<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 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 May 5, 2000 there were 69,288,747 shares outstanding of the Registrant's
common stock, $0.0001 par value.
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<PAGE> 2
ALLIED CAPITAL CORPORATION
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2000
(unaudited) and December 31, 1999..................... 1
Consolidated Statement of Operations -- For the Three
Months Ended March 31, 2000 and 1999 (unaudited)...... 2
Consolidated Statement of Changes in Net Assets -- For
the Three Months Ended March 31, 2000 and 1999
(unaudited)........................................... 3
Consolidated Statement of Cash Flows -- For the Three
Months Ended March 31, 2000 and 1999 (unaudited)...... 4
Consolidated Statement of Investments as of March 31,
2000 (unaudited) and December 31, 1999................ 5
Notes to Consolidated Financial Statements............. 17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 41
Item 2. Changes in Securities and Use of Proceeds......... 41
Item 3. Defaults Upon Senior Securities................... 41
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 41
Item 5. Other Information................................. 41
Item 6. Exhibits and Reports on Form 8-K.................. 41
Signatures................................................ 44
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Private finance (cost: 2000-$718,308;
1999-$639,171)....................................... $ 731,238 $ 647,040
Commercial real estate finance (cost: 2000-$564,048;
1999-$522,022)....................................... 561,406 520,029
Small business finance (cost: 2000-$72,826;
1999-$61,708)........................................ 73,043 61,428
---------- ----------
Total portfolio at value.......................... 1,365,687 1,228,497
---------- ----------
Cash and cash equivalents................................... 12,806 18,155
Other assets................................................ 50,767 43,386
---------- ----------
Total assets...................................... $1,429,260 $1,290,038
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable and debentures.......................... $ 499,350 $ 487,350
Revolving credit facilities........................... 184,000 105,500
Accounts payable and other liabilities................ 27,370 22,675
---------- ----------
Total liabilities................................. 710,720 615,525
---------- ----------
Commitments and Contingencies
Preferred stock............................................. 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 68,431,051 and 65,930,360 issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively......................................... 7 6
Additional paid-in capital............................ 743,364 699,149
Common stock held in deferred compensation trust
(268,030 shares and 516,779 shares at March 31, 2000
and December 31, 1999, respectively)................. (4,373) (6,218)
Notes receivable from sale of common stock............ (30,303) (29,461)
Net unrealized appreciation on portfolio.............. 9,349 4,517
Distributions in excess of earnings................... (6,504) (480)
---------- ----------
Total shareholders' equity........................ 711,540 667,513
---------- ----------
Total liabilities and shareholders' equity........ $1,429,260 $1,290,038
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
(UNAUDITED)
<S> <C> <C>
Interest and related portfolio income:
Interest.............................................. $38,728 $24,684
Premiums from loan dispositions....................... 3,289 1,901
Investment advisory fees and other income............. 1,880 1,093
------- -------
Total interest and related portfolio income....... 43,897 27,678
------- -------
Expenses:
Interest.............................................. 12,311 6,365
Employee.............................................. 4,569 3,361
Administrative........................................ 2,753 2,350
------- -------
Total operating expenses.......................... 19,633 12,076
------- -------
Formula and cut-off awards............................ 1,691 1,772
------- -------
Portfolio income before net realized and unrealized gains... 22,573 13,830
------- -------
Net realized and unrealized gains:
Net realized gains.................................... 2,176 466
Net unrealized gains.................................. 4,832 4,284
------- -------
Total net realized and unrealized gains........... 7,008 4,750
------- -------
Net increase in net assets resulting from operations........ $29,581 $18,580
======= =======
Basic earnings per common share............................. $ 0.45 $ 0.33
======= =======
Diluted earnings per common share........................... $ 0.45 $ 0.33
======= =======
Weighted average common shares outstanding -- basic......... 66,289 56,799
======= =======
Weighted average common shares outstanding -- diluted....... 66,308 56,828
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
(UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................. $ 22,573 $ 13,830
Net realized gains..................................... 2,176 466
Net unrealized gains................................... 4,832 4,284
-------- --------
Net increase in net assets resulting from
operations...................................... 29,581 18,580
-------- --------
Shareholder distributions:
Common stock dividends................................. (30,716) (23,505)
Preferred stock dividends.............................. (55) (55)
-------- --------
Net decrease in net assets resulting from
shareholder distributions....................... (30,771) (23,560)
-------- --------
Capital share transactions:
Sale of common stock................................... 42,246 35,787
Net increase in notes receivable from sale of common
stock................................................. (842) --
Issuance of common stock upon the exercise of stock
options............................................... 1,101 --
Issuance of common stock in lieu of cash
distributions......................................... 1,237 1,243
Net decrease in common stock held in deferred
compensation trust.................................... 1,845 1,067
Other.................................................. (370) 61
-------- --------
Net increase in net assets resulting from capital
share transactions.............................. 45,217 38,158
-------- --------
Total increase in net assets...................... $ 44,027 $ 33,178
======== ========
Net assets at beginning of period........................... $667,513 $491,358
-------- --------
Net assets at end of period................................. $711,540 $524,536
-------- --------
Net asset value per common share............................ $ 10.44 $ 9.00
-------- --------
Common shares outstanding at end of period.................. 68,163 58,254
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
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...... $ 29,581 $ 18,580
Adjustments
Net unrealized gains.................................... (4,832) (4,284)
Depreciation and amortization........................... 202 200
Amortization of loan discounts and fees................. (3,120) (1,150)
Changes in other assets and liabilities................. (3,661) (9,321)
--------- ---------
Net cash provided by operating activities............ 18,170 4,025
--------- ---------
Cash flows from investing activities:
Portfolio investments..................................... (218,308) (159,380)
