-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OxhnWsYsvQPZYpmgEfdLgoKECPHXC87lCfNkwlyk+SW24I7prmxnwtJhKAPUqWrF +Ii6qhftCK5Oq7QdoxglRQ== 0000950133-96-000299.txt : 19960401 0000950133-96-000299.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950133-96-000299 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED CAPITAL CORP CENTRAL INDEX KEY: 0000003845 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 530245085 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 811-00907 FILM NUMBER: 96540665 BUSINESS ADDRESS: STREET 1: 1666 K ST N W STE 901 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 2023311112 MAIL ADDRESS: STREET 2: 1666 K STREET NW 9TH FL CITY: WASHINGTON STATE: DC ZIP: 20006 10-K 1 ALLIED CAPITAL CORPORATION FORM 10-K, 12/31/95. 1 ================================================================================ UNITED STATES 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, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 814-97 ALLIED CAPITAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) ------------ MARYLAND 53-0245085 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) C/O ALLIED CAPITAL ADVISERS, INC. 1666 K STREET, N.W., NINTH FLOOR 20006 WASHINGTON, D.C. (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) 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, $1.00 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 / / The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of March 22, 1996 was approximately $77,268,993 based upon the average bid and asked price for the registrant's common stock on that date. As of March 22, 1996 there were 6,891,836 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders for the year ended December 31, 1995 are incorporated by reference into Parts 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 6, 1996 are incorporated by reference into Part III of this Report. ================================================================================ 2 PART I ITEM 1. BUSINESS Allied Capital Corporation (the "Company") was incorporated under the laws of the District of Columbia in 1958 and was reorganized as a Maryland corporation in 1991. It is a closed-end management investment company that elected in 1991 to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has two active wholly owned subsidiaries, Allied Investment Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial"). Allied Investment and Allied Financial are Maryland corporations registered under the 1940 Act as closed-end management investment companies. Allied Investment is licensed by the U.S. Small Business Administration (the "SBA") as a small business investment company under Section 301(c) of the Small Business Investment Act of 1958 (an "SBIC"), and Allied Financial is licensed by the SBA as a specialized small business investment company under Section 301(d) of the Small Business Investment Act of 1958 (an "SSBIC"). As described below, the Company also has a significant ownership interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end management investment company that has elected to be regulated as a BDC and is an SBA-approved small business lending company. Allied Capital Advisers, Inc. ("Advisers") serves as the investment adviser to the Company under an investment advisory agreement. The investment objective of the Company is to provide a high level of current income and long-term growth in the value of its net assets by providing debt, mezzanine, and equity financing primarily for small, privately owned companies. This objective may be changed by the Board of Directors of the Company without a "vote of a majority of the outstanding voting securities" (as defined in the 1940 Act) of the Company. To achieve its investment objective, the Company invests primarily in and lends primarily to small businesses, both directly and through its wholly owned subsidiaries (unless otherwise indicated, all further references herein to investments made by the Company include those made by its subsidiaries). The investments made by the Company include providing financing for growth, leveraged buyouts of such companies, for note purchases and loan restructurings, and for special situations, such as acquisitions, buyouts, recapitalizations, and bridge financings of such companies. The Company's investments generally take the form of loans with equity features, such as warrants or conversion privileges, that entitle the Company to acquire a portion of the equity in the entity in which the investment is made. The typical maturity of such a loan made by the Company is seven years, with interest-only payments in the early years and payments of both principal and interest in the later years, although loan maturities and principal amortization schedules vary. The Company also makes senior loans without equity features. Loans generally bear interest at a fixed rate that the Company believes is competitive in the venture capital marketplace. Current income is derived primarily from interest earned on the loan element of the Company's investments. Generally, long-term growth in net asset value and realized capital gains, if any, from portfolio companies are achieved through the equity obtained as a result of the Company's growth financing and leveraged buyout activity. The Company seeks to structure its investments so that approximately one-half of the potential return is earned in the form of monthly or quarterly interest payments and the balance is derived from capital gains. The Company's investments may be secured by the assets of the entity in which the investment is made, which collateral interests may be subordinated in certain instances to institutional lenders, such as banks. The Company makes available significant managerial assistance to its portfolio companies. Pending investment of its assets, the Company's funds are generally invested in repurchase agreements fully collateralized by U.S. government securities. The Company usually invests in privately held companies or small public companies that are thinly-traded and generally lack access to capital. These companies generally have been in business for at least one year, have a commercially proven product or service, and seek capital to finance expansion or ownership changes. The Company generally requires that the companies in which it invests demonstrate sales growth, positive cash flow, and profitability, although turnaround situations are also considered. The Company's emphasis is on low- to medium-technology businesses, such as broadcasting, manufacturing, environmental concerns, wholesale distribution, commodities storage, and retail operations. The Company emphasizes the quality of management of the companies in which it invests, and seeks experienced entrepreneurs with a management track record, relevant industry experience, and high integrity. 1 3 Historically, all of the investments of the Company have been made in domestic small businesses. However, the Company recently established a $20 million credit facility with the Overseas Private Investment Corporation ("OPIC"), pursuant to which it anticipates making investments in businesses that engage, in whole or in part, in overseas operations, usually in countries representing the world's emerging markets. OPIC is a self-sustaining federal agency the purpose of which is to promote economic growth in developing countries by encouraging U.S. private investment in those nations. Under OPIC regulations, investments generally may be made only in companies that have some affiliation with a U.S.-based business entity. The Company's first OPIC-related investment was made in February 1996 and consisted of an investment in a wireless communications company expanding operations into Latin America; that investment involved borrowing $5 million from the OPIC credit facility. In January 1996, the Company registered 885,448 shares of its stock to be offered in connection with a rights offering to its existing shareholders. Pursuant to the rights offering, the Company issued to the common stockholders at the close of business on January 22, 1996, (the "Record Date"), one non-transferable subscription right ("Subscription Right") for each share held which entitled each record date stockholder to subscribe for and purchase from the Company up to one authorized, but theretofore unissued share of the Company's common stock for each seven Subscription Rights held (the "Primary Subscription"). Stockholders who fully exercised their Subscription Rights were entitled to the additional privilege of subscribing for shares from the offering not acquired by exercise of Subscription Rights (the "Over-Subscription Privilege"). In addition, the Company increased the number of shares subject to subscription by 15%, or 132,817 shares, for an aggregate total of 1,018,265 shares available under the offering. The subscription price per common share was $13.11, which equaled 95% of the average of the last reported sale price of a share of common stock on the Nasdaq National Market on February 27, 1996 (the expiration date of the rights offering) and each of the four preceding business days. Stockholders participating in the offering subscribed for 404,767 shares through the Primary Subscription and 251,903 shares through the Oversubscription Privilege for a total of 656,670 shares. The Company received net proceeds of $8.2 million from the rights offering after estimated expenses of $458,000, including a 2.5% commission paid to eligible broker/dealers on each share sold as a result of their soliciting efforts. In the registration statement relating to the rights offering, the Company retained the right to offer and sell any unsubscribed-for shares through a subsequent offering. Any such subsequent offering may be made only through the use of a prospectus included in a post-effective amendment to the registration statement. The Company's Operation as a BDC As a BDC, the Company may not acquire any assets other than "Qualifying Assets" unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets (the "70% test"). The principal categories of Qualifying Assets relevant to the business of the Company are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is defined to include any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than an SBIC wholly owned by the BDC (the Company's investments in and advances to Allied Investment and Allied Financial are Qualifying Assets, but its investment in Allied Lending, which is neither wholly owned nor an SBIC, is not) and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit. (2) Securities received in exchange for or distributed with respect to securities described in (1) above, or pursuant to the exercise of options, warrants or rights relating to such securities. (3) Cash, cash items, government securities, or high quality debt securities (within the meaning of the 1940 Act) maturing in one year or less from the time of investment. In addition, to treat securities described in (1) and (2) above as Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance. Making available significant managerial assistance means, among other things, (i) any arrangement whereby the BDC, through its 2 4 directors, officers or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company or (ii) in the case of an SBIC, making loans to a portfolio company. Managerial assistance is made available to the portfolio companies by the Company's directors and officers, who are employees of Advisers, which manages the Company's investments. Each portfolio company is assigned for monitoring purposes to an investment officer and its principals are contacted and counseled if the portfolio company appears to be encountering business or financial difficulties. The Company also provides managerial assistance on a continuing basis to any portfolio company that requests it, whether or not difficulties are perceived. The Company's officers and directors are highly experienced in providing managerial assistance to small businesses. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a "majority of the outstanding voting securities," as defined in the 1940 Act, of the Company. Since the Company made its BDC election, it has not in practice made any substantial change in its structure or, on a consolidated basis, in the nature of its business, except for the disposition of its ownership interest in Allied Lending, as described below, which is not a change that results in the Company ceasing to be a BDC. As a BDC, the Company is entitled to borrow money and issue senior securities representing indebtedness as long as senior securities representing indebtedness have asset coverage of at least 200%. This limitation is not applicable to classes of senior securities representing indebtedness of the Company's SBIC and SSBIC subsidiaries. Co-Investment with Allied Capital Corporation II, Allied Venture Partnership, and Allied Technology Partnership In accordance with the conditions of several exemptive orders of the Securities and Exchange Commission (the "Commission") permitting co-investments (the "Co-investment Guidelines"), most of the Company's acquisitions and dispositions of investments are made in participation with Allied Capital Corporation II ("Allied II"). In the past, the Company also acquired certain investments in participation with Allied Venture Partnership ("Allied Venture") and Allied Technology Partnership ("Allied Technology"), both private venture capital partnerships managed by Advisers, neither of which is now making new investments. Allied II is a closed-end management investment company that has elected to be regulated as a BDC and for which Advisers serves as its investment adviser. At December 31, 1995, Allied II had total consolidated assets of $107,169,000, compared to the Company's total consolidated assets of $148,268,000 at that date. The Co-investment Guidelines generally provide that the Company and its wholly owned subsidiaries must be offered the opportunity to invest in any investment, other than in interim investments or marketable securities, that would be suitable for Allied II or its wholly owned subsidiaries and the Company to the extent proportionate to their respective consolidated total assets. Securities purchased by the Company or its wholly owned subsidiaries in a co-investment transaction with any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology, will consist of the same class of securities, will have the same registration rights, if any, and other rights related thereto, and will be purchased for the same unit consideration. Any such co-investment transaction must be approved by the Company's Board of Directors, including a majority of its independent directors. The Company will not make any investment in the securities of any issuers in which Allied II, Allied Venture or Allied Technology, but not the Company, has previously invested. The Co-investment Guidelines also provide that the Company will have the opportunity to dispose of any securities in which the Company or its wholly owned subsidiaries and any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology, have invested in proportion to their respective holdings of such securities, and that, in any such disposition, the Company will be required to bear no more than its proportionate share of the transaction costs. Allied Investment Allied Investment, as an SBIC, provides capital to privately owned small businesses primarily through loans, generally with equity features, and, to a lesser extent, through the purchase of common or convertible preferred shares. Loans with equity features are generally evidenced by a note or debenture that is convertible into common stock, requiring the holder to make a choice, prior to the loan's maturity, between accepting repayment and maintaining its equity position, or purchasing, frequently for a nominal consideration, common stock of the issuer even after the loan is repaid. Wherever possible, Allied Investment seeks collateral for its loans, but its security interest is usually subordinated to the security interest of other institutional lenders. 