<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-20352
ALLIED CAPITAL COMMERCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------
MARYLAND 52-1777868
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, NW, NINTH FLOOR
WASHINGTON, D.C. 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 19, 1997 was approximately
$343,787,830 based upon the average bid and asked price for the registrant's
common stock on that date. As of March 19, 1997 there were 14,288,771 shares of
the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts I, II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 13, 1997 are incorporated by
reference into Part III of this Report.
<PAGE> 2
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PART I
ITEM 1. BUSINESS.
Allied Capital Commercial Corporation (the "Company") was incorporated
in Maryland in June 1992. The Company's existence as a corporation is
perpetual; however, stockholders holding more than two-thirds of the Company's
shares outstanding and entitled to vote in 2000, 2003 or 2006 can elect to have
the Company's Board of Directors liquidate the Company. Allied Capital
Advisers, Inc. ("Advisers"), a registered investment adviser, serves as the
Company's investment manager.
The Company has elected to qualify as a real estate investment trust
("REIT") for federal tax purposes which allows the Company to pass through
earnings to its stockholders without the incidence of corporate income tax. To
qualify as a REIT, the Company must distribute at least 95% of its taxable
income to its stockholders.
The Company invests primarily in commercial loans to small businesses
secured by liens or mortgages on real estate ("business loans"). Such loans are
purchased or originated by the Company in accordance with established
underwriting criteria discussed below. The Company believes that it competes
successfully in the commercial mortgage finance market due to the creativity
and flexibility of its terms and because it specializes in mortgage financing
for entrepreneurs whose business is a source of revenue in addition to the real
estate itself. The Company derives income from interest on its business loans
and temporary investments and from discounts on its portfolio of purchased and
originated business loans.
When purchasing or originating business loans, the Company generally
participates with Business Mortgage Investors, Inc. ("BMI"), a company
privately owned by institutional and other accredited investors, for which
Advisers also serves as investment manager. The Company and BMI have agreed to
co-invest in the same loans, based upon agreed upon percentages, unless either
elects not to participate in a particular investment. The co-investment
percentages were 77% and 23% for the Company and BMI, respectively, at December
31, 1996. Effective January 1, 1997, BMI is no longer purchasing or originating
mortgage loans and is in liquidation.
Following the Company's initial public offering in July 1992, it began
purchasing loans from the Resolution Trust Corporation (the "RTC") and the
Federal Deposit Insurance Corporation (the "FDIC"). In 1993, the Company
continued to purchase business loans from the RTC and FDIC, and also purchased
business loans from banks, life insurance companies and other financial
institutions as well. The Company generally was able to purchase such loans at
a discount, which permitted it to produce a higher yield for its stockholders.
In 1994, the Company began to originate business loans. The Company continues
to make investments in mortgage loans by either purchasing loans from various
sources or by originating loans.
In November 1995, a securitization of approximately $121 million of
the Company's mortgage loans was effected through Allied Capital Funding,
L.L.C. ("Funding"), a limited liability company owned through financing
subsidiaries of the Company and BMI. The debt financing provided a total of
approximately $79 million to the Company and allowed the Company to achieve
long-term financing on a portion of its loan portfolio at a lower interest rate
than was available under alternative financing arrangements. The Company plans
to securitize additional loan pools if favorable pricing can be obtained.
In 1996, the Company also commenced development of a higher credit
quality commercial real estate loan program intended for purposes of expanding
its market focus and becoming more competitive in its existing markets. The
Company currently intends to continue to increase its origination of business
loans and to explore the possibility of providing other long-term financing to
businesses, such as sale-leaseback financing.
At December 31, 1996, approximately 57% of the Company's portfolio of
business loans carried a fixed rate of interest and approximately 43% had
adjustable rates of interest tied to various indices. The proportion of the
Company's portfolio of business loans which carry a fixed rate increased during
1996 from approximately 43% at December 31, 1995. Business loans originated by
the Company generally have a final maturity of five to seven years.
Occasionally, these loans may require payments of interest only or level
payments of principal and interest calculated to amortize principal on a 10- to
30-year basis with a balloon payment at maturity. At December 31, 1996, the
effective
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yield on the Company's portfolio of business loans was approximately 15%, which
reflects amortization of discounts on loans over the expected life of the loan
and the stated interest rate.
Business loans purchased or originated by the Company are not
intentionally concentrated in any particular geographical area or region or in
any particular industry. Information on certain concentrations of business
loans as of December 31, 1996 by state and industry is incorporated by
reference to Notes 4 and 16 of the Notes to Consolidated Financial Statements
of the Company specified in Item 8 below. Business loans purchased or
originated by the Company are secured by various properties, including hotels
and motels, office buildings, retail establishments, industrial warehouses and
nursing homes.
Loan Underwriting Procedures and Criteria
When the Company evaluates business loans for purchase, it generally
is provided with an information package that typically includes underwriting
information that was developed by the original lending institution at the
inception of the subject loan, such as the loan application, financial
statements of the borrower and property appraisals ("original underwriting
information"), as well as the loan documents and additional information, such
as payment histories. The original underwriting information can be out-of-date,
and Advisers, as the Company's investment manager, seeks to supplement this
information with additional, current data, such as commercial credit reports on
borrowers, geographic and industry demographic and economic data and current
property appraisals or site visits. When the Company seeks to purchase business
loans through a bidding process, its representatives generally are prohibited
from having direct contact with the borrowers during the bidding process, which
limits Advisers' ability to obtain current information about borrowers.
Advisers has developed a set of specific due diligence procedures to obtain
accurate current information about borrowers and the property securing the loan
in these situations which reduces the degree to which Advisers and the Company
must rely on out-of-date underwriting information. Decisions as to whether to
bid on, purchase or originate business loans are made by Advisers' credit
committee.
Leverage
During 1994, the Company, in conjunction with BMI, established a $40
million credit facility with a bank. At December 31, 1996, the Company had
borrowings in an aggregate principal amount of $21.3 million outstanding under
such credit facility. In January 1995, the Company, again in conjunction with
BMI, established a credit facility with an investment bank and at December 31,
1996 this facility provided $150 million in available credit to the Company and
BMI, of which $85.8 million and $1.5 million had been drawn by the Company and
BMI, respectively. The Company's long-term indebtedness pursuant to the debt
offered and sold by Funding was $54 million at December 31, 1996, of which
$10.5 million related to BMI's minority interest.
Competition
A large number of entities and individuals compete for the opportunity
to make the kinds of investments made by the Company. Many of these entities
and individuals have greater financial resources than the combined resources of
the Company. As a result of this competition, the Company may from time to time
be precluded from making otherwise attractive investments on terms considered
to be prudent in light of the risks to be assumed.
Investment Manager
Advisers is the investment manager of the Company pursuant to an
investment management agreement. Under that agreement, Advisers manages the
loans made by the Company, subject to the supervision and control of the Board
of Directors of the Company, and identifies, evaluates, structures, closes and
monitors the transactions in which the Company purchases or originates such
loans. The Company will not make any loan or other investment that has not been
recommended by Advisers. Except as to those investment decisions that require
specific approval or ratification by the Company's Board of Directors, Advisers
has the authority to effect loans, and purchases and sales of loans, for the
Company's account. Some of the directors and officers of Advisers are also
directors and officers of the Company.
The Company pays all of its operating expenses except those
specifically required to be borne by Advisers. The expenses paid by Advisers
include the compensation of its investment officers and the cost of office
space, equipment and
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other personnel necessary for day-to-day operations. The expenses that are paid
by the Company include its share of transaction costs incident to the
acquisition and disposition of loans, legal and auditing fees and expenses, the
fees and expenses of the Company's directors, costs of printing and
distributing proxy statements, public relations and other communications to
stockholders and the fees and expenses of the Company's custodian and transfer
agent. The Company also pays expenses associated with litigation and other
extraordinary or non-recurring expenses with respect to its operations and
investments, as well as expenses of required and optional insurance and
bonding. All fees paid to Advisers by any person in connection with an
investment transaction in which the Company participates or proposes to
participate are paid over to the Company. Advisers is, however, entitled to
retain for its own account any fees paid by or for the account of a company,
including a portfolio company, for special investment banking or consulting
work performed for that company which is not related to such investment
transaction.
As compensation for its services to the Company, Advisers is entitled
to be paid, quarterly in arrears, a management fee. The fee schedule tiers the
management fee percentages payable to Advisers, based upon certain
characteristics of the outstanding loans held in the Company's loan portfolio.
The fee schedule is based upon credit quality and other factors associated with
the loans, and fees range from approximately 0.5% per annum to 3.5% per annum
on each individual loan. The fee schedule places a quarterly cap at a rate of
approximately 2.5% per annum, on the total management fees payable to Advisers
with respect to the Company's investment in loans. The fee schedule in effect
for loans originated or purchased in 1995 and prior years requires a fee on all
loans at a rate of approximately 2.5% per annum. The fee schedule requires a
quarterly fee of 0.125% on cash, temporary investments or other assets of the
Company.
The Company understands that the fee provided for by the investment
management agreement with Advisers is comparable to that frequently paid by
private investment funds engaged in similar types of investments, as
compensation for the efforts and resources devoted by Advisers to identify,
evaluate, structure, close and monitor the types of private investments in
which the Company specializes.
Change of Chairman and Chief Executive Officer
After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new
Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a director
on March 19, 1997 and will not stand for election to the board of directors.
Mr. Walton has been affiliated with the Allied Capital companies for more than
ten years, both as a director of Advisers and as a past director of Allied
Capital Corporation. Mr. Walton's extensive experience in the investment
industry combined with his performance as an entrepreneur provide an excellent
mix of talent for the Company. He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages. Mr. Walton has been a
commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a
private investor and an entrepreneur, and throughout his career has been
involved in the growth and finance of small business.