Repayments of investment principal........................ 53,431 37,321
Proceeds from loan sales.................................. 39,628 40,467
Collections of notes receivable from sale of common
stock................................................... 229 --
Other investing activities................................ (1,891) (440)
--------- ---------
Net cash used in investing activities................ (126,911) (82,032)
--------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 42,246 35,787
Common dividends and distributions paid................... (29,479) (23,959)
Preferred stock dividends paid............................ (55) (55)
Net borrowings under notes payable and debentures......... 12,000 --
Net borrowings under revolving lines of credit............ 78,500 76,390
Other financing activities................................ 180 --
--------- ---------
Net cash provided by financing activities............ 103,392 88,163
--------- ---------
Net (decrease) increase in cash and cash equivalents........ $ (5,349) $ 10,156
--------- ---------
Cash and cash equivalents at beginning of period............ $ 18,155 $ 25,075
--------- ---------
Cash and cash equivalents at end of period.................. $ 12,806 $ 35,231
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PRIVATE FINANCE MARCH 31, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,605 $ 13,605
- -----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,714 6,714
Partnership Interest 1,456 1,456
- -----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,907 9,907
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
- -----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 13,750 13,750
Equity Interest 1,500 3,347
- -----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,985 11,985
Warrants 1,180 1,180
- -----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 15,117 15,117
- -----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,503 2,503
Warrants 220 220
- -----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
- -----------------------------------------------------------------------------------------------------------
CCT Holdings Loan 1,131 1,131
- -----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 308 308
Warrants 12 212
- -----------------------------------------------------------------------------------------------------------
Component Hardware Group Debt Securities 10,000 10,000
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 3,421 3,421
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,933 6,933
Debt Securities 4,945 4,945
Warrants -- --
Options -- --
- -----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,824 5,824
Resources, LLC Options 87 87
- -----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,300 9,300
- -----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
- -----------------------------------------------------------------------------------------------------------
CyberRep.com Debt Securities 3,722 3,722
Warrants 360 1,010
- -----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 54
- -----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 2 2
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
PRIVATE FINANCE MARCH 31, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
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 10,914 8,759
Company, Inc. Debt Securities 1,146 1,146
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 15,839 15,839
Warrants 360 360
- -----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,767 5,767
Warrants 280 3,628
- -----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 14,854 14,854
Warrants 970 1,082
- -----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,749 30,749
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 92
- -----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 108 108
- -----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,915 15,915
Warrants 525 1,000
- -----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
- -----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,527 2,527
Debt Securities 1,753 1,753
Equity Interest 6,867 6,867
Options 1,639 1,639
- -----------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,425 875
Archery, LLC Convertible Debentures 2,305 2,065
- -----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Debt Securities 5,200 5,200
Warrants 87 5,226
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
PRIVATE FINANCE MARCH 31, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Grant Television, Inc. Debt Securities $ 9,183 $ 9,183
Warrants -- 2,500
- -----------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,951 9,951
Common Stock (300,000 shares) 3,000 3,000
- -----------------------------------------------------------------------------------------------------------
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 7,847 7,847
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
International Filler Corporation Debt Securities 14,951 14,951
Equity Interest 2,975 2,975
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,415 18,415
- -----------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 1,939 1,939
Warrants 74 74
- -----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 2,890 2,890
Warrants 259 6,000
- -----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
- -----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,327 6,327
Warrants 96 600
- -----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,681 7,681
Warrants 348 348
- -----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,448 3,448
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 -- --
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
- -----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Morton Grove Pharmaceuticals, Inc. Loan 15,000 15,000
- -----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 240 29
- -----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,021 14,021
Warrants 651 651
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 10
<TABLE>
<CAPTION>
PRIVATE FINANCE MARCH 31, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net-Tel Communications, Inc. Debt Securities $ 9,442 $ 9,442
Series B Convertible
Preferred Stock (647 shares) 5,000 6,255
Warrants 500 625
- -----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,511 9,511
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 500
- -----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 376 376
- -----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,942 10,942
Warrants 900 900
- -----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
- -----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,928 13,928
Warrants 997 997
- -----------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Debt Securities 12,378 12,378
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,816 23,816
Warrants 826 826
- -----------------------------------------------------------------------------------------------------------
Panera Bread Company (1) Warrants 227 243
- -----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,404 14,404
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 6,417 6,417
Warrants 1,050 1,050
- -----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,223 15,223
- -----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,942 3,942
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 10,074 10,074
Warrants 395 395
- -----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 135
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 11
<TABLE>
<CAPTION>
PRIVATE FINANCE MARCH 31, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Soff-Cut Holdings, Inc. Debt Securities $ 8,160 $ 8,160