3 5 As an SBIC, Allied Investment currently has the opportunity to sell to the SBA subordinated debentures with a maturity of up to ten years up to an aggregate principal amount determined by a formula which applies a multiple to its private capital, but not in excess of $90 million (the "$90 million limit"). The $90 million limit generally applies to all financial assistance provided by the SBA to any licensee and its "associates," as that term is defined in SBA regulations. For this purpose, Allied Investment and Allied Financial would be deemed to be "associates" of one another and both may be deemed to be "associates" of Allied Investment Corporation II ("Allied Investment II"), which is also an SBIC and is a subsidiary of Allied II. As a group, Allied Investment and Allied Financial have received $68,300,000 in subordinated debenture and preferred stock investments from the SBA as of December 31, 1995; as a result, this combined ability to apply for additional leverage from the SBA will be limited to $21,700,000 due to the $90 million limit. This combined ability to obtain additional leverage assumes that Allied Investment II does not obtain any SBA leverage. The Company is unable to predict the SBA's ability to meet demands for leverage on an ongoing basis, as such funding may be affected if Congress reduces appropriations for the SBA, which may compel the SBA to allocate leverage or to reduce the current limits on available leverage. Therefore, there is no guaranty that Allied Investment or Allied Financial will be able to obtain additional SBA leverage beyond what is currently held. Allied Investment provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. Allied Financial Allied Financial, as an SSBIC, operates as a small business investment company specializing in the financing of small businesses controlled by socially or economically disadvantaged persons. To determine whether the owners of a small business are socially or economically disadvantaged, the SBA relies on a composite of factors. Business owners who are members of the following groups, among others, are considered socially disadvantaged: African Americans, Hispanic Americans, Native Americans and Asian Pacific Americans. In determining whether the owners of a small business are economically disadvantaged, consideration may be given to factors such as levels of income, location (for instance, urban ghettos, depressed rural areas and areas of high unemployment or underemployment), education level, physical or other special handicap, inability to compete in the marketplace because of prevailing or past restrictive practices or Vietnam-era service in the armed forces, or any other factors that may have contributed to disadvantaged conditions. An SSBIC may sell preferred stock or long-term subordinated debt to the SBA in an amount of up to 200% of its private capital. Beginning with the SBA's 1996 fiscal year commencing on October 1, 1995, Congress has discontinued subsidized funding for the SBA's SSBIC program. Prior to this change, an SSBIC was able to sell preferred stock and debentures which were issued with a rate reduction or subsidy. Preferred stock sold to the SBA after November 1989 pays dividends at an annual rate of four percent (4%) of par value and must be redeemed within 15 years of issuance; preferred stock sold to the SBA before November 1989 pays dividends at an annual rate of three percent (3%) of par value and has no required redemption date. In addition to preferred stock, the SBA had provided leverage to SSBICs at a reduced rate through the purchase or guarantee of debentures. As of December 31, 1995, Allied Financial had unsubsidized capital in the aggregate amount of $2,000,000 and subsidized capital in the aggregate amount of $23,950,000, consisting of subordinated debentures to the SBA in the amount of $16,950,000, 3% preferred stock of $6,000,000 and 4% preferred stock of $1,000,000. Allied Financial provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. The Company's Interest in Allied Lending The Company owned 2,380,000 shares, or all of the outstanding capital stock, of Allied Lending prior to consummation of the initial public offering of Allied Lending's common stock in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending's common stock was reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding at December 31, 1993. The Company has agreed to 4 6 divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's stockholders or otherwise. As part of this divestiture, the Company declared an extra distribution in December 1994 and distributed in early January 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending to 1,244,914 shares, or 28% of the Allied Lending common stock then outstanding. Until 1995, the business of Allied Lending consisted solely of making small business loans which are partially guaranteed under the SBA's 7(a) Loan Program ("7(a) guaranteed loans"). Allied Lending has been an active non-bank lender in the 7(a) Loan Program. Most of the loans made by Allied Lending historically have been made for the purpose of allowing portfolio companies to acquire real estate-related assets, such as factories, workshops, or retail premises, or to refinance outstanding loans made to acquire such real estate; a smaller proportion of such loans has been made for the purpose of allowing portfolio companies to purchase or refinance machinery and equipment. Allied Lending, pursuant to stockholder approval at a Special Meeting of Stockholders on November 9, 1995, expanded its ability to make loans to include, in addition to 7(a) guaranteed loans, loans that are made in conjunction with 7(a) guaranteed loans, and loans pursuant to the SBA 504 program. Investment Adviser Advisers is the investment adviser to the Company pursuant to an investment advisory agreement. In May 1995, the Company's stockholders approved a new investment advisory agreement (the "current agreement"). The current agreement will remain in effect from year to year as long as its continuance is approved at least annually by the Board of Directors, including a majority of the disinterested directors, or by the "vote of a majority of the outstanding voting securities" (as defined in the 1940 Act), of the Company. The current agreement may, however, be terminated at any time on (60) sixty days' notice, without the payment of any penalty, by the Board of Directors or by vote of a majority of the Company's outstanding voting securities, as so defined, and will terminate automatically in the event of its assignment. The terms of the current agreement are virtually identical to those of the investment advisory agreement between the Company and Advisers that it replaced (the "former agreement") except as to the calculation of the investment advisory fee and to the extent clarifying changes were made regarding the nature of professional or technical fees and expenses to be paid by the Company. The terms of the current agreement regarding calculation of the investment advisory fee are intended to reflect Advisers' practice of generally imposing a significantly lower fee on the Company's cash and cash equivalents and Interim Investments (i.e., U.S. government securities) than the fee applicable to the Company's invested assets, which Advisers has historically effected by waiving portions of the investment advisory fee applicable to the Company's cash and cash equivalents and Interim Investments. In the current agreement the provisions of the former agreement concerning the transaction costs to acquire or dispose of an investment were clarified to describe the nature of professional or technical fees and expenses to be paid by the Company and to provide that those fees and expenses included items such as credit reports, title searches, fees of accountants or industry-specific technical experts, and transaction-specific travel expenses. The effect of those clarifications and the replacement of the former agreement does not result in the imposition of any new fee or expense to be paid by the Company or its stockholders. Replacement of the former agreement with the current agreement is expected to result in an advisory fee that is lower than that provided under the former agreement (absent waiver by Advisers of any portion of its fee) and approximately the same as that provided in recent practice when Advisers waived a portion of its fee annually. The terms of the current agreement are summarized below. Pursuant to the current agreement, Advisers manages the investments of the Company, subject to the supervision and control of the Board of Directors. Specifically, Advisers identifies, evaluates, structures, closes, and monitors the investments made by the Company. The Company will not make any investments that have not been recommended by Advisers as long as the current agreement remains in effect. Advisers has the authority to effect acquisitions and dispositions of investments for the Company's account, subject to approval by the Company's Board of Directors. The current agreement provides that the Company will pay all of its own operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its 5 7 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 the Company's share of transaction costs incident to the acquisition and disposition of investments, legal and accounting fees, the fees and expenses of the Company's independent directors and the fees of its officer-directors, the costs of printing and mailing proxy statements and reports to stockholders, 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 of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of any company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or management assistance. Advisers will report to the Board of Directors not less often than quarterly all fees received by Advisers from any source whatever and whether, in its opinion, any such fee is one that Advisers is entitled to retain under the provisions of the current agreement. In the event that any member of the Board of Directors should disagree, the matter will be conclusively resolved by a majority of the Board of Directors, including a majority of the independent Directors. If the Company uses the services of attorneys or paraprofessionals on the staff of Advisers for the Company's corporate purposes in lieu of outside counsel, the Company will reimburse Advisers for such services at hourly rates calculated to cover the cost of such services, as well as for incidental disbursements by Advisers in connection with such services. As compensation for its services to and the expenses paid for the account of the Company, Advisers is paid quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company, consolidated Interim Investments, cash and cash equivalents, plus 0.125% per quarter of the quarter-end value of consolidated Interim Investments, cash and cash equivalents. The current agreement provides specifically that the fee to Advisers will not apply to the Company's investment in Allied Lending, as required by the Commission's 1993 exemptive order permitting the spinoff of Allied Lending. Such fees on an annual basis are approximately 2.5% of the Company's consolidated total assets, less the Company's investment in Allied Lending and consolidated Interim Investments, cash and cash equivalents, and 0.5% of the Company's consolidated Interim Investments, cash and cash equivalents. The fee to Advisers is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, evaluating, structuring, closing, and monitoring the types of private investments in which the Company specializes. The rate of compensation paid by the Company to Advisers is substantially the same as that paid by Allied II, with which Advisers has also negotiated a new investment advisory agreement during 1995. The Company also understands that the fee to Advisers provided for by the current agreement is not in excess of that frequently paid by private investment funds engaged in similar types of investments. Such private funds also typically allocate to management a substantial participation in profits. 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 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. 6 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 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, 1996, as well as certain other information with respect to those persons:
Positions Currently Held with the Principal Occupations Name Age Company During Past Five Years ---- --- ---------------------- ---------------------- David Gladstone 53 Chairman of the Board and Chief Employed by the Company or Executive Officer Advisers since 1974; Chairman and Chief Executive Officer of Allied II, Allied Capital Commercial Corporation ("Allied Commercial"), Allied Lending and Advisers; Director, President and Chief Executive Officer of Business Mortgage Investors, Inc. ("BMI") and Allied Capital Mortgage Corporation ("Allied Mortgage"); Director of The Riggs National Corporation; Trustee of The George Washington University. George C. Williams 69 Vice Chairman of Employed by the Company or the Board Advisers since 1959; Vice Chairman of Allied II, Allied Commercial, Allied Lending and Advisers; Chairman of BMI and Allied Mortgage. He is the father of G. Cabell Williams III. G. Cabell Williams III 41 President, and Chief Employed by the Company or Operating Officer Advisers since 1981. Executive Vice President of Allied II, Allied Commercial, Allied Lending, BMI and Advisers; Director of Environmental Enterprises Assistance Fund. He is the son of George C. Williams.
7 9 Jon A. DeLuca 33 Executive Vice President, Treasurer, Employed by Advisers since and Chief Financial Officer 1994. Executive Vice President, Treasurer and Chief Financial Officer of Allied II, Allied Commercial, Allied Lending, BMI, Allied Mortgage, and Advisers. Manager of Entrepreneurial Services at Coopers & Lybrand from 1986 to 1994. William F. Dunbar 37 Executive Vice President Employed by the Company or Advisers since 1987; President and Chief Operating Officer of Allied II; Executive Vice President of Allied Commercial, Allied Lending, BMI and Advisers. Thomas R. Salley 38 General Counsel and Secretary Employed by Advisers since 1988; General Counsel and Secretary of Allied II, Allied Lending, Allied Commercial, BMI, Allied Mortgage and Advisers. Joan M. Sweeney 36 Executive Vice President Employed by Advisers since 1993; President and Chief Operating Officer of Advisers; Executive Vice President of Allied II, Allied Commercial, Allied Lending, BMI, and Allied Mortgage; Senior Manager at Ernst & Young from 1990 to 1993.
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 "Investor Information" section of, and to Notes 4 and 7 of the Notes to Consolidated Financial Statements contained in, the Company's Annual Report to Stockholders for the year ended December 31, 1995 (the "1995 Annual Report"). ITEM 6. SELECTED FINANCIAL DATA. Information in response to this Item is incorporated by reference to the table in the "Consolidated Comparison of Financial Highlights" section of the 1995 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 1995 Annual Report. 8 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information in response to this Item is incorporated by reference to the Consolidated Financial Statements, notes thereto and Report of Independent Accountants thereon contained in the 1995 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 contained 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 1996 Annual Meeting of Stockholders, scheduled to be held on May 6, 1996 (the "1996 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. ITEM 11. EXECUTIVE COMPENSATION. Information in response to this Item is incorporated by reference to the subsections captioned "Compensation of Executive Officers and Directors," "Incentive Stock Options" and "Compensation of Directors" of the 1996 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information in response to this Item is incorporated by reference to the subsection captioned "Beneficial Ownership of Common Stock" of the 1996 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information in response to this Item is incorporated by reference to the subsections captioned "Certain Transactions" of the 1996 Proxy Statement. 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 from the 1995 Annual Report: Consolidated Balance Sheet at December 31, 1995 and 1994. Consolidated Statement of Operations for the years ended December 31, 1995, 1994 and 1993. Consolidated Statement of Changes in Net Assets for the years ended December 31, 1995, 1994 and 1993. Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993. Consolidated Statement of Loans to and Investments in Small Business Concerns at December 31, 1995. Notes to Consolidated Financial Statements. 9 11 B. Report of Independent Accountants with respect to the financial statements listed in A. above is incorporated by reference from the 1995 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: (3)(A)(1) The Company's Articles of Incorporation. (3)(B)(2) The Company's By-Laws. (4)(A) Instruments Defining the Rights of Security holders. See Exhibits 3(A) and 3(B). (4)(D)(3) Note Agreement between the Company and certain subsidiaries and Massachusetts Mutual Life Insurance Company, as amended, dated April 30, 1992. (4)(E)(2) Loan Agreement between the Company and Overseas Private Investment Corporation, dated April 10, 1995. (4)(F)(2) Unsecured Line of Credit Agreement between the Company and The Riggs National Bank of Washington, DC dated December 18, 1995. (10)(A)(4) Investment Advisory Agreement between the Company and Allied Capital Advisers, Inc. approved by the Company's stockholders on May 4, 1995. (10)(B)(i)(5) Letter Agreement dated November 16, 1993 among Allied Capital Lending Corporation, the Company and Lehman Brothers Inc. (10)(B)(ii)(6) Tax Indemnification Agreement dated November 12, 1993 between the Company and Allied Capital Lending Corporation. (10)(C)(iii)(7) The Company's Dividend Reinvestment Plan. (10)(E)(8) The Company's Incentive Stock Option Plan, as amended. (11)* Statement re computation of per share earnings. (13)(9)* 1995 Annual Report to Stockholders. (21) Subsidiaries of the Company and jurisdiction of incorporation.
Allied Investment Corporation Maryland Allied Capital Financial Corporation Maryland Allied Development Corporation District of Columbia
(23)* Consents of Matthews, Carter and Boyce, independent accountants. (27)* Financial Data Schedule. (28)* Financial statements as of and for the year ended December 31, 1995 of Allied Investment Corporation and Allied Capital Financial Corporation, in the form filed with the Small Business Administration. - --------------------------------- 10 12 * Filed herewith. (1) Incorporated by reference to Exhibit D to the Company's definitive proxy statement filed on April 11, 1991. (2) Incorporated by reference to such Exhibit on Pre-Effective Amendment No. 2 filed with registration statement Form N-2 (File No. 33-64629) on January 24, 1996. (3) Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii), (4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9, 1993. (4) Incorporated by reference to Exhibit A to the Company's definitive proxy statement relating to the meeting of its stockholders held on May 4, 1995. (5) Incorporated by reference to an exhibit of the same number filed with the Company's Form 8-K dated November 19, 1993. (6) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (8) Incorporated by reference to Exhibit A to the Company's definitive proxy statement filed on March 30, 1994 with respect to an annual meeting of stockholders held on May 5, 1994. (9) Except to the extent that portions of this exhibit are incorporated herein by reference, this document shall not be deemed to have been filed pursuant to the Securities Exchange Act of 1934. (b) Reports on Form 8-K. No reports on Form 8-K have been filed for the three months ended December 31, 1995. 11 13 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 28, 1996. /s/ DAVID GLADSTONE ------------------------------------------------- David Gladstone 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.