Employees
The Company has no employees as all of its personnel are furnished by
Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any materially important properties
or other tangible assets.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1997, as well as certain other
information with respect to those persons:
<TABLE>
<CAPTION>
Positions Currently Principal Occupations
Name Age Held with the Company During Past Five Years
- ---- --- --------------------- ----------------------
<S> <C> <C> <C>
William L. Walton 47 Chairman and Chief Employed by Advisers since 1997;
Executive Officer Chairman and Chief Executive Officer of
Allied Capital Corporation ("Allied I"),
Allied Capital Corporation II ("Allied II"),
Allied Capital Lending Corporation ("Allied
Lending") and Advisers; Manager of Allied
Capital Midwest LLC ("Allied Midwest");
Chief Executive Officer of Success Lab, Inc.
(children's educational services) from 1993
to 1996; Chief Executive Officer of
Language Odyssey (educational publishing
and services) from 1992 to 1996; and
Managing Director of Butler Capital
Corporation from 1987 to 1991.
John M. Scheurer 44 President and Chief Employed by Advisers since 1991;
Operating Officer Executive Vice President of Allied I, Allied
II, Allied Lending, Advisers, Allied
Capital Mortgage, LLC ("Allied Mortgage")
and Allied Midwest; President of Business
Mortgage Investors, Inc. ("BMI").
Joan M. Sweeney 37 Executive Vice President Employed by Advisers since 1993; President
and Chief Operating Officer of Advisers;
Executive Vice President of Allied I, Allied
II, Allied Lending, BMI, Allied Mortgage
and Allied Midwest; Senior Manager at
Ernst & Young from 1990 to 1993.
Jon A. DeLuca 34 Executive Vice President, Employed by Advisers since 1994;
Treasurer and Chief Executive Vice President, Treasurer and
Financial Officer Chief Financial Officer of Allied I, Allied II,
Allied Lending, BMI, Allied Mortgage,
Allied Midwest and Advisers since 1994;
Manager of Entrepreneurial Services at
Coopers & Lybrand from 1986 to 1994.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to this Item is incorporated by reference to
the "Shareholder Information" and "Quarterly Stock Price and Distributions to
Shareholders" sections of the Company's Annual Report to Shareholders for the
year ended December 31, 1996 (the "1996 Annual Report") and to Notes 9 and 10
of the Notes to Consolidated Financial Statements contained therein.
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to
the table in the "Selected Consolidated Financial Data" section of the 1996
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to
the financial statements, notes thereto and Reports of Independent Public
Accountants thereon contained in the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to
the identification of directors and nominees in the "Election of Directors"
section and the subsection captioned "Compliance with Reporting Requirements of
Section 16(a) of the Securities Exchange Act of 1934" of the Company's
definitive proxy statement in connection with its 1997 Annual Meeting of
Stockholders, scheduled to be held on May 13 1997 (the "1997 Proxy Statement").
Information in response to this Item also is included under the caption
"Executive Officers of the Registrant" included in Part I of this Report.
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ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to
the "Compensation of Directors and Executive Officers," "Incentive Stock
Options" and "Compensation of Directors" subsections of the 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to
the "Beneficial Ownership of Common Stock" subsection of the 1997 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to
the "Indebtedness of Management" and "Investment Management Agreement"
subsections of the 1997 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
to the 1996 Annual Report:
Consolidated Balance Sheet as of December 31, 1996 and 1995.
Consolidated Statement of Income for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statement of Shareholders' Equity as of December 31,
1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Consolidated Schedule of Loans on Real Estate as of December 31,
1996.
B. The Report of Independent Public Accountants with respect to the
financial statements listed in A. above are incorporated by reference
to the 1996 Annual Report.
2. No financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.
3. The following exhibits are filed herewith or incorporated by
reference as set forth below:
Exhibit Number Description
- -------------- -----------
3(i)(1) Articles of Incorporation
3(ii)(2) By-Laws
4.1 Instruments defining rights of security holders --
See Exhibits 3(i) and 3(ii).
4.2(3) Indenture between the Allied Capital Funding, LLC and
LaSalle National Bank and ABN AMRO Bank N.V., dated
November 1, 1995.
10.1(1) Investment Management Agreement between the Company and
Allied Capital Advisers, Inc., dated June 10, 1992.
10.2(4) Stock Option Plan
10.3(5) Dividend Reinvestment Plan
10.4(2) Mortgage Loan Conveyance Agreement dated between the
Company and ALCC Acceptance Corporation, November 1, 1995.
11* Statement regarding computation of per share earnings.
13* Excerpts from the 1996 Annual Report to Shareholders.
21 Subsidiaries of the Company and jurisdiction of
incorporation:
ALCC Holdings, Inc. . Maryland
Allied Capital Funding, LLC Delaware
ALCC Acceptance Corporation Maryland
Allied Capital Mortgage, LLC Delaware
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<PAGE> 8
23* Consents of Arthur Andersen LLP, independent accountants.
27* Financial Data Schedule
- -------------
* Filed herewith.
(1) Incorporated by reference to an exhibit of the same name filed with
Amendment No. 1 to the Company's Registration Statement on Form S-11
filed June 11, 1992 (File No. 33-47791).
(2) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(3) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for Allied Capital Funding, LLC for
the year ended December 31, 1995.
(4) Incorporated by reference to Exhibit A to the Company's definitive proxy
statement with respect to the Company's 1995 Annual Meeting of
Stockholders on May 25, 1995.
(5) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for the year ended December 31,
1992.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended
December 31, 1996.
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<PAGE> 9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 27, 1997.
/s/ WILLIAM L. WALTON
---------------------------------------
William L. Walton
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ WILLIAM L. WALTON Chairman and March 27, 1997
- --------------------------------------- Chief Executive Officer
William L. Walton (Principal Executive Officer)
/s/ JOHN M. SCHEURER Director, President and March 27, 1997
- --------------------------------------- Chief Operating Officer
John M. Scheurer
/s/ GEORGE C. WILLIAMS Director March 27, 1997
- ---------------------------------------
George C. Williams
/s/ CHARLES L. PALMER Director March 27, 1997
- ---------------------------------------
Charles L. Palmer
/s/ ANTHONY T. GARCIA Director March 27, 1997
- ---------------------------------------
Anthony T. Garcia
/s/ JOHN D. REILLY Director March 27, 1997
- ---------------------------------------
John D. Reilly
/s/ LAURA W. VAN ROIJEN Director March 27, 1997
- ---------------------------------------
Laura W. van Roijen
/s/ JON A. DELUCA Executive Vice President, Treasurer March 27, 1997
- --------------------------------------- and Chief Financial and Accounting
Jon A. DeLuca Officer (Principal Financial
and Accounting Officer)
</TABLE>
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<PAGE> 10
EXHIBIT INDEX
Exhibit
Number Description
11 Statement regarding computation of per share earnings.
13 Excerpts from the 1996 Annual Report to Shareholders.
23 Consents of Arthur Andersen LLP, independent accountants.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
Allied Capital Commercial Corporation
Exhibit 11 Computation of Earnings Per Common Share
Form 10-K
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Common Share:
Net Income $27,901,000 $24,225,000 $18,314,000
=============================================
Weighted average of common
shares outstanding 13,950,887 13,419,518 12,911,136
Weighted average of common
shares issuable on exercise
of outstanding stock options 96,768 33,206 23,182
---------------------------------------------
Weighted average of common
shares outstanding, as adjusted 14,047,655 13,452,724 12,934,318
=============================================
Net Income per share $1.99 $1.80 $1.42
=============================================
Fully Diluted Earnings Per Common Share:
Net Income $27,901,000 $24,225,000 $18,314,000
=============================================
Weighted average common
shares and common share
equivalents as computed for
primary earnings per share 14,047,655 13,452,724 12,934,318
Weighted average of additional
shares issuable on exercise
of outstanding stock options 56,796 58,223 2,937
---------------------------------------------
Weighted average of common
shares outstanding, as adjusted 14,104,451 13,510,947 12,937,255
=============================================
Net Income per share assuming full dilution $1.98 $1.79 $1.42
=============================================
</TABLE>
<PAGE> 1
Allied Capital Commercial Corporation
SHAREHOLDER INFORMATION
CORPORATE OFFICE
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Telephone: (202) 331-1112
Facsimile: (202) 659-2053
News-On-Demand: (888) 329-5519
Investor Relations: (202) 973-6334
Investor Relations E-mail: [email protected]
Marketing: (202) 331-2439
Marketing E-mail: [email protected]
Internet Address: http://www.alliedcapital.com
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries on transferring securities, replacing a lost or stolen
certificate, participating in the Dividend Reinvestment Plan,
requesting Direct Deposit information or processing a change of
address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
In the United States: (800) 937-5449
Outside the United States: (212) 936-5100
E-mail: [email protected]
Internet Address: http://www.amstock.com
FORM 10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as filed with the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written request to the Investor
Relations Department at the Company's corporate office. This information is
also available on Allied Capital's Internet site: http://www.alliedcapital.com
1997 ANNUAL MEETING OF SHAREHOLDERS
Montgomery Room at The Residence Inn by Marriott,
7335 Wisconsin Avenue, Bethesda, Maryland 20814
Tuesday, May 13, 1997
10 a.m. (EST)
All shareholders are welcome to attend.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
Washington, DC
STOCK MARKET LISTING
Allied Capital Commercial Corporation common stock is quoted on the Nasdaq
National Market under the ticker symbol ALCC. Most newspapers list the
Company's stock as "AldCapC." The Company has approximately 1,500 shareholders
of record and 16,800 beneficial shareholders.