Warrants 445 445
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
- -----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,369 6,369
Options 1,000 3,750
- -----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 482 372
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) 4,433 4,433
Warrants 662 662
Options -- --
- -----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,642 12,642
Options 266 266
- -----------------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 8,699 8,699
Warrants 1,124 1,124
- -----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,519 126
Common Stock (910 shares) 57 --
- -----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,890 3,890
Warrants 53 53
Equity Interests 500 500
- -----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,944 4,944
Warrants 15 15
- -----------------------------------------------------------------------------------------------------------
Warn Industries Debt Securities 18,474 18,474
Warrants 1,429 1,429
- -----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
- -----------------------------------------------------------------------------------------------------------
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 15,118 15,118
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 4,100
- -----------------------------------------------------------------------------------------------------------
Total private finance (94 investments) $718,308 $731,238
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 12
<TABLE>
<CAPTION>
MARCH 31, 2000
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
- ------------------------------------------- ---------------- --------- -------- --------
COMMERCIAL REAL ESTATE FINANCE (UNAUDITED)
<S> <C> <C> <C> <C>
Commercial Mortgage Loans Up to 6.99% 4 $ 902 $ 902
7.00%- 8.99% 13 67,852 67,852
9.00%-10.99% 28 35,455 35,545
11.00%-12.99% 37 24,776 24,930
13.00%-14.99% 10 14,142 14,142
15.00% and above 3 1,074 1,050
- -----------------------------------------------------------------------------------------------
Total commercial mortgage loans 95 $144,201 $144,421
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,400 $ 29,400
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,602 35,602
COMM 1999-1 5.7% 105,010 54,491 54,491
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,598 24,598
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,335 44,335
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,157 28,157
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,169 20,169
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,219 20,219
FUNB CMT, Series 1999-C4 6.5% 49,288 22,001 22,001
Heller Financial, HFCMC Series 2000 PH-1 6.8% 55,026 24,615 24,615
SBMS VII, Inc., Series 2000-NL1 7.2% 40,940 26,120 26,120
- --------------------------------------------------------------------------------------------------
Total purchased CMBS $665,200 $ 329,707 $ 329,707
- --------------------------------------------------------------------------------------------------
Residual CMBS $ 76,953 $ 76,953
Residual Interest Spread 5,882 4,382
Real Estate Owned 7,305 5,943
- --------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 564,048 $ 561,406
- --------------------------------------------------------------------------------------------------
Small business finance $ 72,826 $ 73,043
- --------------------------------------------------------------------------------------------------
Total portfolio at value $1,355,182 $1,365,687
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 13
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>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Impact Innovations Group Debt Securities $ 7,841 $ 7,841
Warrants -- --
- -----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,174 18,174
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
- --------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
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>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
<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 at value $1,222,901 $1,228,497
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
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 accompanying unaudited consolidated
financial statements of the Company contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of March 31, 2000 and the results of operations, changes in net
assets, and cash flows for the periods indicated. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 1999 Annual Report. The results of operations for the
three months ended March 31, 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
or its wholly owned or majority owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 1999 balances to conform with the 2000
financial statement presentation.
NOTE 3. PORTFOLIO
The Company's investment operations are conducted in three primary areas:
private finance, commercial real estate finance, and small business finance.
17
<PAGE> 20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
PRIVATE FINANCE
At March 31, 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......... $645,510 $625,685 13.9% $578,570 $559,746 14.2%
Equity interests.................. 72,798 105,553 60,601 87,294
-------- -------- -------- --------
Total................... $718,308 $731,238 $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 March 31, 2000 and December 31, 1999, approximately 98% of the Company's
private finance loan portfolio was composed of fixed interest rate loans. At
March 31, 2000 and December 31, 1999, loans and debt securities with a value of
$32,855,000 and $34,560,000, respectively, were not accruing interest.
The geographic and industry compositions of the private finance portfolio
at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 28% 26%
Southeast................................................... 24 27
Mid-Atlantic................................................ 24 23
West........................................................ 12 11
Northeast................................................... 9 9
International............................................... 3 4
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
18
<PAGE> 21
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........................................... 27% 32%
Consumer Products........................................... 24 19
Industrial Products......................................... 16 11
Telecommunications.......................................... 10 13
Retail...................................................... 7 8
Broadcasting................................................ 5 6
Education................................................... 5 5
Other....................................................... 6 6
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
COMMERCIAL REAL ESTATE FINANCE
At March 31, 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................................. $144,201 $144,421 9.2% $153,767 $154,109 9.4%
CMBS.................................. 412,542 411,042 13.6% 360,950 359,450 13.5%
REO................................... 7,305 5,943 7,305 6,470
-------- -------- -------- --------
Total........................... $564,048 $561,406 $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 March 31, 2000 and December 31, 1999, approximately 79% and 21%, and 81%
and 19%, of the Company's commercial mortgage loan portfolio was composed of
fixed and adjustable interest rate loans, respectively. As of March 31, 2000 and
December 31, 1999, loans with a value of $8,791,000 and $8,334,000,
respectively, were not accruing interest.