Title Signature (Capacity) Date - --------- ---------- ---- /s/ DAVID GLADSTONE Chairman and March 28, 1996 - ------------------------------------------------- Chief Executive Officer David Gladstone (Principal Executive Officer) /s/ GEORGE C. WILLIAMS Vice Chairman of the Board March 28, 1996 - ------------------------------------------------- George C. Williams /s/ G. CABELL WILLIAMS III Director and President March 28, 1996 - ------------------------------------------------- and Chief Operating Officer G. Cabell Williams III /s/ T. MURRAY TOOMEY Director March 28, 1996 - ------------------------------------------------- T. Murray Toomey /s/ JOSEPH A. CLORETY III Director March 28, 1996 - ------------------------------------------------- Joseph A. Clorety III /s/ GUY T. STEUART II Director March 28, 1996 - ------------------------------------------------- Guy T. Steuart II /s/ WARREN K. MONTOURI Director March 28, 1996 - ------------------------------------------------- Warren K. Montouri /s/ MICHAEL I. GALLIE Director March 28, 1996 - ------------------------------------------------- Michael I. Gallie /s/ JON A. DELUCA Executive Vice March 28, 1996 - ------------------------------------------------- President and Chief Jon A. DeLuca Financial Officer (Principal Financial and Accounting Officer)
12 14 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- (11) Statement re computation of per share earnings. (13) 1995 Annual Report to Stockholders. (23) Consents of Matthews, Carter and Boyce, independent accountants. (27) Financial Data Schedule. (28) Financial statements as of and for the year ended December 31, 1995 of Allied Investment Corporation and Allied Capital Financial Corporation, in the form filed with the Small Business Administration.
13 EX-11 2 COMPUTATION OF PER SHARE EARNINGS. 1 Exhibit 11 Allied Capital Corporation and Subsidiaries Computation of Earnings Per Common Share For the Years Ended December 31, 1995, 1994 and 1993
For the Year Ended December 31, ------------------------------------------------ 1995 1994 1993 ------------------------------------------------ Primary Earnings Per Common Share: Net Increase in Net Assets Resulting from Operations $15,317,000 $224,000 $20,406,000 Less: Dividends for Preferred Stock (220,000) (220,000) (220,000) ------------------------------------------------ Net Increase in Net Assets Resulting from Operations Available to Common Shareholders $15,097,000 $4,000 $20,186,000 ================================================ Weighted average number of common shares outstanding 6,169,211 6,132,159 6,108,809 Weighted average number of shares issuable on exercise of outstanding stock options 2,322 22,027 19,054 ------------------------------------------------ Weighted average number of common shares and common share equivalents outstanding 6,171,533 6,154,186 6,127,863 ================================================ Earnings per Common Share $2.45 $0.00 $3.29 ================================================ Fully Diluted Earnings Per Common Share: Net Increase in Net Assets Resulting from Operations $15,317,000 $224,000 $20,406,000 Less: Dividends for Preferred Stock (220,000) (220,000) (220,000) ------------------------------------------------ Net Increase in Net Assets Resulting from Operations Available to Common Shareholders $15,097,000 $4,000 $20,186,000 ================================================ Weighted average number of common shares and common share equivalents outstanding as computed for primary earnings per share 6,171,533 6,154,186 6,127,863 Weighted average of additional shares issuable on exercise of outstanding stock options 39,134 55 15,034 ------------------------------------------------ Weighted average number of common shares and common share equivalents outstanding, as adjusted 6,210,667 6,154,241 6,142,897 ================================================ Earnings per Common Share $2.43 $0.00 $3.29 ================================================
EX-13 3 1995 ANNUAL REPORT. 1 EXHIBIT 13 Company Profile - -------------------------------------------------------------------------------- Allied Capital Corporation [PHOTO] ALLIED CAPITAL CORPORATION is an investment company that has profited from lending to and investing in small businesses for 37 years. The market demand for small business finance is large with few providers, and the Company has developed a specialty in this market niche. Allied Capital Corporation provides investors with the unique opportunity to profit from our investment experience and the ever-growing small business marketplace. The Company operates much like a bank or finance company in its origination of subordinated loans, and it frequently receives and profits from equity interests in small businesses as well. Allied Capital Corporation provides a unique advantage to stockholders when compared to traditional lending institutions, because as an investment company, it pays no corporate taxes - all of its profits pass directly to stockholders. THE ALLIED CAPITAL COMPANIES Allied Capital Corporation is one company in the Allied Capital complex of public and private companies dedicated to financing the growth of small, private businesses. With more than $650 million in combined total assets, Allied Capital is a small business finance specialist and has financed everything from equipment purchases, construction loans and commercial real estate mortgages to management buyouts and acquisitions. Over the last 37 years, Allied Capital has invested in the growth of thousands of businesses nationwide while providing substantial returns to its stockholders. CONTENTS Financial Highlights 1 Letter To Our Stockholders 2 Portfolio Manager's Report 4 Management's Discussion And Analysis 10 Consolidated Comparison Of Financial Highlights 13 Consolidated Financial Statements 14 Consolidated Statement Of Loans To And Investments In Small Business Concerns 20 Notes To The Consolidated Financial Statements 22 Report Of Independent Accountants 29 Investment Officers 30 Directors And Officers 31 Investor Information 32
Cover Photography: The Washington Monument by Carol M. Highsmith 2 Financial Highlights - -------------------------------------------------------------------------------- Allied Capital Corporation
- --------------------------------------------------------------------------------------- December 31, (in thousands, except per share amounts) 1995 1994 - --------------------------------------------------------------------------------------- Total Investments at Value $123,184 $ 115,026 Total Assets $148,268 $ 135,517 Total Debt and Redeemable Preferred Stock $ 83,800 $ 78,005 Shareholders' Equity $ 57,181 $ 49,987 Net Asset Value Available to Common Stockholders $ 51,181 $ 43,987 Net Increase in Net Assets Resulting from Operations $ 15,317 $ 224 Earnings Per Common Share $ 2.45 $ 0.00 Distributions Per Common Share $ 1.44 $ 1.40 Number of Common Shares Outstanding 6,198 6,153 - ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN [FIGURE 1] A $10,000 investment in Allied Capital Corporation in 1960 at its initial public offering, with all dividends reinvested, was worth $3,351,479 at the end of 1995, a 17.5% average annual total return over the 36-year period.
ALLIED CAPTIAL CORPORATION I. $10,000 mountain investment chart 1960 10,000 1961 8,864 1962 7,023 1963 5,150 1964 6,972 1965 13,144 1966 17,802 1967 15,221 1968 19,820 1969 31,944 1970 34,467 1971 25,943 1972 38,783 1973 163,525 1974 80,801 1975 66,405 1976 80,075 1977 126,311 1978 132,028 1979 139,134 1980 174,350 1981 200,072 1982 206,417 1983 408,997 1984 792,568 1985 688,709 1986 839,079 1987 1,450,600 1988 1,460,738 1989 2,051,958 1990 2,244,823 1991 2,217,343 1992 2,897,497 1993 2,699,319 1994 2,896,683 1995 3,351,479
1 3 Letter To Our Stockholders - -------------------------------------------------------------------------------- Allied Capital Corporation [PHOTO]: David Gladstone Chairman & Chief Executive Officer It was a seller's market for most of 1995 and we at Allied Capital Corporation did our best to capitalize on these market circumstances. In total, we recognized more than $5 million in net realized gains on investments within our portfolio. Moreover, at December 31, 1995 the Company still held $7.6 million in net unrealized appreciation on its balance sheet. Earnings for 1995, which totaled $2.45 per common share, were up significantly from 1994. We were able to achieve our ongoing objective of increasing our ordinary interest and dividend income. We increased our total investment income by 16% over 1994, as our portfolio of investments produced more recurring income throughout the year. This year marked the nineteenth consecutive year that Allied Capital increased the total distribution to stockholders. The Company paid a total of $1.44 per share, a 3% increase over last year's total distributions. Concurrent with our objective to increase the portfolio's investment income, we also distributed more in the regular quarterly dividends paid. To this end, the board of directors increased the quarterly dividend twice in 1995. At year-end, the Company's regular quarterly dividend rate was $0.24 per share, a 20% increase over the rate that was in place at the beginning of 1995. We paid an annual extra distribution this year of $0.58 per share, which marked our thirty-third consecutive year of paying an annual extra distribution. Allied Capital Corporation's 1995 total return to stockholders of 15.7% was a strong improvement over the Company's 1994 return, and reflects the increasing strength of TOTAL DISTRIBUTIONS PER COMMON SHARE [FIGURE 2]
II. Distributions Per Share for Last 15 Years (in dollars) 1980 .35 1981 .44 1982 .51 1983 .59 1984 .68 1985 .77 1986 (9 mos) .73 1987 .92 1988 1.02 1989 1.15 1990 1.27 1991 1.30 1992 1.32 1993 1.35 1994 1.40 1995 1.44
2 4 - -------------------------------------------------------------------------------- the portfolio and our commitment to increasing dividends to stockholders. Over the last fifteen years, the average annual total return has been 20.7%; since our initial public offering in 1960, the Company has provided an average annual total return of 17.5% to its stockholders. We are proud of our solid long-term track record, and will continue to strive for superior returns for our investors. "This year marked the nineteenth consecutive year that Allied Capital increased the total annual distributions to stockholders." While we celebrated our strong performance this year, we also mourned the loss of Allied Capital's dear friend and former chairman of the board, Curtis S. Steuart, who passed away in May 1995. Mr. Steuart was a founding director of the Company in 1958, and served as chairman of the board from 1966 until 1985. He continued as a director on our board until 1987 when he retired. We are grateful for the wisdom and guidance he provided to Allied Capital for so many years, and we could not have succeeded without him. Mr. Steuart will be missed by all of us at Allied Capital. We look to 1996 for new challenges and further growth of our business. During the first quarter we raised more than $8 million in new equity through a one-for-seven non-transferable rights offering to our existing stockholders. This new capital will allow the Company to make new investments, as well as to leverage against these assets for future growth. Our overall objective remains to provide our stockholders with strong current income and long-term capital appreciation through the development of our portfolio of small business investments. We value your support and look forward to reporting our results to you throughout the year. All stockholders are cordially invited to attend the Annual Meeting of Stockholders at 10:00 am on Monday, May 6, 1996 at the Strathmore Hall Arts Center, 10701 Rockville Pike, North Bethesda, Maryland. David Gladstone Chairman of the Board 3 5 Portfolio Manager's Report - -------------------------------------------------------------------------------- Allied Capital Corporation [PHOTO]: G. Cabell Williams, III President, Chief Operating Officer & Portfolio Manager Allied Capital's portfolio of small business investments benefited from the significant overall opportunities in the public and private capital markets this year. I am pleased to have this opportunity to share Allied Capital's success stories for 1995. An article published recently in the Private Equity Analyst stated that the average transaction price paid during 1995 for a private company was at a multiple of seven times the company's historical cash flow, a significant increase from the average price paid in 1990 of only four times cash flow. We took advantage of this environment of high earnings multiples and sold many of our mature investments. We spent much of our efforts in 1995 meeting with entrepreneurs and structuring our exit on those portfolio companies that we believed had reached the peak of their pricing multiples. During 1995, Allied Capital realized capital gains from the sale of eight investments within the portfolio. The sale of our investment in ALLIED WASTE INDUSTRIES, INC. provided a $1.5 million gain; GLOBAL SOFTWARE, INC. provided a $753,000 gain; ENVIRCO CORPORATION provided a $1 million gain; WEATHERTECH DISTRIBUTING COMPANY provided a $1 million gain; MAXTEC INTERNATIONAL CORPORATION provided a $203,000 gain; and the sale of our interest in JACKSON PRODUCTS, INC. produced a $327,000 gain. The sale of a portion of our investment in GARDEN RIDGE CORPORATION, which completed its initial public offering (IPO) in May 1995, provided a $2.3 million gain this year. In September, we sold our equity investment in DOGLOO, INC., for a $1.8 million gain. We retained our subordinated debentures in Dogloo, which should continue to provide investment income during 1996. We were extremely pleased with our successful exits from so many of our portfolio investments. We realize, however, that we will incur losses on investments from time to time. In 1995, we incurred a $2.2 million loss from the sale of our investment in EDWARDS HEATING AND AIR CONDITIONING, an investment that had been previously devalued in our portfolio. We also continue to have some non-performing or sub-performing investments in the portfolio that we are closely monitoring. The strength of the capital markets in 1995 increased our opportunity for gains from the sale of certain portfolio investments, but this strength also caused us to restrain our investment activity. During times of inflated valuations, we are particularly cautious in order to avoid paying too much for an investment. We will not compromise Allied Capital's high investment standards, and we will not make an investment when the return does not adequately compensate us for our risk. When the competition for investments is heated, we are not interested in playing simply to win at any price. Competition in the investment field goes hand in hand with higher pricing multiples. We continue to improve our strategies to be more competitive in attracting new investment opportunities. Allied Capital has an advantage over much of the investment community because there are very few lenders who provide the services we do for our market niche. The small business appetite for capital is huge, yet most traditional investors perceive a small business credit as too much work for too few dollars and don't understand how to price and 4 6 structure the investment. We have the experience other investors lack in understanding what an entrepreneur needs. "We have the experience other investors lack in understanding what an entrepreneur needs." We dedicated considerable resources during 1995 to our marketing efforts in order to clearly articulate our niche in the small business investing community. We hope these efforts will result in an increase in the quality and quantity of potential investment opportunities that we review. We invested over $27 million during the year in small businesses in a variety of industries. Although our investment niche is primarily private small businesses, during 1995 we also found investment opportunities that were unique and attractive in a few thinly traded public small businesses. Our new investments were located throughout the United States. We believe each new investment complements our existing portfolio and follows Allied Capital's tradition of investing with superior entrepreneurs and in companies that have strong cash flows, strong recurring revenues, and products that are well established in their marketplaces. In May 1995, Allied Capital provided buyout financing to KIRKER ENTERPRISES, INC., the largest U.S. manufacturer of bulk nail enamel and a producer of automobile coatings for the after market. Located in Paterson, New Jersey, Kirker produces over a thousand colors and uses more than twenty-five different formulas to supply nail enamel to the world's leading cosmetic companies. One of the factors that attracted Allied Capital to this particular small business is the industry's barriers to entry, which keep competition low. Over the past 45 years, Kirker has developed the technological capabilities required to handle the complexities of the manufacturing process, and their product innovations have made many of the formulas and the related manufacturing processes proprietary. Kirker expects future growth from new domestic customers, new product lines, acquisitions from within the industry and international expansion. Allied Capital provided $2.3 million in subordinated debentures, and received warrants to acquire, at a nominal exercise price, an equity interest in the company. [PHOTO]: nails being painted with Kirker polish Located in Paterson, New Jersey, Kirker Enterprises, Inc. produces over a thousand colors and uses more than twenty-five different formulas to supply nail enamel to the world's leading cosmetic companies. 