<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period Commission file number:
ended SEPTEMBER 30, 1996 0-18826
------------------ ----------------------
ALLIED CAPITAL ADVISERS, INC.
------------------------------------------------------
(exact name of Registrant as specified in its charter)
MARYLAND 52-0812307
- ----------------------- ----------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1666 K STREET, N.W.
9TH FLOOR
WASHINGTON, DC 20006
-------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 331-1112
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 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 November 8, 1996 there were 8,990,349 shares outstanding of the Registrant's
common stock, $0.001 par value.
<PAGE> 2
ALLIED CAPITAL ADVISERS, INC.
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . 1
Consolidated Statement of Income - For the Three and Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows - For the Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 7
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 3
PART I - Financial Information
Item 1. Financial Statements
ALLIED CAPITAL ADVISERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 5,736 $ 4,386
Investment advisory fees receivable . . . . . . . . . . . . . . . . . 4,370 4,067
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,100 1,099
------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 11,206 9,552
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . 4,320 4,273
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 841 706
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 245
------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,619 $ 14,776
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued salaries and employee benefits . . . . . . . . . . . . . . . $ 1,813 $ 2,483
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 876 929
------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 2,689 3,412
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . 2,617 2,377
------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 5,306 5,789
------- --------
Contingencies
Shareholders' Equity:
Common stock, $0.001 par value; 20,000,000 shares
authorized; 8,990,349 shares issued and
outstanding as of 9/30/96 and 12/31/95 . . . . . . . . . . . . . . 9 9
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 5,674 5,674
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 5,630 3,304
------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 11,313 8,987
------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . $ 16,619 $ 14,776
======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
<PAGE> 4
ALLIED CAPITAL ADVISERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ -------------------------
1996 1995 1996 1995
---------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Investment advisory and management fees . . . . . . . . . . . . $ 4,064 $ 3,582 $11,850 $ 10,569
Rental and other income . . . . . . . . . . . . . . . . . . . . 318 307 899 773
-------- ------- ------ -------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . 4,382 3,889 12,749 11,342
-------- ------- ------ -------
Expenses:
Salary and employee benefit expenses . . . . . . . . . . . . . 2,010 1,917 6,277 5,987
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 160 481 479
General and administrative . . . . . . . . . . . . . . . . . . 840 665 2,021 1,798
-------- ------- ------ -------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 3,010 2,742 8,779 8,264
-------- ------- ------ -------
Income before income taxes . . . . . . . . . . . . . . . . . . . 1,372 1,147 3,970 3,078
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . 565 488 1,644 1,286
-------- ------- ------ -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 807 $ 659 $ 2,326 $ 1,792
======== ======= ====== =======
Net income per share . . . . . . . . . . . . . . . . . . . . . . $ 0.08 $ 0.07 $ 0.24 $ 0.19
======== ======= ====== =======
Weighted average number of shares and share
equivalents outstanding . . . . . . . . . . . . . . . . . . . 9,913 9,772 9,877 9,624
======== ======= ====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
<PAGE> 5
ALLIED CAPITAL ADVISERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,326 $1,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 281 212
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (135) (136)
Changes in assets and liabilities . . . . . . . . . . . . . . . . . . (794) (802)
------- -------
Net cash provided by operating activities . . . . . . . . . . . . . . 1,678 1,066
------ ------
Cash Flows from Investing Activities:
Expenditures for property and equipment . . . . . . . . . . . . . (328) (312)
Net cash used in investing activities . . . . . . . . . . . . . . . . (328) (312)
------- -------
Cash Flows from Financing Activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . -- 328
------ ------
Net cash provided by financing activities . . . . . . . . . . . . . . -- 328
------ ------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . 1,350 1,082
Cash and cash equivalents - beginning of period . . . . . . . . . . . 4,386 1,955
------ ------
Cash and cash equivalents - end of period . . . . . . . . . . . . . . $5,736 $3,037
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE> 6
ALLIED CAPITAL ADVISERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1. GENERAL
In the opinion of management, the accompanying unaudited consolidated
financial statements of Allied Capital Advisers, Inc. and Subsidiary (the
Company) contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the Company's financial position as of September 30,
1996 and the results of operations, 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 financial statements
be read in conjunction with the financial statements and notes thereto included
in the Company's December 31, 1995 Annual Report. The results of operations for
the nine months ended September 30, 1996 are not necessarily indicative of the
operating results to be expected for the full year. Certain reclassifications
have been made to the 1995 financial statements in order to conform to the 1996
presentation.
NOTE 2. INVESTMENT ADVISORY SERVICES
The Company has investment advisory or management agreements to manage
the assets of certain companies. The Company charges a management fee for
managing the day-to-day activities of these companies pursuant to those
agreements.
