<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2000
COMMISSION FILE NUMBER:
0-22832
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
(State or Jurisdiction of
Incorporation or Organization)
52-1081052
(IRS Employer
Identification No.)
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, DC 20006
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
On August 9, 2000 there were 75,770,441 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 June 30, 2000
(unaudited) and December 31, 1999..................... 1
Consolidated Statement of Operations -- For the Three
and Six Months Ended June 30, 2000 and 1999
(unaudited)........................................... 2
Consolidated Statement of Changes in Net Assets -- For
the Six Months Ended June 30, 2000 and 1999
(unaudited)........................................... 3
Consolidated Statement of Cash Flows -- For the Six
Months Ended June 30, 2000 and 1999 (unaudited)....... 4
Consolidated Statement of Investments as of June 30,
2000 (unaudited) and December 31, 1999................ 5
Notes to Consolidated Financial Statements............. 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 28
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 46
Item 2. Changes in Securities and Use of Proceeds......... 46
Item 3. Defaults Upon Senior Securities................... 46
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 46
Item 5. Other Information................................. 46
Item 6. Exhibits and Reports on Form 8-K.................. 46
Signatures................................................ 50
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Private finance (cost: 2000-$860,436;
1999-$639,171)....................................... $ 871,587 $ 647,040
Commercial real estate finance (cost: 2000-$551,231;
1999-$522,022)....................................... 548,787 520,029
Small business finance (cost: 2000-$68,750;
1999-$61,708)........................................ 67,879 61,428
---------- ----------
Total portfolio at value.......................... 1,488,253 1,228,497
---------- ----------
Cash and cash equivalents................................... 28,724 18,155
Other assets................................................ 55,417 43,386
---------- ----------
Total assets...................................... $1,572,394 $1,290,038
========== ==========
Liabilities:
Notes payable and debentures.......................... $ 495,350 $ 487,350
Revolving credit facilities........................... 231,000 105,500
Accounts payable and other liabilities................ 20,991 22,675
---------- ----------
Total liabilities................................. 747,341 615,525
---------- ----------
Commitments and Contingencies
Preferred stock............................................. 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 74,896,322 and 65,930,360 issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively......................................... 7 6
Additional paid-in capital............................ 844,390 699,149
Common stock held in deferred compensation trust
(259,983 shares and 516,779 shares at June 30, 2000
and December 31, 1999, respectively)................. (2,791) (6,218)
Notes receivable from sale of common stock............ (27,976) (29,461)
Net unrealized appreciation on portfolio.............. 6,574 4,517
Distributions in excess of earnings................... (2,151) (480)
---------- ----------
Total shareholders' equity........................ 818,053 667,513
---------- ----------
Total liabilities and shareholders' equity........ $1,572,394 $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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and related portfolio income:
Interest.............................. $42,986 $28,158 $81,714 $52,842
Premiums from loan dispositions....... 4,554 2,431 7,843 4,332
Investment advisory fees and other
income............................. 2,425 2,597 4,305 3,690
------- ------- ------- -------
Total interest and related
portfolio income............... 49,965 33,186 93,862 60,864
------- ------- ------- -------
Expenses:
Interest.............................. 14,280 8,042 26,591 14,407
Employee.............................. 5,191 3,750 9,760 7,111
Administrative........................ 4,082 2,926 6,835 5,276
------- ------- ------- -------
Total operating expenses.......... 23,553 14,718 43,186 26,794
------- ------- ------- -------
Formula and cut-off awards............ 1,712 1,849 3,403 3,621
------- ------- ------- -------
Portfolio income before net realized and
unrealized gains.......................... 24,700 16,619 47,273 30,449
------- ------- ------- -------
Net realized and unrealized gains:
Net realized gains.................... 12,865 11,096 15,041 11,562
Net unrealized gains (losses)......... (2,775) (5,594) 2,057 (1,310)
------- ------- ------- -------
Total net realized and unrealized
gains.......................... 10,090 5,502 17,098 10,252
------- ------- ------- -------
Net increase in net assets resulting from
operations................................ $34,790 $22,121 $64,371 $40,701
======= ======= ======= =======
Basic earnings per common share............. $ 0.50 $ 0.38 $ 0.94 $ 0.70
======= ======= ======= =======
Diluted earnings per common share........... $ 0.50 $ 0.38 $ 0.94 $ 0.70
======= ======= ======= =======
Weighted average common shares outstanding--
basic..................................... 69,968 58,736 68,128 57,758
======= ======= ======= =======
Weighted average common shares outstanding--
diluted................................... 70,035 58,833 68,175 57,831
======= ======= ======= =======
</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 SIX MONTHS
ENDED JUNE 30,
-------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- --------
(UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................. $ 47,273 $ 30,449
Net realized gains..................................... 15,041 11,562
Net unrealized gains (losses).......................... 2,057 (1,310)
-------- --------
Net increase in net assets resulting from
operations..................................... 64,371 40,701
-------- --------
Shareholder distributions:
Common stock dividends................................. (63,866) (47,030)
Preferred stock dividends.............................. (110) (110)
-------- --------
Net decrease in net assets resulting from
shareholder distributions...................... (63,976) (47,140)
-------- --------
Capital share transactions:
Sale of common stock................................... 141,954 54,729
Net decrease (increase) in notes receivable from sale
of common stock....................................... 1,485 201
Issuance of common stock upon the exercise of stock
options............................................... 1,431 15
Issuance of common stock in lieu of cash
distributions......................................... 2,420 2,379
Net decrease (increase) in common stock held in
deferred compensation trust........................... 3,427 5,869
Other.................................................. (572) (80)
-------- --------
Net increase in net assets resulting from capital
share transactions............................. 150,145 63,113
-------- --------
Total increase in net assets...................... $150,540 $ 56,674
======== ========
Net assets at beginning of period........................... $667,513 $485,117
-------- --------
Net assets at end of period................................. $818,053 $541,791
-------- --------
Net asset value per common share............................ $ 10.96 $ 9.11
-------- --------
Common shares outstanding at end of period.................. 74,636 59,442
======== ========
</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 SIX MONTHS
ENDED JUNE 30,
---------------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) --------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $ 64,371 $ 40,701
Adjustments
Net unrealized (gains) losses.......................... (2,057) 1,310
Depreciation and amortization.......................... 423 399
Amortization of loan discounts and fees................ (6,211) (4,434)
Changes in other assets and liabilities................ (9,484) (14,137)
--------- ---------
Net cash provided by operating activities............ 47,042 23,839
--------- ---------
Cash flows from investing activities:
Portfolio investments..................................... (431,600) (342,485)
Repayments of investment principal........................ 58,833 71,910
Proceeds from loan sales.................................. 117,092 68,018
Collections of notes receivable from sale of common
stock.................................................. 2,567 201
Other investing activities................................ 3,280 (2,926)
--------- ---------
Net cash used in investing activities................ (249,828) (205,282)
--------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 141,954 54,729
Common dividends and distributions paid................... (61,446) (46,418)
Preferred stock dividends paid............................ (110) (110)
Net borrowings under notes payable and debentures......... 8,000 148,662
Net borrowings under revolving lines of credit............ 125,500 25,000
Other financing activities................................ (543) --
--------- ---------
Net cash provided by financing activities............ 213,355 181,863
--------- ---------
Net increase in cash and cash equivalents................... $ 10,569 $ 420
--------- ---------
Cash and cash equivalents at beginning of period............ $ 18,155 $ 25,075
--------- ---------
Cash and cash equivalents at end of period.................. $ 28,724 $ 25,495
========= =========
</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 JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ACE Products, Inc. Loans $ 13,825 $ 13,825
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,811 6,811
Limited Partnership Interest 1,456 806
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,327 9,327
Warrants 629 629
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 14,073 14,073
Equity Interest 1,500 3,347
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 12,198 12,198
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 15,364 15,364
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,507 2,507
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
CTT Holdings Loan 1,149 1,149
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 293 293
Warrants 12 212
-----------------------------------------------------------------------------------------------------------
Chickasaw Holding Company Loan 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Component Hardware Group Debt Securities 10,075 10,075
Class A Preferred Stock (18,000 shares) 1,800 1,800
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,424 3,424
Warrants -- --
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,939 6,939
Debt Securities 4,948 4,948
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,832 5,832
Resources, LLC Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,303 9,303
Debt Securities 4,962 4,962
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CyberRep.com Debt Securities 3,751 3,751
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
PRIVATE FINANCE JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
DeVlieg-Bullard, Inc. (1) Warrants $ 350 $ 3
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) 7 6
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
Drilltec Patents & Technologies Loan 10,918 8,762
Company, Inc. Debt Securities 1,500 1,500
Warrants -- --
-----------------------------------------------------------------------------------------------------------
eCentury Capital Partners, L.P. Limited Partnership Interest 1,287 1,287
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
E-Talk Corporation Debt Securities 8,733 8,733
Warrants 1,157 1,157
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,852 15,852
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,781 5,781
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 14,859 14,859
Warrants 970 2,554
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 31,865 31,865
Communications, LLC Options 500 1,250
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 110 110
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,328 1,328
Common Stock (41,644 shares) 214 --
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 16,087 16,087
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,781 2,781
Debt Securities 1,815 1,815
Equity Interest 6,867 6,867
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
PRIVATE FINANCE JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Grant Broadcasting Systems II Debt Securities $ 5,200 $ 5,200
Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,188 9,188
Warrants -- 2,500
-----------------------------------------------------------------------------------------------------------
HealthASPex, Inc. Series A Convertible Preferred Stock
(189,568 shares) 640 640
Series A Preferred Stock
(225,112 shares) 760 760
Common Stock (1,036,700 shares) -- --