The geographic composition and the property types securing the commercial
mortgage loan portfolio at March 31, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Southeast................................................... 34% 31%
Mid-Atlantic................................................ 26 32
West........................................................ 26 25
Midwest..................................................... 11 9
Northeast................................................... 3 3
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
19
<PAGE> 22
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................................................. 45% 42%
Office...................................................... 26 24
Retail...................................................... 12 11
Recreation.................................................. 7 8
Other....................................................... 10 15
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
CMBS
At March 31, 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.............................. $329,707 $329,707 $277,694 $277,694
Residual CMBS............................... 76,953 76,953 76,374 76,374
Residual interest spread.................... 5,882 4,382 6,882 5,382
-------- -------- -------- --------
Total............................. $412,542 $411,042 $360,950 $359,450
======== ======== ======== ========
</TABLE>
PURCHASED CMBS. The Company has Purchased CMBS bonds with a face amount of
$665,200,000 and a cost of $329,707,000, with the difference representing
original issue discount. As of March 31, 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 March 31, 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.
20
<PAGE> 23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The underlying rating classes of the Purchased CMBS at March 31, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
PERCENTAGE PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL
(IN THOUSANDS) -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
BB+......................................... $ 8,543 2.6% $ -- -- %
BB.......................................... 45,828 13.9 41,091 14.8
BB-......................................... 56,003 17.0 46,692 16.8
B+.......................................... 45,981 14.0 41,765 15.0
B........................................... 75,738 23.0 64,830 23.4
B-.......................................... 47,819 14.5 40,995 14.8
CCC......................................... 6,538 2.0 6,506 2.3
Unrated..................................... 43,257 13.0 35,815 12.9
-------- ----- -------- -----
Total............................. $329,707 100.0% $277,694 100.0%
======== ===== ======== =====
</TABLE>
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 March 31, 2000 and December 31, 1999, the mortgage loan pool had an
approximate weighted average stated interest rate of 9.3% and 9.3%,
respectively. The three bond classes sold had an aggregate weighted average
interest rate of 6.5% and 6.5% as of March 31, 2000 and December 31, 1999,
respectively. 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%.
The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS at March 31, 2000 and December 31, 1999
were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
West........................................................ 28% 32%
Mid-Atlantic................................................ 24 23
Midwest..................................................... 21 21
Southeast................................................... 20 20
Northeast................................................... 7 4
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
21
<PAGE> 24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
PROPERTY TYPE
Retail...................................................... 29% 33%
Housing..................................................... 24 29
Office...................................................... 23 20
Hospitality................................................. 14 9
Other....................................................... 10 9
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
SMALL BUSINESS FINANCE
At March 31, 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...................................... $52,093 $52,344 $43,246 $43,000
Residual interest in loans sold................. 4,645 4,645 4,036 4,036
Residual interest spread........................ 14,734 14,734 14,046 14,046
REO............................................. 1,354 1,320 380 346
------- ------- ------- -------
Total................................. $72,826 $73,043 $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.
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.
22
<PAGE> 25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
As of March 31, 2000 and December 31, 1999, 7(a) loans with a value of
$5,965,000 and $5,562,000, respectively, were not accruing interest.
As of March 31, 2000 and December 31, 1999, 7(a) loans include a balance of
$8,797,000 and $7,667,000, respectively, that is guaranteed by the SBA.
NOTE 4. DEBT
At March 31, 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.................................... 74,650 74,650 74,650 62,650
OPIC loan......................................... 5,700 5,700 5,700 5,700
-------- -------- -------- --------
Total notes payable and debentures........ 499,350 499,350 499,350 487,350
-------- -------- -------- --------
Revolving credit facilities:
Revolving line of credit.......................... 400,000 150,000 340,000 82,000
Master loan and security agreement................ 100,000 34,000 100,000 23,500
-------- -------- -------- --------
Total revolving credit facilities......... 500,000 184,000 440,000 105,500
-------- -------- -------- --------
Total............................................. $999,350 $683,350 $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% and 7.6% at March 31, 2000 and December 31, 1999, respectively.
The notes may be prepaid in whole or in part together with an interest premium,
as stipulated in the note agreement.
SBA DEBENTURES. At March 31, 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.