In May 1996, the Company reached an agreement with Allied Capital Commercial
Corporation ("Allied Commercial"), a commercial mortgage real estate
investment trust whose assets are managed by the Company, to revise the fee
schedule under the investment management agreement between those entities. As
of September 30, 1996 and December 31, 1995, the assets of Allied Commercial
represented approximately $348 million, or 46%, and $298 million, or 44%, of the
assets under management of the Company, respectively. Fees earned from managing
Allied Commercial's assets represented approximately 42% and 39% of the
Company's total revenue for the nine months ended September 30, 1996 and for the
year ended December 31, 1995, respectively. The revised fee schedule applies to
fees payable by Allied Commercial beginning with the quarter ended March 31,
1996, and only applies to loans originated or purchased by Allied Commercial on
or after January 1, 1996. All other loans in Allied Commercial's portfolio
remain subject to the prior fee schedule of approximately 2.5% per annum on
invested assets.
The revised fee schedule reflects three tiers of management fee percentages
payable to the Company, based upon a classification of the outstanding loans
(i.e., "Invested Assets") held in Allied Commercial's investment portfolio.
This three-tiered schedule is intended to allow Allied Commercial to enter
into two new business areas. First, Allied Commercial will seek to originate
or purchase high credit quality, lower interest rate loans and to be more cost
competitive on these types of loans. Second, it will seek to originate or
otherwise invest, on a limited basis, in loans secured by real estate with
more difficult credit situations that may offer a higher return to the
portfolio.
Class A loans, which have loan-to-value, debt service coverage, and payment
history characteristics that generally are superior to those of Allied
Commercial's loan portfolio at December 31, 1995, will incur management fees,
payable quarterly in arrears, at a rate of 1.25% per annum, subject to
adjustment by the Company to a rate of 1.0% per annum under certain
circumstances.
Class B loans, which have credit characteristics that generally are comparable
to those of the majority of loans held in Allied Commercial's loan portfolio
at December 31, 1995, will incur management fees, payable quarterly in arrears,
at a rate of 2.5% per annum. Most small loans fall into this category, which
reflects the prior fee structure for Allied Commercial's portfolio of
Invested Assets.
4
<PAGE> 7
ALLIED CAPITAL ADVISERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Class C loans, which have credit characteristics that generally are inferior
to those of Allied Commercial's existing loan portfolio, will incur management
fees, payable quarterly in arrears, at a rate of 3.5% per annum. These loans
are "out of the ordinary," and therefore require more sophisticated
underwriting and/or closer monitoring than the majority of Allied Commercial's
existing loans. Class C loans either represent "turnaround financing"
investments or have a non-performing or sub-performing payment history.
Similar to the previous fee arrangement, the revised fee schedule places
a quarterly cap, at a rate of 2.5% per annum, on the total management fees
payable to the Company with respect to Allied Commercial's holdings of Invested
Assets.
Management fees payable to the Company with respect to Allied Commercial's
holdings of cash, cash equivalents, and short-term U.S. government
or agency securities and repurchase agreements collateralized thereby (i.e.,
"Cash and Interim Investments") are not affected by the revised fee schedule.
Cash and Interim Investments will continue to incur management fees, payable
quarterly in arrears, at a rate of 0.5% per annum.
NOTE 3. REVOLVING LINE OF CREDIT AGREEMENT
The Company renewed its revolving line-of-credit agreement (the "Agreement")
with a bank whereby the Company may borrow the lesser of 70% of the accrued
advisory fee receivable or $1,000,000 with the same terms. The renewed
Agreement expires May 31, 1997.
5
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 1996 AND 1995
Net income increased 22% to $807,000 or $0.08 per share for the third
quarter of 1996 from $659,000 or $0.07 per share in the third quarter
of 1995. Total revenue increased 13% to $4,382,000 from the same
quarter a year ago. Total revenue is comprised of investment advisory
and management fees and rental and other income. The increase in
investment advisory and management fee revenue resulted from the
increase in assets under management. Assets under management equaled
approximately $755 million and approximately $639 million as of
September 30, 1996 and 1995, respectively. This represents an 18%
increase in assets under management. In addition, rental and other
income increased 4% to $318,000 from $307,000 for the three months
ended September 30, 1996 and 1995, respectively. This increase
resulted primarily from the increase in interest earned from cash and
temporary investments.
The Company has been able to control its operating expenses as it
continues to increase its assets under management. Total operating
expenses as a percent of revenue have declined to 69% for third
quarter 1996 as compared to 71% for the comparable period in 1995.
The effective tax rate in determining net income was approximately 41%
and 42% for three months ended September 30, 1996 and 1995,
respectively.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net income for the nine months ended September 30, 1996 was $2.33
million or $0.24 per share, an increase of $534,000 or 30% over the
comparable nine month period of the prior year. The growth in assets
under management resulted in an increase of 12% in investment advisory
and management fee revenue over the comparable period last year.