DIVIDENDS AND DISTRIBUTIONS
Generally, quarterly dividends on common stock are paid on the last business
day of each quarter. The Company has also paid a fifth distribution at year-end
since 1993.
STOCK PRICE
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C>
1995 Q1 16.88 14.75 16.50
Q2 17.75 15.34 17.63
Q3 19.13 17.13 18.13
Q4 19.88 17.38 19.75
1996 Q1 20.00 18.25 18.88
Q2 20.25 18.63 19.75
Q3 23.50 19.63 21.88
Q4 24.25 21.50 23.25
</TABLE>
TOTAL DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$ 0.40 $ 1.00 $ 1.47 $ 1.78 $ 1.98
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Value of $10,000 Investment at IPO
- ----------------------------------
Year-End Value
-------- -----
<S> <C>
1992* $12,198
1993 $12,007
1994 $13,131
1995 $17,215
1996 $22,242
</TABLE>
* The Commpany's IPO was in July 1992.
A $10,000 investment in Allied Capital Commercial Corporation in 1992 at its
initial public offering, with all dividends reinvested, was worth $22,242 at
the end of 1996, a 19.4% average annual total return over this period.
<PAGE> 2
Allied Capital Commercial Corporation
COMPANY PROFILE
Allied Capital Commercial Corporation offers shareholders the opportunity to
profit from a nationwide portfolio of commercial real estate loans secured by a
variety of property types. Managed by Allied Capital Advisers, Inc., the
company seeks to provide current income and long-term capital appreciation for
its shareholders.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in Real Estate Loans $355,461 $273,510
Total Assets $370,304 $297,891
Total Debt Outstanding $161,254 $ 98,625
Shareholders' Equity $195,329 $186,724
Net Margin on Investments $ 32,919 $ 28,305
Net Income $ 27,901 $ 24,225
Net Income Per Share $ 1.99 $ 1.80
Distributions Per Share* $ 1.98 $ 1.78
Weighted Average Number of Shares
and Share Equivalents Outstanding 14,048 13,453
</TABLE>
*Represents the cumulative dividends declared by the board of directors
in the year of declaration.
Allied Capital Commercial Corporation
1
<PAGE> 3
Allied Capital Commercial Corporation
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992*
- ---------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
<S> <C> <C> <C> <C> <C>
Total distributions $ 27,734 $ 24,000 $ 19,043 $ 12,805 $ 5,113
Distributions per share (tax basis):
Ordinary income $ 1.75 $ 1.62 $ 1.21 $ 0.93 $ 0.29
Capital gains 0.23 0.16 0.26 0.07 0.01
Return of capital -- -- -- -- 0.10
----------------------------------------------------
Total distributions declared per share $ 1.98 $ 1.78 $ 1.47 $ 1.00 $ 0.40
====================================================
Distribution in cash $ 1.54 $ 1.29 $ 1.16 $ 1.00 $ 0.40
Distribution in stock through the dividend reinvestment plan $ 0.44 $ 0.49 $ 0.31 $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Total investment income $ 45,638 $ 33,542 $ 22,545 $ 14,505 $ 3,855
====================================================
Net margin on investments $ 32,919 28,305 20,932 14,450 3,820
Operating expenses 8,297 6,582 5,051 3,111 107
Gains from dispositions of real estate loans 5,706 3,048 2,433 861 70
Minority interest 2,427 546 -- -- --
----------------------------------------------------
Net income $ 27,901 $ 24,225 $ 18,314 $ 12,200 $ 3,783
====================================================
Net income per share $ 1.99 $ 1.80 $ 1.42 $ 0.95 $ 0.30
====================================================
Weighted average number of shares and share equivalents outstanding 14,048 13,453 12,934 12,846 12,788
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
Investments in real estate loans, net $355,461 $273,510 $198,514 $112,255 $ 59,824
Total assets $370,304 $297,891 $233,555 $178,374 $176,714
Bonds payable $ 54,123 $ 98,625 $ -- $ -- $ --
Notes payable $107,131 $ -- $ 50,101 $ -- $ --
Shareholders' equity $195,329 $186,724 $178,839 $175,960 $176,560
</TABLE>
*Represents operations from July 9, 1992 (date of inception) through December
31, 1992.
Allied Capital Commercial Corporation
9
<PAGE> 4
Allied Capital Commercial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
ORGANIZATION
Allied Capital Commercial Corporation is a Maryland corporation and its term as
a corporation is perpetual; however, the board of directors will include in the
proxy statement in the years 2000, 2003 and 2006 a resolution to be voted on by
the shareholders to liquidate the corporation. The corporation will be
liquidated if holders of two-thirds of the shares approve the resolution at any
of the above dates. Allied Capital Commercial Corporation has elected to be
taxed as a real estate investment trust (REIT) under Subchapter M of the
Internal Revenue Code, as amended.
Allied Capital Commercial Corporation and Business Mortgage Investors, Inc.
(BMI), a private REIT, have coinvested with each other in certain business
loans secured by real estate since January 1993. The coinvestment rate of these
business loans between Allied Capital Commercial Corporation and BMI has been
approximately 77% and 23%, respectively.
The consolidated financial statements of Allied Capital Commercial Corporation
include the accounts of Allied Capital Commercial Corporation and its wholly
owned subsidiaries, ALCC Holdings, Inc. and ALCC Acceptance Corporation, and
its majority owned subsidiary Allied Capital Mortgage LLC (Allied Mortgage).
The accounts of ALCC Acceptance Corporation include the accounts of its
majority owned subsidiary Allied Capital Funding, LLC (Funding). Allied Capital
Commercial Corporation and its subsidiaries are hereinafter referred to as the
"Company." The Company is managed by Allied Capital Advisers, Inc. (Advisers)
pursuant to an investment management agreement.
LOAN PORTFOLIO
The Company purchases or originates small business loans that are generally
secured by real estate and used in owner-operated or owner-managed small
businesses. The Company generally seeks a business loan size between $1 million
and $15 million that meets certain underwriting requirements. The Company's
loan terms include both fixed and variable rate type loans. As of December 31,
1996, the Company's loan portfolio consisted of 57% fixed rate loans and 43%
variable rate loans, as compared to 43% fixed rate loans and 57% variable rate
loans as of December 31, 1995. The Company has financed and continues to
finance many different property types including hotels and motels, office
buildings, retail and convenience stores, warehouses, medical offices, nursing
homes and factories.
The Company makes investments across the nation and its loan portfolio has been
segregated into five regions: Northeast; Southeast; Central; Southwest and
West. As of December 31, 1996, the Company's loan concentration by region was
20%, 40%, 5%, 13% and 22%, respectively. This compares to the Company's loan
concentration by region as of December 31, 1995 of 38%, 28%, 3%, 14% and 17%
for the Northeast, Southeast, Central, Southwest and West regions,
respectively.
The Company invested $161.9 million in real estate loans for the year ended
December 31, 1996 as compared to $102.1 million and $107.8 million invested for
the years ended December 31, 1995 and 1994, respectively. After considering
normal principal payments and early payoffs of certain loans, the net increases
in the Company's loan portfolio were $81.9 million, $75.0 million and $86.3
million, for the years ended December 31, 1996, 1995 and 1994, respectively.
Loan payoffs received prior to their maturity resulted in realized gains of
$5.7 million, $3.3 million and $2.6 million for the years ended December 31,
1996, 1995 and 1994, respectively.
As of December 31, 1996, 39%, 21% and 12% of the Company's loan portfolio was
invested in properties secured by hotels and motels, office buildings and
retail space, respectively, as compared to 38%, 16% and 16% for the same
categories as of December 31, 1995. In addition to industry concentration, the
Company has made investments in which the underlying properties are subject to
certain risk factors that could impair the collateral value. The Company
evaluates the risks associated with its loans in terms of potential
contingencies associated with environmental, hurricane and seismic risks.
Depending on the nature of the risk factors, the Company may require the
borrower to have the appropriate insurance coverage for these types of
contingencies.
Loans greater than 120 days past due are considered to be impaired. The Company
does not accrue interest on these loans and does not accrue interest for
certain other loans
Allied Capital Commercial Corporation
10
<PAGE> 5
Allied Capital Commercial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
that may be considered impaired. As of December 31, 1996 and 1995, the loans
that were not accruing interest totaled $11.0 million and $5.1 million,
respectively. The Company generally makes every effort to work with the
borrower in order to restore the loan to a performing status before exercising
other alternatives, such as foreclosure on the property.
The Company's loan loss reserve at December 31, 1996 was approximately $1.5
million as compared to $1.0 million at December 31, 1995. During 1996, the
Company increased its provision for loan losses by $1.0 million, and two loans
were charged off against the reserve in the amount of $558,000. For the years
ended December 31, 1995 and 1994, no loans were charged off against the
reserve, and increases to the provision equaled $500,000 and $512,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash from operations to provide working capital to pay its
operating expenses, interest expense on outstanding indebtedness and to pay
dividends to its shareholders. The Company funds new loans from loan repayments
and through borrowings on its credit facilities. The Company has two primary
credit facilities that it shares with BMI. The first is a $40 million revolving
line of credit with a bank (line of credit). The second is a $150 million
repurchase agreement (repurchase facility), with an investment bank. At
December 31, 1996 the Company had borrowed $21 million and $86 million under
the line of credit and repurchase facility, respectively. The Company uses the
line of credit and the repurchase facility to warehouse loans until they can be
permanently financed through the public offering of debt, or through other
means. In November 1995 the Company, through Funding, financed a pool of its
loans through the public offering of debt securities. At December 31, 1996 the
bonds outstanding related to this offering totaled $54 million.