23
<PAGE> 26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
Scheduled future maturities of notes payable and debentures at March 31,
2000 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 17,300
2001........................................................ 9,350
2002........................................................ --
2003........................................................ 140,000
2004........................................................ 221,000
Thereafter.................................................. 111,700
--------
Total............................................. $499,350
========
</TABLE>
REVOLVING CREDIT FACILITIES
REVOLVING LINE OF CREDIT. In March 2000, the Company increased its
unsecured revolving line of credit to $400,000,000 from $360,000,000. The
facility bears interest at the London Interbank Offer Rate ("LIBOR") plus 1.25%
and adjusts at the beginning of each new interest period, usually every thirty
days. The interest rates were 7.3% and 7.7% at March 31, 2000 and December 31,
1999, respectively, and the facility requires a commitment fee equal to 0.25% of
the committed amount. The new line expires in March 2001. The line of credit
requires monthly interest payments and all principal is due upon its expiration.
MASTER LOAN AND SECURITY AGREEMENT. The Company has a facility to borrow
up to $100,000,000, using certain commercial mortgage loans as collateral. The
Company pledges commercial mortgage loans as collateral for the facility such
that the amount borrowed is approximately equal to 80% of the value of the
collateral pledged. The agreement generally requires interest-only payments with
all principal due at maturity. Principal may be repaid at any time without
penalty. The agreement bears interest at the one-month LIBOR plus 1.0%, and
adjusts daily, or 7.1% and 6.8% at March 31, 2000 and December 31, 1999,
respectively. The agreement matures on October 27, 2000.
The average debt outstanding on the revolving credit facilities were
$128,621,000 and $123,860,000 for the three months ended March 31, 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 three
months ended March 31, 2000 and for the year ended December 31, 1999, were
$184,000,000 and $199,392,000, and 7.2% and 6.5%, respectively.
24
<PAGE> 27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SHAREHOLDERS' EQUITY
Sale of common stock in the quarter ended March 31, 2000 and the year ended
December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) ------- --------
<S> <C> <C>
Number of common shares..................................... 2,636 8,659
Gross proceeds.............................................. $44,341 $172,539
Less costs including underwriting fees...................... (2,095) (8,270)
------- --------
Net proceeds.............................................. $42,246 $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 three months ended March 31,
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............................................... 71 233
Average price per share..................................... $17.41 $19.43
</TABLE>
NOTE 6. EARNINGS PER COMMON SHARE
Earnings per common share for the three months ended March 31, 2000 and
1999 were as follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------- -------
<S> <C> <C>
Net increase in net assets resulting from operations........ $29,581 $18,580
Less preferred stock dividends.............................. (55) (55)
------- -------
Income available to common shareholders..................... $29,526 $18,525
======= =======
Basic shares outstanding.................................... 66,289 56,799
Options outstanding to officers............................. 19 29
------- -------
Diluted shares outstanding.................................. 66,308 56,828
======= =======
BASIC EARNINGS PER COMMON SHARE............................. $ 0.45 $ 0.33
======= =======
DILUTED EARNINGS PER COMMON SHARE........................... $ 0.45 $ 0.33
======= =======
</TABLE>
25
<PAGE> 28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award
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 three months ended March 31,
2000 and the year ended December 31, 1999, $204,000 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 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 three months ended March 31, 2000 and for the year ended
December 31, 1999, $1,487,000 and $6,221,000, respectively, was expensed as a
result of the Formula Award. For the three months ended March 31, 2000 and for
the year ended December 31, 1999, the liability related to the Formula Award was
$2,079,000 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 three months ended March 31, 2000 and for the year ended December 31,
1999, $369,000 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 previous year.
NOTE 8. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $0.45 per
common share dividend or $30,716,000 for the three months ended March 31, 2000.
26
<PAGE> 29
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 10K. 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 capital to small and middle-market 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 finance originated for sale under our Allied Capital
Express brand name.
The Company's portfolio composition at March 31, 2000 and December 31, 1999
was as follows:
<TABLE>
<CAPTION>
AT AT
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Private Finance............................................. 54% 53%
Commercial Real Estate Finance.............................. 41% 42%
Small Business Finance...................................... 5% 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.
27
<PAGE> 30
PORTFOLIO AND INVESTMENT ACTIVITY
Total portfolio investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------ ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $1,365.7 $1,228.5
Yield................................................ 13.0% 13.0%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR
--------------- ENDED DECEMBER 31,
2000 1999 1999
------ ------ ------------------
(IN MILLIONS)
<S> <C> <C> <C>
New Investments............................... $218.3 $159.4 $751.9
Repayments.................................... $ 53.4 $ 37.3 $145.7
Sales......................................... $ 39.6 $ 40.5 $198.4
</TABLE>
PRIVATE FINANCE
Private finance investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------ ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $731.2 $647.0
Yield................................................ 13.9% 14.2%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR
-------------- ENDED DECEMBER 31,
2000 1999 1999
------ ----- ------------------
(IN MILLIONS)
<S> <C> <C> <C>
New Investments................................ $112.6 $39.4 $346.7
Repayments..................................... $ 36.8 $24.6 $ 87.5
</TABLE>
The private finance portfolio increased 13% from December 31, 1999 to March
31, 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 the first quarter of
2000 and for 1999. During the three months ended March 31, 2000, the Company
originated seven new private financings with an average investment size of $15.3
million. During 1999, the Company originated 27 new private financings 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%.