5 7 Portfolio Manager's Report - -------------------------------------------------------------------------------- Allied Capital Corporation We provided Labor Ready, an industrial staffing service, with $2.7 million in subordinated debentures and received warrants to purchase shares of the company's common stock. [PHOTO]: Labor Ready Worker This year we invested in LABOR READY, INC., a successful participant in the temporary staffing industry. Driven by employers' demands for flexible staffing, the temporary personnel industry has experienced significant growth. In particular, the industrial segment of the temporary staffing market in which Labor Ready competes has doubled from approximately $4 billion in 1991 to $8.1 billion in 1994. Labor Ready, headquartered in Washington state, provides short notice staffing of low-skilled and semi-skilled personnel for manufacturing, construction and service businesses. The company operates "dispatch halls" where customers phone in their personnel requests, and workers meet to receive job assignments and return to be paid the same day. More than 100 locations are in operation in 26 states and Canada. We provided $2.7 million in subordinated debentures and received warrants to acquire shares of the Company's common stock. With our investment, Labor Ready will finance the costs incurred from the roll out of new locations. EL DORADO COMMUNICATIONS, INC. is an Hispanic-owned and -oriented broadcast company started in 1993. El Dorado currently owns three major-market FM stations - two in Houston and one in Los Angeles - and operates an additional nine Spanish stations under lease management agreements in Dallas, Houston and Los Angeles. We believe these stations are poised to quickly become significant players in their respective markets. El Dorado's Houston stations - KQQK and KXTJ - command a 3.9% share of the Houston audience and rank number one and number three respectively among Hispanic listeners. Allied Capital provided $4.1 million in senior debt and received warrants to acquire a small portion of El Dorado's equity. Another exciting investment was in NOBEL EDUCATION DYNAMICS, INC., a for-profit provider of child care and education services. Nobel operates 106 campuses in 12 states educating children from ages six weeks through the eighth 6 8 - -------------------------------------------------------------------------------- grade. By serving middle-income working families that place a high value on quality education, Nobel's mission is to be the leading provider of affordable private education. Allied Capital provided $3 million to Nobel in exchange for a subordinated note and preferred stock with warrants. The proceeds allowed Nobel to improve existing operations, build new schools where demand is high, and acquire existing schools and child care centers. Nobel, which is publicly traded on Nasdaq under the symbol NEDI, increased its revenues by 29% and pretax profits by 34% during the last year. We believe Nobel has an outstanding management team, and we are excited about this company's future potential. "We believe each new investment complements our existing portfolio and follows Allied Capital's tradition of investing with superior entrepreneurs and in companies that have strong cash flows, strong recurring revenues, and products that are well established in their marketplaces." RADIO ONE OF ATLANTA, INC. was formed in 1995 to acquire the assets of WQUL-FM, a newly upgraded 25-kilowatt radio station servicing the Atlanta market. The company's management team has a long and successful track record in urban radio in the Washington D.C. and Baltimore markets. This fact, combined with the favorable economics of the Atlanta radio market, made this start-up station an attractive investment opportunity for Allied Capital. In order to finance the company's $6.6 million purchase of WQUL-FM, we provided $2.3 million in senior and subordinated debt and received stock purchase warrants to acquire a portion of the company's equity. During 1994, the convenience store industry nationally experienced very strong growth and profitability. Allied Capital saw the opportunity to invest in this growth industry during 1995 by providing buyout financing for the second [PHOTO]: Manufacturing plant Investments in manufacturing companies account for 20% of our portfolio and include Polyflex/B&L Holdings, CeraTech Holdings, Inc., Liberty Business Forms & Systems, Inc., and Master Power, Inc. 7 9 Portfolio Manager's Report - -------------------------------------------------------------------------------- Allied Capital Corporation largest 7-Eleven licensee in the United States, CONVENIENCE CORPORATION OF AMERICA. Convenience Corporation of America operates 146 convenience stores in twelve Midwestern states. The current management team has operated the company for the last fifteen years and has remained in place after the recent buyout. The company sees significant opportunities for this business through their business plan, which includes installing franchised fast food kiosks in suitable locations and further developing the franchise area by building and acquiring additional stores. Allied Capital provided $4.2 million in subordinated debentures and owns warrants to acquire an equity interest in the business at a nominal exercise price. The single largest investment in Allied Capital's portfolio continues to be our investment in ALLIED CAPITAL LENDING CORPORATION (Allied Lending), our formerly wholly owned subsidiary. We were pleased with the recovery of the market price of Allied Lending shares during 1995 as well as the growth in the company's dividends for the year. The stock market reacted harshly to the news in December 1994 that the Small Business Administration (SBA) was to place a $500,000 limit on the maximum size of an SBA guaranteed loan, and we began 1995 with a depreciated investment in Allied Lending's stock. The company performed quite well in 1995, despite that regulatory hurdle, and we ended the year recapturing our value. The SBA reversed its $500,000 loan size limit in 1995, and Allied Lending is once again making $1 million government guaranteed loans. The company has also expanded its investment objective to make other small business loans in addition to those guaranteed by the SBA. We will divest our holdings in this company by the end of 1998, as a condition of the order that we received from the Securities and Exchange Commission in 1993 when we sold the majority of our ownership to the public. As we look forward to 1996 and beyond, our portfolio includes many other strong investments that may provide future appreciation and capital gains. JUNE BROADCASTING, INC. a 1993 investment, is currently under contract to be sold. Similarly, GENOA LIME COMPANY, in which we made our investment eight years ago, is currently considering offers to be sold. We held 61,241 shares of GARDEN RIDGE CORPORATION at the end of 1995 which were sold in January 1996 for a gain of $1.7 PORTFOLIO INDUSTRY BREAKDOWN [FIGURE 3] Retail-12% Software-5% Service-11% Distribution-7% Manufacturing-20% Broadcasting-25% Real Estate-8% Registered Investment Company-12% 8 10 - -------------------------------------------------------------------------------- million. GRANT BROADCASTING, MASTER POWER, INC., AMERICAN BARBECUE AND GRILL, and TPGHOLDINGS, INC. are other portfolio companies that are doing well and may provide us with capital gains in the future. [PHOTO]: American Barbecue & Grill meal American Barbecue and Grill, a 1994 investment for Allied Capital, operates a chain of K.C. Masterpiece Barbeque & Grill restaurants. The same family that developed the popular K.C. Masterpiece barbecue sauce product line continues to use the proprietary product name. Allied Capital now provides financing to companies that are expanding their operations into emerging markets overseas. In April 1995, we entered into an agreement to borrow up to $20 million from the Overseas Private Investment Corporation (OPIC), and with this new debt capital we launched a new division, Allied Capital International. In February of 1996, we closed our first OPIC-related investment by providing $5 million to a U.S.-based wireless communications company expanding operations into Latin America. Allied Capital participated in the $30 million financing with several large equity investors. We are excited about the growth opportunities that international financing can provide for Allied Capital and hope to close at least one other OPIC-related investment during 1996. With hard work, we hope that 1996 will be as productive and profitable as 1995 was for Allied Capital and its stockholders. As always, we appreciate your support. 9 11 Management's Discussion And Analysis - -------------------------------------------------------------------------------- Allied Capital Corporation LIQUIDITY AND CAPITAL RESOURCES Total investments increased by $8.2 million or 7.1% to $123.2 million at December 31, 1995 from $115 million at December 31, 1994. The Company invested $27.6 million in small business concerns in 1995, a 23% decline from the $35.7 million invested in 1994. This decline was a result of the market forces in 1995 which led us to be cautious in making new investments. The Company was able to exit several mature investments in 1995 and had other investments pay off early which contributed to total investment repayments of $28.4 million. Exits and early pay offs resulted in net realized gains of $5.5 million. Valuation changes in the portfolio resulted in net unrealized appreciation of $6.5 million for the year ended December 31, 1995. In September 1995, $7.5 million of the Company's outstanding subordinated debentures held by the Small Business Administration (SBA) matured. The Company issued $14 million of new subordinated debentures to the SBA on September 27, 1995, and a portion of the proceeds from these new debentures were used to repay the matured debentures. The remaining proceeds will be used to invest in small business concerns. The Company continues to have a forward commitment from the SBA of $1.3 million which expires in August 1996; however, the Company must first submit an application to draw on the committed funds and receive SBA approval of that application. Beginning with SBA's 1996 fiscal year commencing on October 1, 1995, Congress discontinued subsidized funding for the SBA'sspecialized small business investment company (SSBIC) program, in which Allied Capital Financial Corporation (Allied Financial) participates. Prior to this change, an SSBIC was able to sell preferred stock and debentures with a rate reduction or subsidy to the SBA. In addition to low dividend preferred stock, the SBA provided leverage to SSBICs at a reduced interest rate. While subsidized funding is not available, Allied Financial will still be able to apply for SBA leverage through the SBIC program, in which Allied Investment Corporation (Allied Investment) participates. The Company is unable to predict the SBA's ability to meet demands for leverage on an ongoing basis. Such funding may be affected if Congress reduces appropriations for the SBA, which may compel the SBA to allocate leverage or reduce the current limits on available leverage. Therefore, there is no guaranty that Allied Investment or Allied Financial will be able to obtain additional SBA leverage beyond what is currently held. In order to continue to fund its growth in investment activity, the Company restructured one source of debt capital during the year, obtained a new credit facility and, subsequent to year-end, raised additional equity capital. Effective in September 1995, the Company restructured its $10 million revolving line of credit to provide for a three-year term. The Company had available $8.5 million under this line of credit at December 31, 1995. The Company secured a new credit facility with the Overseas Private Investment Corporation (OPIC) to borrow up to $20 million to provide financing for international projects involving qualifying U.S. small businesses. This credit facility expires at the earlier of borrowing $20 million or April 1998. There were no outstanding borrowings under this facility as of December 31, 1995. As of January 29, 1996, the Company had drawn down $5 million of this credit facility. Finally, during the first quarter of 1996, the Company raised approximately $8.2 million net of expenses in new common equity through a one-for-seven non-transferable rights offering to the Company's stockholders of record on January 22, 1996. At December 31, 1995, outstanding commitments for future financings by the Company were $5.4 million. Given the cash and cash equivalents available at December 31, 1995, available credit facilities and the proceeds from the rights offering, the Company believes that it has adequate capital to continue to satisfy its operating needs, commitments and other future investment opportunities that may arise throughout 1996. RESULTS OF OPERATIONS Comparison of 1995 and 1994. Net increase in net assets resulting from operations was $15.3 million for the year ended December 31, 1995 as compared to $224,000 for the same period in 1994. Earnings per common share increased to $2.45 per common share from a breakeven level for the same period in 1994. 