Operating expenses in 1996 as compared with the corresponding period
in 1995, have grown at a rate of 6%.
The Company's total revenue for the nine months ended September 30,
1996 was $12,749,000, as compared to $11,342,000 for the same period
in 1995. Assets under management increased by approximately $85
million during the nine months ended September 30, 1996 with a total
increase of $116 million since the end of the third quarter of 1995.
The growth in assets during the nine months ended September 30, 1996
was largely due to the purchase and origination of commercial real
estate loans for Allied Commercial and Business Mortgage Investors,
Inc. ("BMI"). In the nine months ended September 30, 1996 Allied
Commercial and BMI collectively have increased invested assets
incurring a 2.5% per annum fee by $11 million and invested assets
incurring 1 - 1.25% per annum increased $71 million.
Income before income taxes increased $892,000 to $3,970,000 for the
nine months ended September 30, 1996, over the same period in 1995.
Total operating expenses were 69% and 73% of total revenue for the
nine months ended September 30, 1996 and 1995, respectively.
Income before income taxes includes the operations of the office
building purchased in September of 1994. During the nine months ended
September 30, 1996, the building generated rental income of $670,000,
as compared to $610,000 for the same period in 1995. For the same
periods, the building's total expenses were $383,000 and $360,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $5,736,000 in cash and cash
equivalents as compared to $4,386,000 at December 31, 1995. The
Company does not have any short or long-term debt obligations
outstanding as of September 30, 1996.
The Company's primary source of funds is its advisory and management
agreements with the companies it manages. The Company believes that
cash flow generated from operations will be sufficient to fulfill its
working capital requirements. The Company renewed its revolving
line-of-credit with a bank whereby the Company may borrow the lesser
of 70% of the accrued advisory fees receivable or $1,000,000. The
revolving line-of-credit was renewed with the same terms as before and
expires May 31, 1997.
Statements included in this filing concerning the Company's future
prospects are "forward looking statements" under the Federal
securities laws. There can be no assurance that future results will
be achieved and actual results could differ materially from forecasts
and estimates. Important factors that could cause actual results to
differ materially are included but are not limited to those listed in
the Company's quarterly reports as filed on Form 10-Q and annual
report as filed on Form 10-K.
6
<PAGE> 9
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 known 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
None
Item 5. OTHER INFORMATION
Not applicable
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 September 30, 1996.
7
<PAGE> 10
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 ADVISERS, INC.
-----------------------------
(Registrant)
/s/Jon A. DeLuca
--------------------------------------
Date: November 13, 1996 Jon A. DeLuca
Executive Vice President and
Chief Financial Officer
8
<PAGE> 1
Allied Capital Advisers, Inc.
Exhibit 11 Statement of Computation of Earnings Per Common Share
Form 10-Q
September 30, 1996
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1996 1995 1996 1995
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
Primary Earnings Per Common Share:
Net Income $807,000 $659,000 $2,236,000 $1,792,000
========================== ============================
Weighted average of common
shares outstanding 8,990,349 8,960,309 8,990,349 8,906,518
Weighted average of common
shares issuable on exercise
of outstanding stock options 922,612 811,250 886,370 717,680
-------------------------- ----------------------------
Weighted average of common
shares outstanding, as adjusted 9,912,961 9,771,559 9,876,719 9,624,198
========================== ============================
Net Income per share $0.08 $0.07 $0.24 $0.19
========================== ============================
Fully Diluted Earnings Per Common
Share:
Net Income $807,000 $659,000 $2,326,000 $1,792,000
========================== ============================
Weighted average common
shares and common share
equivalents as computed for
primary earnings per share 9,912,961 9,771,559 9,876,719 9,624,198
Weighted average of additional
shares issuable on exercise
of outstanding stock options 0 18,262 30,558 134,000
-------------------------- ----------------------------
Weighted average of common
shares outstanding, as adjusted 9,912,961 9,789,821 9,907,277 9,758,198
========================== ===========================
Net Income assuming full dilution $0.08 $0.07 $0.23 $0.18
========================== ===========================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, statement of operations and cash flows and is
qualified in its entirety by reference to such Form 10-Q for the quarter ended
September 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,736
<SECURITIES> 0
<RECEIVABLES> 4,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,206
<PP&E> 5,888
<DEPRECIATION> 1,568
<TOTAL-ASSETS> 16,619
<CURRENT-LIABILITIES> 2,689
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 11,304
<TOTAL-LIABILITY-AND-EQUITY> 16,619
<SALES> 0
<TOTAL-REVENUES> 12,749
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,970
<INCOME-TAX> 1,644
<INCOME-CONTINUING> 2,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,326
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