28
<PAGE> 31
COMMERCIAL REAL ESTATE FINANCE
Commercial real estate finance investment activity and yields were as
follows:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
2000 1999
------------ ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value.................................. $561.4 $520.0
Yield............................................... 12.5% 12.3%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR
------------- ENDED DECEMBER 31,
2000 1999 1999
----- ----- ------------------
(IN MILLIONS)
<S> <C> <C> <C>
New Investments................................. $63.9 $98.0 $288.7
Repayments...................................... $13.0 $ 8.7 $ 51.5
Sales........................................... $13.5 $26.8 $ 86.1
</TABLE>
The commercial real estate finance portfolio increased 8.0% from December
31, 1999 to March 31, 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 bonds increased to an attractive level
for the Company to purchase the securities. The Company opportunistically
purchased CMBS during 1999, and may continue to do so during 2000. However, the
Company has begun to curtail its CMBS investment activity to maintain a balanced
portfolio. 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 underlying pool of approximately 2,100 loans that are collateral for
our CMBS have the following ranges of loan to value ("LTV") and debt service
coverage ratios ("DSCR").
<TABLE>
<CAPTION>
LOAN TO VALUE RANGES $ %
-------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
Less than 60%............................................... $1,070.1 11%
60 - 65%.................................................... 713.5 7%
65 - 70%.................................................... 1,599.0 16%
70 - 75%.................................................... 3,283.9 33%
75 - 80%.................................................... 3,131.3 31%
Greater than 80%............................................ 183.8 2%
-------- ---
$9,981.6 100%
======== ===
Weighted average LTV........................................ 70.8%
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
1.00 - 1.25................................................. $2,299.4 23%
1.26 - 1.50................................................. 5,729.0 57%
1.51 - 1.75................................................. 1,288.4 13%
1.76 - 2.00................................................. 381.1 4%
Greater than 2.00........................................... 283.7 3%
-------- ---
$9,981.6 100%
======== ===
Weighted average DSCR....................................... 1.39
</TABLE>
The increase in the commercial real estate portfolio during 2000 and 1999
was primarily due to the purchase of CMBS. During the first quarter of 2000, the
Company purchased $50.4 million in CMBS with a face value of $96.0 million and a
weighted average yield to maturity of 14.4% 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. During 1999, the Company also sold $86.1 million of commercial
mortgage loans with a weighted average yield of approximately 9.5% and
redeployed the proceeds into higher yielding assets. For the three months ended
March 31, 2000, the Company sold $13.5 million of commercial mortgage loans.
SMALL BUSINESS FINANCE
During the second quarter of 1999, the Company combined its commercial real
estate loan origination activity with its SBA 7(a) lending activity in order to
increase its loans originated for sale 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 MARCH 31, AT DECEMBER 31,
------------ ---------------
2000 1999
------------ ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value................................... $73.0 $61.4
Yield................................................ 11.3% 11.5%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED MARCH FOR THE YEAR ENDED
31, DECEMBER 31,
------------- ------------------
2000 1999 1999
----- ----- ------------------
(IN MILLIONS)
<S> <C> <C> <C>
New Investments................................. $41.8 $22.0 $116.5
Repayments...................................... $ 3.6 $ 4.0 $ 6.7
Sales........................................... $26.1 $13.7 $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 the Internet site launched during
30
<PAGE> 33
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.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The following table summarizes Allied Capital's operating results for the
three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest................................................ $38,728 $24,684 $14,044 57%
Premiums from loan dispositions......................... 3,289 1,901 1,388 73%
Investment advisory fees and other income............... 1,880 1,093 787 72%
------- ------- ------- ----
Total interest and related portfolio income..... 43,897 27,678 16,219 59%
------- ------- ------- ----
EXPENSES
Interest................................................ 12,311 6,365 5,946 93%
Employee................................................ 4,569 3,361 1,208 36%
Administrative.......................................... 2,753 2,350 403 17%
------- ------- ------- ----
Total operating expenses........................ 19,633 12,076 7,557 63%
------- ------- ------- ----
Formula and cut-off awards.............................. 1,691 1,772 (81) (5%)
------- ------- ------- ----
Portfolio income before net realized and
unrealized gains............................. 22,573 13,830 8,743 63%
------- ------- ------- ----
NET REALIZED AND UNREALIZED GAINS
Net realized gains...................................... 2,176 466 1,710 367%
Net unrealized gains.................................... 4,832 4,284 548 13%
------- ------- ------- ----
Total net realized and unrealized gains......... 7,008 4,750 2,258 48%
------- ------- ------- ----
Net increase in net assets resulting from operations...... $29,581 $18,580 $11,001 59%
======= ======= ======= ====
Diluted earnings per share................................ $ 0.45 $ 0.33 $ 0.12 36%
======= ======= ======= ====
Weighted average shares outstanding - diluted............. 66,308 56,828 9,480 17%
</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 three months
ended March 31, 2000 by 59% as compared to the three months ended March 31,
1999. Total interest and related portfolio income is primarily a function of the
level of interest income earned and the balance of portfolio
31
<PAGE> 34
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
MARCH 31,
----------------
2000 1999
------ ------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income................. $43.9 $27.7
Per share................................................... $0.66 $0.49
</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 50% to $1,260.1 million at March 31, 2000 from $837.5 million at
March 31, 1999. The weighted average yield on the interest bearing investments
in the portfolio at March 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------
2000 1999
----- -----
<S> <C> <C>
Private Finance............................................. 13.9% 14.0%
Commercial Real Estate Finance.............................. 12.5% 11.5%
Small Business Finance...................................... 11.3% 10.9%
Total Portfolio............................................. 13.0% 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 $2.2 million, and $1.8 million for the three months ended March 31,
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.