10 12 Management's Discussion And Analysis - -------------------------------------------------------------------------------- Allied Capital Corporation As a business development company, the Company's portfolio consists primarily of securities issued by small privately held companies. These types of investments, by their nature, carry a high degree of business and financial risk. The Company seeks to achieve a high level of current income from its investments in these businesses to compensate for these risks. Total investment income increased 16% from $12.2 million in 1994 to $14.1 million in 1995. Interest income increased by $1.6 million or 15% to $12 million in 1995, compared to $10.4 million in 1994, due to a net increase in loans and debt securities outstanding. The Company also received a prepayment penalty on the early pay off of an investment in the third quarter of 1995 totaling $60,000, which is included in interest income. Dividends declined by $200,000 or 10.9% to $1.5 million in 1995 compared to $1.7 million in 1994 primarily due to the distribution of 335,086 shares of Allied Capital Lending Corporation (Allied Lending) stock in January 1995. Other income consists primarily of $327,000 of litigation costs incurred in prior periods, recovered during 1995, and $136,000 of income resulting from an equity participation in one portfolio company. Total expenses increased 7% from $10.1 million in 1994 to $10.8 million in 1995. Interest expense grew due to the net increase in subordinated debentures held by the SBA of $6.5 million in late September 1995 and a full year of interest charges on the $7 million of similar debentures issued in September 1994. Investment advisory fee expense increased due to the growth of the Company's portfolio of investments and other assets upon which the investment advisory fee is based. Legal and accounting fees in 1995 were down from the prior year as the Company settled various legal matters in late 1994, which required significant legal resources in that year. Net realized gains on investments increased 62.8% to $5.5 million from $3.4 million for the years ended December 31, 1995 and 1994, respectively. The increase in net realized gains resulted from the disposition or early pay off of investments. Several mature investments were sold in 1995. Net realized gains are unpredictable; however, the Company exits its portfolio investments when it believes the realized gains can be maximized. In December 1994, the SBA revised its 7(a) guaranteed loan program and announced that it would place a loan size cap of $500,000 on the loans that it would guarantee under this program. This is the program from which Allied Lending generates a significant amount of its loan volume. As a result, the market price of the Company's investment in Allied Lending declined to $10.38 per share at December 31, 1994. In mid-October 1995, federal legislation was passed which removed the $500,000 loan size limit and restored 75% guarantees on loans of up to $1 million. At December 31, 1995, the market price of Allied Lending had increased to $13.25 per share, a 27.6% increase over the market price at December 31, 1994. Distributions to common stockholders for 1995 of $8.9 million approximated the net investment income before net unrealized appreciation (depreciation) on investments. The distributions were comprised of taxable ordinary and capital gain income. Comparison of 1994 and 1993. Net increase in net assets resulting from operations was $224,000 or breakeven on a per common share basis, as compared to $20.4 million or $3.29 per common share for the year ended December 31, 1993. Due to the changes in the SBA's guaranteed loan program that were announced in December of 1994, the market price of the Company's investment in Allied Lending declined to $10.38 per share at December 31, 1994. At December 31, 1993, the market price for this stock was $15.75 per share. This decline in market value at December 31, 1994 reduced 1994 income by $4.1 million or $0.66 per common share. During 1993, the Company had realized gains of approximately $9 million and unrealized appreciation of approximately $15 million resulting from the 1993 initial public offering of the stock of Allied Lending, formerly a wholly owned subsidiary of the Company. Investment income remained relatively constant in 1994, even though there was significant growth in invested assets. This was primarily due to the fact that 1993 financial results included eleven months of Allied Lending's operations while Allied Lending was a wholly owned subsidiary. Allied Lending's operations contributed $3 million in interest income and premium 11 13 Management's Discussion And Analysis - -------------------------------------------------------------------------------- Allied Capital Corporation income in 1993. In 1994, the Company received $1.7 million in dividend income from its residual 36% interest in Allied Lending. As a result, the Company replaced approximately $1.3 million in recurring investment income lost on the sale of Allied Lending with income from increased investments in the Company's portfolio. Expenses also remained relatively constant in 1994 as compared to 1993. Interest expense remained stable because the Company's new borrowings of $7 million from the SBA occurred late in 1994 and were at interest rates below the level of other borrowings of the Company. The investment advisory fee stayed constant even given the growth in invested assets as the Company was not charged a fee on its investment of approximately $14.9 million in Allied Lending, as was agreed to in conjunction with Allied Lending's 1993 initial public offering. During 1993, the Company was charged an investment advisory fee on the assets of Allied Lending for the approximate eleven months that it was a wholly owned subsidiary. Legal and accounting fees and other operating expenses remained constant in total; however, the Company continued to incur legal expenses related to various matters. For the year ended December 31, 1994, net investment income before net unrealized appreciation (depreciation) on investments, which includes ordinary investment income and net realized capital gains, was $5.5 million or $0.90 per common share, a 33% decrease from $8.2 million or $1.34 per common share in 1993. Realized gains of $3.4 million in 1994 were below expectations, again primarily due to the unexpected decline in the market value of Allied Lending stock. During the fourth quarter of 1994, the Company chose to distribute shares of Allied Lending to its stockholders rather than sell those shares at depressed prices. The gain that was recognized on this transaction reflects the decreased market value at the end of the year, and as a result, depressed the Company's net investment income before net unrealized appreciation (depreciation) on investments. Distributions to stockholders for 1994 were $1.40 per common share and were comprised of $1.23 in taxable ordinary and capital gain income and $0.17 per common share in a return of capital. The Company's taxable income of $1.23 per common share differed significantly from its net investment income before net unrealized appreciation (depreciation) on investments of $0.90 per common share due to timing differences in the recognition of income for tax purposes versus financial reporting purposes. The $0.17 per common share return of capital was an unexpected result, again due to the decline in value of Allied Lending stock and its effect on the gain recognition from dividends. 12 14 Consolidated Comparison Of Financial Highlights - -------------------------------------------------------------------------------- Allied Capital Corporation
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share amounts) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS - --------------------------------------------------------------------------------------------------------------------------- Total tax distributions $ 8,894 $ 8,595 $ 8,239 $ 8,027 $ 7,830 Ordinary income per common share $ 0.40 $ 0.31 $ - $ 0.45 $ 0.66 Net capital gains per common share 1.04 0.92 1.35 0.87 0.39 Return of capital per common share - 0.17 - - 0.25 ------------------------------------------------------------------ Total tax distributions per common share $ 1.44 $ 1.40 $ 1.35 $ 1.32 $ 1.30 OPERATIONS - --------------------------------------------------------------------------------------------------------------------------- Total investment income $ 14,126 $ 12,216 $ 12,384 $ 11,335 $ 13,292 Per common share $ 2.29 $ 1.99 $ 2.02 $ 1.85 $ 2.18 Net investment income $ 3,332 $ 2,126 $ 2,300 $ 3,055 $ 4,138 Per common share $ 0.54 $ 0.35 $ 0.38 $ 0.50 $ 0.68 Net realized gains on investments $ 5,526 $ 3,394 $ 5,943 $ 4,507 $ 2,834 Net unrealized appreciation (depreciation) on investments $ 6,459 $ (5,296) $ 12,163 $ 694 $ (1,840) Net realized gains and unrealized appreciation (depreciation) on investments $ 11,985 $ (1,902) $ 18,106 $ 5,201 $ 994 Per common share $ 1.94 $ (0.31) $ 2.95 $ 0.85 $ 0.16 Net increase in net assets resulting from operations $ 15,317 $ 224 $ 20,406 $ 8,256 $ 5,132 Per common share $ 2.48 $ 0.04 $ 3.33 $ 1.35 $ 0.84 Preferred stock dividends $ 220 $ 220 $ 220 $ 220 $ 220 Per common share $ 0.03 $ 0.04 $ 0.04 $ 0.03 $ 0.03 Net increase in net assets resulting from operations available to common stockholders $ 15,097 $ 4 $ 20,186 $ 8,036 $ 4,912 Per common share $ 2.45 $ 0.00 $ 3.29 $ 1.32 $ 0.81 Weighted average number of common shares and common share equivalents outstanding 6,172 6,154 6,128 6,111 6,085 FINANCIAL POSITION - --------------------------------------------------------------------------------------------------------------------------- Investments at value $123,184 $ 115,026 $ 94,630 $ 78,470 $ 73,480 Investments at cost $115,615 $ 111,058 $ 88,224 $ 84,227 $ 79,931 Total assets $148,268 $ 135,517 $ 134,606 $ 124,823 $104,283 Total debt and redeemable preferred stock $ 83,800 $ 78,005 $ 70,800 $ 70,800 $ 53,561 Shareholders' equity $ 57,181 $ 49,987 $ 58,185 $ 45,991 $ 44,814 Net asset value available to common stockholders $ 51,181 $ 43,987 $ 52,185 $ 39,991 $ 38,814 Per common share $ 8.26 $ 7.15 $ 8.54 $ 6.57 $ 6.44 Per common share market value at end of year $ 13.63 $ 13.13 $ 14.75 $ 14.50 $ 17.50 Common shares outstanding at end of year 6,198 6,153 6,109 6,090 6,024
13 15 Consolidated Balance Sheet - -------------------------------------------------------------------------------- Allied Capital Corporation
- ---------------------------------------------------------------------------------------------------- December 31, (in thousands, except number of shares) 1995 1994 - ---------------------------------------------------------------------------------------------------- ASSETS Investments at Value: Loans and debt securities (cost: 1995 - $98,119; 1994 - $92,705) $ 90,377 $ 84,949 Equity securities (cost: 1995 - $15,039; 1994 - $15,083) 31,600 28,225 Other investment assets (cost: 1995 - $2,457; 1994 - $3,270) 1,207 1,852 --------------------------- Total investments 123,184 115,026 Cash and cash equivalents 22,743 6,609 U.S. government securities - 10,210 Other assets 2,341 3,672 --------------------------- Total assets $ 148,268 $ 135,517 =========================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving line of credit $ 1,500 $ 2,205 Debentures and notes payable 81,300 74,800 Dividends and distributions payable 3,808 3,910 Accrued interest payable 1,469 1,393 Investment advisory fee payable 722 658 Other liabilities 1,288 1,564 --------------------------- 90,087 84,530 --------------------------- Redeemable preferred stock 1,000 1,000 --------------------------- Commitments and Contingencies Shareholders' Equity: Preferred stock of wholly owned subsidiary, $100 par value, 200,000 shares authorized; 60,000 shares issued and outstanding at December 31, 1995 and 1994 6,000 6,000 Common Stock, $1 par value, 10,000,000 shares authorized; 6,198,138 and 6,152,703 shares issued and outstanding at December 31, 1995 and 1994 6,198 6,153 Additional paid-in capital 41,491 40,960 Notes receivable from sale of common stock (401) (816) Net unrealized appreciation on investments 7,569 1,110 Distributions in excess of accumulated earnings (3,676) (3,420) --------------------------- Total shareholders' equity 57,181 49,987 --------------------------- Total liabilities and shareholders' equity $ 148,268 $ 135,517 ===========================
The accompanying notes are an integral part of these financial statements. 14 16 Consolidated Statement Of Operations - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share amounts) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Investment Income: Interest $ 11,957 $ 10,401 $ 10,100 Dividends 1,556 1,746 170 Premium income - - 1,973 Other income 613 69 141 ----------------------------------------- Total investment income 14,126 12,216 12,384 ----------------------------------------- Expenses: Interest expense 6,735 6,333 6,346 Investment advisory fee 2,799 2,356 2,285 Legal and accounting fees 654 977 1,109 Other operating expenses 606 424 344 ----------------------------------------- Total expenses 10,794 10,090 10,084 ----------------------------------------- Net investment income 3,332 2,126 2,300 Net realized gains on investments 5,526 3,394 5,943 Net investment income before net unrealized appreciation (depreciation) on investments 8,858 5,520 8,243 Net unrealized appreciation (depreciation) on investments 6,459 (5,296) 12,163 ----------------------------------------- Net increase in net assets resulting from operations $ 15,317 $ 224 $ 20,406 ========================================= Earnings per common share $ 2.45 $ 0.00 $ 3.29 ========================================= Weighted average number of common shares and common share equivalents outstanding 6,172 6,154 6,128 =========================================
The accompanying notes are an integral part of these financial statements. 15 17 Consolidated Statement Of Changes In Net Assets - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share amounts) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Increase in Net Assets Resulting from Operations: Net investment income $ 3,332 $ 2,126 $ 2,300 Net realized gains on investments 5,526 3,394 5,943 Net unrealized appreciation (depreciation) on investments 6,459 (5,296) 12,163 ----------------------------------------- Net increase in net assets resulting from operations 15,317 224 20,406 ----------------------------------------- Distributions to Stockholders from: Net investment income (2,110) (705) - Excess of net investment income (355) (1,216) - Net capital gains (6,429) (4,595) (8,239) Excess of net capital gains - (1,035) - Return of capital (tax) - (1,044) - Preferred stock dividends (220) (220) (220) ----------------------------------------- Net decrease in net assets resulting from distributions to stockholders (9,114) (8,815) (8,459) ----------------------------------------- Capital Share Transactions: Net (increase) decrease in notes receivable from sale of common stock 415 (50) 46 Issuance of common shares upon the exercise of stock options - 200 201 Issuance of common shares in lieu of cash distributions 576 243 - ----------------------------------------- Net increase in net assets resulting from capital share transactions 991 393 247 ----------------------------------------- Total increase (decrease) in net assets 7,194 (8,198) 12,194 Net assets at beginning of year 49,987 58,185 45,991 Net assets at end of year 57,181 49,987 58,185 Preferred stock of wholly owned subsidiary (6,000) (6,000) (6,000) ----------------------------------------- Net asset value available to common stockholders $ 51,181 $ 43,987 $ 52,185 ========================================= Net asset value per common share $ 8.26 $ 7.15 $ 8.54 ========================================= Common shares outstanding at end of year 6,198 6,153 6,109 =========================================
The accompanying notes are an integral part of these financial statements. 16 18 Consolidated Statement Of Cash Flows - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net increase in net assets resulting from operations $ 15,317 $ 224 $ 20,406 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net unrealized (appreciation) depreciation on investments (6,459) 5,296 (12,163) Write-off of investments 3,337 2,006 3,321 Net realized gains on investments (8,863) (5,400) (9,264) Interest - (1,159) - Amortization of loan discounts (728) (409) (195) Changes in assets and liabilities: Other assets 1,331 (255) 697 Accrued interest payable 76 110 27 Investment advisory fee payable 64 249 (125) Other liabilities (276) 1,215 (2,192) ----------------------------------------- Net cash provided by operating activities 3,799 1,877 512 ----------------------------------------- Cash Flows from Investing Activities: Investments in small business concerns (27,551) (35,748) (23,753) Purchase of U.S. government securities (14,957) (37,448) (18,375) Payments on loans and debt securities and other investment assets 19,111 12,504 15,557 Net proceeds from sale of equity securities 9,268 2,677 11,709 Redemption of U.S. government securities 25,208 39,281 6,173 Payments on notes receivable from sale of common stock 415 150 247 ----------------------------------------- Net cash provided by (used in) investing activities 11,494 (18,584) (8,442) ----------------------------------------- Cash Flows from Financing Activities: Common dividends and distributions paid (4,734) (8,027) (8,046) Preferred stock dividends (220) (220) (220) Proceeds from issuance of long-term debt 14,000 7,000 - Payments on long term debt (7,500) (2,000) - Borrowings under revolving line of credit 6,964 2,205 - Payments on revolving line of credit (7,669) - - ----------------------------------------- Net cash provided by (used in) financing activities 841 (1,042) (8,266) ----------------------------------------- Net increase (decrease) in cash and cash equivalents 16,134 (17,749) (16,196) Cash and cash equivalents, beginning of year 6,609 24,358 40,554 ----------------------------------------- Cash and cash equivalents, end of year $ 22,743 $ 6,609 $ 24,358 ========================================= Supplemental Disclosure of Cash Flow Information Noncash investing and financing activities: Issuance of common shares upon the exercise of stock options $ - $ 200 $ 201 Issuance of common shares in lieu of cash distributions $ 576 $ 243 $ - Issuance of Allied Capital Lending Corporation shares in lieu of cash distributions $ 3,686 $ - $ - Interest paid $ 6,659 $ 6,223 $ 6,319
