<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, 1997 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 May 12, 1997 there were 8,992,070 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 - As of March 31, 1997 and December 31, 1996 ............... 1
Consolidated Statement of Income - For the Three Months Ended
March 31, 1997 and 1996 ................................................................ 2
Consolidated Statement of Cash Flows - For the Three Months Ended
March 31, 1997 and 1996 .............................................................. 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 ....................................................................... 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 ......................................................... 8
Signatures ....................................................................................... 9
</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>
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 4,819 $ 5,060
Investment advisory and management fees receivable .................... 4,013 4,282
Other current assets .................................................. 1,296 1,107
-------- --------
Total current assets ................................................ 10,128 10,449
Property and equipment, net ............................................. 4,313 4,279
Deferred compensation trust ............................................. 1,818 1,514
Deferred income taxes ................................................... 1,097 1,087
Other assets ............................................................ 186 194
------- -------
Total assets ....................................................... $ 17,542 $ 17,523
======= =======
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accrued salaries and employee benefits ............................... $ 1,726 $ 3,113
Accounts payable and accrued expenses ................................. 1,133 701
------- --------
Total current liabilities ........................................... 2,859 3,814
Deferred compensation ................................................... 2,661 2,658
------- --------
Total liabilities ................................................... 5,520 6,472
------- --------
Contingencies
Shareholders' Equity:
Common stock, $0.001 par value; 20,000,000 shares
authorized; 8,992,070 shares and 8,867,430
outstanding as of 3/31/97 and 12/31/96, respectively ................ 9 9
Additional paid-in capital ............................................ 5,974 5,674
Retained earnings ..................................................... 6,879 6,106
Common stock held in deferred compensation trust ...................... (840) (738)
----- -----
Total shareholders' equity .......................................... 12,022 11,051
------- -------
Total liabilities and shareholders' equity .......................... $ 17,542 $ 17,523
======= =======
</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
March 31,
--------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenue:
Investment advisory and management fees ................................ $ 3,995 $ 3,885
Rental and other income ................................................ 331 288
-------- --------
Total revenue ...................................................... 4,326 4,173
-------- --------
Expenses:
Salaries and employee benefits ........................................ 2,057 2,217
General and administrative ............................................ 692 462
Depreciation and amortization ......................................... 106 90
Rent ................................................................... 164 160
-------- --------
Total Expenses ...................................................... 3,019 2,929
-------- --------
Income before income taxes ............................................... 1,307 1,244
Income tax expense ....................................................... 534 512
-------- --------
Net income .............................................................. $ 773 $ 732
======== ========
Net income per share ..................................................... $ 0.08 $ 0.07
======== ========
Weighted average number of shares and share
equivalents outstanding ............................................... 9,678 9,879
======== ========
</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 Three Months Ended March 31,
------------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ................................................................... $ 773 $ 732
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ........................................... 106 90
Deferred income taxes .................................................... (10) (51)
Changes in assets and liabilities ........................................ (778) (724)
------ ------
Net cash provided by operating activities .................................... 91 47
------ ------
Cash Flows from Investing Activities:
Expenditures for property and equipment .................................. (142) (214)
Acquisition of investments in deferred compensation trust ................ (338) -
Distribution of deferred compensation .................................... (50) (50)
------ ------
Net cash used in investing activities ........................................ (530) (264)
------ ------
Cash Flows for Financing Activities:
Acquisition of common stock in deferred compensation trust................ (102) -
Proceeds from sale of common stock ....................................... 300 -
------ ------
Net cash provided by financing activity ...................................... 198 -
------ ------
Net decrease in cash and cash equivalents ................................... (241) (217)
Cash and cash equivalents - beginning of period .............................. 5,060 4,386
------ ------
Cash and cash equivalents - end of period .................................... $ 4,819 $ 4,169
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
<PAGE> 6
ALLIED CAPITAL ADVISERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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,
1997 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, 1996 Annual Report. The results
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the operating results to be expected for the full year. Certain
reclassifications have been made to the 1996 financial statements in order to
conform to the 1997 presentation.
NOTE 2. INVESTMENT ADVISORY SERVICES
The Company has investment advisory or management agreements to manage the
assets of certain companies. The investment advisory or management agreements
are generally annual agreements and remain in effect as long as they continue
to be approved by the board of directors of the companies under management.
These agreements may be terminated at any time on sixty days' notice, without
penalty, by the managed companies' board of directors or by a vote of the
holders of a majority of the managed companies' outstanding shares, and these
agreements will terminate automatically in the event of their assignment.
The Company does not have an ownership interest in most of the companies it
manages; however, certain officers and directors of the Company are also
officers and directors of the companies managed, and therefore they may be
considered affiliates. The Company manages the day-to-day activities of these
companies pursuant to the investment advisory or management agreements and
provides personnel, administrative services and assistance, facilities and
other support. As set forth in the agreements, the Company pays certain
operating expenses, including compensation of the companies' officers and other
related personnel costs, office space, and equipment.
