------- ------- ------- -----
Total operating expenses....................... 23,879 17,158 6,721 39%
-------- ------- ------- -----
Formula and cut-off awards............................. 1,394 1,567 (173) (11%)
-------- ------- ------- -----
Portfolio income before net realized and
unrealized gains............................ 30,719 19,273 11,446 59%
-------- ------- ------- -----
NET REALIZED AND UNREALIZED GAINS
Net realized gains..................................... 8,054 4,886 3,168 65%
Net unrealized gains (losses).......................... (2,324) 2,785 (5,109) (183%)
-------- ------- ------- -----
Total net realized and unrealized gains........ 5,730 7,671 (1,941) (25%)
-------- ------- ------- -----
Net increase in net assets resulting from operations..... $ 36,449 $26,944 $ 9,505 35%
======== ======= ======= =====
Diluted earnings per share............................... $ 0.48 $ 0.44 $ 0.04 9%
======== ======= ======= =====
Weighted average shares outstanding - diluted............ 76,133 61,458 14,675 24%
</TABLE>
Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses. In addition to the discussion of the comparison of the three months
ended September 30, 2000 to the three months ended September 30, 1999 that
follows, refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Comparison of Nine Months Ended September 30, 2000
and 1999" above for additional discussion regarding the nature of and reasons
for fluctuation in income and expense items in the Company's operating results.
Total interest and related portfolio income increased for the three months
ended September 30, 2000 by 47% as compared to the three months ended September
30, 1999. Total interest and related portfolio income is primarily a function of
the level of interest income earned and the balance of
39
<PAGE> 44
portfolio assets. In addition, total interest and related portfolio income
includes premiums from loan dispositions, prepayment premiums, and investment
advisory fees and other income.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income................. $56.0 $38.0
Per share................................................... $0.73 $0.62
</TABLE>
The increase in interest income earned results primarily from continued
growth of the Company's investment portfolio and the Company's focus on
increasing its overall portfolio yield. The Company's investment portfolio,
excluding non-interest bearing equity interests in portfolio companies,
increased by 44% to $1,485.0 million at September 30, 2000 from $1,033.6 million
at September 30, 1999.
Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $2.9 million and $1.5 million for the three months ended September
30, 2000 and 1999, respectively. This premium income results primarily from the
premium paid by purchasers of loans originated through Allied Capital Express,
less the origination commissions associated with the loans sold. The Company
sold $33.1 million and $25.2 million of loans originated through Allied Capital
Express during the three months ended September 30, 2000 and 1999, respectively.
The Company also sold commercial mortgage loans totaling $1.6 million and $27.7
million for the three months ended September 30, 2000 and 1999, respectively.
There were no prepayment premiums for the three months ended September 30, 2000
and $3.2 million for the three months ended September 30, 1999.
Our operating expenses include interest, employee and administrative
expenses. The Company's largest expense is interest on indebtedness. The
fluctuations in interest expense during the three months ended September 30,
2000 and 1999 are attributable to changes in the level of borrowings by the
Company and its subsidiaries under various notes payable and debentures and
revolving credit facilities. The Company's borrowing activity and weighted
average interest cost, including fees and closing costs, were as follows:
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS
ENDED
SEPTEMBER 30,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt...................................... $762.2 $537.9
Average Outstanding Debt.................................... $734.3 $517.0
Weighted Average Cost....................................... 8.1% 7.4%
BDC Asset Coverage*......................................... 236% 223%
</TABLE>
-------------------------
* As a BDC, the Company is generally required to maintain a ratio of 200% of
total assets to total borrowings.
Employee expenses include salaries and employee benefits. The increase in
salaries and employee benefits for the periods presented reflects the increase
in total employees, combined with wage increases and the experience level of
employees hired. Total employees were 136 and 124 at September 30, 2000 and
1999, respectively. The Company has been an active recruiter for experienced
investment and operational personnel, and the Company will continue to actively
recruit and hire new professionals throughout 2000 to support anticipated
portfolio growth.