-----------------------------------------------------------------------------------------------------------
HMT, Inc. Debt Securities 9,952 9,952
Common Stock (300,000 shares) 3,000 3,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (310,000 shares) 310 310
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 6,263 6,263
Warrants 1,674 1,674
-----------------------------------------------------------------------------------------------------------
Intellirisk Management Corporation Loans 9,950 9,950
-----------------------------------------------------------------------------------------------------------
iSolve Incorporated Series A Preferred Stock (14,853 shares) 874 874
Common Stock (13,306 shares) 14 14
-----------------------------------------------------------------------------------------------------------
International Filler Corporation Debt Securities 14,587 14,587
Common Stock 3,000 3,000
Warrants 420 420
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,660 18,660
-----------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 1,943 1,943
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 2,900 2,900
Warrants 259 6,000
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,336 6,336
Warrants 96 96
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,698 7,698
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,458 3,458
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. Loan 2,000 2,000
Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 10
<TABLE>
<CAPTION>
PRIVATE FINANCE JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
MedAssets.com, Inc. Debt Securities -- --
Series B Convertible
Preferred Stock (227,665 shares) $ 2,049 $ 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Mid-Atlantic Venture Fund IV, L.P. Limited Partnership Interest 1,801 1,801
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Grove Pharmaceuticals, Inc. Loan 15,000 15,000
Convertible Preferred Stock
(106,947 shares) 5,000 5,000
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 24
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 14,054 14,054
Warrants 651 651
-----------------------------------------------------------------------------------------------------------
Net-Tel Communications, Inc. Debt Securities 9,458 9,458
Series B Convertible
Preferred Stock (647 shares) 5,000 5,000
Series C Convertible
Preferred Stock (340,523 shares) 3,000 3,000
Warrants 500 1,880
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,531 9,531
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 500
-----------------------------------------------------------------------------------------------------------
North American Loans 1,461 883
Archery, LLC Convertible Debentures 2,363 2,111
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 368 368
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,963 10,963
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,962 13,962
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Oriental Trading Company, Inc. Debt Securities 12,449 12,449
Preferred Equity Interest 1,483 1,483
Common Equity Interest 17 17
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,828 23,828
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
Packaging Advantage Corporation Debt Securities 11,509 11,509
Common Stock (200,000 shares) 2,000 2,000
Warrants 963 963
-----------------------------------------------------------------------------------------------------------
Panera Bread Company (1) Common Stock (25,040 shares) 161 230
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 11
<TABLE>
<CAPTION>
PRIVATE FINANCE JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
PF.Net Communications, Inc. Debt Securities $ 11,469 $ 11,469
Warrants 3,540 3,540
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,661 14,661
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 6,438 6,438
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,426 15,426
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,944 3,944
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 10,170 10,170
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 --
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,180 8,180
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
Warrants 446 446
-----------------------------------------------------------------------------------------------------------
Southwest PCS, LLC Loan 7,500 7,500
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,457 7,374
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 575 465
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
Startec Global Communications, Inc. Debt Securities 19,800 19,800
Warrants -- --
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Preferred Stock (1,116,902 shares) 4,507 4,507
Warrants 662 662
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 12,652 12,652
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,511 127
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,893 3,893
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 12
<TABLE>
<CAPTION>
PRIVATE FINANCE JUNE 30, 2000
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
United Pet Group Debt Securities $ 4,952 $ 4,952
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Venturehouse Group, LLC Common Equity Interest 333 333
-----------------------------------------------------------------------------------------------------------
Walker Investment Fund, II, L.P. Limited Partnership Interest 600 600
-----------------------------------------------------------------------------------------------------------
Warn Industries Debt Securities 18,727 18,727
Warrants 1,429 1,429
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
Wilmar Industries, Inc. Debt Securities 28,249 28,249
Warrants 1,688 1,688
-----------------------------------------------------------------------------------------------------------
Wilshire Restaurant Group, Inc. Debt Securities 15,000 15,000
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,836 12,836
-----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 7,572 7,572
Equity Interests 1,700 1,700
Warrants 450 450
-----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,123 15,123
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 4,100
-----------------------------------------------------------------------------------------------------------
Total private finance (107 investments) $860,436 $871,587
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 13
<TABLE>
<CAPTION>
JUNE 30, 2000
INTEREST NUMBER OF -------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
------------------------------------------- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE (UNAUDITED)
Commercial Mortgage Loans Up to 6.99% 4 $ 887 $ 887
7.00%- 8.99% 8 29,420 29,420
9.00%-10.99% 19 23,067 23,067
11.00%-12.99% 40 34,324 34,633
13.00%-14.99% 14 16,511 16,511
15.00% and above 3 1,056 1,032
-----------------------------------------------------------------------------------------------
Total commercial mortgage loans 88 $105,265 $105,550
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,676 $ 29,676
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,762 35,762
COMM 1999-1 5.7% 105,010 54,837 54,837
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,699 24,699
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,392 44,392
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,401 28,401
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,092 20,092
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,326 20,326
FUNB CMT, Series 1999-C4 6.5% 49,288 22,162 22,162
Heller Financial, HFCMC Series 2000 PH-1 6.8% 55,026 24,786 24,786
SBMS VII, Inc., Series 2000-NL1 7.2% 40,940 26,202 26,202
DLJ Commercial Mortgage Trust, Series 2000-CF1 7.0% 47,370 25,250 25,250
--------------------------------------------------------------------------------------------------
Total purchased CMBS $712,570 $ 356,585 $ 356,585
--------------------------------------------------------------------------------------------------
Residual CMBS $ 77,694 $ 77,694
Residual Interest Spread 5,127 3,408
Real Estate Owned 6,560 5,550
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 551,231 $ 548,787
--------------------------------------------------------------------------------------------------
Small business finance $ 68,750 $ 67,879
--------------------------------------------------------------------------------------------------
Total portfolio $1,480,417 $1,488,253
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
ACE Products, Inc. Debt Securities $ 13,386 $ 13,386
-----------------------------------------------------------------------------------------------------------
Acme Paging, L.P. Debt Securities 6,618 6,618
Partnership Interest 1,456 2,100
-----------------------------------------------------------------------------------------------------------
Allied Office Products Debt Securities 9,905 9,905
Warrants -- --
-----------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Inc. Warrants 125 125
-----------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
-----------------------------------------------------------------------------------------------------------
Aurora Communications, LLC Loans 13,370 13,370
Equity Interest 1,500 1,500
-----------------------------------------------------------------------------------------------------------
Avborne, Inc. Debt Securities 11,959 11,959
Warrants 1,180 1,180
-----------------------------------------------------------------------------------------------------------
Bakery Chef, Inc. Loans 10,967 10,967
-----------------------------------------------------------------------------------------------------------
CampGroup, LLC Debt Securities 2,491 2,491
Warrants 220 220
-----------------------------------------------------------------------------------------------------------
Candlewood Hotel Company (1) Preferred Stock (3,250 shares) 3,250 3,250
-----------------------------------------------------------------------------------------------------------
Celebrities, Inc. Loan 310 310
Warrants 12 212
-----------------------------------------------------------------------------------------------------------
Convenience Corporation of America Debt Securities 8,355 2,738
Series A Preferred Stock (31,521 shares) 334 --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. Debt Securities 3,460 3,460
Warrants -- 538
-----------------------------------------------------------------------------------------------------------
CorrFlex Graphics, LLC Loan 6,957 6,957
Debt Securities 4,942 4,942
Warrants -- --
Options -- --
-----------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 5,817 5,817
Resources, LLC Options 87 87
-----------------------------------------------------------------------------------------------------------
Coverall North America Loan 9,298 9,298
-----------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 --
-----------------------------------------------------------------------------------------------------------
CyberRep.com Debt Securities 3,694 3,694
Warrants 360 1,010
-----------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 --
-----------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc. (1) Warrants 350 29
-----------------------------------------------------------------------------------------------------------
Directory Investment Corporation Common Stock (470 shares) -- --
-----------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (34 shares) -- --
Series B Common Stock (6 shares) 8 --
Series C Common Stock (10 shares) 22 --
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Drilltec Patents & Technologies Loan $ 10,911 $ 8,755
Company, Inc. Debt Securities 786 786
Warrants -- --
-----------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Debt Securities 1,875 343
Common Stock (100 shares) 250 --
-----------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. Loans 306 306
-----------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
-----------------------------------------------------------------------------------------------------------
Esquire Communications Ltd. (1) Warrants 6 --
-----------------------------------------------------------------------------------------------------------
Ex Terra Credit Recovery, Inc. Series A Preferred Stock (500 shares) 500 500
Common Stock (2,500 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Executive Greetings, Inc. Debt Securities 15,825 15,825
Warrants 360 360
-----------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company Debt Securities 5,753 5,753
Warrants 280 3,628
-----------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. (1) Debt Securities 12,053 12,053
Warrants 970 970
-----------------------------------------------------------------------------------------------------------
Galaxy American Debt Securities 30,740 30,740
Communications, LLC Options -- 750
-----------------------------------------------------------------------------------------------------------
Garden Ridge Corporation Debt Securities 26,537 26,537
Preferred Stock (1,130 shares) 1,130 1,130
Common Stock (471 shares) 613 613
