<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period Commission file number:
ended JUNE 30, 1995 0-18016
------------- -----------
ALLIED CAPITAL CORPORATION II
------------------------------------------------------
(exact name of Registrant as specified in its charter)
MARYLAND 52-1628801
------------------------- --------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1666 K STREET, N.W.
SUITE 901
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 or 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 11, 1995 there were 6,938,191 shares outstanding of the Registrant's
common stock, $1 par value.
<PAGE>
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Financial Position as of June 30, 1995
and December 31, 1994........................................... 1
Consolidated Statement of Operations - For the Three and
Six Months Ended June 30, 1995 and 1994......................... 2
Consolidated Statement of Changes in Net Assets - For the
Six Months Ended June 30, 1995 and 1994......................... 3
Consolidated Statement of Cash Flows - For the Six Months Ended
June 30, 1995 and 1994.......................................... 4
Notes to Consolidated Financial Statements...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 8
Item 2. Changes in Securities.......................................... 8
Item 3. Defaults Upon Senior Securities................................ 8
Item 4. Submission of Matters to a Vote of Security Holders............ 8
Item 5. Other Information.............................................. 8
Item 6. Exhibits and Reports on Form 8-K............................... 9
Signatures.............................................................. 10
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands, except number of shares)
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Investments at value:
Loans and debt securities....................... $ 85,123 $ 79,423
Equity securities............................... 10,893 6,714
Other investment assets......................... 1,646 1,993
------- -------
Total investments........................... 97,662 88,130
Cash and cash equivalents......................... 4,458 11,591
U.S. government securities........................ 1,086 748
Other assets...................................... 1,130 1,465
-------- --------
Total assets................................ $104,336 $101,934
-------- --------
-------- --------
Liabilities
Dividends and distributions payable............... $ -- $ 2,359
Investment advisory fee payable................... 623 579
Due to affiliates................................. 139 297
Other liabilities................................. 1,016 1,224
-------- --------
Total liabilities.......................... 1,778 4,459
-------- --------
Commitments and Contingencies
Shareholders' Equity
Common stock, $1 par value; 20,000,000 shares
authorized; 6,938,191 shares issued and
outstanding at 6/30/95 and 12/31/94.............. 6,938 6,938
Additional paid-in capital........................ 89,860 89,860
Notes receivable from sale of common stock........ (844) (943)
Net unrealized appreciation on investments........ 7,303 2,919
Distributions in excess of accumulated earnings... (699) (1,299)
-------- --------
Total shareholders' equity................. 102,558 97,475
-------- --------
Total liabilities and shareholders' equity. $104,336 $101,934
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
<PAGE>
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1995 1994 1995 1994
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Investment income:
Interest............................................ $2,585 $2,195 $5,450 $4,238
Other income........................................ 223 -- 290 --
-------- ------- ------- ------
Total investment income........................... 2,808 2,195 5,740 4,238
-------- ------- ------- ------
Expenses:
Investment advisory fee............................. 623 529 1,214 1,033
Legal and audit fees................................ 55 15 183 79
Other operating expenses............................ 151 121 232 174
-------- ------- ------- ------
Total expenses.................................... 829 665 1,629 1,286
-------- ------- ------- ------
Net investment income................................. 1,979 1,530 4,111 2,952
Net realized gains on investments..................... 56 540 96 620
-------- ------- ------- ------
Net investment income before net unrealized
appreciation on investments.......................... 2,035 2,070 4,207 3,572
Net unrealized appreciation on investments............ 3,613 596 4,384 525
-------- ------- ------- ------
Net increase in net assets resulting from operations.. $5,648 $2,666 $8,591 $4,097
-------- ------- ------- ------
-------- ------- ------- ------
Earnings per share.................................... $ 0.81 $ 0.38 $ 1.24 $ 0.59
-------- ------- ------- ------
-------- ------- ------- ------
Weighted average number of shares and share
equivalents outstanding.............................. 6,963 6,938 6,952 6,938
-------- ------- ------- ------
-------- ------- ------- ------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
<PAGE>
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1995 1994
----------- ----------
<S> <C> <C>
Increase in net assets resulting from operations:
Net investment income.................................. $ 4,111 $ 2,952
Net realized gains on investments...................... 96 620
Net change in unrealized appreciation on investments... 4,384 525
-------- --------
Net increase in net assets resulting from operations. 8,591 4,097
Distributions to Shareholders.............................. (3,607) (3,469)