40
<PAGE> 45
Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses for the three months ended September 30, 2000 as compared to the three
months ended September 30, 1999 was primarily the result of increases in costs
associated with the growth of the Company and new regional offices.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance and
commercial mortgage loans, offset by losses on investments. For further
discussion of net realized and unrealized gains and losses, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Comparison of Nine Months Ended September 30, 2000 and 1999"
above.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains.............................................. $ 8.7 $ 6.7
Realized Losses............................................. $(0.7) $(1.8)
----- -----
Net Realized Gains.......................................... $ 8.0 $ 4.9
===== =====
Net Unrealized Gains (Losses)............................... $(2.3) $ 2.8
===== =====
</TABLE>
The weighted average common shares outstanding used to compute basic
earnings per share were 75.5 million and 61.0 million for the three months ended
September 30, 2000 and 1999, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 76.1 million and 61.5 million for the three months ended
September 30, 2000 and 1999, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At September 30, 2000, the Company had $26.2 million in cash and cash
equivalents. The Company invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short-term repurchase
agreements fully collateralized by such securities. The Company's objective is
to manage to a low cash balance and fund new originations with its credit
facilities.
41
<PAGE> 46
'DEBT
The Company had outstanding debt at September 30, 2000 as follows:
<TABLE>
<CAPTION>
ANNUAL
AMOUNT INTEREST
OUTSTANDING COST(1)
------------- --------
(IN MILLIONS)
<S> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable......................... $419.0 7.7%
SBA debentures............................................ 77.5 8.5%
Auction rate reset note................................... 75.0 8.6%
OPIC loan................................................. 5.7 6.6%
------ ----
Total notes payable and debentures................ $577.2 7.9%
------ ----
Revolving credit facilities:
Revolving line of credit.................................. $185.0 8.7%
------ ----
Total debt........................................ $762.2 8.1%
====== ====
</TABLE>
-------------------------
(1) The annual interest cost includes the cost of commitment fees and other
facility fees.
UNSECURED LONG-TERM NOTES PAYABLE. The Company has issued long-term debt
to institutional lenders, primarily insurance companies. The notes have five- or
seven-year maturities. The notes require payment of interest only semi-annually,
and all principal is due upon maturity.
On October 24, 2000, the Company closed on $125 million of five-year
unsecured long-term debt, financed primarily by insurance companies. The
five-year notes were priced at 8.54% and have substantially the same terms as
the Company's existing long-term debt. The proceeds from this debt were used to
repay borrowings from the revolving line of credit.
SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
payable to the SBA with terms of ten years. The notes require payment of
interest only semi-annually, and all principal is due upon maturity. The Company
may borrow up to $105 million from the SBA under the SBIC program. At September
30, 2000, the Company has a commitment to borrow up to an additional $21 million
from the SBA. The commitment expires on September 30, 2004.
AUCTION RATE RESET NOTE. On August 31, 2000, the Company completed a
private placement of a $75 million Auction Rate Reset Senior Note Series A. The
note matures on December 2, 2002 and bears interest at the London Inter-Bank
Offer Rate ("LIBOR") plus 175 basis points which adjusts quarterly. Interest is
due quarterly and the Company, at its option, may pay or defer such interest
payments.
REVOLVING LINE OF CREDIT. The Company has a two-year, $417.5 million
unsecured revolving line of credit that expires in May 2002. This facility may
be expanded up to $500 million. At the Company's option, the credit facility
bears interest at a rate equal to (i) the one-month LIBOR plus 1.25% or (ii) the
higher of (a) the Bank of America, N.A. prime rate or (b) the Federal Funds rate
plus 0.50%. The credit facility requires monthly payments of interest, and all
principal is due upon maturity.
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<PAGE> 47
EQUITY CAPITAL AND DIVIDENDS
The Company raises debt and equity capital for continued investment in
growing businesses. Because the Company is a RIC, it distributes its income and
requires external capital for growth. Because the Company is a BDC, it is
limited in the amount of debt capital it may use to fund its growth, since it is
generally required to maintain a ratio of 200% of total assets to total
borrowings, or approximately 1 to 1 debt to equity capital ratio.
To support its growth during the nine months ended September 30, 2000, the
Company raised $250.9 million in new equity capital, of which $108.9 million was
raised during the three months ended September 30, 2000, primarily through the
sale of shares from its shelf registration statement. At September 30, 2000,
total shareholders' equity had increased to $933.3 million. The Company issues
equity from time to time using a shelf registration statement. The Company
issues new equity when it has a clear use of proceeds for attractive investment
opportunities. Historically, this process has enabled the Company to raise
equity on an accretive basis for existing shareholders.