-----------------------------------------------------------------------------------------------------------
Genesis Worldwide, Inc. (1) Loan 1,328 1,328
Common Stock (41,644 shares) 214 81
-----------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corporation Loan 108 108
-----------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 15,742 15,742
Warrants 525 1,000
-----------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- 154
-----------------------------------------------------------------------------------------------------------
Global Communications, LLC Loans 2,526 2,526
Debt Securities 1,733 1,733
Equity Interest 6,867 6,867
Options 1,639 1,639
-----------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,390 840
Archery, LLC Convertible Debentures 2,248 2,008
-----------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II Debt Securities 5,200 5,200
Warrants 87 5,226
-----------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,177 9,177
Warrants -- 2,500
-----------------------------------------------------------------------------------------------------------
Hotelevision, Inc. Preferred Stock (1,000,000 shares) 1,000 1,000
-----------------------------------------------------------------------------------------------------------
Icon International, Inc. Series A Preferred Stock (13,720 shares) 1,334 1,334
Series B Preferred Stock (11,987 shares) 1,166 1,166
-----------------------------------------------------------------------------------------------------------
Impact Innovations Group Debt Securities 7,841 7,841
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Jakel, Inc. Loan 18,174 18,174
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 16
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
JRI Industries, Inc. Debt Securities $ 2,134 $ 2,134
Warrants 74 74
-----------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 3,502 3,502
Warrants 324 4,100
-----------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Warrants 348 3,495
Equity Interest 4 9
-----------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,318 6,318
Warrants 96 600
-----------------------------------------------------------------------------------------------------------
Kyrus Corporation Debt Securities 7,665 7,665
Warrants 348 348
-----------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Inc. Debt Securities 3,439 3,439
Common Stock (64,535 shares) 142 142
-----------------------------------------------------------------------------------------------------------
The Loewen Group, Inc. (1) High-Yield Senior Secured Debt 15,150 14,150
-----------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred
Stock (26,000 shares) 359 213
-----------------------------------------------------------------------------------------------------------
Master Plan, Inc. Common Stock (156 shares) 42 3,042
-----------------------------------------------------------------------------------------------------------
MedAssets.com, Inc. Debt Securities 3,793 3,793
Series B Convertible
Preferred Stock (227,665 shares) 2,049 2,049
Warrants 136 136
-----------------------------------------------------------------------------------------------------------
Meigher Communications, L.P. Loan 2,938 2,938
-----------------------------------------------------------------------------------------------------------
Mid Atlantic Telecom Plus, LLC Loan 11,109 11,109
-----------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Warrants -- --
-----------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 7 7
Debt Securities 1,823 243
Common Stock (33,333 shares) -- --
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Morton Industrial Group (1) Common Stock (5,835 shares) 241 20
-----------------------------------------------------------------------------------------------------------
MVL Group Debt Securities 13,989 13,989
Warrants 651 651
-----------------------------------------------------------------------------------------------------------
Net-Tel Communications, Inc. Debt Securities 9,426 9,426
Series B Convertible
Preferred Stock (647 shares) 5,000 5,000
Warrants 500 500
-----------------------------------------------------------------------------------------------------------
Nobel Learning Communities, Debt Securities 9,492 9,492
Inc. (1) Series D Convertible
Preferred Stock (265,957 shares) 2,000 2,000
Warrants 575 575
-----------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, L.P. Debt Securities 384 384
-----------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,922 10,922
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 140 --
-----------------------------------------------------------------------------------------------------------
Opinion Research Corporation (1) Debt Securities 13,896 13,896
Warrants 996 996
-----------------------------------------------------------------------------------------------------------
Outsource Partners, Inc. Debt Securities 23,802 23,802
Warrants 826 826
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Panera Bread Company (1) Warrants $ 227 $ 271
-----------------------------------------------------------------------------------------------------------
Physician Specialty Corporation Debt Securities 14,388 14,388
Redeemable Preferred
Stock (850 shares) 850 850
Convertible Preferred
Stock (97,411 shares) 150 150
Warrants 476 476
-----------------------------------------------------------------------------------------------------------
Pico Products, Inc. (1) Loan 1,300 1,300
Debt Securities 4,591 2,591
Common Stock (208,000 shares) 59 3
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Polaris Pool Systems, Inc. Debt Securities 6,395 6,395
Warrants 1,050 1,050
-----------------------------------------------------------------------------------------------------------
Powell Plant Farms, Inc. Loan 15,031 15,031
-----------------------------------------------------------------------------------------------------------
Progressive International Corporation Debt Securities 3,940 3,940
Preferred Stock (500 shares) 500 500
Common Stock (197 shares) 13 13
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Schwinn/GT Debt Securities 9,978 9,978
Warrants 395 395
-----------------------------------------------------------------------------------------------------------
Seasonal Expressions, Inc. Series A Preferred
Stock (1,000 shares) 993 136
-----------------------------------------------------------------------------------------------------------
Soff-Cut Holdings, Inc. Debt Securities 8,140 8,140
Warrants 446 446
Preferred Stock (300 shares) 300 300
Common Stock (2,000 shares) 200 200
-----------------------------------------------------------------------------------------------------------
Southwest PCS, L.P. Debt Securities 6,364 6,364
Options 1,000 2,000
-----------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 469 360
Common Stock (6,208 shares) 25 18
-----------------------------------------------------------------------------------------------------------
SunStates Refrigerated Services, Inc. Loans 6,130 4,641
Debt Securities 2,445 1,316
-----------------------------------------------------------------------------------------------------------
Sure-Tel, Inc. Preferred Stock (1,116,902 shares) 3,108 3,108
Warrants 662 662
Options -- --
-----------------------------------------------------------------------------------------------------------
Sydran Food Services II, L.P. Debt Securities 11,674 11,674
Options 266 266
-----------------------------------------------------------------------------------------------------------
Teknekron Infoswitch Corporation Debt Securities 13,863 13,863
Warrants 900 900
-----------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,528 135
Common Stock (910 shares) 57 --
-----------------------------------------------------------------------------------------------------------
Tubbs Snowshoe Company, LLC Debt Securities 3,886 3,886
Warrants 54 54
Equity Interests 500 500
-----------------------------------------------------------------------------------------------------------
United Pet Group Debt Securities 4,938 4,938
Warrants 15 15
-----------------------------------------------------------------------------------------------------------
Wildwood Designs, Inc. Loan 1,167 1,167
-----------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Company Warrants 24 322
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 18
<TABLE>
<CAPTION>
PRIVATE FINANCE DECEMBER 31, 1999
PORTFOLIO COMPANY -------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) INVESTMENT(2) COST VALUE
--------------------------------------- --------------------------------------------- -------- --------
<S> <C> <C> <C>
Wilton Industries, Inc. Loan $ 12,390 $ 12,390
-----------------------------------------------------------------------------------------------------------
Woodstream Corporation Debt Securities 8,000 8,000
Equity Interests 1,700 1,700
Warrants -- --
-----------------------------------------------------------------------------------------------------------
Wyo-Tech Acquisition Corporation Debt Securities 15,113 15,113
Preferred Stock (100 shares) 3,700 3,700
Common Stock (99 shares) 100 4,100
-----------------------------------------------------------------------------------------------------------
Total private finance (91 investments) $639,171 $647,040
-----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income
producing and restricted.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31, 1999
INTEREST NUMBER OF -----------------------
(IN THOUSANDS, EXCEPT NUMBER OF LOANS) RATE RANGES LOANS COST VALUE
---------------------------------------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE FINANCE
Commercial Mortgage Loans Up to 6.99% 5 $ 1,422 $ 1,422
7.00%- 8.99% 15 71,619 71,595
9.00%-10.99% 41 39,415 39,623
11.00%-12.99% 30 25,016 25,175
13.00%-14.99% 12 15,207 15,230
15.00% and above 3 1,088 1,064
------------------------------------------------------------------------------------------------
Total commercial mortgage loans 106 $ 153,767 $ 154,109
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATED
INTEREST FACE
-------- ----
<S> <C> <C> <C> <C>
Purchased CMBS
Mortgage Capital Funding, Series 1998-MC3 5.5% $ 61,302 $ 29,141 $ 29,141
Morgan Stanley Capital I, Series 1999-RM1 6.4% 71,640 35,453 35,453
COMM 1999-1 5.7% 105,010 54,166 54,166
Morgan Stanley Capital I, Series 1999-FNV1 6.1% 49,486 24,505 24,505
DLJ Commercial Mortgage Trust 1999-CG2 6.1% 96,622 44,288 44,288
Commercial Mortgage Acceptance Corp., Series
1999-C1 6.8% 50,449 28,115 28,115
LB Commercial Mortgage Trust, Series 1999-C2 6.7% 42,391 20,054 20,054
Chase Commercial Mortgage Securities Corp.,
Series 1999-2 6.5% 43,046 20,121 20,121
FUNB CMT, Series 1999-C4 6.5% 49,288 21,851 21,851
--------------------------------------------------------------------------------------------------
Total purchased CMBS $569,234 $ 277,694 $ 277,694
--------------------------------------------------------------------------------------------------
Residual CMBS $ 76,374 $ 76,374
Residual Interest Spread 6,882 5,382
Real Estate Owned 7,305 6,470
--------------------------------------------------------------------------------------------------
Total commercial real estate finance $ 522,022 $ 520,029
--------------------------------------------------------------------------------------------------
Small business finance $ 61,708 $ 61,428
--------------------------------------------------------------------------------------------------
Total portfolio $1,222,901 $1,228,497
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation has two wholly owned subsidiaries that have
also elected to be regulated as BDCs. Allied Investment Corporation ("Allied
Investment") is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company ("SBIC"). Allied Capital SBLC Corporation
("Allied SBLC") is licensed by the Small Business Administration ("SBA") as a
Small Business Lending Company and is a participant in the SBA Section 7(a)
Guaranteed Loan Program. In addition, the Company has a real estate investment
trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT") and several single-
member limited liability companies established primarily to hold real estate
properties.
Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company."
The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests primarily
in private, small and middle-market companies in a variety of industries and in
diverse geographic locations in the United States.
NOTE 2. BASIS OF PRESENTATION
In the opinion of management, the unaudited consolidated financial results
of the Company included herein contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of and for the six months ended June 30, 2000 and 1999 and the
results of operations, changes in net assets, and cash flows for these periods.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's December 31, 1999 Annual Report. The results
of operations for the six months ended June 30, 2000 are not necessarily
indicative of the operating results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly owned 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.