The accompanying notes are an integral part of these financial statements. 17 19 Consolidated Statement Of Loans To And Investments In Small Business Concerns - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------------------------- COMPANY'S NAME (STATE) DECEMBER 31, 1995 (TYPE OF BUSINESS) INVESTMENTS COST VALUE - -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except number of shares) AGPAL BROADCASTING, INC. (OR) Loans and Debt Securities $ 930 $ 930 (radio stations) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- ALLIED CAPITAL LENDING CORPORATION (MD) (1,3) Common Stock (1,244,914 shares) 2,974 14,565 (registered investment company) - -------------------------------------------------------------------------------------------------------------------------------- AMERICAN BARBECUE & GRILL (KS) Loans and Debt Securities 2,134 2,134 (restaurants) Warrants 71 71 - -------------------------------------------------------------------------------------------------------------------------------- ARNOLD MOVING COMPANY, INC. (KY) Loans and Debt Securities 299 303 (moving/storage firm) Warrants 11 85 - -------------------------------------------------------------------------------------------------------------------------------- ASW HOLDING CORPORATION (IL) Loans and Debt Securities 832 832 (steel wool manufacturer) Warrants 53 53 - -------------------------------------------------------------------------------------------------------------------------------- BELLEFONTE LIME CO. (PA) (3) Common Stock (2,869 shares) 16 800 (mineral quarry & production) - -------------------------------------------------------------------------------------------------------------------------------- CELEBRITIES, INC. (FL) Loans and Debt Securities 409 409 (radio station) Warrants 12 12 - -------------------------------------------------------------------------------------------------------------------------------- CENTENNIAL MEDIA CORP. (CO) (2,3) Loans and Debt Securities 2,078 725 (telephone directories) Common Stock (1,803 shares) 948 0 - -------------------------------------------------------------------------------------------------------------------------------- CERATECH HOLDINGS, INC. (IL) Loans and Debt Securities 1,180 1,180 (ceramic plate manufacturer) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- CHERRY TREE TOYS, INC. (OH) Loans and Debt Securities 1,091 1,091 (direct marketer of woodcrafts) Common Stock (117 shares) 0 0 - -------------------------------------------------------------------------------------------------------------------------------- CITIPOSTAL, INC. (NY) Convertible Preferred Stock Series B (30,500 shares) 289 0 (courier network) Common Stock (74 shares) 70 0 - -------------------------------------------------------------------------------------------------------------------------------- COAST GAS, INC. (CA) Loans and Debt Securities 2,172 2,172 (natural gas liquids distributor) Warrants 124 124 - -------------------------------------------------------------------------------------------------------------------------------- CONSUMER HEALTH SERVICES, INC. (CO) Convertible Preferred Stock (127,940 shares) 180 0 (med./dent. consumer info. service) - -------------------------------------------------------------------------------------------------------------------------------- CONVENIENCE CORPORATION OF AMERICA (NE) Loans and Debt Securities 4,200 4,200 (convenience stores) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- CONTEMPORARY MEDIA, INC. (ID) Loans and Debt Securities 581 581 (radio stations) Warrants 204 204 - -------------------------------------------------------------------------------------------------------------------------------- DEH PRINTED CIRCUITS, INC. (IL) Loans and Debt Securities 2,313 2,313 (circuit board manufacturer) Warrants 133 133 - -------------------------------------------------------------------------------------------------------------------------------- DEVLIEG-BULLARD, INC. (CT) (1) Warrants 207 231 (tool manufacturer) - -------------------------------------------------------------------------------------------------------------------------------- DMI FURNITURE, INC. (KY) (1) Convertible Preferred Stock (399,840 shares) 500 412 (furniture manufacturer) - -------------------------------------------------------------------------------------------------------------------------------- EL DORADO COMMUNICATIONS, INC. (CA) Loans and Debt Securities 4,060 4,060 (radio stations) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- ENVIROPLAN, INC. (NJ) (2) Loans and Debt Securities 2,449 1,680 (emissions monitoring systems) Warrants 120 0 - --------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Unrestricted security 18 20 Consolidated Statement Of Loans To And Investments In Small Business Concerns - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------------------------- COMPANY'S NAME (STATE) DECEMBER 31, 1995 (TYPE OF BUSINESS) INVESTMENTS COST VALUE - -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except number of shares) ESQUIRE COMMUNICATIONS, LTD. (NY) (1) Loans and Debt Securities $ 2,398 $ 2,398 (court reporting services) Warrants 3 3 - -------------------------------------------------------------------------------------------------------------------------------- FOUNTAINHEAD TECHNOLOGIES,INC. (RI) Loans and Debt Securities 1,578 1,578 (non-chlorine water purification systems) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- GARDEN RIDGE CORPORATION (TX) (1) Common Stock (61,241 shares) 374 1,892 (home decorating and craft products) Warrants 112 2,108 - -------------------------------------------------------------------------------------------------------------------------------- GATEWAY HEALTHCARE CORPORATION (VA) Loans and Debt Securities 853 853 (medical supplies distributor) Convertible Preferred Stock (4,225 shares) 497 42 Warrants 2 0 - -------------------------------------------------------------------------------------------------------------------------------- GENOA MINE ACQUISITION CORP. (OH) (3) Capital Stock (20 shares) 44 800 (limestone mining) - -------------------------------------------------------------------------------------------------------------------------------- GRANT BROADCASTING SYSTEMS II (FL) Loans and Debt Securities 1,074 1,074 (television stations) Warrants 78 963 - -------------------------------------------------------------------------------------------------------------------------------- INNOTECH, INC. (VA) Warrants 29 0 (bifocal lens manufacturer) - -------------------------------------------------------------------------------------------------------------------------------- JUNE BROADCASTING, INC. (NJ) Warrants 58 2,006 (radio stations) - -------------------------------------------------------------------------------------------------------------------------------- KIRKER ENTERPRISES, INC. (NJ) Loans and Debt Securities 2,138 2,138 (nail enamel manufacturer) Warrants 203 203 - -------------------------------------------------------------------------------------------------------------------------------- LABOR READY, INC. (WA) (1) Loans and Debt Securities 2,343 2,650 (temporary labor services) Warrants 315 49 - -------------------------------------------------------------------------------------------------------------------------------- LIBERTY BUSINESS FORMS & SYSTEMS, INC. (NY) Loans and Debt Securities 1,938 1,938 (inventory control tags and forms) Warrants 57 57 - -------------------------------------------------------------------------------------------------------------------------------- LOVE MORTGAGE CO. (DC) Loans and Debt Securities 736 400 (real estate mortgages) Warrants 200 0 - -------------------------------------------------------------------------------------------------------------------------------- MASTER POWER, INC. (MD) Loans and Debt Securities 205 205 (power tool manufacturer) Preferred Stock (44,516 shares) 6 213 Warrants 4 124 - -------------------------------------------------------------------------------------------------------------------------------- MIDVIEW ASSOCIATES, L.P. (VA) Loans and Debt Securities 271 271 (residential land development) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- MILL-IT STRIPING, INC. (FL) Loans and Debt Securities 125 125 (highway paint striping) Warrants 125 0 - -------------------------------------------------------------------------------------------------------------------------------- MLX/SINTERMET CORP. (GA) (1,4) Common Stock (5,835 shares-MLX) 241 58 (friction materials manufacturer) - -------------------------------------------------------------------------------------------------------------------------------- NOBEL EDUCATION DYNAMICS, INC. (PA) (1) Loans and Debt Securities 2,250 2,250 (educational services) Preferred Stock (99,734 shares) 750 431 Warrants 0 501 - -------------------------------------------------------------------------------------------------------------------------------- OLD MILL HOLDINGS, INC. (PA) (2) Loans and Debt Securities 657 458 (custom embroidered apparel) Warrants 45 0 - -------------------------------------------------------------------------------------------------------------------------------- PALMER CORPORATION (NJ) Preferred Stock (200,000 shares) 200 100 (video stores) - --------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Unrestricted security 19 21 Consolidated Statement Of Loans To And Investments In Small Business Concerns - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------------------------- COMPANY'S NAME (STATE) DECEMBER 31, 1995 (TYPE OF BUSINESS) INVESTMENTS COST VALUE - -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except number of shares) PIATL HOLDINGS, INC. (NJ) (3) Loans and Debt Securities $ 116 $ 116 (environmental consulting) Preferred Stock (355 shares) 266 93 Common Stock (35 shares) 1 0 - -------------------------------------------------------------------------------------------------------------------------------- POLYFLEX/B & L HOLDINGS (MS) Loans and Debt Securities 480 480 (plastic bag manufacturer) Warrants 28 374 - -------------------------------------------------------------------------------------------------------------------------------- PROVIDENTIAL CORPORATION (CA) Common Stock (52,794 shares) 1,000 211 (shared appreciation reverse mortgages) - -------------------------------------------------------------------------------------------------------------------------------- QUALITY SOFTWARE PRODUCTS HOLDINGS, PLC (UK) (1) Common Stock (52,908 shares) 504 484 (accounting software) - -------------------------------------------------------------------------------------------------------------------------------- RADIO ONE OF ATLANTA, INC. (GA) Loans and Debt Securities 2,342 2,342 (radio stations) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- R-TEX DECORATIVES COMPANY, INC. (PA) Loans and Debt Securities 850 850 (decorative ribbon manufacturer) Warrants 32 0 - -------------------------------------------------------------------------------------------------------------------------------- SPA LENDING CORPORATION (DC) (3) Preferred Stock Series A (5,578 shares) 398 398 (health spas) Preferred Stock Series B (8,755 shares) 506 37 Preferred Stock Series C (14,092 shares) 1,680 0 Common Stock (6,208 shares) 413 0 - -------------------------------------------------------------------------------------------------------------------------------- SUNSTATES REFRIGERATED SERVICES, INC. (GA) (2,3) Loans and Debt Securities 2,796 1,530 (cold food storage) Preferred Stock (43,884 shares) 194 0 Common Stock (16,630 shares) 145 0 - -------------------------------------------------------------------------------------------------------------------------------- TACO TICO, INC. (KS) (2) Loans and Debt Securities 1,137 154 (Mexican fast food restaurant) Warrants 28 0 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL FOAM, INC. (CT) (2,3) Loans and Debt Securities 1,744 237 (packaging systems) Common Stock (910 shares) 57 0 - -------------------------------------------------------------------------------------------------------------------------------- TPG HOLDINGS,INC. (TX) Loans and Debt Securities 1,614 1,614 (commercial banking software development) Warrants 13 2,120 - -------------------------------------------------------------------------------------------------------------------------------- VISU-COM, INC. (MD) (3) Loans and Debt Securities 2,250 1,250 (visual communications products) Preferred Stock (22,425 shares) 54 0 Common Stock (135 shares) 223 0 - -------------------------------------------------------------------------------------------------------------------------------- WBIV, INC. (CA) Loans and Debt Securities 399 399 (radio station) Warrants 0 0 - -------------------------------------------------------------------------------------------------------------------------------- WEST VIRGINIA RADIO CORPORATION (WV) Loans and Debt Securities 571 571 (radio station) Warrants 200 0 - -------------------------------------------------------------------------------------------------------------------------------- WILLIAMS BROTHERS LUMBER COMPANY (GA) Loans and Debt Securities 602 602 (builders' supply yards) Warrants 15 1,614 - -------------------------------------------------------------------------------------------------------------------------------- WINCAPP BROADCASTING, INC. (PA) Loans and Debt Securities 695 695 (radio station) Warrants 23 23 - -------------------------------------------------------------------------------------------------------------------------------- Z-SPANISH RADIO NETWORK (CA) Loans and Debt Securities 2,984 2,984 (radio stations) Warrants 3 3 - -------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL $ 74,912 $ 84,369 - --------------------------------------------------------------------------------------------------------------------------------
(1) Public company; (2) Interest not being accrued; (3) May be considered an affiliate; (4) Unrestricted security 20 22 Consolidated Statement Of Loans To And Investments In Small Business Concerns - -------------------------------------------------------------------------------- Allied Capital Corporation
