<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 MARCH 31, 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 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
On May 3, 1996 there were 8,990,349 shares outstanding of the Registrant's
common stock, $0.001 par value.
<PAGE> 2
ALLIED CAPITAL ADVISERS, INC. AND SUBSIDIARY
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1996 and December 31, 1995 . . . . 1
Consolidated Statement of Income - For the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Cash Flows - For the Three Months Ended
March 31, 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. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 4,169 $ 4,386
Investment advisory fees receivable . . . . . . . . . . 3,967 4,067
Other current assets . . . . . . . . . . . . . . . . . 942 1,099
------- --------
Total current assets . . . . . . . . . . . . . . . . 9,078 9,552
Property and equipment, net . . . . . . . . . . . . . . . 4,397 4,273
Deferred income taxes . . . . . . . . . . . . . . . . . . 757 706
Other assets . . . . . . . . . . . . . . . . . . . . . . 247 245
------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $ 14,479 $ 14,776
======= ========
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accrued salaries and employee benefits . . . . . . . . $ 1,297 $ 2,483
Accounts payable and accrued expenses . . . . . . . . . 993 929
------- --------
Total current liabilities . . . . . . . . . . . . . . 2,290 3,412
Deferred compensation . . . . . . . . . . . . . . . . . . 2,470 2,377
------- --------
Total liabilities . . . . . . . . . . . . . . . . . . 4,760 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 3/31/96 and 12/31/95 . . . . . . .
9 9
Additional paid-in capital . . . . . . . . . . . . . . 5,674 5,674
Retained earnings . . . . . . . . . . . . . . . . . . . 4,036 3,304
------- --------
Total shareholders' equity . . . . . . . . . . . . . 9,719 8,987
------- --------
Total liabilities and shareholders' equity . . . . . $ 14,479 $ 14,776
======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
<PAGE> 4
ALLIED CAPITAL ADVISERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Revenue:
Investment advisory and management fees . . . . . . . . . . . . . $ 3,885 $ 3,179
Rental and other income . . . . . . . . . . . . . . . . . . . . . 288 401
------ --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . 4,173 3,580
------ --------
Expenses:
Salary and employee benefit expenses . . . . . . . . . . . . . . 2,217 2,056
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 159
General and administrative . . . . . . . . . . . . . . . . . . . 552 475
----- --------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,929 2,690
------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . 1,244 890
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . 512 367
------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 732 $ 523
======== ========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.07 $ 0.06
======== ========
Weighted average number of shares and share
equivalents outstanding . . . . . . . . . . . . . . . . . . . . 9,879 9,455
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
<PAGE> 5
ALLIED CAPITAL ADVISERS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1996 1995
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<S> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 732 $ 523
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 90 68
Deferred income taxes . . . . . . . . . . . . . . . . . . (51) (41)
Changes in assets and liabilities . . . . . . . . . . . . . . (774) (885)
------- ---------
Net cash used in operating activities . . . . . . . . . . . . (3) (335)
------- ---------
Cash Flows from Investing Activities:
Expenditures for property and equipment . . . . . . . . . (214) (54)
------- ---------
Net cash used in investing activities . . . . . . . . . . . . (214) (54)
------- ---------
Net decrease in cash and cash equivalents . . . . . . . . . . (217) (389)
Cash and cash equivalents - beginning of period . . . . . . . 4,386 1,955
------ --------
Cash and cash equivalents - end of period . . . . . . . . . . $ 4,169 $ 1,566
====== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE> 6
ALLIED CAPITAL ADVISERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 three months ended March
31, 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.
On May 3, 1996, the Company reached an agreement in principle with
Allied Capital Commercial Corporation ("Allied Commercial"), a
commercial mortgage REIT whose assets are managed by the Company, to
revise the fee schedule under the investment management agreement
between those entities. As of March 31, 1996 and December 31, 1995,
the assets of Allied Commercial represented approximately $349
million, or 48%, and $298 million, or 44%, of the assets under
management of the Company, and fees earned from managing Allied
Commercial's assets represented approximately 42% and 39% of the
Company's total revenue for the three months ended March 31, 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 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 1.00% 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 2.50% per
annum. Most loans fall into this category, which reflects the
prior fee structure for Allied Commercial's portfolio of Invested
Assets.
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
3.50% 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.
4
<PAGE> 7
ALLIED CAPITAL ADVISERS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
Similar to the previous fee arrangement, the revised fee schedule
places a quarterly cap, at a rate of 2.50% 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. Rather, Cash and Interim
Investments will continue to incur management fees, payable quarterly
in arrears, at a rate of 0.50% per annum.
NOTE 3. REVOLVING LINE OF CREDIT AGREEMENT
The Company has a 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. The Agreement expires
May 31, 1996; however, management anticipates renewing this Agreement
with similar terms prior to its expiration.