The Company entered into a five-year interest rate swap agreement in July 1996
in an effort to manage its exposure to fluctuations in interest rates in
anticipation of a future long-term financing. The swap agreement has a notional
amount equal to $50 million whereby the Company pays a third party a fixed rate
equal to 6.92%, and the Company receives from the third party a rate equal to
the 90-day LIBOR, semi-annually. This swap agreement has the effect of
providing a hedge for fixed rate loans temporarily financed with the variable
rate warehouse facilities, and provides a hedge against changes in long-term
interest rates until such time as the loans are permanently financed.
Management anticipates obtaining long-term financing during late 1997.
During 1996, the Company issued approximately 309,000 common shares at an
average price of $20.69 per share to existing shareholders who participated in
the dividend reinvestment plan. The Company also issued approximately 224,000
shares for approximately $4.0 million, through the exercise of stock options
for which the Company provided loans for approximately $3.1 million.
Management of the Company believes that the cash flow from operations, and the
availability of its existing line of credit and repurchase facility is
sufficient to enable the Company to meet its current and anticipated future
liquidity requirements including payment of dividends to its shareholders. The
Company plans to increase its outstanding indebtedness during the upcoming year
in order to finance new real estate investments. The Company is currently
exploring several new sources of debt capital.
RESULTS OF OPERATIONS
The consolidated financial statements include the operations of Funding for the
entire year of 1996 and the operations of Allied Mortgage since October 1,
1996. The amounts in 1995 only include the consolidation of Funding's
operations from November 1, 1995.
In early 1996, Advisers identified a market opportunity to originate or
purchase higher credit quality loans with lower stated interest rates. The
Company's primary focus is hard-to-finance real estate lending; however,
Advisers determined that the Company could make profitable loans in a narrow
segment of the marketplace focused on borrowers with strong credit
characteristics. These borrowers lack some of the criteria generally required
by low-rate lenders, such as banks or real estate mortgage conduits. In order
for the Company to compete for these lower-rate loans, Advisers and the Company
revised the Company's expense structure through a revision to the investment
management fee. The fee schedule was first revised on May 3, 1996 and that
schedule applied to all loans originated or purchased on or after January 1,
1996.
Allied Capital Commercial Corporation
11
<PAGE> 6
Allied Capital Commercial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
Advisers and the Company 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 percentages payable to
Advisers, based upon certain characteristics of the outstanding loans held in
the Company'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% per annum to 3.5% per annum on each individual loan. The
revised fee schedule places a quarterly cap, at a rate of approximately 2.5%
per annum, on the total management fees payable to Advisers with respect to the
Company's investment in loans. The fee schedule in effect in 1995 and prior
years required a fee on all loans at a rate of approximately 2.5% per annum.
The new fee schedule does not alter the fees charged on cash, temporary
investments or other assets of the Company.
COMPARISON OF 1996 WITH 1995
Net income for the year ended December 31, 1996 equaled $27.9 million or $1.99
per share as compared to $24.2 million or $1.80 per share for 1995, a 15%
increase. Net income increased as a result of the Company being able to
increase its loan portfolio over 1995 levels, which generated more interest
income, and due to increased realized gains from repayments of loans prior to
their maturity. For the year ended December 31, 1996, the Company's loan
portfolio had a weighted average stated rate of approximately 10.3% as compared
to 10% for the year ended December 31, 1995. At December 31, 1996, loans
totaled $355.5 million, compared to $273.5 million at the end of 1995.
Amortization of loan discount increased 35% to $6.5 million in 1996 as compared
to $4.9 million in 1995. The portfolio's weighted average yield, which includes
stated interest and loan discount amortization, was 13.4% at December 31, 1996
as compared to 15% at December 31, 1995.
Net margin on investments after deducting interest expense and provision for
loan losses was $32.9 million for the year ended December 31, 1996 as compared
to $28.3 million for the year ended December 31, 1995, an increase of 16%. Net
margin on investments as a percentage of total investment income was 72% and
84% for 1996 and 1995, respectively. Net margin on investments as a percent of
total income is expected to decrease as the Company leverages its equity
capital with debt in order to increase its loan portfolio. As the overall net
margin on investments increases, the return on equity and returns to
shareholders should increase.
Interest expense increased $6.3 million to $11.0 million in 1996 from $4.7
million in 1995. During 1996, the Company modified its credit facilities to
provide for more favorable interest rates and borrowing levels. The interest
rate on the line of credit is LIBOR plus 190 basis points or 7.5%, as of
December 31, 1996, as compared to LIBOR plus 220 basis points or 7.9%, as of
December 31, 1995. The interest rate on the repurchase facility is LIBOR plus
112 basis points, or 6.7%, at December 31, 1996, as compared to LIBOR plus 190,
or 7.6%, at December 31, 1995.
Investment management fees increased to $7.3 million in 1996 from $6.0 million
in 1995, or 21% because of the increase in the Company's loan portfolio. Other
expenses of the Company increased to $1.8 million in 1996 from $672,000 in
1995. This increase is a function of the growth in the loan portfolio and
includes expenses such as legal costs associated with portfolio transactions,
directors fees, shareholder services and other miscellaneous costs.
Realized gains result when a loan that was initially purchased at a discount is
repaid in excess of its net amortized cost. For the year ended December 31,
1996, realized gains equaled $5.7 million as compared to $3.3 million in 1995.
The Company distributed $1.98 per share to shareholders in 1996, an increase of
11% over 1995 distributions of $1.78 per share. The 11% increase in the per
share distribution is after effecting for a 3.9% increase in the common shares
outstanding from December 31, 1995 to December 31, 1996. The Company increased
its regular quarterly dividend in each quarter of 1996, and the fourth quarter
dividend of 1996 equaled $0.50 per share as compared to $0.42 per share for the
fourth quarter of 1995.
The Company is required to distribute at least 95% of its taxable income to
shareholders. It has been the Company's objective to distribute all of its
taxable income to shareholders. Income for financial reporting purposes differs
from taxable income due to timing differences in the recognition of loan
discount amortization, realized gains and the provision for loan losses.
Allied Capital Commercial Corporation
12
<PAGE> 7
Allied Capital Commercial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF 1995 WITH 1994
Net income for the year ended December 31, 1995 equaled $24.2 million or $1.80
per share as compared to $18.3 million or $1.42 per share for 1994, a 32%
increase. Net income, which includes interest from loans, discount amortization
and realized gains and is reduced for the minority interest in income,
increased as a result of the Company continuing to increase its investments in
loans during 1995. For the year ended December 31, 1995, the Company's loan
portfolio had a weighted average stated interest rate of approximately 10%,
which remained constant when compared to 1994. The increase in the stated
interest was primarily due to the increase in the principal amount of loans. At
December 31, 1995 loans totaled $273.5 million, compared to $198.5 million at
December 31, 1994. Amortization of loan discount increased 59% to $4.9 million
for the year ended December 31, 1995 as compared to $3.1 million for 1994.
Including stated interest and discount amortization, the weighted average yield
in the loan portfolio at December 31, 1995 and 1994 was approximately 15%.
The Company continued to leverage its equity in 1995 and increased its total
outstanding indebtedness by $48.5 million to $98.6 million at December 31,
1995. As a result, interest expense increased $3.6 million to $4.7 million in
1995. Net margin on investments after interest expense and provision for loan
losses increased to $28.3 million or 35% over the prior year. Net margin on
investments as a percent of total investment income was 84% and 93% for 1995
and 1994, respectively.
Investment management fees increased to $6 million in 1995 from $4.4 million in
1994 or 37%. The Company paid quarterly fees to its investment manager equal to
0.625% per quarter on total assets excluding temporary investments and cash,
and 0.125% per quarter on temporary investments and cash. The increase in
management fees resulted from the increase in the loan portfolio. Other
operating expenses of the Company remained relatively constant in 1995 as
compared to 1994. The Company provided for an increase in the allowance for
loan losses of $0.5 million in 1995.
Realized gains on the early repayments of loans purchased at a discount totaled
$3.3 million in 1995 as compared to $2.6 million in 1994.
Total distributions to shareholders, including four regular quarterly dividends
and an extra distribution, were $1.78 per share, an increase of 21% over 1994
dividends of $1.47 per share. The growth in profits allowed the Company to
continue to increase its regular quarterly dividend throughout 1995, from $0.35
per share for the fourth quarter of 1994 to $0.42 per share for the fourth
quarter of 1995.
FACTORS AFFECTING THE COMPANY'S BUSINESS
Interest rate fluctuations. Loans with variable interest rates may become
unattractive to some borrowers as market interest rates increase. Substantial
changes in market interest rates could result in greater rates of prepayments
of or defaults on outstanding loans and may inhibit the expansion of the
Company's business and reduce its profitability. The Company also originates or
purchases loans with fixed rates of interest. Loans with fixed interest rates
that are financed with variable rate debt capital could expose the Company to
reduced net margins on its loans as interest rates increase. The Company
carefully monitors this exposure and endeavors to match fixed rate loans on a
long-term basis with fixed rate financing.
Competition. A large number of entities and individuals compete for the
opportunity to make the kinds of investments made by the Company. Many of these
entities and individuals have greater financial resources than the combined
resources of the Company. As a result of this competition, the Company may from
time to time be precluded from making otherwise attractive investments on terms
considered to be prudent in light of the risks to be assumed.
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.