The Company receives advisory and management fees as set forth in the various
advisory or management agreements it has with the managed entities. At March
31, 1997 and December 31, 1996, the Company managed assets of approximately
$807,000,000 and $764,000,000, respectively. Included in invested assets at
March 31, 1997 and December 31, 1996, were approximately $51,000,000 and
$53,000,000, respectively, in assets of a company that is co-managed by another
investment manager. The Company pays one-third of its fees received from this
company to the co-manager.
The fees charged pursuant to these agreements generally approximate 2.5 percent
on invested assets and 0.5 percent on interim investments and cash and cash
equivalents on an annual basis. The Company receives payments of advisory and
management fees quarterly in arrears. The Company from time to time will waive
or adjust its advisory or management fees, given certain regulatory or economic
circumstances. The Company believes that it is prudent to waive or adjust its
fees when market conditions dictate such an adjustment, and such actions will
enhance the Company's investment advisory and management performance overall.
In order for Allied Capital Commercial Corporation (Allied Commercial) to
remain competitive, the Company revised the management fee structure with
Allied Commercial. The fee schedule was first revised on May 3, 1996 and that
scheduled applied to all loans originated or purchased on or after January 1,
1996. Advisers and Allied Commercial modified the fees again in January 1997
for loans originated or purchased on or after January 1, 1997.
The revised fee schedule tiers the management fee payable to Advisers, based
upon certain characteristics of the outstanding loans held in Allied
Commercial's loan portfolio. The revised fee schedule is based upon credit
quality and other factors associated with the loans, and fees range from
approximately 0.5 percent per annum to 3.5 percent per annum. The revised fee
schedule places a quarterly cap, at a rate of approximately 2.5 percent per
annum, on the total management fees payable
4
<PAGE> 7
to Advisers with respect to Allied Commercial's portfolio. The new fee
schedule does not alter the fees charged on cash, temporary investments or
other assets.
For the first quarter of 1997 and 1996, investment advisory and management fees
as a percent of total average assets under management were 2.0% and 2.2%,
respectively.
NOTE 3. DEFERRED COMPENSATION TRUST
In the first quarter of 1997, the trust purchased various securities, including
18,390 shares of the Company's common stock, which is accounted for as treasury
stock. The other investments made by the Trust included money market funds,
mutual funds, and common stock of certain companies that are under management
of the Company.
NOTE 4. 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
or management fee receivable or $1,000,000. The Agreement expires May 31,
1997.
NOTE 5. NET INCOME PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128, "Earnings per Share" (SFAS 128). SFAS
128 is effective for financial statements for both interim and annual periods
ending after December 15, 1997. SFAS 128 modifies the method of calculation of
net income per share and also requires a reconciliation between basic and
diluted per share amounts. Early adoption of the statement prior to the end of
1997 is not allowed.
The following table (in thousands except per share data) presents the effect of
SFAS 128 on the Company's net income per share as if adopted for current period
disclosure:
<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Net income ......................................................... $773 $732
==== ====
Basic average shares outstanding .................................... 8,933 8,990
===== =====
Basic net income per share .......................................... $0.09 $0.08
===== =====
Effect of dilutive securities:
Outstanding stock options ...................................... 745 889
----- -----
Diluted average shares outstanding ................................. 9,678 9,879
===== =====
Diluted net income per share ........................................ $0.08 $0.07
===== =====
</TABLE>
NOTE 6. CONTINGENCIES
The Company is party to certain lawsuits in connection with its business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, management does not expect that these actions will have a
material effect upon the financial condition of the Company.
5
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Allied Capital Advisers, Inc. and its subsidiary (The
Company) had $4.8 million in cash and cash equivalents. Current assets were
$10.1 million compared to current liabilities of $2.9 million.
The Company is a service company and does not have a significant budget for
capital expenditures. Capital expenditures during the first quarter of 1997
were $142,000 and have been largely due to the purchase of computer equipment.
Capital resources available at March 31, 1997 appear adequate to satisfy future
operating needs. There are no known demands or uncertainties that might cause
the Company to have an increased or decreased demand for liquidity.
RESULTS OF OPERATIONS
Comparison of 1997 to 1996
David Gladstone stepped down as Chairman and Chief Executive Officer in early
1997. Mr. Gladstone also resigned as director of the Company in 1997 and did
not stand for reelection to the board of directors of the Company.
The Company's board of directors appointed William L. Walton as the Company's
new Chairman and Chief Executive Officer. Mr. Walton has been affiliated with
the Allied Capital companies for more than ten years, both as a director of the
Company and as a past director of Allied Capital Corporation.
Net income increased 5.6% to $773,000 or $0.08 per share for the three months
ended March 31, 1997 from $732,000 or $0.07 per share for the comparable period
in 1996. Investment advisory and management fee revenue increased to $4.0
million for the three months ended March 31, 1997 compared to $3.9 million for
the comparable period in 1996, an increase of 2.8%. The increase in net income
and investment advisory fee revenue resulted from the Company being able to
continue to increase the assets of the various companies under its management.
Total assets under management increased to approximately $807 million as of
March 31, 1997 from approximately $764 million at December 31, 1996. This
represents a 5.6% increase in assets under management. The investment advisory
and management fees charged are pursuant to investment advisory and management
agreements and the fees may vary depending upon the particular agreement, and
such fees range from 0.5% to 3.5% on invested assets and are 0.5% on cash and
temporary investments.