The Company's Board has established a dividend policy for 2000 to review
the dividend rate quarterly, and to adjust the quarterly dividend rate
throughout the year as the Company's earnings momentum builds. In 1999, the
Board had established a dividend policy of level quarterly dividends of $0.40
per common share, for an annual total distribution of $1.60 per common share to
approximate annual taxable income. The Board changed its dividend policy for
2000 because of the Company's significant portfolio growth and continued growth
in ordinary taxable income. For the first and second quarter of 2000, the Board
declared a $0.45 per common share dividend. For the third and fourth quarters of
2000, the Board declared a dividend of $0.46 per common share.
As a result of growth in ordinary taxable income combined with the
increased size and diversity of the Company's portfolio and its projected future
capital gains, the Company's Board of Directors will continue to evaluate
whether to retain or distribute capital gains as they occur. The new policy will
allow the Company to continue to distribute some capital gains, but will also
allow the Company to retain gains that exceed a normal capital gains
distribution level, and therefore avoid any unusual spike in dividends in any
one year. The new policy also enables the Board to selectively retain gains to
support future growth.
The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowings under short- or long-term credit facilities or other debt securities,
through asset sales, or through the sale or issuance of new equity capital. The
Company will utilize its short-term credit facilities only as a means to bridge
to long-term financing. The Company evaluates its interest rate exposure on an
ongoing basis. The Company maintains a matched-funding philosophy that focuses
on matching the estimated maturities of its loan and investment portfolio to the
estimated maturities of its borrowings. The Company also manages its interest
rate risk by financing floating-rate assets with similar term floating-rate
liabilities and fixed-rate assets with similar term fixed-rate liabilities. To
the extent deemed necessary, the Company may hedge variable and short-term
interest rate exposure through interest rate swaps or other techniques. At
September 30, 2000, the Company's debt to equity ratio was less than 1 to 1. The
Company's weighted average cost of funds was 8.1% at September 30, 2000. There
are no significant maturities of long-term debt until 2002. The Company believes
that it has access to capital sufficient to fund its ongoing investment and
operating activities, and from which to pay dividends.
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<PAGE> 48
INVESTMENT CONSIDERATIONS
Investing in the Company involves a number of significant risks and other
factors relating to the structure and investment objective of the Company. As a
result, there can be no assurance that the Company will achieve its investment
objective.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our
portfolio consists primarily of long-term loans to and investments in private
companies. There is generally no publicly available information about these
companies, and we rely significantly on the diligence of our employees and
agents to obtain information in connection with the Company's investment
decisions. In addition, some smaller businesses have narrower product lines and
market shares than their competition, and may be more vulnerable to customer
preferences, market conditions or economic downturns, which may adversely affect
the return on, or the recovery of, our investment in such businesses.
Investments in private businesses, therefore, involve a high degree of business
and financial risk, which can result in substantial losses and accordingly
should be considered speculative.
OUR BORROWERS MAY DEFAULT ON THEIR PAYMENTS. We primarily invest in and
lend to companies that may have limited financial resources and that may be
unable to obtain financing from traditional sources. Numerous factors may affect
a borrower's ability to repay its loan, including the failure to meet its
business plan, a downturn in its industry or negative economic conditions.
Deterioration in a borrower's financial condition and prospects may be
accompanied by deterioration in the collateral for the loan. We make unsecured,
subordinated loans and invest in equity securities, which may involve a higher
degree of repayment risk.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We acquire most of our
investments directly from private companies. The majority of the investments in
our portfolio will be subject to restrictions on resale or otherwise have no
established trading market. The illiquidity of most of our portfolio may
adversely affect our ability to dispose of loans and securities at times when it
may be advantageous for us to liquidate such investments.
WE INVEST IN NON-INVESTMENT GRADE CMBS. The commercial mortgage-backed
securities ("CMBS") in which we invest are non-investment grade, which means
that nationally recognized statistical rating organizations rate them below the
top four investment-grade rating categories (i.e., "AAA" through "BBB").
Non-investment grade securities usually provide a higher yield than do
investment-grade bonds, but with the higher return comes greater risk.
Non-investment grade securities are considered speculative, and their capacity
to pay principal and interest in accordance with the terms of their issue is not
ensured. Therefore, the non-investment grade CMBS tend to be less liquid, may
have a higher risk of default and may be more difficult to value.