18
<PAGE> 21
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
PRIVATE FINANCE
At June 30, 2000 and December 31, 1999, the private finance portfolio
consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans and debt securities................ $763,409 $744,469 14.5% $578,570 $559,746 14.2%
Equity interests......................... 97,027 127,118 60,601 87,294
-------- -------- -------- --------
Total........................... $860,436 $871,587 $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 June 30, 2000 and December 31, 1999, approximately 97% and 98% of the
Company's private finance loan portfolio was composed of fixed interest rate
loans, respectively. At June 30, 2000 and December 31, 1999, loans and debt
securities with a value of $37,662,000 and $34,560,000, respectively, were not
accruing interest.
The geographic and industry compositions of the private finance portfolio
at June 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Midwest..................................................... 27% 26%
Mid-Atlantic................................................ 26 23
Southeast................................................... 20 27
West........................................................ 16 11
Northeast................................................... 8 9
International............................................... 3 4
--- ---
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>
INDUSTRY
Business Services........................................... 31% 32%
Consumer Products........................................... 21 19
Telecommunications.......................................... 14 13
Industrial Products......................................... 12 11
Retail...................................................... 7 8
Broadcasting................................................ 5 6
Education................................................... 4 5
Other....................................................... 6 6
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
COMMERCIAL REAL ESTATE FINANCE
At June 30, 2000 and December 31, 1999, the commercial real estate finance
portfolio consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
COST VALUE YIELD COST VALUE YIELD
(IN THOUSANDS) -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans................................. $105,265 $105,550 9.8% $153,767 $154,109 9.4%
CMBS.................................. 439,406 437,687 13.8% 360,950 359,450 13.5%
REO................................... 6,560 5,550 7,305 6,470
-------- -------- -------- --------
Total........................... $551,231 $548,787 $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 June 30, 2000 and December 31, 1999, approximately 68% and 32%, and 81%
and 19% of the Company's commercial mortgage loan portfolio was composed of
fixed and adjustable interest rate loans, respectively. As of June 30, 2000 and
December 31, 1999, loans with a value of $9,299,000 and $8,334,000,
respectively, were not accruing interest.
20
<PAGE> 23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic composition and the property types securing the commercial
mortgage loan portfolio at June 30, 2000 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
Southeast................................................... 33% 31%
Mid-Atlantic................................................ 26 32
West........................................................ 23 25
Midwest..................................................... 14 9
Northeast................................................... 4 3
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Hospitality................................................. 35% 42%
Office...................................................... 26 24
Retail...................................................... 17 11
Recreation.................................................. 9 8
Other....................................................... 13 15
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
CMBS
At June 30, 2000 and December 31,1999, the CMBS portfolio consisted of the
following:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
COST VALUE COST VALUE
(IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Purchased CMBS.............................. $356,585 $356,585 $277,694 $277,694
Residual CMBS............................... 77,694 77,694 76,374 76,374
Residual interest spread.................... 5,127 3,408 6,882 5,382
-------- -------- -------- --------
Total............................. $439,406 $437,687 $360,950 $359,450
======== ======== ======== ========
</TABLE>
PURCHASED CMBS. At June 30, 2000, the Company has Purchased CMBS bonds
with a face amount of $712,570,000 and a cost of $356,585,000, with the
difference representing original issue discount. As of June 30, 2000 and
December 31, 1999, the estimated yield to maturity on the Purchased CMBS was
approximately 14.7% and 14.6%, respectively. The Company's yield on its
Purchased CMBS is based upon a number of assumptions that are subject to certain
business and economic uncertainties and contingencies. Examples include the
timing and magnitude of credit losses on the mortgage loans underlying the
Purchased CMBS that are a result of the general condition of the real estate
market (including competition for tenants and their related credit quality) and
changes in market rental rates. At June 30, 2000 and December 31, 1999, the
yield on the Purchased CMBS portfolio was computed assuming a 1% loss estimate
for its entire underlying collateral mortgage pool. As these uncertainties and
contingencies are difficult to predict and are subject to future events which
may alter these assumptions, no assurance can be given that the anticipated
yields to maturity will be achieved.
21
<PAGE> 24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
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.
The underlying rating classes of the Purchased CMBS at June 30, 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+......................................... $ 8,570 2.4% $ -- -- %
BB.......................................... 52,664 14.8 41,091 14.8
BB-......................................... 57,805 16.2 46,692 16.8
B+.......................................... 49,985 14.0 41,765 15.0
B........................................... 80,861 22.7 64,830 23.4
B-.......................................... 52,499 14.7 40,995 14.8
CCC......................................... 6,574 1.8 6,506 2.3
Unrated..................................... 47,627 13.4 35,815 12.9
-------- ----- -------- -----
Total............................. $356,585 100.0% $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 June 30, 2000, December 31, 1999 and 1998, 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 June 30, 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%.
22
<PAGE> 25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
The geographic composition and the property types of the underlying
mortgage loan pools securing the CMBS at June 30, 2000 and December 31, 1999
were as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
GEOGRAPHIC REGION
West........................................................ 32% 32%
Midwest..................................................... 22 21
Mid-Atlantic................................................ 21 23
Southeast................................................... 19 20
Northeast................................................... 6 4
--- ---
Total............................................. 100% 100%
=== ===
PROPERTY TYPE
Retail...................................................... 32% 33%
Housing..................................................... 30 29
Office...................................................... 21 20
Hospitality................................................. 7 9
Other....................................................... 10 9
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
SMALL BUSINESS FINANCE
At June 30, 2000 and December 31, 1999, the small business finance
portfolio consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----------------- -----------------
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
7(a) loans...................................... $44,111 $43,337 $43,246 $43,000
Residual interest in loans sold................. 7,074 7,074 4,036 4,036
Residual interest spread........................ 16,229 16,229 14,046 14,046
REO............................................. 1,336 1,239 380 346
------- ------- ------- -------
Total................................. $68,750 $67,879 $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
23
<PAGE> 26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PORTFOLIO, CONTINUED
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.
As of June 30, 2000 and December 31, 1999, 7(a) loans with a value of
$5,675,000 and $5,562,000, respectively, were not accruing interest.
As of June 30, 2000 and December 31, 1999, 7(a) loans include a balance of
$8,894,000 and $7,667,000, respectively, that is guaranteed by the SBA.
NOTE 4. DEBT
At June 30, 2000 and December 31, 1999, the Company had the following debt:
<TABLE>
<CAPTION>
2000 1999
--------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable................ $ 419,000 $419,000 $419,000 $419,000
SBA debentures................................... 100,650 70,650 74,650 62,650
OPIC loan........................................ 5,700 5,700 5,700 5,700
---------- -------- -------- --------
Total notes payable and debentures....... 525,350 495,350 499,350 487,350
---------- -------- -------- --------
Revolving credit facilities:
Revolving line of credit......................... 417,500 231,000 340,000 82,000
Master loan and security agreement............... 100,000 -- 100,000 23,500
---------- -------- -------- --------
Total revolving credit facilities........ 517,500 231,000 440,000 105,500
---------- -------- -------- --------
Total............................................ $1,042,850 $726,350 $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 June 30, 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.
24
<PAGE> 27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. DEBT, CONTINUED
SBA DEBENTURES. At June 30, 2000 and December 31, 1999, the Company had
debentures payable to the SBA with terms of ten years and at interest rates
ranging from 6.9% to 9.6%. The debentures require semi-annual interest-only
payments with all principal due upon maturity. The SBA debentures are subject to
prepayment penalties if paid prior to maturity.
Scheduled future maturities of notes payable and debentures at June 30,
2000 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT MATURING
---- ---------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 13,300
2001........................................................ 9,350
2002........................................................ --
2003........................................................ 140,000
2004........................................................ 221,000
Thereafter.................................................. 111,700
--------
Total............................................. $495,350
========
</TABLE>
REVOLVING CREDIT FACILITIES
REVOLVING LINE OF CREDIT. In May 2000, the Company increased its unsecured
revolving line of credit to $417,500,000 from $400,000,000. The facility may be
expanded up to $500,000,000. 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 7.9% and
7.7% at June 30, 2000 and December 31, 1999, respectively, and the facility
requires a commitment fee equal to 0.25% of the committed amount. The line
expires in May 2002. The line of credit requires monthly interest payments and
all principal is due upon its expiration.
MASTER LOAN AND SECURITY AGREEMENT. The Company 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 7.6% and 6.8% at June 30, 2000 and December 31, 1999,
respectively. The agreement matures on October 27, 2000.
The average debt outstanding on the revolving credit facilities were
$163,041,000 and $123,860,000 for the six months ended June 30, 2000 and for the
years ended December 31, 1999, respectively. The maximum amount borrowed under
these facilities and the weighted average interest rate for the six months ended
June 30, 2000 and for the years ended December 31, 1999, were $240,000,000 and
$199,392,000, and 7.4% and 6.5%, respectively.
25
<PAGE> 28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SHAREHOLDERS' EQUITY
Sale of common stock for the six months ended June 30, 2000 and the year
ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS) -------- --------
<S> <C> <C>
Number of common shares..................................... 8,763 8,659
Gross proceeds.............................................. $148,715 $172,539
Less costs including underwriting fees...................... (6,761) (8,270)
-------- --------
Net proceeds.............................................. $141,954 $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 six months ended June 30, 2000
and for the year ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------ ------
<S> <C> <C>
Shares issued............................................... 140 233
Average price per share..................................... $17.28 $19.43
</TABLE>
NOTE 6. EARNINGS PER COMMON SHARE
Earnings per common share for the six months ended June 30, 2000 and 1999
were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
-----------------
2000 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------- -------
<S> <C> <C>
Net increase in net assets resulting from operations........ $64,371 $40,701
Less preferred stock dividends.............................. (110) (110)
------- -------
Income available to common shareholders..................... $64,261 $40,591
======= =======
Weighted average basic shares outstanding................... 68,128 57,758
Options outstanding to officers............................. 47 73
------- -------
Weighted average diluted shares outstanding................. 68,175 57,831
======= =======
BASIC EARNINGS PER COMMON SHARE............................. $ 0.94 $ 0.70
======= =======
DILUTED EARNINGS PER COMMON SHARE........................... $ 0.94 $ 0.70
======= =======
</TABLE>
26
<PAGE> 29
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 six months ended June 30, 2000
and the year ended December 31, 1999, $527,000 and $532,000, respectively, of
the Cut-off Award vested.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6%
of the difference between an amount equal to the combined aggregated market
capitalizations of the Predecessor Companies as of the close of the market on
the day before the Merger date (December 30, 1997), less an amount equal to the
combined aggregate market capitalizations of Allied Lending and the Predecessor
Companies as of the close of the market on the Merger announcement date.