Capital Share Transactions................................. 99 33
-------- --------
Net Increase in Net Assets................................. 5,083 661
Net assets at beginning of period.......................... 97,475 96,225
-------- --------
Net assets at end of period................................ $102,558 $ 96,886
-------- --------
-------- --------
Net asset value per share.................................. $ 14.78 $ 13.96
-------- --------
-------- --------
Shares outstanding at end of period........................ 6,938 6,938
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE>
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1995 1994
------ -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net increase in net assets resulting from operations........... $ 8,591 $ 4,097
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Net unrealized appreciation on investments................. (4,384) (525)
Net realized gains on investments.......................... (96) (620)
Changes in assets and liabilities:
Other assets............................................... 335 (208)
Investment advisory fee payable............................ 44 58
Due to affiliates.......................................... (158) (714)
Other liabilities.......................................... (208) 60
------- -------
Net cash provided by operating activities.............. 4,124 2,148
------- -------
Cash Flows From Investing Activities:
Net increase in investments................................. (5,051) (9,523)
Net (purchase) redemption of U.S. government securities..... (338) 5,828
Payments on notes receivable................................ 99 33
------- -------
Net cash used in investing activities................... (5,290) (3,662)
------- -------
Cash Flows From Financing Activities:
Dividends and distributions paid............................ (5,967) (4,995)
------- -------
Net cash used in financing activities................... (5,967) (4,995)
------- -------
Net decrease in cash and cash equivalents........................ (7,133) (6,509)
Cash and cash equivalents, beginning of period................... 11,591 10,947
------- -------
Cash and cash equivalents, end of period......................... $ 4,458 $ 4,438
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
<PAGE>
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
NOTE 1. GENERAL
In the opinion of management, the accompanying unaudited
consolidated financial statements of Allied Capital Corporation II and
subsidiaries (the Company) contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position as of June 30, 1995 and the results of
operations, changes in net assets, and cash flows for the periods
indicated. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 1994 Annual
Report. The results of operations for the six months ended June 30,
1995 are not necessarily indicative of the operating results to be
expected for the full year. Certain reclassifications have been made
to the 1994 condensed financial statements in order to conform to the
1995 presentation.
NOTE 2. DISTRIBUTIONS
The Company's Board of Directors declared a $0.27 per share second
quarter dividend that was paid on June 30, 1995 to shareholders of
record on June 16, 1995. In addition, the Company's Board of Directors
also declared a $0.25 per share first quarter dividend that was paid on
March 31, 1995 to shareholders of record on March 17, 1995.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Commitments. The Company had loan commitments outstanding equal to
$3.0 million at June 30, 1995 to invest in various existing and
prospective portfolio companies.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Total investments increased by 10.8% from $88.1 million at
December 31, 1994 to $97.7 million at June 30, 1995. This increase was
primarily due to new investments of $16 million, net of repayments
and valuation changes of approximately $6 million. Cash and cash
equivalents and U.S. government securities decreased by 55% from
$12.3 million at December 31, 1994 to $5.5 million at June 30, 1995 due
to the increase in investments, net of repayments, and dividends paid
to shareholders. Net assets increased from $97.5 million at
December 31, 1994 to $102.6 million at June 30, 1995. This increase
is due to the net increase in net assets resulting from operations for
the six months ended June 30, 1995 exceeding the first and second
quarter dividends declared.
At June 30, 1995 outstanding commitments for future financings
were $3.0 million. The Company's current cash and short-term
investments combined with its available $25 million line of credit
is adequate to satisfy these commitments, and other future investment
opportunities throughout the year.
RESULTS OF OPERATIONS
Second Quarter Ended June 30, 1995 Compared with Second Quarter Ended
June 30, 1994.
Net increase in net assets resulting from operations for the
second quarter of 1995 of $5.6 million increased 112% as compared to
the 1994 net increase in net assets resulting from operations of
$2.7 million. Earnings per share for the quarter increased to $0.81
per share from $0.38 per share in 1994.
The largest single factor effecting the increase in net assets
resulting from operations for the second quarter ended June 30, 1995
resulted from $3.6 million in unrealized appreciation on investments
resulting from the Company's valuation of the portfolio as of
June 30, 1995. The Company believes that several small businesses in
the portfolio have appreciated significantly, and that this
appreciation can be evaluated through recent offering of the small
business concern's stock or through current private negotiations for
new financing or sale transactions.