Allied Capital Commercial Corporation
13
<PAGE> 8
Allied Capital Commercial Corporation
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in real estate loans, net $355,461 $273,510
Cash and cash equivalents 2,025 12,668
Note receivable from affiliate 203 4,751
Accrued interest receivable 3,496 3,804
Deferred financing costs, net 957 1,650
Other assets 8,162 1,508
-----------------------
Total assets $370,304 $297,891
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bonds payable $ 54,123 $ 98,625
Notes payable 107,131 --
Accrued interest payable 994 570
Dividends payable 1,420 2,323
Investment management fee payable 1,930 1,628
Other liabilities 1,219 1,981
Minority interest 8,158 6,040
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.0001 par value, 50,000,000 shares authorized; 14,266,514 and
13,733,787 issued and outstanding at December 31, 1996 and 1995 1 1
Additional paid-in capital 202,615 192,251
Notes receivable from sale of common stock (6,345) (4,419)
Accumulated distributions in excess of net income (942) (1,109)
-----------------------
Total shareholders' equity 195,329 186,724
-----------------------
Total liabilities and shareholders' equity $370,304 $297,891
=======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Commercial Corporation
14
<PAGE> 9
Allied Capital Commercial Corporation
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Income from real estate loans:
Stated interest $36,335 $26,884 $17,203
Discount amortization 6,544 4,860 3,058
Other investment income 1,450 601 31
-------------------------------
Total income from real estate loans 44,329 32,345 20,292
Interest on temporary investments 1,309 1,197 2,253
-------------------------------
Total investment income 45,638 33,542 22,545
Interest and related expenses:
Interest expense 10,960 4,661 1,078
Provision for loan losses 1,000 500 512
Other 759 76 23
-------------------------------
Net margin on investments 32,919 28,305 20,932
Operating Expenses:
Investment management fees 7,269 5,986 4,369
Other 1,028 596 682
-------------------------------
Income before gains and minority interest 24,622 21,723 15,881
Gains from dispositions of real estate loans, net 5,706 3,048 2,433
-------------------------------
Income before minority interest 30,328 24,771 18,314
Minority interest 2,427 546 --
-------------------------------
Net income $27,901 $24,225 $18,314
===============================
Net income per share $1.99 $1.80 $1.42
===============================
Weighted average number of shares and share equivalents outstanding 14,048 13,453 12,934
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Commercial Corporation
15
<PAGE> 10
Allied Capital Commercial Corporation
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional Unrealized Distributions
Number Stock at Paid-in Notes Depreciation in Excess of
(in thousands) of Shares Par Value Capital Receivable on Investments Net Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 12,829 $ 1 $177,319 $ (755) $-- $ (605) $175,960
Share issuances through dividend reinvestment plan 242 -- 4,006 -- -- -- 4,006
Incentive stock options exercised 90 -- 1,400 (1,300) -- -- 100
Payments on notes receivable -- -- -- 25 -- -- 25
Unrealized depreciation on investments -- -- -- -- (523) -- (523)
Net income -- -- -- -- -- 18,314 18,314
Dividends declared -- -- -- -- -- (19,043) (19,043)
---------------------------------------------------------------------------
Balance, December 31, 1994 13,161 1 182,725 (2,030) (523) (1,334) 178,839
Share issuances through dividend reinvestment plan 353 -- 6,126 -- -- -- 6,126
Incentive stock options exercised 220 -- 3,400 (2,654) -- -- 746
Payments on notes receivable -- -- -- 265 -- -- 265
Reversal of unrealized depreciation on investments -- -- -- -- 523 -- 523
Net income -- -- -- -- -- 24,225 24,225
Dividends declared -- -- -- -- -- (24,000) (24,000)
---------------------------------------------------------------------------
Balance, December 31, 1995 13,734 1 192,251 (4,419) -- (1,109) 186,724
Share issuances through dividend reinvestment plan 309 -- 6,399 -- -- -- 6,399
Incentive stock options exercised 224 -- 3,965 (3,050) -- -- 915
Payments on notes receivable -- -- -- 1,124 -- -- 1,124
Net income -- -- -- -- -- 27,901 27,901
Dividends declared -- -- -- -- -- (27,734) (27,734)
---------------------------------------------------------------------------
Balance, December 31, 1996 14,267 $ 1 $202,615 $(6,345) $-- $ (942) $195,329
===========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Commercial Corporation
16
<PAGE> 11
Allied Capital Commercial Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 27,901 $ 24,225 $ 18,314
Adjustments to reconcile net income to net cash provided by operating activities:
Discount amortization (6,544) (4,860) (3,058)
Gains from disposition of loans (5,706) (3,297) (2,591)
Provision for loan losses 1,000 500 512
Loss on sale of investments -- 249 158
Minority interest 2,427 546 --
Amortization of deferred financing costs 693 72 --
Changes in assets and liabilities:
Accrued interest receivable 308 (458) (374)
Other assets (6,654) (1,267) 104
Investment management fee payable 302 352 479
Accrued interest payable 424 495 --
Other liabilities (762) 1,594 (1,155)
------------------------------------
Net cash provided by operating activities 13,389 18,151 12,389
------------------------------------
Cash flows from investing activities:
Investment in loans (161,963) (102,147) (107,842)
Collections of loan principal 93,244 57,268 25,691
Collections (advances) under note receivable from affiliate 4,548 2,747 (7,498)
Collection of notes receivable from sale of common stock 1,124 265 25
Proceeds from the sale of government securities -- 24,055 29,304
------------------------------------
Net cash used in investing activities (63,047) (17,812) (60,320)
------------------------------------
Cash flows from financing activities:
Net proceeds from long-term debt -- 79,321 --
Payments of long-term debt (44,502) (185) --
Net (payments) borrowings under revolving line of credit 107,131 (26,891) 26,891
Net (payments) borrowings against government securities available for sale -- (23,210) 23,210
Cash dividends paid (22,238) (18,431) (12,160)
Issuance of common stock 915 746 100
Minority interest distributions (2,291) -- --
------------------------------------
Net cash provided by financing activities 39,015 11,350 38,041
------------------------------------
Net (decrease) increase in cash and cash equivalents (10,643) 11,689 (9,890)
Cash and cash equivalents at beginning of period 12,668 979 10,869
------------------------------------
Cash and cash equivalents at end of period $ 2,025 $ 12,668 $ 979
====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Commercial Corporation
17
<PAGE> 12
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION. Allied Capital Commercial Corporation (Allied Commercial) is a
Maryland corporation and was formed to invest in loans secured primarily by
first liens on commercial real estate. Allied Commercial has elected to be
taxed as a real estate investment trust (REIT) under the Internal Revenue Code,
as amended.
Commencing in January 1993, Allied Commercial and Business Mortgage Investors,
Inc. (BMI), a private REIT, agreed to coinvest with each other in certain real
estate loans. The coinvestment rate of these loans between Allied Commercial
and BMI has been approximately 77% and 23%, respectively. Allied Commercial and
BMI both have investment management agreements with Allied Capital Advisers,
Inc. (Advisers) and certain officers and directors of Advisers are also
officers and directors of Allied Commercial and BMI.
Allied Commercial's term as a corporation is perpetual; however, the board of
directors will include in the proxy statement in the years 2000, 2003 and 2006
a resolution to be voted on by the shareholders to liquidate Allied Commercial.
If holders of two-thirds of the shares approve the resolution at any of the
above dates, Allied Commercial will be liquidated.
BASIS OF PRESENTATION. The consolidated financial statements of Allied
Commercial include the accounts of Allied Commercial and its wholly owned
subsidiaries, ALCC Holdings, Inc. and ALCC Acceptance Corporation, and its
majority-owned subsidiary Allied Capital Mortgage, LLC (Allied Mortgage). The
accounts of ALCC Acceptance Corporation include the accounts of its
majority-owned subsidiary, Allied Capital Funding, LLC (Funding). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Allied Capital Commercial Corporation and its subsidiaries are
hereinafter referred to as the "Company".
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
INCOME TAXES. Generally, a REIT will not be subject to federal income taxation
on that portion of its income that qualifies as REIT taxable income to the
extent that it distributes at least 95 percent of its taxable income to its
shareholders and complies with certain other requirements of the Internal
Revenue Code. Accordingly, no provision has been made for federal income taxes
for the Company in the accompanying consolidated financial statements.
Net income for financial reporting purposes of the Company may differ from
taxable income for the periods presented due to timing differences in the
recognition of loan discount amortization, realized gains from modification of
loan terms and loan losses.
INVESTMENTS IN LOANS. The Company's investments in loans consist of commercial
real estate loans that are either purchased from unrelated third parties or
originated directly with the borrower. Generally, loans that are purchased are
obtained at an amount less than face value creating market discount. Loans that
are originated generally require the borrower to pay loan origination and
closing fees at the time the transaction is completed. The Company accounts for
its investments in loans, purchased or originated, at their amortized cost. The
difference between the cost and the unpaid principal balance is carried as a
discount or premium. The Company generally amortizes original issue and market
discounts over the remaining term of the loan using the effective interest
method.
Investment income is comprised of the stated interest discount amortization and
other investment income.
PROVISION FOR LOAN LOSSES. The Company measures the impairment of its loans
based upon the fair value of the underlying collateral which is determined on
an individual loan basis. In arriving at the fair value of the collateral, many
factors are considered, including market evaluations of the underlying
collateral, operating cash flow from the
Allied Capital Commercial Corporation
18
<PAGE> 13
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property and credit concentrations. When the fair value of the underlying
collateral securing the loan is less than the amortized cost in the loan, an
allowance is generally established for the deficiency including an estimate of
selling cost with a corresponding charge to expense. The existing allowances
will be either increased or decreased based upon future valuations by a charge
to income, through a provision for loan losses or by charge-offs (net of
recoveries), respectively.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company uses derivative financial
instruments to reduce interest rate risks. The Company has established a
control environment which includes policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash in banks and
all highly liquid investments with original maturities of three months or less.