OUR PORTFOLIO IS RECORDED AT FAIR VALUE AS DETERMINED BY THE BOARD OF
DIRECTORS. Pursuant to the requirements of the Investment Company Act of 1940
("1940 Act"), the Board of Directors is required to value each asset quarterly,
and we are required to carry our portfolio at fair value as determined by the
Board of Directors. Since there is typically no public market for the loans and
equity securities of the companies in which we make investments, our Board of
Directors estimates the fair value of these loans and equity securities pursuant
to a written valuation policy and a consistently applied valuation process.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses; we are instead required by the 1940 Act to specifically value each
individual investment and record an unrealized loss for an asset that we believe
has become impaired. We adjust quarterly the valuation of our portfolio to
reflect the Board of Directors' estimate of the current realizable value of each
investment in our portfolio. Without a readily ascertainable market value, the
estimated value of our portfolio of loans and equity securities may differ
significantly from the values that would be placed on the portfolio if there
existed a ready market for the loans and
44
<PAGE> 49
equity securities. Any changes in estimated value are recorded in the Company's
statement of operations as "Net unrealized gains (losses)."
WE BORROW MONEY WHICH MAY INCREASE THE RISK OF INVESTING IN OUR
COMPANY. We borrow from, and issue senior debt securities to, banks, insurance
companies and other lenders. Lenders of these senior securities have fixed
dollar claims on our consolidated assets that are superior to the claims of our
common shareholders. Borrowings, also known as leverage, magnify the potential
for gain or loss on amounts invested and, therefore, increase the risks
associated with investing in our securities. If the value of our consolidated
assets increases, then leveraging would cause the net asset value attributable
to the Company's common stock to increase more sharply than it would have had we
not leveraged. Conversely, if the value of our consolidated assets decreases,
leveraging would cause net asset value to decline more sharply than it otherwise
would have had we not leveraged. Similarly, any increase in our consolidated
income in excess of consolidated interest payable on the borrowed funds would
cause our net income to increase more than it would without the leverage, while
any decrease in our consolidated income would cause net income to decline more
sharply than it would have had we not borrowed. Such a decline could negatively
affect our ability to make common stock dividend payments, and, if asset
coverage for a class of senior security representing indebtedness declines to
less than 200%, we may be required to sell a portion of our investments when it
is disadvantageous to do so. Leverage is generally considered a speculative
investment technique.
As of September 30, 2000, the Company's asset coverage for indebtedness was
236%. Our ability to achieve our investment objective may depend in part on our
continued ability to maintain a leveraged capital structure by borrowing from
banks or other lenders on favorable terms. There can be no assurance that we
will be able to maintain such leverage.
At September 30, 2000, the Company had $762.2 million of outstanding
indebtedness, bearing a weighted annual interest cost of 8.1%. In order for us
to cover these annual interest payments on indebtedness, we must achieve annual
returns on our September 30, 2000 portfolio of at least 3.6%.
CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL. Because we
borrow money to make investments, our income is dependent upon the difference
between the rate at which we borrow funds and the rate at which we invest these
funds. In periods of sharply rising interest rates, our cost of funds would
increase, which would reduce our portfolio income before net realized and
unrealized gains. However, there would be no effect on the return, if any, that
could be generated from our equity interests. We use a combination of long-term
and short-term borrowings and equity capital to finance our investing
activities. Investments originated for sale generally carry variable rates and
are financed with short-term variable rate debt. Our long-term fixed-rate
investments are financed with long-term fixed-rate debt and equity. We may use
interest rate risk management techniques in an effort to limit our exposure to
interest rate fluctuations. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act. There can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our portfolio income.
BECAUSE WE MUST DISTRIBUTE INCOME, WE WILL CONTINUE TO NEED ADDITIONAL
CAPITAL. We will continue to need capital to fund incremental growth in our
investments. Historically, we have borrowed from financial institutions and have
issued equity securities. A reduction in the availability of funds from
financial institutions could limit our ability to grow. We must distribute at
least 90% of our taxable net operating income excluding net realized long-term
capital gains to our stockholders to maintain our regulated investment company
("RIC") status. As a result such earnings will not be available to fund
investment originations. We expect to continue to borrow from financial
institutions and sell additional equity securities. If we fail to obtain funds
from such sources or from other sources to fund our investments, it could limit
our ability to grow, which could have a material adverse effect on the value of
the Company's common stock. In addition, as a business development
45
<PAGE> 50
company ("BDC"), we are generally required to maintain a ratio of at least 200%
of total assets to total borrowings, which may restrict our ability to borrow in
certain circumstances.