Total investment income increased 28% from $2.2 million for the
second quarter of 1994 to $2.8 million for the second quarter of 1995.
The increase in interest income resulted from an increase in loans and
debt securities. Other income consists primarily of legal fees
recovered during the second quarter of 1995. Expenses increased 25%
from $0.7 million from the second quarter of 1994 to $0.8 million for
the second quarter of 1995. The investment advisory fee increased 18%
resulting from the increase in investments that the investment advisory
fee is based upon. Net realized gains on investments decreased to
$56,000 for the second quarter of 1995 from $0.5 million in the second
quarter of 1994. Net realized gains are unpredictable as the Company
exits transactions when it believes realized gains can be maximized.
Six Months Ended June 30, 1995 Compared with Six Months Ended
June 30, 1994.
Net increase in net assets resulting from operations for the six
months ended June 30, 1995 increased to $8.6 million or 110% from
$4.1 million in the same period of 1994. Earnings per share for the
period increased to $1.24 per share from $0.59 per share in 1994. The
increase in net assets resulting from operations for the six months was
caused by the same factors discussed in the quarter-to-quarter
comparison above.
6
<PAGE>
PORTFOLIO CHANGES
The following represents portfolio investment balances in the Company as
of June 30, 1995 that have changes in appreciation or depreciation by more than
10% as compared to the appreciation or depreciation as of December 31, 1994.
<TABLE>
<CAPTION>
Appreciation (Depreciation)
-------------------------------------
Investment Company June 30, 1995 December 31, 1994 $ Change Percent Change
------------------ ------------- ----------------- -------- --------------
<S> <C> <C> <C> <C>
Allied Waste $ 351,556 $ 0 $351,556 *
Devlieg-Bullard (51,764) 0 (51,764) *
Dogloo, Inc. 574,372 0 574,372 *
Envirco Corp 633,687 124,687 509,000 408%
Enviroplan (27,853) 66,529 (94,382) (142%)
Garden Ridge 2,735,064 433,125 2,301,939 531%
Grant Broadcasting 290,992 0 290,992 *
Jackson Products 642,530 183,418 459,112 250%
June Broadcasting 990,571 411,970 578,601 140%
Markings and Equipment (632,140) (315,000) (317,140) (101%)
Mill It Stripping (125,000) 0 (125,000) *
Montgomery Tank 165,946 123,906 42,040 34%
National Museum 302,432 0 302,432 *
Old Mill (31,556) 0 (31,556) *
Princeton Care 6,845 0 6,845 *
R-Tex Decoratives (25,439) 0 (25,439) *
Savage Mill 706,810 869,263 (162,453) (19%)
Sunstates Refrigeration (2,525) 0 (2,525) *
West Virginia Radio (200,000) (150,000) (50,000) (33%)
Williams Brothers 683,599 856,799 (173,200) (20%)
<FN>
* Percentage not applicable due to zero balance at December 31, 1994.
</TABLE>
7
<PAGE>
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any material pending legal proceeding
and no such material proceedings are know to be contemplated.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Allied Capital Corporation II held its annual meeting of
shareholders on May 11, 1995 in Chevy Chase, Maryland. The following
directors were elected as proposed in the proxy material to serve until
the next annual shareholders meeting:
<TABLE>
<CAPTION>
FOR WITHHELD
--------- --------
<S> <C> <C>
David Gladstone 5,822,855 49,843
George C. Williams 5,821,656 51,041
William F. Dunbar 5,822,792 49,905
Lawrence I. Hebert 5,822,855 49,843
John D. Reilly 5,822,855 49,843
Smith T. Wood 5,822,855 49,843
John D. Firestone 5,822,855 49,843
John I. Leahy 5,817,559 55,139
</TABLE>
Shareholders also ratified the selection of Matthews Carter &
Boyce to serve as independent accountants until the next shareholders
meeting. The Company received 5,777,893 shares voting in favor of
ratification, 44,192 shares voting against the ratification, and 50,609
shares abstaining from voting.
Shareholders also approved a new Investment Advisory Agreement
which clarified certain provisions of the existing agreement and
ensured compliance with applicable requirements of the Investment
Company Act of 1940. The Company received 5,545,905 shares voting in
favor of approving the amendment, 98,363 shares voting against
approving the amendment, and 89,328 shares abstaining from voting.