Advisers' compensation committee allocated the Formula Award to individual
officers on December 30, 1997. The amount of the Formula Award as computed at
December 30, 1997 was $18,994,000. This amount was contributed to the Company's
deferred compensation trust under the deferred compensation plan and was used to
purchase shares of the Company's stock (included in common stock held in
deferred compensation trust). The Formula Award vests equally in three
installments on December 31, 1998, 1999 and 2000; provided, however, that such
Formula Award vests immediately upon a change in control of the Company. The
Formula Award has been expensed in each year in which it vests. For the six
months ended June 30, 2000 and for the year ended December 31, 1999, $2,876,000
and $6,221,000, respectively, was expensed as a result of the Formula Award. For
the six months ended June 30, 2000 and for the year ended December 31, 1999, the
liability related to the Formula Award was $3,468,000 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 six months ended
June 30, 2000 and for the year ended December 31, 1999, $563,000 and $61,000,
respectively, of the Formula Award was forfeited.
On January 3, 2000 and January 4, 1999, the Company distributed shares of
the Company's common stock with a value of $4,274,000 and $4,062,000,
respectively, representing the portion of the Formula Award that vested during
the previous year.
NOTE 8. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $0.90 per
common share dividend or $63,866,000 for the six months ended June 30, 2000.
27
<PAGE> 30
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included herein and in the Company's
annual report on Form 10-K. This Management's Discussion and Analysis contains
certain forward-looking statements. These statements include the plans and
objectives of management for future operations and financial objectives, loan
portfolio growth and availability of funds. These forward-looking statements are
subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are
set forth below in the Investment Considerations section. Other factors that
could cause actual results to differ materially include the uncertainties of
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements included herein are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate. Therefore, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
OVERVIEW
The Company provides private investment capital to private and undervalued
public companies in a variety of different industries and in diverse geographic
locations. Our lending and investment activity is focused in three areas:
- Private finance
- Commercial real estate finance, and
- Small business loans originated for sale under our Allied Capital Express
brand name.
The Company's portfolio composition at June 30, 2000 and December 31, 1999
was as follows:
<TABLE>
<CAPTION>
AT AT
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Private Finance............................................. 59% 53%
Commercial Real Estate Finance.............................. 37% 42%
Small Business Finance...................................... 4% 5%
</TABLE>
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gains earned on the
Company's investment portfolio after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
earned on a loan and the amortization of loan origination points and discounts.
The level of interest income is directly related to the balance of the
investment portfolio multiplied by the weighted average yield on the portfolio.
The Company's ability to generate interest income is dependent on economic,
regulatory and competitive factors that influence interest rates and loan
originations, and the Company's ability to secure financing for its investment
activities.
28
<PAGE> 31
PORTFOLIO AND INVESTMENT ACTIVITY
Total portfolio investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value.................................... $1,488.3 $1,228.5
Yield................................................. 13.6% 13.0%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED FOR THE YEAR
JUNE 30, JUNE 30, ENDED
--------------- --------------- DECEMBER 31,
2000 1999 2000 1999 1999
------ ------ ------ ------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments..................... $184.0 $183.1 $402.3 $342.5 $751.9
Repayments.......................... $ 5.3 $ 34.6 $ 58.8 $ 71.9 $145.7
Sales............................... $ 77.5 $ 23.5 $117.1 $ 68.0 $198.4
</TABLE>
PRIVATE FINANCE
Private finance investment activity and yields were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value.................................... $871.6 $647.0
Yield................................................. 14.5% 14.2%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED FOR THE YEAR
JUNE 30, JUNE 30, ENDED
--------------- --------------- DECEMBER 31,
2000 1999 2000 1999 1999
------ ------ ------ ------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments..................... $126.4 $ 87.9 $239.0 $127.2 $346.7
Repayments.......................... $ 2.4 $ 23.6 $ 39.2 $ 48.3 $ 87.5
</TABLE>
The private finance portfolio increased 35% from December 31, 1999 to June
30, 2000, and 67% and 90% 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 June 30, 2000, the Company
originated 9 new private financings with an average investment size of $12.4
million and a weighted average current yield on loans and debt securities of
15.2%. During the six months ended June 30, 2000, the Company originated 16 new
private financings with an average investment size of $13.9 million and a
weighted average current yield on loans and debt securities of 15.0%. 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%.
29
<PAGE> 32
During the second quarter of 2000, the Company began an initiative to
invest in and strategically partner with select private equity funds focused on
investments in technology and the new economy. The strategy for these fund
investments is to provide solid investment returns and build strategic
relationships with the fund managers and their portfolio companies. The Company
believes that it will have opportunities to co-invest with the funds as well as
finance their portfolio companies as they mature.
The Company believes that the fund investment strategy is an excellent
means of participating in technology investing through a diverse pooled
investment portfolio. The fund concept allows the Company to participate in a
pooled investment return without exposure to the risk of any single technology
investment. During the second quarter of 2000, the Company committed a total of
$17.7 million to four private equity funds. The committed amount is expected to
be invested over the next three years. The Company funded $4.0 million of this
commitment during the second quarter.
COMMERCIAL REAL ESTATE FINANCE
Commercial real estate finance investment activity and yields were as
follows:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value.................................... $548.8 $520.0
Yield................................................. 13.0% 12.3%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED FOR THE YEAR
JUNE 30, JUNE 30, ENDED
------------- -------------- DECEMBER 31,
2000 1999 2000 1999 1999
----- ----- ----- ------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments........................ $27.2 $71.8 $91.1 $169.8 $288.7
Repayments............................. $ 1.3 $ 7.1 $14.3 $ 15.8 $ 51.5
Sales.................................. $38.0 $ 2.2 $51.5 $ 33.0 $ 86.1
</TABLE>
The commercial real estate finance portfolio increased 6% from December 31,
1999 to June 30, 2000 and increased 46.5% for the year ended December 31, 1999.
During 1999, the Company began to migrate its portfolio from investments in
lower yielding commercial mortgage loans to higher yielding real estate
investments.
During 1998, the Company reduced its commercial mortgage loan origination
activity for its own portfolio due to declining interest rates and began to sell
its loans to other lenders. Then, beginning in the fourth quarter of 1998, the
Company began to take advantage of a unique market opportunity to acquire
non-investment grade commercial mortgage-backed securities ("CMBS") at
significant discounts from the face amount of the bonds. Turmoil in the CMBS
market created a lack of liquidity for the traditional buyers of non-investment
grade bonds. As a result, yields on these collateralized bonds increased, thus
providing an attractive investment opportunity. The Company opportunistically
purchased CMBS throughout 1999, and has continued to do so during 2000. However,
the Company has begun to curtail its CMBS investment activity to maintain a
balanced portfolio. 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.
30
<PAGE> 33
The underlying pool of approximately 2,300 loans that are collateral for
our CMBS had underwritten loan to value ("LTV") and debt service coverage ratios
("DSCR") as follows.
<TABLE>
<CAPTION>
LOAN TO VALUE RANGES $ %
-------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
Less than 60%............................................... $ 1,147.6 11%
60 - 65%.................................................... 802.3 7%
65 - 70%.................................................... 1,736.5 16%
70 - 75%.................................................... 3,630.6 34%
75 - 80%.................................................... 3,280.9 30%
Greater than 80%............................................ 181.7 2%
--------- ---
$10,779.6 100%
========= ===
Weighted average LTV........................................ 70.6%
</TABLE>
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE
RATIO RANGES $ %
--------------------- ------------- ---
(IN MILLIONS)
<S> <C> <C>
1.00 - 1.25................................................. $ 2,535.4 23%
1.26 - 1.50................................................. 6,258.7 58%
1.51 - 1.75................................................. 1,284.6 12%
1.76 - 2.00................................................. 417.5 4%
Greater than 2.00........................................... 283.4 3%
--------- ---
$10,779.6 100%
========= ===
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. The Company purchases CMBS at
significant discounts from the face amount of the bonds. During the second
quarter of 2000, the Company purchased $25.1 million in CMBS with a face value
of $47.4 million and a weighted average yield to maturity of 15.2% after
assuming a 1% loss rate on the underlying collateral mortgage pool. During the
six months ended June 30, 2000 the Company purchased $75.5 million in CMBS with
a face value of $143.4 million and a weighted average yield to maturity of 14.7%
after assuming a 1% loss rate on the underlying collateral mortgage pool. In
1999, the Company purchased $245.9 million in CMBS with a face value of $507.9
million and a weighted average yield to maturity of 14.6% after assuming a 1%
loss rate on the underlying collateral mortgage pool. At June 30, 2000, the face
value of the entire purchased CMBS portfolio was $712.6 million, our cost of
acquiring the securities was $356.6 million and our unamortized discount was
$356.0 million. The yield on the purchased CMBS portfolio was 14.7% as of June
30, 2000.
The Company has been liquidating much of its whole commercial mortgage loan
portfolio so that it can redeploy the proceeds into higher yielding assets. For
the three months ended June 30, 2000, the Company sold $38.0 million of
commercial mortgage loans and for the six months ended June 30, 2000, the
Company sold $51.5 million of commercial mortgage loans. At June 30, 2000, the
Company's whole commercial loan portfolio had been reduced to $105.6 million
from $154.1 million at December 31, 1999. During 1999, the Company sold $86.1
million of commercial mortgage loans.