Prepayment premiums were $1.1 million, and $0.1 million for the three
months ended March 31, 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 single largest expense is interest on indebtedness. The
fluctuations in interest expense during the three months ended March 31, 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
32
<PAGE> 35
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
MARCH 31,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt...................................... $683.4 $410.7
Average Outstanding Debt.................................... $627.3 $353.9
Weighted Average Cost....................................... 7.9% 7.2%
BDC Asset Coverage*......................................... 217% 246%
</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 125 and 108 at March 31, 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 three months ended March 31, 2000 as compared to the three
months ended March 31, 1999 was primarily the result of increases in costs
associated with the growth of the Company and new regional offices.
The formula and cut-off awards totaled $1.7 million and $1.8 million, or
$0.03 per share and $0.03 per share, for the three months ended March 31, 2000
and 1999, respectively.
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. Realized gains and
losses were as follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains.............................................. $ 2.7 $ 0.8
Realized Losses............................................. (0.5) (0.3)
----- -----
Net Realized Gains.......................................... $ 2.2 $ 0.5
===== =====
Net Unrealized Gains........................................ $ 4.8 $ 4.3
===== =====
</TABLE>
Realized gains of $2.7 million for the three months ended March 31, 2000
primarily resulted from transactions involving two portfolio companies, Julius
Koch USA, Inc. ($1.7 million) and FTI
33
<PAGE> 36
Consulting, Inc. ($0.7 million). The Company reversed previously recorded
unrealized appreciation of $2.1 million when these gains were realized. Realized
gains for the three months ended March 31, 1999 resulted primarily from
transactions involving three portfolio companies.
Realized losses of $0.5 million for the three months ended March 31, 2000
resulted from the liquidation of certain portfolio investments, with the largest
individual loss coming from DEH Printed Circuits, Inc. ($0.2 million). Losses
realized for the three months ended March 31, 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 $0.4 million and
$0.3 million when the related losses were realized for the three months ended
March 31, 2000 and 1999, respectively.
Net unrealized gains for the three months ended March 31, 2000 and 1999
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. At March 31, 2000, net
unrealized appreciation in the portfolio totaled $9.3 million and was composed
of unrealized appreciation of $38.1 million, resulting primarily from
appreciated equity interests in portfolio companies, and unrealized depreciation
of $28.8 million, resulting primarily from underperforming loan and equity
interests in the portfolio. At March 31, 1999, net unrealized appreciation in
the portfolio totaled $6.7 million and was composed of unrealized appreciation
of $33.3 million and unrealized depreciation of $26.6 million. Net realized and
unrealized gains can vary substantially on a quarterly basis.
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 March 31, 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.................................................... $ 149.2 10.9%
2.................................................... 1,117.4 81.8%
3.................................................... 53.3 3.9%
4.................................................... 33.1 2.4%
5.................................................... 12.7 1.0%
-------- ------
$1,365.7 100.0%
======== ======
</TABLE>
Grade 5 private finance investments totaled $11.7 million at value at March
31, 2000, or 0.9% 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 $31.1 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 previously 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
34
<PAGE> 37
potential loss when such exposure is identified. Grade 5 private finance
investments at December 31, 1999 totaled $12.6 million at value, or 1.0% of the
Company's total portfolio, respectively.
At March 31, 2000, the credit quality of the Company's CMBS portfolio
remained strong, and delinquencies in the underlying collateral pool were
negligible. 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 $31.9 million at value at March 31, 2000, or 2.3% of the total portfolio.
Included in this category are loans valued at $11.9 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.
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 66.3 million and 56.8 million for the three months ended
March 31, 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 66.3 million and 56.8 million for the three months ended
March 31, 2000 and 1999, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At March 31, 2000, the Company had $12.8 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.