Item 5. OTHER INFORMATION
During 1994, in the course of a review of certain regulatory matters,
the Company determined that the board of directors of the Company was
composed of a lesser percentage of non-interested directors than
required by relevant provisions of the Investment Company Act of 1940
(the ""1940 Act''). Specifically, certain non-officer directors of the
Company owned stock of Allied Capital Advisers, Inc. (""Advisers''),
and one non-officer director was affiliated with a broker/dealer
registered under the Securities Exchange Act of 1934. Actions were
taken promptly to bring the Company's board of directors into
compliance with the relevant provisions of the 1940 Act. A committee
of non-interested directors of the Company and Allied Capital
Corporation was formed to review this matter. At its own initiative,
Advisers also undertook an audit of compliance with securities laws as
they relate to the Company and its subsidiaries. The Company currently
does not believe that this situation will have a material adverse
effect on the operations of the Company or on its financial position.
8
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
11 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1995.
9
<PAGE>
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 II
-----------------------------
(Registrant)
/s/ Jon A. DeLuca
-----------------------------
Date: August 14, 1995 Jon A. DeLuca
--------------- Senior Vice President and
Chief Financial Officer
10
<PAGE>
Allied Capital Corporation II and Subsidiaries
Exhibit 11 Computation of Earnings Per Common Share
Form 10-Q
June 30, 1995
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1995 1994 1995 1994
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Net Increase in Net Assets Resulting from Operations $5,648,000 $2,666,000 $8,591,000 $4,097,000
------------------------- ------------------------
------------------------- ------------------------
Weighted average number of shares outstanding 6,938,191 6,938,191 6,938,191 6,938,191
Weighted average number of
shares issuable on exercise
of outstanding stock options 25,059 -- 7,028 336
------------------------- ------------------------
Weighted average number of shares and
share equivalents outstanding 6,963,250 6,938,191 6,945,219 6,938,527
------------------------- ------------------------
------------------------- ------------------------
Earnings per Share $0.81 $0.38 $1.24 $0.59
------------------------- ------------------------
------------------------- ------------------------
Fully Diluted Earnings Per Share:
Net Increase in Net Assets Resulting
from Operations $5,648,000 $2,666,000 $8,591,000 $4,097,000
------------------------- ------------------------
------------------------- ------------------------
Weighted average number of
shares and share equivalents
outstanding as computed for
primary earnings per share 6,963,250 6,938,191 6,945,219 6,938,527
Weighted average of additional
shares issuable on exercise
of outstanding stock options -- 2,624 -- 983
------------------------- ------------------------
Weighted average of shares and
share equivalents outstanding, as adjusted 6,963,250 6,940,815 6,945,219 6,939,510
------------------------- ------------------------
------------------------- ------------------------
Earnings per Share $0.81 $0.38 $1.24 $0.59
------------------------- ------------------------
------------------------- ------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary Financial Information extracted from Consolidated
Statement of Financial Positions, Consolidated Statement of Operations,
Consolidated Statement of Changes in Net Assets, Consolidated Statement of Cash
Flows, and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 90,359
<INVESTMENTS-AT-VALUE> 97,662
<RECEIVABLES> 0
<ASSETS-OTHER> 1,130
<OTHER-ITEMS-ASSETS> 5,544
<TOTAL-ASSETS> 104,336
<PAYABLE-FOR-SECURITIES> 1,016
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 762
<TOTAL-LIABILITIES> 1,778
<SENIOR-EQUITY> 6,938
<PAID-IN-CAPITAL-COMMON> 89,860
<SHARES-COMMON-STOCK> 6,938
<SHARES-COMMON-PRIOR> 6,938
<ACCUMULATED-NII-CURRENT> 4,111
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 96
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,384
<NET-ASSETS> 102,558
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,450
<OTHER-INCOME> 290
<EXPENSES-NET> 1,629
<NET-INVESTMENT-INCOME> 4,111
<REALIZED-GAINS-CURRENT> 96
<APPREC-INCREASE-CURRENT> 4,384
<NET-CHANGE-FROM-OPS> 8,591
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,607
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,402
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,214
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,629
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.05
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 1.24
<PER-SHARE-DIVIDEND> 0.52
<PER-SHARE-DISTRIBUTIONS> 0.01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.78
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