DEFERRED FINANCING COSTS. Financing costs are based on actual costs incurred in
obtaining the financing and are deferred and amortized as part of interest
expense over the term of the related debt instrument.
PER SHARE INFORMATION. Net income per share is calculated using the weighted
average number of shares and share equivalents outstanding for the periods
presented. Share equivalents included in the computation represent shares
issuable upon the assumed exercise of options which would have a dilutive
effect in years in which there were earnings.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
NEW ACCOUNTING STANDARDS. In June 1996, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. It also establishes criteria for the recognition of either a
servicing asset or servicing liability for servicing contracts to service
financial assets. This standard is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. The Company believes adoption of
the new standard, effective January 1, 1997, will not have a material impact on
its consolidated financial position or results of operations.
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective Date
of Certain Provisions of SFAS No. 125" which amends the previously issued SFAS
No. 125 and deferred implementation of the standards enumerated in SFAS No. 125
for repurchase agreements and dollar rolls, securities lending and similar
transactions to transfers of financial assets that occur after December 31,
1997.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and
1994 data to conform to the 1996 presentation.
NOTE 3. MINORITY INTEREST
FUNDING. In November 1995, the Company, through one of its wholly owned
subsidiaries, contributed an aggregate of $121,068,000 in loans to Funding in
exchange for a majority equity interest. Additionally, BMI, through its wholly
owned subsidiary, contributed an aggregate of $27,073,000 in loans to Funding
in exchange for a minority equity interest. Funding is a limited purpose
finance company that issued $98,810,000 of 6.92 percent Commercial Mortgage
Collateralized Bonds, Series 1995-C1 (the Bonds) in November 1995. Following
the issuance of the Bonds, Funding distributed the proceeds to the Company's
and BMI's respective wholly owned subsidiaries which reduced
Allied Capital Commercial Corporation
19
<PAGE> 14
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
their respective equity interests in Funding. The net equity in Funding
represents the Company's and BMI's respective wholly owned subsidiaries'
subordinated interest in the loans contributed. For financial reporting
purposes, the assets and liabilities of Funding have been consolidated with
those of the Company, and BMI's interest in Funding is included in the
Company's financial statements as a minority interest.
BMI's minority interest in the balance of the loans, interest income and
discount amortization are equivalent to BMI's original coinvestment ownership
percentage at the time the investments in the loans were made with the Company.
The Company and BMI have agreed to allocate the expenses incurred by Funding
based on the ratio of the outstanding principal amount of the loans contributed
to Funding in exchange for their respective equity interests. In addition, the
Company and BMI have agreed that the liability for Bonds payable should be
allocated using this same percentage. The allocation percentages for the
Company and BMI are approximately 82 percent and 18 percent, respectively.
ALLIED MORTGAGE. On October 1, 1996, the Company contributed an aggregate of
$9,384,000 in loans to Allied Mortgage in exchange for a majority equity
interest. The Company's ownership of Allied Mortgage at December 31, 1996
equaled 79 percent. The assets, liabilities and operating results for the
period October 1, 1996 to December 31, 1996 of Allied Mortgage have been
consolidated into the Company and have been reduced by the interests of the
minority owners.
NOTE 4. INVESTMENTS IN LOANS
As of December 31, 1996, approximately 57 percent and 43 percent of the
Company's portfolio of loans carried fixed and adjustable interest rate loans,
respectively. In addition, approximately 19 percent, 11 percent and 10 percent
of the the Company's portfolio as of December 31, 1996, were located in
California, Virginia and Maryland, respectively. In addition, loans for hotels,
office buildings, retail and industrial warehouses equaled 39 percent, 21
percent, 12 percent and 10 percent respectively, or 82 percent of the Company's
portfolio as of December 31, 1996.
As of December 31, 1996 and 1995, the unamortized discount balance was
$37,124,000 and $37,821,000, respectively, and has been included with
investments in loans in the accompanying consolidated balance sheet.
The Company generally defines impaired loans as those that are past due 120
days or more or loans that have been specifically identified. The Company
measures loan impairment based on the fair value of the loan collateral less
estimated selling expenses. Specific reserves for impaired loans totaled
$1,454,000, and $1,012,000, as of December 31, 1996 and 1995, respectively. In
1996, 1995 and 1994, the Company increased its provision for loan losses by
$1,000,000, $500,000 and $512,000, respectively. These increases were offset by
charge-offs totaling $558,000 for the year ended December 31, 1996, with no
charge-offs recorded for the years ended December 31, 1995 and 1994. The
Company's policy is to recognize interest income on impaired loans on the cash
basis with cash payments applied to the loan principal balance.
As of December 31, 1996 and 1995, loans that were not accruing interest equaled
$10,978,000 and $5,134,000, respectively. Of the total impaired loans
identified by the Company, $3,721,000 and $2,588,000, of the recorded
investment in these loans were specifically reserved for as of December 31,
1996 and 1995, respectively. The average recorded investment in impaired loans
during 1996 and 1995 was $8,056,000 and $4,091,000, respectively. Interest
income on impaired loans was $566,000 and $269,000, respectively.
NOTE 5. NOTE RECEIVABLE FROM AFFILIATE
As of December 31, 1996 and 1995, the Company had outstanding advances to BMI
of $203,000 and $4,751,000, respectively. The advances to BMI allow BMI the
opportunity to participate in the purchase or origination of loans with the
Company. All advances made to BMI are collateralized by the underlying loans in
which the Company holds a
Allied Capital Commercial Corporation
20
<PAGE> 15
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
majority ownership interest and are due on demand. The maximum amount that may
be advanced to BMI is $7,500,000. The Company's advances to BMI earn interest
at the Wall Street Journal prime rate plus 2 percent, which equaled 10.25
percent and 10.5 percent as of December 31, 1996 and 1995. Interest income
recorded by the Company from this source for the years ended December 31, 1996,
1995 and 1994 was $194,000, $170,000 and $287,000, respectively.
NOTE 6. INVESTMENTS AVAILABLE FOR SALE
During 1995, the Company liquidated its investment in a security collateralized
by a pool of mortgage loans with the Federal National Mortgage Association,
guaranteed by the Government National Mortgage Association, and realized a loss
of $249,000, which has been included in gains from the disposition of real
estate loans on the accompanying consolidated statement of income.
NOTE 7. BONDS AND NOTES PAYABLE
BONDS PAYABLE. On November 20, 1995, Funding issued $98,810,000 of 6.92 percent
Series 1995-C1 Commercial Mortgage Collateralized Bonds. The Bonds have been
rated "AA" by Fitch Investors Service, L.P. The Bonds were secured by a trust
estate consisting primarily of a pool of 64 loans that were secured by first
liens on various types of commercial properties and were nonrecourse to the
Company. As of November 1, 1995, the cut-off date (date on which the Bonds were
issued), the loans in the pool had an aggregate principal balance of
approximately $148,141,000, after adjusting the principal balance for principal
due on or before November 1, 1995.
The loans included in the pool were either originated or acquired by the
Company or originated or acquired jointly by the Company and BMI. The Company
conveyed its interest in each loan to ALCC Acceptance Corporation and BMI
conveyed its interest in each loan to BMI Acceptance Corporation (collectively,
the Finance Companies). The Finance Companies in turn conveyed their interests
to Funding.
The Bonds pay interest and principal monthly on the 25th day of each month
commencing in December 1995, with respect to interest accrued through the last
day of the preceding month. The minimum required payment to bond holders on a
monthly basis equals the sum of the total scheduled principal payments for the
loans in the pool and interest due on the Bonds. The stated maturity for the
Bonds is February 25, 2003.
Funding received $97,449,000 in net proceeds from the issuance of the Bonds.
The respective portions of the proceeds were distributed by Funding to the
Company and BMI through the Finance Companies.
As of December 31, 1996, based on the scheduled principal payments of the
loans, scheduled principal payments on an aggregate basis for the Bonds are
expected to be as follows: 1997--$6,856,000; 1998--$3,656,000;
1999--$11,437,000; 2000--$9,745,000; 2001--$1,485,000; and thereafter
$20,944,000.
NOTES PAYABLE. The Company, in conjunction with BMI, has a $40,000,000
revolving line of credit with a bank. The revolving line of credit bears
interest at LIBOR plus 190 basis points, or 7.5 percent as of December 31,
1996, and expires in August 1997. At December 31, 1996, the Company had
borrowings under this revolving line of credit of $21,356,000. The Company had
no outstanding borrowings as of December 31, 1995.
The Company, again in conjunction with BMI, has an approved credit facility
with Merrill Lynch Mortgage Capital, Inc., whereby the Company and BMI can
borrow up to $150,000,000 through repurchase agreements using its investments
in loans as collateral. As of December 31, 1996, the Company's recorded
investment in these loans pledged as collateral totaled $96,014,000, which
approximated their market value. The terms of the repurchase agreements are
interest only with all principal due at maturity. The repurchase agreements
bear interest at LIBOR plus 112 basis points, or 6.7 percent, as of December
31, 1996. At December 31, 1996, the Company had borrowed $85,775,000 under the
repurchase agreements. The repurchase agreements mature on March 21, 1997 and
it is anticipated that the repurchase agreements will be extended with similar
terms.
Allied Capital Commercial Corporation
21
<PAGE> 16
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INTEREST RATE SWAP AGREEMENT
The Company entered into an interest rate swap agreement (the "swap agreement")
with Morgan Guaranty Trust Company of New York in anticipation of a future
long-term financing of its loans on July 22, 1996. The swap agreement has a
notional amount of $50 million, and the Company pays a fixed rate of 6.92% and
receives a rate equal to the 90-day LIBOR semi-annually on the notional amount.