For the first quarter of 1997 and 1996, investment advisory and management fees
as a percent of total average assets under management were 2.0% and 2.2%,
respectively. Included in invested assets under management as March 31, 1997
are approximately $51 million in assets of a company that is co-managed by
another investment manager. The Company pays one-third of its management fees
from this company to the co-manager.
The company from time to time will waive or adjust its investment advisory or
management fees depending upon the type of investments of a company under
management. The Company and its managed fund will agree to a waiver or
adjustment of advisory and management fees when particular regulatory or
economic circumstances warrant. The Company believes that it is prudent to
waive or adjust its fees when market conditions dictate, and such action will
enhance the Company's investment advisory and management performance overall.
Throughout the first quarter of 1997, the companies under management providing
mezzanine financing continued to experience increased competition in the
marketplace. These companies are approaching new investment activity cautiously
to assure that they receive adequate compensation for the levels of risk
associated with these investments. As a result, asset growth for these
companies has slowed, and the market is expected to remain competitive.
Rental and other income includes rent income generated from the office
building, interest earned on cash and temporary investments and earnings from
the assets in its deferred compensation trust (realized and unrealized
earnings). Rental and other income increased 14.9% to $331,000 for the three
months ended March 31, 1997 from $288,000 for the same period in 1996. For the
three months ended March 31, 1997 and 1996, the office building generated
rental income of $236,000 and $222,000, respectively. Interest income from
cash and temporary investments was $82,000 and $67,000 for the first quarter
ended March 31, 1997 and 1996, respectively. In addition, earnings from the
assets held in the deferred compensation trust equaled $14,000
6
<PAGE> 9
for the three months ended March 31, 1997. The first quarter of 1996 did not
have earnings from the deferred compensation trust because it was not
established until December 1996. Earnings in the deferred compensation trust
include interest and dividend income and unrealized appreciation or
depreciation on equity securities.
Total expenses increased 3.1% to $3.0 million as compared to $2.9 million for
the three months ended March 31, 1997 and 1996, respectively. Salaries and
employee benefits decreased $0.2 million, or 7.2% compared to 1996 expenses.
The decrease in salaries and employee benefits in 1997 represents a reduction
in headcount for senior investment personnel. The Company is recruiting
additional investment professionals and the level of salary expense is
anticipated to rise throughout the year. General and administrative expenses
increased to $692,000 or 50% for the three months ended March 31, 1997 as
compared to the comparable period in 1996. The increase in general and
administrative expenses is primarily due to the Company's use of investment
consultants while management continues to recruit for permanent investment
professionals.
Pre-tax income for the three months ended March 31, 1997 increased by 5.0% or
$62,000 over 1996. The effective tax rate was 41% for the first quarter ended
March 31, 1997 and 1996.
Statements included in this report 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.
7
<PAGE> 10
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in connection with its
business. While the outcome of these legal proceedings cannot at this
time be predicted with certainty, management does not expect that
these actions will have a material effect upon the financial condition
of the Company.
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 February 7, 1997 to disclose
a revision to its investment management fee schedule with Allied
Capital Commercial Corporation. The revised fee schedule allows for
fees as low as 0.5% per annum on high quality loans to approximately
3.0% 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 January 1, 1997 and applies to loans originated or purchased
on or after January 1, 1997.
8
<PAGE> 11
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, 1997 Jon A. DeLuca
Executive Vice President and
Chief Financial Officer
9
<PAGE> 1
Allied Capital Advisers, Inc.
Exhibit 11 Computation of Earnings Per Common Share
Form 10-Q
March 31, 1997
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Primary Earnings Per Common Share:
Net Income $773,000 $723,000
==============================
Weighted average of common
shares outstanding 8,932,747 8,990,349
Weighted average of common
shares issuable on exercise
of outstanding stock options 745,277 888,620
------------------------------
Weighted average of common
shares outstanding, as adjusted 9,678,024 9,878,969
==============================
Net Income per share $0.08 $0.07
==============================
Fully Diluted Earnings Per Common Share:
Net Income $773,000 $723,000
==============================
Weighted average common
shares and common share
equivalents as computed for
primary earnings per share 9,678,024 9,878,969
==============================
Weighted average of additional
shares issuable on exercise
of outstanding stock options 0 92,076
------------------------------
Weighted average of common
shares outstanding, as adjusted 9,678,024 9,971,045
==============================
Net Income assuming full dilution $0.08 $0.07
==============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, statements of operations and cash flows and is
qualified in its entirety by reference to such form 10Q for the quarter
ended March 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,819
<SECURITIES> 0
<RECEIVABLES> 4,013
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,128
<PP&E> 6,038
<DEPRECIATION> 1,725
<TOTAL-ASSETS> 17,542
<CURRENT-LIABILITIES> 2,859
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 12,022
<TOTAL-LIABILITY-AND-EQUITY> 17,542
<SALES> 0
<TOTAL-REVENUES> 4,326
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,307
<INCOME-TAX> 534
<INCOME-CONTINUING> 773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 773
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