31
<PAGE> 34
SMALL BUSINESS FINANCE
During the second quarter of 1999, the Company combined its whole
commercial real estate loan origination activity with its SBA 7(a) lending
activity in order to increase its loans originated for sale 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 JUNE 30, AT DECEMBER 31,
2000 1999
----------- ---------------
(IN MILLIONS)
<S> <C> <C>
Portfolio at Value.................................... $67.9 $61.4
Yield................................................. 12.3% 11.5%
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED FOR THE YEAR
JUNE 30, JUNE 30, ENDED
---------------- ---------------- DECEMBER 31,
2000 1999 2000 1999 1999
----- ----- ----- ----- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
New Investments................... $30.4 $23.5 $72.2 $45.5 $116.5
Repayments........................ $ 1.7 $ 3.8 $ 5.3 7.8 $ 6.7
Sales............................. $39.5 $21.3 $65.6 $35.0 $112.3
</TABLE>
Allied Capital Express loan origination activity for 2000 and 1999
increased due to the opening of new regional office locations and from
opportunities created by our Internet site launched in the fall of 1999. Loans
in the Allied Capital Express program are originated for sale; therefore, the
increase in loan sales is the result of the increase in originations. In
addition, beginning in 1999, the Company began to sell 90% of the unguaranteed
portion of SBA 7(a) loans through a structured finance agreement with a
commercial paper conduit. Allied Capital Express targets small commercial real
estate loans that are, in many cases, originated in conjunction with SBA 7(a)
loans. SBA 7(a) loans are originated with variable interest rates priced at
spreads ranging from 1.75% to 2.75% over the prime lending rate.
32
<PAGE> 35
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The following table summarizes Allied Capital's operating results for the
six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest................................................ $81,714 $52,842 $28,872 55%
Premiums from loan dispositions......................... 7,843 4,332 3,511 81%
Investment advisory fees and other income............... 4,305 3,690 615 17%
------- ------- ------- ----
Total interest and related portfolio income..... 93,862 60,864 32,998 54%
------- ------- ------- ----
EXPENSES
Interest................................................ 26,591 14,407 12,184 85%
Employee................................................ 9,760 7,111 2,649 37%
Administrative.......................................... 6,835 5,276 1,559 30%
------- ------- ------- ----
Total operating expenses........................ 43,186 26,794 16,392 61%
------- ------- ------- ----
Formula and cut-off awards.............................. 3,403 3,621 (218) (6%)
------- ------- ------- ----
Portfolio income before net realized and
unrealized gains............................. 47,273 30,449 16,824 55%
------- ------- ------- ----
NET REALIZED AND UNREALIZED GAINS
Net realized gains...................................... 15,041 11,562 3,479 30%
Net unrealized gains (losses)........................... 2,057 (1,310) 3,367 257%
------- ------- ------- ----
Total net realized and unrealized gains......... 17,098 10,252 6,846 67%
------- ------- ------- ----
Net increase in net assets resulting from operations...... $64,371 $40,701 $23,670 58%
======= ======= ======= ====
Diluted earnings per share................................ $ 0.94 $ 0.70 $ 0.24 34%
======= ======= ======= ====
Weighted average shares outstanding - diluted............. 68,175 57,831 10,344 18%
</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 six months
ended June 30, 2000 by 54% as compared to the six months ended June 30, 1999.
Total interest and related portfolio income is primarily a function of the level
of interest income earned and the balance of portfolio assets. In
33
<PAGE> 36
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 SIX
MONTHS ENDED
JUNE 30,
----------------
2000 1999
------ ------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income................. $93.9 $60.9
Per share................................................... $1.38 $1.05
</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 43% to $1,361.1 million at June 30, 2000 from $954.1 million at
June 30, 1999. The weighted average yield on the interest bearing investments in
the portfolio at June 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
AT
JUNE 30,
--------------
2000 1999
----- -----
<S> <C> <C>
Private Finance............................................. 14.5% 13.7%
Commercial Real Estate Finance.............................. 13.0% 11.8%
Small Business Finance...................................... 12.3% 10.9%
Total Portfolio............................................. 13.6% 12.4%
</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 $5.8 million and $3.7 million for the six months ended June 30, 2000
and 1999, respectively. This premium income results primarily from the premium
paid by purchasers of loans originated through Allied Capital Express, less the
origination commissions associated with the loans sold. The Company sold $65.6
million and $35.0 million of loans originated through Allied Capital Express
during the six months ended June 30, 2000 and 1999, respectively. The Company
also sold commercial mortgage loans totaling $51.5 million and $33.0 million for
the six months ended June 30, 2000 and 1999, respectively.
Prepayment premiums were $2.0 million, and $0.6 million for the six months
ended June 30, 2000 and 1999, respectively. While the scheduled maturities of
private finance and commercial real estate loans range from five to ten years,
it is not unusual for the Company's borrowers to refinance or pay off their
debts to the Company ahead of schedule. Because the Company seeks to finance
primarily seasoned, performing companies, such companies at times can secure
lower cost financing as their balance sheets strengthen, or as more favorable
interest rates become available. Therefore, the Company generally structures its
loans to require a prepayment premium for the first three to five years of the
loan.
Our operating expenses include interest, employee and administrative
expenses. The Company's single largest expense is interest on indebtedness. The
fluctuations in interest expense during the six months ended June 30, 2000 and
1999 are attributable to changes in the level of borrowings by the Company and
its subsidiaries under various notes payable and debentures and revolving credit
34
<PAGE> 37
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
SIX MONTHS
ENDED
JUNE 30,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt...................................... $726.4 $508.0
Average Outstanding Debt.................................... $659.0 $388.3
Weighted Average Cost....................................... 8.1% 7.5%
BDC Asset Coverage*......................................... 225% 219%
</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 129 and 114 at June 30, 2000 and 1999,
respectively. The Company has been an active recruiter for experienced
investment and operational personnel, and the Company will continue to actively
recruit and hire new professionals throughout 2000 to support anticipated
portfolio growth.
Administrative expenses include the leases for the Company's headquarters
in Washington, DC, and its regional offices. Administrative expenses also
include travel costs, stock record expenses, directors' fees, legal and
accounting fees and various other expenses. The increase in administrative
expenses for the six months ended June 30, 2000 as compared to the six months
ended June 30, 1999 was primarily the result of increases in costs associated
with the growth of the Company and new regional offices.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance and
commercial mortgage loans, offset by losses on investments.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains.............................................. $15.9 $14.9
Realized Losses............................................. $(0.9) $(3.3)
----- -----
Net Realized Gains.......................................... $15.0 $11.6
===== =====
Net Unrealized Gains (Losses)............................... $ 2.1 $(1.3)
===== =====
</TABLE>
Realized gains of $15.9 million for the six months ended June 30, 2000,
resulted primarily from transactions involving five portfolio companies,
Southwest PCS, L.P. ($11.5 million), Julius Koch USA, Inc. ($1.7 million),
Hotelevision ($1.0 million), FTI Consulting, Inc. ($0.7 million) and Panera
Bread Co. ($0.6 million). During the second quarter of 2000, the Company had the
opportunity to sell its equity interest in Southwest PCS, L.P. ("SWPCS") to
SWPCS's parent company. The Company sold its equity interest in exchange for two
notes totaling $12.5 million. The
35
<PAGE> 38
first note is a short-term full recourse note for $5.0 million, bearing interest
at a rate of 15% per annum. The second note is a two-year full recourse note for
$7.5 million, bearing interest at 15% per annum. The second note is secured by
the equity interest sold by the Company. The Company reversed previously
recorded unrealized appreciation of $3.7 million when these gains were realized.
Realized gains for the six months ended June 30, 1999 of $14.9 million resulted
primarily from transactions involving two portfolio companies. The Company
reversed previously recorded unrealized appreciation of $6.5 million when these
1999 gains were realized.
Realized losses of $0.9 million and $3.3 million for the six months ended
June 30, 2000 and 1999, respectively, resulted from the liquidation of certain
portfolio investments. Losses realized for the six months ended June 30, 2000
and 1999 had been recognized in NIA over time as unrealized depreciation when
the Company determined that the respective portfolio security's value had become
impaired. Thus, the Company reversed previously recorded unrealized depreciation
totaling $0.7 million and $2.7 million when the related losses were realized for
the six months ended June 30, 2000 and 1999, respectively.
Net unrealized gains of $2.1 million and net unrealized losses of $1.3
million for the six months ended June 30, 2000 and 1999, respectively, consisted
of valuation changes resulting from the Board of Directors' valuation of the
Company's assets and the effect of reversals of unrealized appreciation or
depreciation resulting from realized gains or losses. At June 30, 2000, net
unrealized appreciation in the portfolio totaled $6.6 million and was composed
of unrealized appreciation of $36.8 million, resulting primarily from
appreciated equity interests in portfolio companies, and unrealized depreciation
of $30.2 million, resulting primarily from underperforming loan and equity
interests in the portfolio. At June 30, 1999, net unrealized appreciation in the
portfolio totaled $1.1 million and was composed of unrealized appreciation of
$29.1 million and unrealized depreciation of $28.0 million.
Net realized and unrealized gains can vary substantially on a quarterly
basis. Therefore, quarterly net realized and unrealized gains should not be
annualized to predict expected annual results.
The Company employs a standard grading system for the entire portfolio.
Grade 1 is used for those investments from which a capital gain is expected.
Grade 2 is used for investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no loss of
interest or principal is expected. Grade 4 is used for investments for which
some loss of contractually due interest is expected, but no loss of principal is
expected. Grade 5 is used for investments for which some loss of principal is
expected and the investment is written down to net realizable value.