OUR PORTFOLIO MAY NOT PRODUCE CAPITAL GAINS. Private finance investments
are typically structured as debt securities with a relatively high fixed rate of
interest and with an equity feature such as conversion rights, warrants or
options. As a result, private finance investments generate interest income from
the time they are made, and may also produce a realized gain from an
accompanying equity feature. We cannot be sure that our portfolio will generate
a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS
AND INCOME AVAILABLE FOR DIVIDENDS. We have operated the Company so as to
qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). If we meet certain source of income, diversification
and distribution requirements, the Company qualifies for pass-through tax
treatment. The Company would cease to qualify for pass-through tax treatment if
it were unable to comply with these requirements, or if it ceased to qualify as
a BDC under the 1940 Act. We also could be subject to a 4% excise tax (and, in
certain cases, corporate level income tax) if we fail to make certain
distributions. If the Company fails to qualify as a RIC, the Company would
become subject to federal income tax as if it were an ordinary corporation,
which would substantially reduce our net assets and the amount of income
available for distribution to our shareholders.
WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We
compete for investments with many other companies and individuals, some of whom
have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT. We are regulated by the
Commission and the SBA. In addition, changes in the laws or regulations that
govern BDCs, RICs, real estate investment trusts ("REITs"), SBICs and SBLCs may
significantly affect our business. Laws and regulations may be changed from time
to time, and the interpretations of the relevant laws and regulations also are
subject to change. Any change in the law or regulations that govern our business
could have a material impact on the Company or its operations.
QUARTERLY RESULTS MAY FLUCTUATE. The Company's quarterly operating results
could fluctuate due to a number of factors. These factors include, among others,
variations in the investment origination volume, variation in timing of
prepayments, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, you
should not rely on quarterly results to be indicative of the Company's
performance in future quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the quantitative or qualitative
disclosures about market risk since December 31, 1999.
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<PAGE> 51
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in the normal course of business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, the Company does not expect that these proceedings will have a
material effect upon the Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000 ACC issued a total of
58,715 shares pursuant to a dividend reinvestment plan. This plan is not
registered and relies on an exemption from registration in the Securities Act of
1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1(18) Agreement and Plan of Merger, dated as of October 31, 2000,
by and among Allied Capital Corporation, Allied Capital B
Sub Corporation, and BLC Financial Services, Inc.
2.2(18) Voting and Support Agreement with key shareholders of BLC
Financial Services, Inc. dated October 31, 2000.
2.3(18) Lockup Agreement with key shareholders of BLC Financial
Services, Inc. dated October 31, 2000.
2.4(18) Agreement and Plan of Merger, dated as of October 31, 2000,
by and among the Company, Allied Capital F Sub Corporation
and Futuronics Corporation.
2.5(18) Voting and Support Agreement with key shareholders of
Futuronics Corporation dated October 31, 2000.
2.6(18) Lockup Agreement with key shareholders of Futuronics
Corporation dated October 31, 2000.
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(ii)(2) Articles of Merger.
3(iii)(15) Bylaws.
4.1(6) Specimen certificate of the Company's Common stock, par
value $0.0001 per share. See exhibits 3(i), 3(ii) and 3(iii)
for other instruments defining the rights of security
holders.
</TABLE>
47
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.2(4) Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
5 Not applicable.
9 Not applicable.
10.1(11) Credit Agreement dated as of March 9, 1999 between the
Company, as borrower, each of the financial institutions
initially a signatory thereto, as Lenders, and Nationsbank,
N.A., as administrative agent, Nationsbanc Montgomery
Securities LLC, as sole lead arranger and sole book manager,
First Union National Bank, as syndication agent, BankBoston,
N.A., as documentation agent, Riggs Bank, N.A., as managing
agent, and Chevy Chase Bank, F.S.B. and Credit Lyonnais New
York Branch, as co-agents.
10.1a(12) First Amendment to Credit Agreement dated May 7, 1999.
10.1b(15) Second Amendment to Credit Agreement dated January 18, 2000.
10.1c(15) Third Amendment to Credit Agreement dated March 17, 2000.
10.1d(16) Amended and Restated Credit Agreement dated May 17, 2000.
10.2(8) Note Agreement dated as of April 30, 1998.
10.3(5) 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(12) Note Agreement dated as of May 1, 1999.
10.4a(15) Note Agreement dated as of November 15, 1999.