The swap agreement terminates July 22, 2001. Net differences under the swap
agreement are recognized as an adjustment to interest expense currently.
NOTE 9. SHAREHOLDERS' EQUITY
The authorized capital of the Company includes 5,000,000 shares of Preferred
Stock with a par value of $0.0001, none of which is currently issued.
The Company has a dividend reinvestment plan (the Plan). Under the Plan,
shareholders of record are automatically enrolled and may opt out at any time.
The Company may instruct the stock transfer agent to buy shares in the open
market or the Company may issue new shares. When the Company issues new shares,
the price at which shares are allocated to participant accounts is equal to the
average of the closing sales prices reported for the shares for the five days
on which trading in the shares took place immediately prior to and including
the payment date. During 1996 and 1995, the Company issued 309,283 and 352,707
shares at an average price of $20.69 and $17.36 per share, respectively.
The Company has an incentive stock option plan (ISO plan) that allows the
granting of options to the Company's officers. The vesting provisions for
individual option grants are determined at issuance by the board of directors,
Under the ISO plan, as amended, a maximum of 1,486,349 options may be granted
at a price not less than the market value of the underlying shares on the date
of grant and are exercisable over a period not to exceed ten years. Holders of
ten percent or more of the Company's outstanding shares must exercise their
options within a period not to exceed five years. Officers may borrow from the
Company the funds necessary to exercise vested stock options. The loans have
varying terms not exceeding ten years, bear interest at the applicable federal
interest rate in effect at the date of issue and have been recorded as a
reduction in shareholders' equity. For the years ended December 31, 1996, 1995
and 1994, officers of the Company borrowed $3,050,000, $2,654,000, and
$1,300,000, respectively, from the Company in order to exercise their options
and made principal payments of $1,124,000, $265,000, and $25,000, respectively,
during the same periods. The Company recognized interest income of $303,000,
$179,000, and $56,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
A summary of the status of the Company's incentive stock option plan as of
December 31, 1996, 1995 and 1994, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(shares in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVG. Weighted Avg. Weighted Avg.
Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 712 $17.32 629 $16.80 602 $16.72
Granted 137 19.25 323 17.08 117 16.25
Exercised (224) 17.74 (220) 15.44 (90) 15.55
Forfeited (68) 17.33 (20) 17.61 -- --
--- --- ---
Outstanding at end of year 557 17.63 712 17.32 629 16.80
=== === ===
Options exercisable at year-end 186 265 263
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allied Capital Commercial Corporation
22
<PAGE> 17
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about incentive stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(shares in thousands) Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 12/31/96 Contractual Life Exercise Price As of 12/31/96 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$15.25-$17.38 188 6.7 years $16.06 73 $16.42
$17.75-$17.75 175 8.6 17.75 45 17.75
$18.75-$19.25 194 8.0 19.04 68 19.02
--- ---
$15.25-$19.25 557 7.7 17.63 186 17.69
=== ===
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The company accounts for the ISO plan as required by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees," and no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with Statement of Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (SFAS 123), the Company's net income
and net income per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year Ended December 31, 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $27,901 $24,225
Pro forma $27,637 $23,858
Net income per share:
As reported $ 1.99 $ 1.80
Pro forma $ 1.97 $ 1.77
- ------------------------------------------------------------
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants; risk-free interest rates of 6 percent for both
1996 and 1995; expected dividend yield of 8 percent for 1996 and 1995; expected
life of 5 years for all options granted in 1995 and 1996; expected volatility
of 29 percent for 1996 and 1995.
NOTE 10. DIVIDENDS AND DISTRIBUTIONS
For the years ended December 31, 1996, 1995 and 1994, the Company's board of
directors declared the following distributions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
TOTAL Total Total
TOTAL PER Total Per Total Per
(In Thousands, Except Per Share Amounts) AMOUNT SHARE Amount Share Amount Share
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 6,061 $0.44 $5,046 $0.38 $3,464 $0.27
Second Quarter 6,388 0.46 5,353 0.40 3,855 0.30
Third Quarter 6,764 0.48 5,540 0.41 4,270 0.33
Fourth Quarter 7,101 0.50 5,738 0.42 4,577 0.35
Annual Extra Distribution 1,420 0.10 2,323 0.17 2,877 0.22
--------------------------------------------------------------
Total $27,734 $1.98 $24,000 $1.78 $19,043 $1.47
==============================================================
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allied Capital Commercial Corporation
23
<PAGE> 18
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For income tax purposes, distributions for 1996, 1995 and 1994 were 88 percent,
91 percent and 83 percent ordinary income and 12 percent, 9 percent and 17
percent net capital gains, respectively. The following table summarizes the
differences between taxable income and financial reporting income for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Financial statement net income $27,901 $24,225 $18,314
Adjustments:
Amortization of discount (694) (1,229) (632)
Gains from dispositions of loans (795) 475 849
Expenses not deductible for tax 1,294 562 512
------------------------------
Taxable income $27,706 $24,033 $19,043
==============================
- -----------------------------------------------------------------------
</TABLE>
NOTE 11. INVESTMENT MANAGEMENT AGREEMENT
The Company has an investment management agreement with Advisers. Advisers,
under the supervision of the Company's board of directors, identifies,
evaluates, structures and closes the investments to be made by the Company,
arranges debt and equity capital for the Company, and is responsible for
monitoring the investments made by the Company, including portfolio management
and servicing. The investment management agreement may be terminated at any
time, without penalty, on sixty days' notice to Advisers if holders of
two-thirds of the Company's shares vote to terminate the agreement. In
addition, this agreement will terminate automatically in the event of its
assignment. Certain officers and directors of Advisers are also officers and
directors of the Company.
The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation of
the Company's officers and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses that
are paid by the Company include its share of transaction costs incident to the
acquisition and disposition of investments, professional fees and expenses, the
fees and expenses of the Company's directors, the costs of printing and mailing
reports to shareholders, costs associated with promoting the Company's stock
and the fees and expenses of the Company's custodian and transfer agent. The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses related to
insurance and bonding.
Under the stated terms of its investment management agreement with Advisers,
the Company is obligated to pay fees on its consolidated invested assets at a
rate that approximates 2.5 percent per annum. In order for the Company to
provide loans to borrowers at lower interest rates and increase its
competitiveness in the marketplace, Advisers revised its fee schedule on May 3,
1996 and January 9, 1997 with the Company for all loans that were originated or
purchased on or after January 1, 1996 and January 1, 1997, respectively. The
revised fee schedules agreed to on these dates reflect different types of
management fee percentages payable to Advisers based upon certain
characteristics of the outstanding loans held in the Company's investment
portfolio. The revised fees ranged from 0.5 percent of invested assets to 3.5
percent of invested assets with a quarterly cap, at a rate of 2.5 percent per
annum, on the total management fees payable to Advisers.
Management fees payable to Advisers with respect to the Company's holdings of
cash and interim investments have not been affected by the revisions to the fee
schedule. Management fees on cash and interim investments are payable quarterly
in arrears, at a rate of approximately 0.5 percent per annum.
NOTE 12. PRO FORMA FINANCIAL DATA (UNAUDITED)
As a result of forming Funding and its issuance of the Bonds in November 1995
and the Company's majority ownership, the Company consolidated Funding's
operations
Allied Capital Commercial Corporation
24
<PAGE> 19
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
into its financial statements. As a result, the historical results of
operations and earnings per share may not be indicative of future results of
operations. The following represents the pro forma condensed statement of
income as if Funding issued the Bonds and the Company consolidated Funding's
operations as of the beginning of the year in which the transaction occurred,
as well as at the beginning of the preceding year. The pro forma condensed
statement of income is not necessarily indicative of what actual results of
operations of the Company would have been assuming this transaction had been
completed as of January 1, 1995 and 1994, respectively, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
For the Years Ended
December 31,
(in thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Total investment income $38,853 $32,531
Total expenses 14,305 12,844
Net realized gains 3,048 2,433
Minority interest 2,650 2,660
------------------
Net income $24,946 $19,460
==================
Net income per share $ 1.85 $ 1.50
==================
- ------------------------------------------------------------
</TABLE>
NOTE 13. DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Fair Value of Financial
Instruments," requires disclosures about the fair value for all financial
instruments. All of the Company's financial instruments are held or issued for
purposes other than trading. The following methods and assumptions were used to
estimate the fair value of each class of financial instrument for which it is
practical to estimate that value:
CASH AND CASH EQUIVALENTS AND OTHER SHORT-TERM INSTRUMENTS. The carrying amount
approximates fair value because of the short maturity of these instruments.
NOTE RECEIVABLE FROM AFFILIATES. The fair value of the note receivable is
estimated using the current interest rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
As of December 31, 1996 and 1995, the Company considered the recorded amount to
approximate the fair value.
INVESTMENTS IN REAL ESTATE LOANS. The fair value of the Company's real estate
loans is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. The estimated fair value of the
Company's investments in loans approximated the carrying amount as of December
31, 1996 and 1995.
NOTES PAYABLE. This debt is at floating interest rates which approximate
current rates available to the Company for such debt, and accordingly the fair
value of such floating rate debt approximates the current carrying amount.
BONDS PAYABLE. The estimated fair value of the Company's fixed rate bonds
payable approximates its current carrying amount based upon the subordination
amount of this transaction.
INTEREST RATE SWAP AGREEMENT. The fair value of interest rate swaps (used for
hedging purposes) is the estimated amount that the Company would receive or pay
to terminate the swap agreement at the reporting date, taking into account
current interest rates and the current creditworthiness of the swap
counterparty. As of December 31, 1996, the Company would have incurred a loss
of approximately $961,000 to terminate the swap agreement.