- -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 INDUSTRY (NUMBER OF LOANS) COST VALUE - -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except number of loans) LOANS WITH NO EQUITY - -------------------------------------------------------------------------------------------------------------------------------- Accounting Services (1 loan) $ 177 $ 177 - -------------------------------------------------------------------------------------------------------------------------------- Adult Care Facilities (2 loans) 1,935 1,935 - -------------------------------------------------------------------------------------------------------------------------------- Auto Repair Shops (10 loans) 1,446 1,446 - -------------------------------------------------------------------------------------------------------------------------------- Chemical Manufacturer (1 loan) 5 5 - -------------------------------------------------------------------------------------------------------------------------------- Clean Room Equipment Manufacturer (1 loan) 66 0 - -------------------------------------------------------------------------------------------------------------------------------- Computer Hardware Developer (1 loan) 159 25 - -------------------------------------------------------------------------------------------------------------------------------- Doughnut Shops (4 loans) 633 633 - -------------------------------------------------------------------------------------------------------------------------------- Drycleaners (3 loans) 528 528 - -------------------------------------------------------------------------------------------------------------------------------- Federal Government Contractors (1 loan) 207 103 - -------------------------------------------------------------------------------------------------------------------------------- Fried Chicken Restaurants (2 loans) 1,401 1,401 - -------------------------------------------------------------------------------------------------------------------------------- Grocery Store (1 loan) 169 169 - -------------------------------------------------------------------------------------------------------------------------------- Heating Contractor (1 loan) 256 256 - -------------------------------------------------------------------------------------------------------------------------------- Hotels/Motels (6 loans) 8,503 8,107 - -------------------------------------------------------------------------------------------------------------------------------- HVAC Distributor (1 loan) 522 522 - -------------------------------------------------------------------------------------------------------------------------------- Limestone Mining (1 loan) 799 1,204 - -------------------------------------------------------------------------------------------------------------------------------- Liquor Store (1 loan) 530 530 - -------------------------------------------------------------------------------------------------------------------------------- Orthopedic Equipment (1 loan) 610 610 - -------------------------------------------------------------------------------------------------------------------------------- Pet Products Manufacturer (1 loan) 3,393 3,393 - -------------------------------------------------------------------------------------------------------------------------------- Physical Rehabilitation Facility (1 loan) 340 224 - -------------------------------------------------------------------------------------------------------------------------------- Pizza Shops (23 loans) 1,186 497 - -------------------------------------------------------------------------------------------------------------------------------- Radio Stations (10 loans) 10,666 10,666 - -------------------------------------------------------------------------------------------------------------------------------- Retail Shop (1 loan) 447 1,024 - -------------------------------------------------------------------------------------------------------------------------------- Small Appliances Distributor (1 loan) 250 250 - -------------------------------------------------------------------------------------------------------------------------------- Sporting Goods Manufacturer (1 loan) 2,248 2,248 - -------------------------------------------------------------------------------------------------------------------------------- Television Station (1 loan) 125 125 - -------------------------------------------------------------------------------------------------------------------------------- Television Directory (1 loan) 1,000 1,000 - -------------------------------------------------------------------------------------------------------------------------------- Travel Agency (1 loan) 138 23 - -------------------------------------------------------------------------------------------------------------------------------- Wholesale Food Distributor (1 loan) 232 232 - -------------------------------------------------------------------------------------------------------------------------------- Yogurt Shops (3 loans) 276 276 - -------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL $ 38,247 $ 37,609 - -------------------------------------------------------------------------------------------------------------------------------- Other Investment Assets (A) 1,651 401 - -------------------------------------------------------------------------------------------------------------------------------- Pledged Repurchase Agreements 805 805 - -------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL $ 2,456 $ 1,206 - -------------------------------------------------------------------------------------------------------------------------------- GRAND TOTAL $ 115,615 $ 123,184 ================================================================================================================================
(A) Non-income producing 21 23 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Allied Capital Corporation (the Company) is a closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940 (1940 Act). The Company seeks to achieve a high level of current income by providing debt, mezzanine and equity financing primarily for small privately owned growth companies, and through long-term growth on the value of its net assets. The Company has two wholly owned, regulated investment company subsidiaries, Allied Investment Corporation (Allied Investment) and Allied Capital Financial Corporation (Allied Financial). Allied Investment and Allied Financial are licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC) and a Specialized Small Business Investment Company (SSBIC), respectively. The Company has an investment advisory agreement with Allied Capital Advisers, Inc. (Advisers) whereby Advisers manages the investments of the Company subject to the supervision and control of the Company's board of directors. Certain directors and officers of Advisers are also directors and officers of the Company. Co-investments. Investments made by the Company are made in participation with a separately organized public closed-end management investment company and two private venture capital partnerships, which are also managed by the Company's investment adviser, in accordance with various exemptive orders issued to the Company by the Securities and Exchange Commission (Commission) permitting co-investments. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany balances and transactions. Valuation of Investments. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. U.S. government securities, cash and cash equivalents are carried at cost which approximates fair value. Interest and Dividend Income. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Original issue discount is amortized into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Realized Gains or Losses and Unrealized Appreciation or Depreciation on Investments. Realized gains or losses are accounted for on the trade date and are measured by the difference between the proceeds of sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the difference between cost and value. Distributions to Stockholders. Distributions to stockholders are recorded on the ex-dividend date. Federal Income Taxes. The Company and its wholly owned subsidiaries' objectives are to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company and its wholly owned subsidiaries annually distribute all of their taxable income to their stockholder(s); therefore, a federal income tax provision is not required. In addition, no provision for deferred income taxes has been made for the unrealized appreciation on investments since the Company and its wholly owned subsidiaries intend to continue to annually distribute all of their taxable income. Dividends declared by the Company in December that are payable to stockholders of record on a specified date in such month, but is paid during January of the following year, is treated as if the dividends were received by the stockholder on December 31 of the year declared. Earnings Per Common Share. Earnings are defined as the net investment income, net realized gains on investments and net unrealized appreciation or depreciation on investments and are reduced by the preferred stock dividend requirements. The computation of earnings per common share is based 22 24 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation on the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect in years where there are earnings. Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. At December 31, cash and cash equivalents consisted of the following:
- -------------------------------------------------------------- (in thousands) 1995 1994 - -------------------------------------------------------------- Cash $ 802 $ 4,707 Repurchase agreements 21,941 1,902 ------------------------- Total $ 22,743 $ 6,609 ========================= - --------------------------------------------------------------
On December 31, 1995, the Company had purchased $21,941,000 of overnight repurchase agreements collateralized by U.S. government securities under agreements to resell on January 2, 1996. Due to the short-term nature of the agreements, the Company did not take possession of the securities which were instead held for the Company by the bank. Incentive Stock Option Plan. Statement of Financial Accounting Standards No. 123, issued in October 1995, established new accounting standards for stock-based compensation plans and is effective for fiscal years beginning after December 15, 1995. This new standard will have no material impact on the Company's financial statements. Reclassifications. Certain reclassifications have been made to the 1994 and 1993 financial statements to conform with the 1995 financial statement presentation. NOTE 2. INVESTMENTS The loans and debt securities included in investments are at annual stated interest rates ranging from approximately zero percent to 17 percent, and are generally payable in installments with final maturities from six months to twenty-seven years from date of issue. At December 31, 1995 and 1994, loans and debt securities with a cost basis of $13,084,000 and $10,123,000, respectively, were not accruing interest. The investments of the Company and its subsidiaries consist primarily of securities issued by privately held companies. A majority of the securities held by the Company are subject to restrictions on their resale or are otherwise illiquid and cannot be sold to the public without registration under the Securities Act of 1933. In connection with the Company's investments in securities of publicly traded companies, the securities held with the following companies are subject to restrictions on their sale: Allied Capital Lending Corporation (1,090,000 shares are restricted); DeVlieg-Bullard, Inc.; DMI Furniture, Inc.; Esquire Communications, Ltd.; Garden Ridge Corporation; Labor Ready, Inc.; Nobel Education Dynamics, Inc.; and Quality Software Products Holdings, PLC. All of the Company's equity securities are non-income producing except for its investments in Allied Capital Lending Corporation (Allied Lending) and DMI Furniture, Inc. Dividends from Allied Lending were $1,519,000, $1,706,000 and $126,400 for 1995, 1994 and 1993, respectively. The following industries represent five percent or more of the total value of the investments outstanding at December 31:
- -------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------- Hotels and motels 7% 7% Manufacturing 20% 27% Broadcasting 25% 18% Registered investment company 12% 13% Software 5% 5% - --------------------------------------------------------------
23 25 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation At December 31, 1995 and 1994, the net unrealized appreciation (depreciation) for all securities based on cost for federal income tax purposes was as follows:
- ------------------------------------------------------------------------ (in thousands) 1995 1994 - ------------------------------------------------------------------------ Aggregate gross unrealized appreciation in which there is an excess of value over cost $ 23,925 $ 14,036 Aggregate gross unrealized depreciation in which there is an excess of cost over value (18,257) (15,191) ------------------------------- Net unrealized appreciation (depreciation) $ 5,668 $ (1,155) =============================== - -------------------------------------------------------------------------
The aggregate cost of securities at December 31, 1995 and 1994 for federal income tax purposes was $117,516,000 and $113,323,000, respectively. NOTE 3. INVESTMENT ADVISORY AGREEMENT The Company has an investment advisory agreement with Advisers that is approved at least annually by the board of directors or by vote of the holders of a majority of the outstanding shares of the Company. The agreement may be terminated at any time on sixty days' notice, without penalty, by the Company's board of directors or by vote of the holders of a majority of the Company's outstanding common shares and will terminate automatically in the event of its assignment. 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 the Company's share of transaction costs incident to the acquisition and disposition of investments, legal and accounting fees, the fees and expenses of the Company's independent directors and the fees of its officer-directors, the costs of printing and mailing proxy statements and reports to stockholders, 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 of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is 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 or management assistance. As compensation for its services to and the expenses paid for the account of the Company, Advisers is paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a fee was paid equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company, interim investments (i.e., U.S. government securities) and cash and cash equivalents, plus 0.125 percent per quarter of the quarter-end value of consolidated interim investments, cash and cash equivalents. These fees on an annual basis approximate 2.5 percent on consolidated invested assets and 0.5 percent on consolidated interim investments, cash and cash equivalents. In the first quarter of 1995, and in 1994 and 1993, Advisers was entitled to a fee equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company (subsequent to Allied Lending's public offering in November 1993) and consolidated cash and cash equivalents in excess of $2,000,000 in working capital. 24 26 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation NOTE 4. DIVIDENDS AND DISTRIBUTIONS The Company's board of directors declared and the Company paid a $0.24 per common share dividend for the fourth quarter, a $0.22 per common share dividend for the third quarter and a $0.20 per common share dividend each for the first and second quarters of 1995. The Company's board of directors also declared an extra distribution in the fourth quarter of $0.58 per common share, which was paid to stockholders on January 31, 1996, for a total distribution in 1995 equal to $1.44 per common share. The components of the dividends and distributions of taxable income declared by the board of directors for 1995, 1994 and 1993 are as follows:
- ---------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1995 1994 1993 PER Per Per AMOUNT SHARE Amount Share Amount Share - ---------------------------------------------------------------------------------------------------------------------- Ordinary income $ 2,465 $ 0.40 $ 1,921 $ 0.31 $ - $ - Long-term capital gains 6,429 1.04 5,630 0.92 8,239 1.35 Return of capital (tax) - - 1,044 0.17 - - -------------------------------------------------------------------------------- Totals distributions $ 8,894 $ 1.44 $ 8,595 $ 1.40 $ 8,239 $ 1.35 ================================================================================ - ----------------------------------------------------------------------------------------------------------------------