10.4b* Note Agreement dated as of October 15, 2000.
10.5(14) Second Amended and Restated Master Loan & Security Agreement
dated October 28, 1999 between the Company and Morgan
Stanley Mortgage Capital, Inc.
10.6(6) Sale and Servicing Agreement dated as of January 1, 1998
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and the Company and LaSalle National
Bank Inc. and ABN AMRO Bank N.V.
10.7(6) Indenture dated as of January 1, 1998 between Allied Capital
Commercial Mortgage Trust 1998-1 and LaSalle National Bank.
10.8(6) Amended and Restated Trust Agreement dated January 1, 1998
between Allied Capital CMT, Inc., LaSalle National Bank Inc.
and Wilmington Trust Company.
10.9(6) Guaranty dated as of January 1, 1998 by the Company.
10.10(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
10.10a(7) First Amendment to the Company's Employee Stock Ownership
Plan dated April 30, 1998.
10.10b(14) Termination Amendment to the Allied Capital Employee Stock
Ownership Plan effective December 31, 1999.
10.10c(16) Employment Agreement dated June 15, 2000 between the Company
and William L. Walton.
10.10d(16) Employment Agreement dated June 15, 2000 between the Company
and Joan M. Sweeney.
10.10e(16) Employment agreement dated June 15, 2000 between the Company
and G. Cabell Williams III.
10.11(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
</TABLE>
48
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.12(9) Amended Stock Option Plan.
10.12a(13) Allied Capital 401(k) Plan dated September 1, 1999.
10.13a(6) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
10.13b(6) Form of Custody Agreement with La Salle National Bank.
10.14(17) Auction Rate Reset Note Agreement, dated as of August 31,
2000 between the Company and Intrepid Funding Master Trust,
a Delaware business trust administered by Banc of America
Securities LLC; Forward Issuance Agreement, dated as of
August 31, 2000, between the Company and Banc of America
Securities LLC; Remarketing and Contingency Purchase
Agreement, dated as of August 31, 2000 between the Company
and Banc of America Securities LLC.
10.18(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 contained herein.
21 Subsidiaries of the Company and jurisdiction of
incorporation/organization:
Allied Investment Corporation Maryland
Allied Capital SBLC Corporation Maryland
Allied Capital REIT, Inc. Maryland
Allied Capital Holdings LLC Delaware
Allied Capital Beteiligungsberatung GmbH Germany
27* Financial Data Schedule
</TABLE>
--------------------
* 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.
(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 Annual Report on Form 10-K for the year ended December
31, 1997.
(4) Incorporated by reference to the exhibit of the same name filed with
Allied I's Annual Report on Form 10-K for the year ended December 31,
1996.
(5) Incorporated by reference to Exhibit f.7 of Allied I's Pre-Effective
Amendment No. 2 filed with the registration statement on Form N-2 on
January 24, 1996 (File No. 33-64629). Assignment to Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(6) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on May 5, 1998 (File No. 333-51899).
(7) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998.
(8) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
49
<PAGE> 54
(9) Incorporated by reference to Exhibit A of the Company's definitive
proxy materials for the Company's 2000 Annual Meeting of Stockholders
filed with the Commission on March 29, 2000.
(10) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
(11) Incorporated by reference to Exhibit f.2.a with the Company's
registration statement on Form N-2 (File No. 333-75161) filed on March
26, 1999.
(12) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1999.
(13) Incorporated by reference to Exhibit 4.4 of the Allied Capital 401(k)
Plan registration statement on Form S-8, filed on behalf of such Plan
on October 8, 1999 (File No. 333-88681).
(14) Incorporated by reference to the exhibit of the same name filed with
the Company's Post-Effective Amendment No. 1 to Form N-2 (File No.
333-84973) on November 10, 1999.
(15) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
(16) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on August 11, 2000. (File No. 333-43534)
(17) Incorporated by reference to the exhibit of the same name to Allied
Capital's registration statement on Pre-Effective Amendment No. 1 to
Form N-2 filed on Allied Capital's behalf with the Commission on
September 12, 2000 (File No. 333-43534).
(18) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-14 filed on the Company's
behalf with the Commission on November 6, 2000.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000.
50
<PAGE> 55
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)
<TABLE>
<S> <C>
Dated: November 6, 2000 /s/ PENNI F. ROLL
----------------------------------------------
Executive Vice President and Chief Financial
Officer
</TABLE>
51