At June 30, 2000, the Company's portfolio was graded as follows:
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE OF
GRADE AT VALUE TOTAL PORTFOLIO
----- ------------- ---------------
(IN MILLIONS)
<S> <C> <C>
1.................................................... $ 138.1 9.3%
2.................................................... 1,240.5 83.3%
3.................................................... 46.1 3.1%
4.................................................... 38.6 2.6%
5.................................................... 25.0 1.7%
-------- ------
$1,488.3 100.0%
======== ======
</TABLE>
36
<PAGE> 39
Included in the Grade 5 portfolio at June 30, 2000 are private finance
investments totaling $19.1 million at value, or 1.3% 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
$39.5 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 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.
At June 30, 2000, the credit quality of the Company's CMBS portfolio
remained strong, with less than 0.2% in delinquencies. The yield used to accrue
interest on this portfolio assumes a 1% loss rate on the entire underlying
collateral mortgage pool.
For the total investment portfolio, loans greater than 120 days delinquent
were $48.7 million at value at June 30, 2000, or 3.3% of the total portfolio.
Included in this category are loans valued at $16.1 million that are fully
secured by real estate. Loans greater than 120 days delinquent generally do not
accrue interest. Loans greater than 120 days delinquent at December 31, 1999
were $18.6 million at value, or 1.5% of the total portfolio, which included
$11.7 million that were fully secured by real estate. Because we are a provider
of long-term privately negotiated investment capital, it is not atypical for us
to defer payment of principal or interest from time to time. As a result, the
amount of our portfolio that is greater than 120 days delinquent may vary from
quarter to quarter. The terms of our private finance agreements frequently
provide an opportunity for our portfolio companies to restructure their debt and
equity capital. During such restructuring, we may not receive or accrue interest
or dividend payments. We price our investment portfolio to provide adequate
current returns for our shareholders assuming that a portion of the portfolio at
any time may not be accruing interest currently. We also price our investments
for a total return including current interest or dividends plus capital gains
from the sale of equity securities. Therefore, the amount of loans greater than
120 days delinquent is not necessarily an indication of future principal loss or
loss of anticipated investment return. The Company's portfolio grading system is
used as a means to assess loss of investment return (Grade 4 assets) or loss of
investment principal (Grade 5 assets).
The Company has elected to be taxed as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). As long as the Company qualifies as a RIC, the Company is not taxed on
its investment company taxable income or realized capital gains, to the extent
that such income or gains are distributed, or deemed to be distributed, to
shareholders on a timely basis. Annual tax distributions may differ from NIA for
the fiscal year due to timing differences in the recognition of income and
expenses, returns of capital and net unrealized appreciation or depreciation,
which are not included in taxable income.
In order to maintain its RIC status, the Company must, in general, (1)
derive at least 90% of its gross income from dividends, interest, gains from the
sale of securities and other specified types of income; (2) meet investment
diversification requirements as defined in the Code; and (3) distribute annually
to shareholders at least 90% of its investment company taxable ordinary income.
The Company intends to take all steps necessary to continue to meet the RIC
qualifications. However, there can be no assurance that the Company will
continue to elect or qualify for such treatment in future years.
The weighted average common shares outstanding used to compute basic
earnings per share were 68.1 million and 57.8 million for the six months ended
June 30, 2000 and 1999, respectively. The
37
<PAGE> 40
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 68.2 million and 57.8 million for the six months ended
June 30, 2000 and 1999, respectively.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
The following table summarizes Allied Capital's operating results for the
three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JUNE 30,
------------------- PERCENT
2000 1999 CHANGE CHANGE
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST AND RELATED PORTFOLIO INCOME
Interest................................................ $42,986 $28,158 $14,828 53%
Premiums from loan dispositions......................... 4,554 2,431 2,123 87%
Investment advisory fees and other income............... 2,425 2,597 (172) (7%)
------- ------- ------- ----
Total interest and related portfolio income..... 49,965 33,186 16,779 51%
------- ------- ------- ----
EXPENSES
Interest................................................ 14,280 8,042 6,238 78%
Employee................................................ 5,191 3,750 1,441 38%
Administrative.......................................... 4,082 2,926 1,156 40%
------- ------- ------- ----
Total operating expenses........................ 23,553 14,718 8,835 60%
------- ------- ------- ----
Formula and cut-off awards.............................. 1,712 1,849 (137) (7%)
------- ------- ------- ----
Portfolio income before net realized and
unrealized gains............................. 24,700 16,619 8,081 49%
------- ------- ------- ----
NET REALIZED AND UNREALIZED GAINS
Net realized gains...................................... 12,865 11,096 1,769 16%
Net unrealized losses................................... (2,775) (5,594) 2,819 50%
------- ------- ------- ----
Total net realized and unrealized gains......... 10,090 5,502 4,588 83%
------- ------- ------- ----
Net increase in net assets resulting from operations...... $34,790 $22,121 $12,669 57%
======= ======= ======= ====
Diluted earnings per share................................ $ 0.50 $ 0.38 $ 0.12 32%
======= ======= ======= ====
Weighted average shares outstanding - diluted............. 70,035 58,833 11,202 19%
</TABLE>
Net increase in net assets resulting from operations (NIA) results from
total interest and related portfolio income earned, less total expenses incurred
in the operations of the Company, plus net realized and unrealized gains or
losses. In addition to the discussion of the comparison of the three months
ended June 30, 2000 to the three months ended June 30, 1999 that follows, refer
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Comparison of Six Months Ended June 30, 2000 and 1999" above for
additional discussion regarding the nature of and reasons for fluctuation in
income and expense items in the Company's operating results.
Total interest and related portfolio income increased for the three months
ended June 30, 2000 by 51% as compared to the three months ended June 30, 1999.
Total interest and related portfolio income is primarily a function of the level
of interest income earned and the balance of portfolio
38
<PAGE> 41
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
JUNE 30,
----------------
2000 1999
------ ------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Total Interest and Related Portfolio Income................. $50.0 $33.2
Per share................................................... $0.71 $0.56
</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 43% to $1,361.1 million at June 30, 2000 from $954.1 million at
June 30, 1999.
Included in net premiums from loan dispositions are premiums from loan
sales and premiums received on the early repayment of loans. Premiums from loan
sales were $3.6 million and $1.9 million for the three months ended June 30,
2000 and 1999, respectively, resulting primarily from the sale of $39.5 million
and $21.3 million of loans originated through Allied Capital Express during the
three months ended June 30, 2000 and 1999, respectively. The Company also sold
commercial mortgage loans totaling $38.0 million and $2.2 million for the three
months ended June 30, 2000 and 1999, respectively. Prepayment premiums were $0.9
million, and $0.5 million for the three months ended June 30, 2000 and 1999,
respectively.
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 June 30, 2000 and
1999 are attributable to changes in the level of borrowings by the Company and
its subsidiaries under various notes payable and debentures and revolving credit
facilities. The Company's borrowing activity and weighted average interest cost,
including fees and closing costs, were as follows:
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS
ENDED
JUNE 30,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Total Outstanding Debt...................................... $726.4 $508.0
Average Outstanding Debt.................................... $690.6 $422.3
Weighted Average Cost....................................... 8.1% 7.5%
BDC Asset Coverage*......................................... 225% 219%
</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 129 and 114 at June 30, 2000 and 1999,
respectively. The Company has been an active recruiter for experienced
investment
39
<PAGE> 42
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 June 30, 2000 as compared to the three
months ended June 30, 1999 was primarily the result of increases in costs
associated with the growth of the Company and new regional offices.
Net realized gains resulted from the sale of equity securities associated
with certain private finance investments and the realization of unamortized
discount resulting from the sale and early repayment of private finance and
commercial mortgage loans, offset by losses on investments. For further
discussion of net realized and unrealized gains and losses, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Comparison of Six Months Ended June 30, 2000 and 1999" above.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JUNE 30,
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Realized Gains.............................................. $13.2 $14.1
Realized Losses............................................. (0.3) (3.0)
----- -----
Net Realized Gains.......................................... $12.9 $11.1
===== =====
Net Unrealized Losses....................................... $(2.8) $(5.6)
===== =====
</TABLE>
The weighted average common shares outstanding used to compute basic
earnings per share were 70.0 million and 58.7 million for the three months ended
June 30, 2000 and 1999, respectively. The increases in the weighted average
shares reflect the issuance of new shares and the issuance of shares pursuant to
a dividend reinvestment plan.
All per share amounts included in management's discussion and analysis have
been computed using the weighted average shares used to compute diluted earnings
per share, which were 70.0 million and 58.8 million for the three months ended
June 30, 2000 and 1999, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At June 30, 2000, the Company had $28.7 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.
40
<PAGE> 43
DEBT
The Company had outstanding debt at June 30, 2000 as follows:
<TABLE>
<CAPTION>
ANNUAL
AMOUNT INTEREST
OUTSTANDING COST(1)
------------- --------
(IN MILLIONS)
<S> <C> <C>
Notes payable and debentures:
Unsecured long-term notes payable......................... $419.0 7.7%
SBA debentures............................................ 70.7 8.3%
OPIC loan................................................. 5.7 6.6%
------ ----
Total notes payable and debentures................. $495.4 7.8%
------ ----
Revolving credit facilities:
Revolving line of credit.................................. $231.0 8.7%
======
Total debt......................................... $726.4 8.1%
====== ====
</TABLE>
-------------------------
(1) The annual interest cost includes the cost of commitment fees and other
facility fees.
UNSECURED LONG-TERM NOTES PAYABLE. The Company has issued long-term debt
to institutional lenders, primarily insurance companies. The notes have five- or
seven-year maturities. The notes require payment of interest only semi-annually,
and all principal is due upon maturity.