5
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had $4,169,000 in cash and cash
equivalents as compared to $4,387,000 at December 31, 1995. The
Company does not have any short or long-term debt obligations as of
March 31, 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 does have a 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.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1996 was $732,000.
This is an increase of $209,000, or 40% over the same period in 1995.
The substantial growth in net income is a result of increases in
revenue arising from increasing invested assets under management
combined with moderate growth in operating expenses.
The Company's revenue for the three months ended March 31, 1996 was
$4,173,000, and was $3,580,000 for the same period in 1995, for an
increase of 17%. Assets under management increased by approximately
$50 million during the first quarter 1996 with a total increase of
approximately $160 million since the end of the first quarter of 1995.
Total assets under management at March 31, 1996 were approximately
$720 million. The significant growth in assets during the first
quarter of 1996 was largely due to the purchase and originations of
commercial real estate loans for Allied Commercial and Business
Mortgage Investors, Inc. Allied Commercial began to offer two new
products in the first quarter of 1996. One product is a stronger
credit quality loan that offers a more competitive interest rate, and
Allied Commercial was able to purchase and originate loans aggregating
$53 million of these loans in the first quarter alone. As discussed
in Note 2 to the financial statements, the Company has revised its fee
schedule with Allied Commercial for these higher-credit quality loans,
and the Company will charge a fee ranging from approximately 1% to
1.25% per annum on these loans. Originations and purchases in the
other funds under the Company's management in the first quarter of
1996 were largely offset by repayments and changes in valuation, and
as a result, did not contribute to an increase in advisory fee
revenue. Cash and temporary investments in the aggregate for the
funds under the Company's management increased by approximately $13
million largely due to the successful completion of a rights offering
to the shareholders of Allied Capital Corporation that generated
approximately $8.2 million in new equity for that fund.
Income before income taxes increased $354,000 to $1,244,000 for the
three months ended March 31, 1996, over the same period in 1995.
Total expenses as a percent of total revenue has continued to decline
throughout 1995 and 1996; since, expenses were 70% and 75% of total
revenue for the quarters ended March 31, 1996 and 1995, respectively.
Operating expenses increased by 9% in the first quarter of 1996 as
compared to the first quarter of 1995. This increase was largely a
result of salary increases over the past year.
Income before income taxes includes the operations of the office
building purchased in September of 1994. During the three months
ending March 31, 1996, the building generated rental income of
$222,000 and $203,000 for the same period in 1995. For the same
periods, the building's operating expenses were $110,000 and $104,000,
respectively.
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
The Company filed a report on Form 8-K on May 6, 1996 to
disclose a revision to its investment management fee
schedule for Allied Capital Commercial Corporation (Allied
Commercial). The revised fee schedule allows for fees
as low as 1.0% per annum on high quality loans to
approximately 3.5% per annum for those that require more
sophisticated underwriting, closer monitoring or carry loan
characteristics that are generally inferior to loans
currently in the portfolio. However, there is a quarterly cap
at a rate of approximately 2.5% per annum on the total
management fees payable to the Company. The revised fee
schedule is effective March 31, 1996 and applies to
loans originated or purchased on or after January 1, 1996.
All other loans in Allied Commercial's Portfolio remain
subject to the existing fee schedule.
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: May 13, 1996 Jon A. DeLuca
Executive Vice President and
Chief Financial Officer
8
<PAGE> 1
Allied Capital Advisers, Inc.
Exhibit 11 Computation of Earnings Per Common Share
Form 10-Q
March 31, 1996
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Primary Earnings Per Common Share:
Net Income $732,000 $523,000
============================
Weighted average of common
shares outstanding 8,990,349 8,854,288
Weighted average of common
shares issuable on exercise
of outstanding stock options 888,620 600,439
----------------------------
Weighted average of common
shares outstanding, as adjusted 9,878,969 9,454,727
============================
Net Income per share $0.07 $0.06
============================
Fully Diluted Earnings Per Common Share:
Net Income $732,000 $523,000
============================
Weighted average common
shares and common share
equivalents as computed for
primary earnings per share 9,878,969 9,454,727
Weighted average of additional
shares issuable on exercise
of outstanding stock options 92,076 103,534
----------------------------
Weighted average of common
shares outstanding, as adjusted 9,971,045 9,558,261
============================
Net Income assuming full dilution $0.07 $0.05
============================
</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
March 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,169
<SECURITIES> 0
<RECEIVABLES> 3,967
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,078
<PP&E> 5,766
<DEPRECIATION> 1,369
<TOTAL-ASSETS> 14,479
<CURRENT-LIABILITIES> 2,290
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 9,710
<TOTAL-LIABILITY-AND-EQUITY> 14,479
<SALES> 0
<TOTAL-REVENUES> 4,173
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,244
<INCOME-TAX> 512
<INCOME-CONTINUING> 732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 732
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