COMMITMENTS TO EXTEND CREDIT. The fair value of commitments is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of the commitments as of December 31, 1996
totaled $33,675,000.
Allied Capital Commercial Corporation
25
<PAGE> 20
Allied Capital Commercial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash financing activities:
Consolidation of long-term debt
related to minority interest $ -- $18,062 $ --
Issuance of common shares in
exchange for notes receivable $3,050 $ 2,654 $1,300
Issuance of common shares in
lieu of cash for dividends $6,399 $ 6,126 $4,006
Non-cash investing activities:
Consolidation of mortgage loans
related to minority interest $2,004 $23,490 $ --
Interest paid $9,843 $ 4,166 $1,003
- --------------------------------------------------------------------
</TABLE>
NOTE 15. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding of $33,675,000 at December 31, 1996 for
new loan originations and purchases.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to loans are limited due to a large
base and geographic dispersion. The Company makes investments across the nation
and its loan portfolio can be segregated into five regions: Northeast,
Southeast, Central, Southwest and West. As of December 31, 1996, the Company's
loan concentration by these regions was 20%, 40%, 5%, 13% and 22%,
respectively. This compares to the Company's loan concentration by region as of
December 31, 1995 of 38%, 28%, 3%, 14% and 17%, respectively.
The Company places its cash with financial institutions and, at times, cash
held in checking accounts in financial institutions may be in excess of the
Federal Deposit Insurance Corporation insured limit.
At December 31, cash and cash equivalents consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Cash equivalents $ 5,928 $14,440
Less escrows held (3,903) (1,772)
-----------------
Total $ 2,025 $12,668
=================
- ----------------------------------------------------------
</TABLE>
NOTE 17. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1996
(in thousands, except per share amounts) QTR 1 QTR 2 QTR 3 QTR 4
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $10,093 $11,266 $11,794 $12,485
Net income $ 6,855 $ 7,683 $ 6,391 $ 6,972
Net income per share $ 0.50 $ 0.55 $ 0.45 $ 0.49
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1995
Qtr 1 Qtr 2 Qtr 3 Qtr 4
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $7,280 $8,202 $8,765 $9,295
Net income $5,877 $5,547 $6,333 $6,468
Net income per share $ 0.44 $ 0.41 $ 0.47 $ 0.47
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allied Capital Commercial Corporation
26
<PAGE> 21
Allied Capital Commercial Corporation
CONSOLIDATED SCHEDULE OF LOANS ON REAL ESTATE AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of loans) Loan Principal
Amount Subject
to Delinquent
Current Final Periodic Carrying Principal Principal or
Description Interest Rate Maturity Payment Terms Amount Amount Interest*
- -----------------------------------------------------------------------------------------------------------------------------------
First mortgage on commercial property 10% 2003 Level principal $ 12,711 $ 12,764 $ --
Cupertino, California and interest payments,
Office/research complex amortizing to maturity;
paydown in 2003
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First mortgages on commercial property,
each having a carrying amount less than
3% of total carrying amount:
Auto services, 18 loans 8.00%-12.50% 1996-2020 Various 3,227 3,864 --
Churches, 3 loans 6.75%- 8.50% 1997-2011 Various 419 571 --
Convenience/gas stations, 4 loans 11.00%-13.75% 1997-2010 Various 10,926 11,153 --
Hotels-full service, 32 loans 7.50%-14.75% 1996-2006 Various 97,241 100,885 1,473
Hotels-limited service, 16 loans 8.25%-13.00% 1996-2021 Various 29,438 31,668 --
Hotels-resorts/suites, 4 loans 7.25%-10.50% 1998-2005 Various 12,138 12,918 1,856
Marinas, 3 loans 6.66%-12.75% 1998-2012 Various 1,184 1,392 555
Mini-storage facilities, 3 loans 8.19%- 9.75% 1998-2017 Various 2,382 2,751 --
Mixed use, 7 loans 5.25%-16.00% 1996-2013 Various 5,117 5,238 --
Hospitals, nursing homes &
medical offices, 18 loans 7.50%-12.75% 1996-2027 Various 17,698 20,969 --
Office buildings, 67 loans 5.00%-13.00% 1996-2021 Various 75,953 86,968 775
Restaurants, 15 loans 7.91%-10.50% 1996-2020 Various 3,315 3,923 420
Retail operations, 44 loans 4.00%-12.00% 1996-2019 Various 44,477 53,296 2,513
Warehouses, 31 loans 8.72%-12.50% 1996-2017 Various 21,094 23,234 --
Other, 26 loans 2.00%-16.00% 1996-2024 Various 19,595 22,444 3,386
- ------------------------------------------------------------------------------------------------------------------------------------
Totals 356,915 394,038 10,978
- ------------------------------------------------------------------------------------------------------------------------------------
Loan loss reserve 1,454 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE LOANS AT AMORTIZED COST
AFTER LOAN LOSS RESERVE $355,461 $394,038 $10,978
====================================================================================================================================
</TABLE>
* These accounts reflect the principal amount of loans where the payments are
three months or more past due.
Allied Capital Commercial Corporation
27
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Allied Capital Commercial Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Allied Capital
Commercial Corporation and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allied Capital Commercial
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Consolidated Schedule of Loans on
Real Estate is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audit of the basic financial statements and, in our opinion is fairly stated,
in all material respects, in relation to the basic financial statements taken
as a whole.
/s/ ARTHUR ANDERSEN LLP
Washington, DC
February 6, 1997
Allied Capital Commercial Corporation
28
<PAGE> 23
Allied Capital Commercial Corporation
DIRECTORS AND OFFICERS*
<TABLE>
<CAPTION>
DIRECTORS
<S> <C> <C>
William L. Walton(1) Katherine C. Marien Julie E. Svoboda
Chairman of the Board & Executive Vice President Vice President, Controller &
Chief Executive Officer Assistant Treasurer
Joan M. Sweeney
David Gladstone Executive Vice President Christina L. DelDonna
Vice Chairman Vice President & Assistant Controller
G. Cabell Williams III
John M. Scheurer(1) Executive Vice President Jeff E. Erhardt
President & Chief Operating Officer Assistant Vice President
Arthur S. Cooper
Anthony T. Garcia(2) Senior Vice President Mohamoud M. Garad
Financial Consultant Assistant Vice President
Robert J. Corry
Charles L. Palmer(1,2) Senior Vice President Alexandra M. Johns
President/Managing General Partner, Assistant Vice President
North American Company Tricia B. Daniels
Senior Vice President & Secretary Kristine M. Lansing
John D. Reilly(1,3) Assistant Vice President &
Chairman, Reilly Investment Corporation Michael J. Grisius Assistant Secretary
Senior Vice President
Laura W. van Roijen(2,3) Donna B. Natale
Private Real Estate Investor John J. Hall, Jr. Assistant Vice President &
Senior Vice President Assistant Secretary
George C. Williams
Financial Consultant George Stelljes III Peter M. Ramsey
Senior Vice President Assistant Vice President
(1) Executive Committee
(2) Audit Committee Kelly A. Anderson James P. Shevlin
(3) Compensation Committee Vice President, Corporate Controller & Assistant Vice President
Assistant Treasurer
*As of March 1, 1997 Michael R. Sifers
John W. Benton Assistant Vice President
OFFICERS Vice President
Thomas R. Salley III
William L. Walton Michael G. Carey Assistant Secretary
Chairman of the Board & Vice President
Chief Executive Officer Thomas H. Westbrook
Suzanne V. Sparrow Assistant Secretary
John M. Scheurer Vice President, Investor Relations &
President & Chief Operating Officer Assistant Secretary
Jon A. DeLuca
Executive Vice President, Treasurer &
Chief Financial Officer
</TABLE>
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1996 and 1995 and the distributions
paid per share. The quotations represent interdealer quotations and do not
include markups, markdowns or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1996 1995
DISTRIBUTIONS Distributions
HIGH LOW PER SHARE High Low Per Share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $20.00 $18.25 $0.44 $16.88 $14.75 $0.38
Second Quarter $20.25 $18.63 $0.46 $17.75 $15.34 $0.40
Third Quarter $23.50 $19.63 $0.48 $19.13 $17.13 $0.41
Fourth Quarter $24.25 $21.50 $0.50 $19.88 $17.38 $0.42
Annual Extra Distribution $0.10 $0.17
----- -----
Total Distribution $1.98 $1.78
===== =====
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 6, 1997 included in
Allied Capital Commercial Corporation's Annual Report to security holders. It
should be noted that we have not audited any financial statements of the
company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1997
<PAGE> 2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the incorporation by
reference in the registration statement on Form S-8 File No. 33-79422, of our
report dated February 6, 1997 incorporated by reference in Allied Capital
Commercial Corporation's Form 10-K for the year ended December 31, 1996 and to
all references to our Firm included in such registration statement.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,025
<SECURITIES> 0
<RECEIVABLES> 356,915
<ALLOWANCES> 1,454
<INVENTORY> 0
<CURRENT-ASSETS> 12,818
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 370,304
<CURRENT-LIABILITIES> 5,563
<BONDS> 161,254
0
0
<COMMON> 1
<OTHER-SE> 195,328
<TOTAL-LIABILITY-AND-EQUITY> 370,304
<SALES> 45,638
<TOTAL-REVENUES> 45,638
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,774
<LOSS-PROVISION> 1,282
<INTEREST-EXPENSE> 10,960
<INCOME-PRETAX> 27,901
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,901
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.98
</TABLE>