SBA DEBENTURES. The Company, through its SBIC subsidiary, has debentures
payable to the SBA with terms of ten years. The notes require payment of
interest only semi-annually, and all principal is due upon maturity. The Company
may borrow up to $105 million from the SBA under the SBIC program. At June 30,
2000, the Company has a commitment to borrow up to an additional $30 million
from the SBA. The commitment expires on March 1, 2010.
REVOLVING LINE OF CREDIT. The Company has a two-year, $417.5 million
unsecured revolving line of credit that expires in May 2002. This facility may
be expanded up to $500 million. At the Company's option, the credit facility
bears interest at a rate equal to (i) the one-month London Inter-Bank Offered
Rate ("LIBOR") plus 1.25% or (ii) the higher of (a) the Bank of America, N.A.
prime rate or (b) the Federal Funds rate plus 0.50%. The credit facility
requires monthly payments of interest, and all principal is due upon maturity.
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. There were no borrowings under this facility at June
30, 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 BDC, it is
limited in the amount of debt capital it may use to fund its growth, since it is
generally required to maintain a ratio of 200% of total assets to total
borrowings, or approximately 1 to 1 debt to equity capital ratio.
To support its growth during the six months ended June 30, 2000, the
Company raised $141.9 million in new equity capital, of which $99.7 million was
raised during the three months ended June 30, 2000, primarily through the sale
of shares from its shelf registration statement. At June 30, 2000, total
shareholders' equity had increased to $818.1 million. We raise equity from time
to time using a shelf registration statement. We raise new equity when we have a
clear use of proceeds for
41
<PAGE> 44
attractive investment opportunities. Historically, this process has enabled us
to raise equity on an accretive basis for existing shareholders of our common
stock.
The Company's Board has established a dividend policy for 2000 to review
the dividend rate quarterly, and to adjust the quarterly dividend rate
throughout the year as the Company's earnings momentum builds. In 1999, the
Board had established a dividend policy of level quarterly dividends of $0.40
per common share, for an annual total distribution of $1.60 per common share to
approximate annual taxable income. The Board changed its dividend policy for
2000 because of the Company's significant portfolio growth and continued growth
in ordinary taxable income. For the first and second quarter of 2000, the Board
declared a $0.45 per common share dividend. For the third quarter of 2000, the
Board has declared a dividend of $0.46 per common share.
As a result of growth in ordinary taxable income combined with the
increased size and diversity of the Company's portfolio and its projected future
capital gains, the Company's Board of Directors will continue to evaluate
whether to retain or distribute capital gains as they occur. The new policy will
allow the Company to continue to distribute some capital gains, but will also
allow the Company to retain gains that exceed a normal capital gains
distribution level, and therefore avoid any unusual spike in dividends in any
one year. The new policy also enables the Board to selectively retain gains to
support future growth.
The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations, through
borrowings under short- or long-term credit facilities or other debt securities,
through asset sales, or through the sale of new equity capital. The Company will
utilize its short-term credit facilities only as a means to bridge to long-term
financing. The Company evaluates its interest rate exposure on an ongoing basis.
The Company maintains a matched-funding philosophy that focuses on matching the
estimated maturities of its loan and investment portfolio to the estimated
maturities of its borrowings. The Company also manages its interest rate risk by
financing floating-rate assets with similar term floating-rate liabilities and
fixed-rate assets with similar term fixed-rate liabilities. To the extent deemed
necessary, the Company may hedge variable and short-term interest rate exposure
through interest rate swaps or other techniques. At June 30, 2000, the Company's
debt to equity ratio was less than 1 to 1. The Company's weighted average cost
of funds was 8.1% at June 30, 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 June 30, 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.
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
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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 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
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<PAGE> 46
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 June 30, 2000, the Company's asset coverage for indebtedness was
225%. 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 June 30, 2000, the Company had $726.4 million of outstanding
indebtedness, bearing a weighted annual interest cost of 8.1%. In order for us
to cover annual interest payments on indebtedness, we must achieve annual
returns on our portfolio of at least 3.7%.
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 company
("BDC"), we are generally required to maintain a ratio of at least 200% of total
assets to total borrowings, which may restrict our ability to borrow in certain
circumstances.
OUR PORTFOLIO MAY NOT PRODUCE CAPITAL GAINS. Private finance investments
are typically structured as debt securities with a relatively high fixed rate of
interest and with an equity feature such as conversion rights, warrants or
options. As a result, private finance investments generate interest income from
the time they are made, and may also produce a realized gain from an
accompanying equity feature. We cannot be sure that our portfolio will generate
a current return or capital gains.
LOSS OF PASS-THROUGH TAX TREATMENT WOULD SUBSTANTIALLY REDUCE NET ASSETS
AND INCOME AVAILABLE FOR DIVIDENDS. We have operated the Company so as to
qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). If we meet certain source of income, diversification
and distribution requirements, the Company qualifies for
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pass-through tax treatment. The Company would cease to qualify for pass-through
tax treatment if it were unable to comply with these requirements, or if it
ceased to qualify as a BDC under the 1940 Act. We also could be subject to a 4%
excise tax (and, in certain cases, corporate level income tax) if we fail to
make certain distributions. If the Company fails to qualify as a RIC, the
Company would become subject to federal income tax as if it were an ordinary
corporation, which would substantially reduce our net assets and the amount of
income available for distribution to our shareholders.
WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We
compete for investments with many other companies and individuals, some of whom
have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices. As a
result of this competition, sometimes we may be precluded from making otherwise
attractive investments.
WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT. We are regulated by the
Commission and the SBA. In addition, changes in the laws or regulations that
govern BDCs, RICs, real estate investment trusts ("REITs"), SBICs and SBLCs may
significantly affect our business. Laws and regulations may be changed from time
to time, and the interpretations of the relevant laws and regulations also are
subject to change. Any change in the law or regulations that govern our business
could have a material impact on the Company or its operations.
QUARTERLY RESULTS MAY FLUCTUATE. The Company's quarterly operating results
could fluctuate due to a number of factors. These factors include, among others,
variations in the investment origination volume, variation in timing of
prepayments, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, you
should not rely on quarterly results to be indicative of the Company's
performance in future quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the quantitative or qualitative
disclosures about market risk since December 31, 1999.
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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 June 30, 2000 ACC issued a total of 69,000
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
On May 9, 2000, the Company held its Annual Meeting of Shareholders in
Washington, DC. Shareholders voted on three matters; the substance of these
matters and the results of the voting of each such matter are described below.
There were no broker non-votes for these three matters.
1. Election of Directors: Shareholders elected four directors of the
Company, who will serve for three years, or until their successors are
elected and qualified. Votes were cast as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
John I. Leahy.......................................... 63,900,048 504,869
Warren K. Montouri..................................... 63,895,396 509,520
Guy T. Steuart II...................................... 63,898,102 506,816
T. Murray Toomey, Esq.................................. 63,892,022 512,892
</TABLE>
The following directors are continuing as directors of the Company for
their respective terms -- William L. Walton, Brooks H. Browne, John D.
Firestone, Anthony T. Garcia, Lawrence I. Hebert, Robert E. Long, Laura W.
van Roijen and George C. Williams, Jr.
2. Ratification of the selection of Arthur Andersen LLP to serve as
independent public accountants for the year ending December 31, 2000.
Votes were cast as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
63,911,191 231,331 262,386
</TABLE>
3. Shareholders approved the amendment to the Company's Stock Option Plan.
Votes were cast as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
38,885,243 3,786,279 941,790
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
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<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.
10.1c(15) Third Amendment to Credit Agreement dated March 17, 2000.
10.1d(16) Amended and Restated Credit Agreement dated May 17, 2000.
10.2(8) Note Agreement dated as of April 30, 1998.
10.3(5) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
10.4(12) Note Agreement dated as of May 1, 1999.
10.4a(15) Note Agreement dated as of November 15, 1999.
10.5(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.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.10b(14) Termination Amendment to the Allied Capital Employee Stock
Ownership Plan effective December 31, 1999.
10.10c(16) Employment Agreement dated June 15, 2000 between the Company
and William L. Walton.
10.10d(16) Employment Agreement dated June 15, 2000 between the Company
and Joan M. Sweeney.
10.10e(16) Employment agreement dated June 15, 2000 between the Company
and G. Cabell Williams III.
10.11(10) Amended and Restated Deferred Compensation Plan dated
December 30, 1998.
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 herein.
21 Subsidiaries of the Company and jurisdiction of
incorporation/organization:
Allied Investment Corporation Maryland
Allied Capital SBLC Corporation Maryland
Allied Capital REIT, Inc. Maryland
Allied Capital Holdings LLC Delaware
Allied Capital Beteiligungsberatung GmbH Germany
27* Financial Data Schedule
</TABLE>
--------------------
* Filed herewith.
(1) Incorporated by reference to exhibit 3(i) with Allied Lending's Annual
Report on Form 10-K for the year ended December 31, 1996.
(2) Incorporated by reference from Appendix B to the Company's
registration statement on Form N-14 filed on the Company's behalf with
the Commission on September 26, 1997 (File No. 333-36459).
(3) Incorporated by reference to the exhibit of the same name filed with
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(4) Incorporated by reference to the exhibit of the same name filed with
Allied I's Annual Report on Form 10-K for the year ended December 31,
1996.
(5) Incorporated by reference to Exhibit f.7 of Allied I's Pre-Effective
Amendment No. 2 filed with the registration statement on Form N-2 on
January 24, 1996 (File No. 33-64629). Assignment to Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
(6) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on May 5, 1998 (File No. 333-51899).
(7) Incorporated by reference to the exhibit of the same name filed with
the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998.
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<PAGE> 51
(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.
(16) Incorporated by reference to the exhibit of the same name to the
Company's registration statement on Form N-2 filed on the Company's
behalf with the Commission on August 11, 2000.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended June
30, 2000.
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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: August 11, 2000 /s/ PENNI F. ROLL
-------------------------------------
Executive Vice President and Chief
Financial Officer
</TABLE>
50