35
<PAGE> 38
DEBT
The Company had outstanding debt at March 31, 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............................................ 74.7 8.3%
OPIC loan................................................. 5.7 6.6%
------ ----
Total notes payable and debentures................. $499.4 7.8%
------ ----
Revolving credit facilities:
Revolving line of credit.................................. $150.0 8.3%
Master loan and security agreement........................ 34.0 7.4%
------ ----
Total revolving credit facilities.................. $184.0 8.2%
------ ----
Total debt......................................... $683.4 7.9%
====== ====
</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 private 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.
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.
REVOLVING LINE OF CREDIT. The Company has a two-year, $400 million
unsecured revolving line of credit that expires in March 2001. At the Company's
option, the credit facility bears interest at a rate equal to (i) the one-month
London Inter-Bank Offered Rate ("LIBOR") plus 1.25% or (ii) the higher of (a)
the NationsBank, 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. The Company is currently negotiating to increase its availability
under this line of credit, as well as to extend the maturity date.
MASTER LOAN AND SECURITY AGREEMENT. The Company has a facility to borrow
up to $100 million using certain commercial mortgage loans as collateral. The
agreement generally requires interest-only payments with all principal due at
maturity. The agreement charges interest at LIBOR plus 1.0%. The facility
matures in October 2000.
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 business
development company, 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.
To support its growth during the first quarter of 2000, the Company raised
$42.2 million in new equity capital, primarily through the sale of shares from
its shelf registration statement. At March 31, 2000, total shareholders' equity
had increased to $711.5 million. The Company issues new equity only in cases
where attractive investment opportunities have been identified, thus resulting
in accretive growth for existing shareholders.
36
<PAGE> 39
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 share, for an annual total distribution of $1.60 per 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 share dividend.
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, through asset sales, or
through obtaining 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 manages
interest rate risk through a diversified borrowing base and a matched-funding
policy. A diversified borrowing base consists of short- and long-term debt with
a variable or fixed rate. The matched-funding policy states that floating rate
assets generally be financed with similar term floating-rate liabilities and
fixed-rate assets generally be financed 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 March 31, 2000, the Company's debt to equity ratio was less than
1 to 1. Approximately 73% of the Company's debt had a fixed interest rate, and
the Company's weighted average cost of funds was 7.9% at March 31, 2000. There
are no significant maturities of long-term debt until 2003. The Company believes
that it has access to capital sufficient to fund its ongoing investment and
operating activities, and from which to pay dividends.
The "Year 2000 problem" refers to the inability of many computers,
computer-based systems, related software, and other electronics to process dates
accurately during the Year 2000 and beyond. As of March 31, 2000, we have not
experienced any business disruption as a result of the Year 2000 problem and we
also do not expect significant Year 2000 related business disruptions in the
future.
37
<PAGE> 40
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 or 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 (e.g., "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
38
<PAGE> 41
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 March 31, 2000, the Company's asset coverage for indebtedness was
217%. 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 March 31, 2000, the Company had $683.4 million of outstanding
indebtedness, bearing a weighted annual interest cost of 7.9%. In order for us
to cover annual interest payments on indebtedness, we must achieve annual
returns on our portfolio of at least 3.8%.
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
39
<PAGE> 42
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 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.
40
<PAGE> 43
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 March 31, 2000 ACC issued a total of 71,037
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>
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.
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.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1c(15) Third Amendment to Credit Agreement dated March 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.
10.5(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.
10.11(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
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.
10.18(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 in the
Company's 1999 Annual Report filed as Exhibit 13 herewith.
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.
42
<PAGE> 45
(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.
(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 19, 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.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended March
31, 2000.
43
<PAGE> 46
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: May 9, 2000 /s/ PENNI F. ROLL
-------------------------------------
Executive Vice President and Chief
Financial Officer
</TABLE>
44
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<INVESTMENTS-AT-COST> 1,355,182
<INVESTMENTS-AT-VALUE> 1,365,687
<RECEIVABLES> 0
<ASSETS-OTHER> 50,767
<OTHER-ITEMS-ASSETS> 12,806
<TOTAL-ASSETS> 1,429,260
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 499,350
<OTHER-ITEMS-LIABILITIES> 211,370
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 7
<PAID-IN-CAPITAL-COMMON> 743,364
<SHARES-COMMON-STOCK> 68,163
<SHARES-COMMON-PRIOR> 65,414
<ACCUMULATED-NII-CURRENT> (6,504)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,349
<NET-ASSETS> 711,540
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 38,728
<OTHER-INCOME> 5,169
<EXPENSES-NET> 21,324
<NET-INVESTMENT-INCOME> 22,573
<REALIZED-GAINS-CURRENT> 2,176
<APPREC-INCREASE-CURRENT> 4,832
<NET-CHANGE-FROM-OPS> 29,581
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 30,716
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,636
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 71
<NET-CHANGE-IN-ASSETS> 44,027
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 480
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 12,311
<GROSS-EXPENSE> 21,324
<AVERAGE-NET-ASSETS> 689,527
<PER-SHARE-NAV-BEGIN> 10.20
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.45
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.44
<EXPENSE-RATIO> 0.07
</TABLE>