The 1995 distributions of $1.44 per common share were comprised of cash payments and issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan in the amounts of $1.28 and $0.16, respectively. The 1994 distributions of $1.40 per common share were comprised of cash payments, issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan, and the distribution of shares of Allied Lending in the amounts of $0.76, $0.04, and $0.60, respectively. The 1993 distributions of $1.35 per common share were paid in cash. Amounts represent the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual common shares outstanding on the record date for each dividend paid. The following represents a reconciliation from taxable income to income for financial reporting purposes for the years ended December 31:
- -------------------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------- Taxable income $ 9,114 $ 7,771 $ 8,459 Market discount amortization - (807) - Net realized gains (losses) 185 (1,049) - Net unrealized appreciation (depreciation) on investments 6,459 (5,296) 12,163 Other (441) (395) (216) ------------------------------------------------ Financial statement income 15,317 224 20,406 Preferred stock dividends (220) (220) (220) ------------------------------------------------ Amount available for common stockholders $ 15,097 $ 4 $ 20,186 ================================================ - --------------------------------------------------------------------------------------------
Under the 1940 Act, the Company is not permitted to make distributions to stockholders unless it meets certain asset coverage requirements with respect to money borrowed and senior securities issued. The Company is in compliance with these requirements. The Company's wholly owned subsidiaries annually distribute all of their taxable income to the Company. In order to make such distributions, the subsidiaries must meet the minimum capital requirements as set forth by the SBA. The subsidiaries are in compliance with these requirements. NOTE 5. DEBT Line of Credit. The Company has a revolving line of credit agreement with a bank under which it may borrow up to $10,000,000, which bears interest at the one-month LIBOR rate plus 2.5 percent per annum, payable monthly, and expires September 30, 1998. As of December 31, 1995 and 1994, the Company was paying interest at 8.219 percent and 7.088 percent per annum, respectively, on its outstanding borrowings. The Company must pay an annual commitment fee of $12,500 and a quarterly facility fee of 0.125 percent per annum on the unused portion of the line of credit. As of December 31, 1995, the Company had available $8,500,000 under the revolving line of credit agreement. Senior Notes. The Company has $20,000,000 of senior notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The senior notes are scheduled to mature over a five-year period commencing in 1998 through 2002 with annual principal payments of $4,000,000. 25 27 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation Subordinated Debentures. Subordinated debentures are payable to the Small Business Administration (SBA) and represent amounts due to the SBA as a result of borrowings made pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1995 were as follows:
- ------------------------------------------------------------------ (in thousands) YEAR ENDING INTEREST DECEMBER 31, AMOUNT RATES - ------------------------------------------------------------------ 1996 $ - - 1997 7,000 7.950% - 10.350% 1998 6,650 8.875% - 9.800% 1999 - - 2000 17,300 8.700% - 9.600% Thereafter 30,350 6.875% - 9.080% -------- Total $ 61,300 ======== - ------------------------------------------------------------------
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. Overseas Private Investment Corporation (OPIC) Loan. On April 10, 1995, the Company entered into a loan agreement with OPIC under which the Company may borrow up to $20,000,000 (loan commitment) to provide financing for international projects involving qualifying U.S. small businesses. Loans under this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the applicable period of the borrowing. In addition, OPIC is entitled to receive from the Company a contingent fee at maturity of the loan equal to five percent of the return generated by the OPIC-related investments in excess of seven percent. There are no required principal payments until the OPICloans mature ten years from the date of the first disbursement under the loan agreement. The loan commitment expires on the earlier of the first date on which the amount of the loans equal $20,000,000 or April 10, 1998. At December 31, 1995, there were no outstanding borrowings under the loan agreement. NOTE 6. PREFERRED STOCK As of December 31, 1995, Allied Financial, one of the Company's subsidiaries, had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. Allied Financial has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. NOTE 7. SHAREHOLDERS' EQUITY During 1994, the Company paid $1,044,000 in distributions that represented a return of capital for tax purposes. This has been charged to additional paid-in capital. The Company has a dividend reinvestment plan (the Plan). Stockholders of record may enroll in the Plan at any time. The Company may instruct the stock transfer agent to buy shares in the open market or to issue new shares. When the Company issues new shares, the price is equal to the average of the closing sales prices reported for the shares for the five days on which trading in the shares takes place on and immediately prior to the dividend payment date. During 1995, the Company issued 45,435 shares at an average price of $12.72 per share. During 1994, the Company issued 18,512 shares at an average price of $13.09 per share. The Company has an incentive stock option plan (the ISO plan) which allows the granting of options to the Company's officers. Under the ISO plan as amended, a maximum of 1,350,000 options may be granted at a price not less than the market value on the date of the grant and may be exercisable over a ten year period. In May 1994, the ISO plan was amended to permit grants to non-officer directors. The Company's stockholders approved a one-time grant of options to each member of the board of directors who is not an employee of the investment adviser to purchase 10,000 shares of the Company's common stock and such grants were subject to Commission approval. Such approval was granted by the Commission on December 26, 1995 and the options were granted at the current market price as of that date. Holders of ten percent or more of the Company's stock must exercise their options within a five-year period. Officers of the Company may borrow from the Company the funds necessary to exercise vested stock options. The loans have varying terms not exceeding ten years and generally bear interest at the applicable Federal interest rate in effect at the date of issue. 26 28 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation A summary of the activity in the plan is as follows:
- -------------------------------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------------------------------- Options outstanding at January 1, 701,473 686,847 496,285 Options granted 332,800 50,000 336,101 Options exercised - (25,382) (19,169) Options canceled (194,886) (9,992) (126,370) ----------------------------------------------------------- Options outstanding at December 31, 839,387 701,473 686,847 =========================================================== Options available for grant 162,136 300,050 3,967 Options exercisable 602,824 521,487 422,362 ----------------------------------------------------------- Option prices per share: Granted $ 12.38 - 13.63 $ 14.13 $ 13.00 Exercised - $ 7.34 - 8.53 $ 9.00 - 12.00 Canceled $ 12.05 - 16.50 $ 14.00 - 16.50 $ 14.00 - 18.00 ----------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding to various prospective and existing portfolio companies totaling $5,433,000 at December 31, 1995. At December 31, 1995, the Company had standby letters of credit and third party guarantees outstanding totaling $1,300,000. The conditional commitments under the letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. Repurchase agreements of $805,000 have been used as collateral for the letters of credit. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. Allied Lending, formerly a wholly owned subsidiary, originates certain loans which are 70 to 90 percent guaranteed by the SBA. Allied Lending then sells the guaranteed portion of these loans in the secondary market. The Internal Revenue Service may assert that these types of transactions subjected Allied Lending to a liability for income taxes of up to $845,000 for the year ended December 31, 1992. The Company has agreed to indemnify Allied Lending for this potential liability. Management believes that the Company has valid defenses for the position that such transactions do not subject Allied Lending to a liability for additional income taxes. NOTE 9. CONCENTRATIONS OF CREDIT RISK The Company and its subsidiaries place their cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. NOTE 10. SUBSEQUENT EVENTS The Company issued to the common stockholders at the close of business on January 22, 1996, the record date, non-transferable subscription rights that entitled record date stockholders to subscribe for and purchase from the Company up to one authorized, but heretofore unissued share of the Company's common stock for each seven subscription rights held. The Company offered a total of 885,448 shares of common stock pursuant to this offer. Stockholders who fully exercised their subscription rights were entitled to the additional privilege of subscribing for shares from the offering not acquired by exercise of subscription rights. In addition, the Company increased the number of shares subject to subscription by 15 percent, or 132,817 shares, for an aggregate total of 1,018,265 shares available under the offering. The subscription price per common share was $13.11, which equaled 95 percent of the average of the last reported sale price of a share of common stock on the Nasdaq National Market on February 27, 1996 (the expiration date) and each of the four preceding business days. Stockholders participating in the offering subscribed for 404,767 shares through the primary subscription and 251,903 shares through the oversubscription privilege for a total of 656,670 shares. The Company received net proceeds of $8,200,000 27 29 Notes To Consolidated Financial Statements - -------------------------------------------------------------------------------- Allied Capital Corporation from the rights offering after estimated expenses of $458,000, including a 2.5 percent commission paid to eligible broker/dealers on each share sold as a result of their soliciting efforts. The Company will attempt to sell the remaining 361,595 registered shares to other investors under similar terms during 1996. NOTE 11. DISPOSITION OF SUBSIDIARY The Company owned all of the outstanding capital stock of Allied Lending prior to consummation of the initial public offering of Allied Lending shares in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending shares was reduced to 1,580,000 shares, or approximately 36 percent of the Allied Lending shares outstanding at December 31, 1993. The Company will divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's stockholders or otherwise. The Company declared an extra dividend in December 1994 and distributed on January 6, 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending shares to 1,244,914 shares, or approximately 28 percent of the Allied Lending shares then outstanding. - -------------------------------------------------------------------------------- NOTE 12. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1995 QTR 1 QTR 2 QTR 3 QTR 4 -------------------------------------------------------------------------------------------------------------------------- Total investment income $ 3,549 $ 3,229 $ 3,564 $ 3,784 Net investment income $ 881 $ 504 $ 899 $ 1,048 Net increase in net assets resulting from operations $ 2,134 $ 7,196 $ 3,089 $ 2,898 Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase in net assets resulting from operations available to common stockholders $ 2,079 $ 7,141 $ 3,034 $ 2,843 Per common share $ 0.34 $ 1.16 $ 0.49 $ 0.46 -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- 1994 Qtr 1 Qtr 2 Qtr 3 Qtr 4 -------------------------------------------------------------------------------------------------------------------------- Total investment income $ 2,594 $ 2,507 $ 2,718 $ 4,397 Net investment income $ 204 $ 131 $ 518 $ 1,273 Net increase (decrease) in net assets resulting from operations $ 752 $ 2,641 $ (55) $ (3,114) Preferred stock dividends $ 55 $ 55 $ 55 $ 55 Net increase (decrease) in net assets resulting from operations available to common stockholders $ 697 $ 2,586 $ (110) $ (3,169) Per common share $ 0.11 $ 0.42 $ (0.02) $ (0.52) ---------------------------------------------------------------------------------------------------------------------------
Quarterly amounts for 1994 have been reclassified to conform with classifications used in the financial statements for 1995. 28 30 Report Of Independent Accountants - -------------------------------------------------------------------------------- Allied Capital Corporation THE BOARD OF DIRECTORS AND STOCKHOLDERS ALLIED CAPITAL CORPORATION We have audited the consolidated balance sheet of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1995 and 1994, including the consolidated statement of loans to and investments in small business concerns as of December 31, 1995, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 1995, and the selected per share data presented as financial highlights for each of the five years in the period ended December 31, 1995. These financial statements and per share data are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and per share data based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and per share data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the examination or confirmation of securities owned at December 31, 1995 and 1994. 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 and selected per share data referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 1995, and the selected per share data for each of the five years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include securities valued at $123,184,000 as of December 31, 1995 and $115,026,000 as of December 31, 1994, (83 percent and 85 percent, respectively, of total assets) whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. MATTHEWS, CARTER AND BOYCE McLean, Virginia February 2, 1996 29 31 Investment Officers - -------------------------------------------------------------------------------- Allied Capital Corporation [PHOTO] Philip A. McNeill Senior Vice President [PHOTO] Susan Gallagher Senior Vice President [PHOTO] Carr T. Preston Senior Vice President [PHOTO] Thomas H. Westbrook Senior Vice President [PHOTO] George Stelljes III Senior Vice President [PHOTO] Richard E. Fearon, Jr. Vice President [PHOTO] Gay S. Truscott Vice President [PHOTO] Erik A. Scott Vice President [PHOTO] Robert M. Monk Assistant Vice President [PHOTO] Donnel K. Pullum Assistant Vice President 30 32 Directors And Officers - -------------------------------------------------------------------------------- Allied Capital Corporation DIRECTORS David Gladstone(1) Chairman of the Board & Chief Executive Officer George C. Williams(1) Vice Chairman of the Board G. Cabell Williams III President & Chief Operating Officer Joseph A. Clorety III(2,3) President, Clorety and Company, Inc. (registered investment adviser) Michael I. Gallie(1,2) Principal, The Millennium Group (financial & management consulting firm) Warren K. Montouri(2,3) Investor Guy T. Steuart II(1,3) President, Steuart Investment Company T. Murray Toomey(1) Attorney at Law OFFICERS David Gladstone Chairman of the Board George C. Williams Vice Chairman of the Board G. Cabell Williams III President & Chief Operating Officer William F. Dunbar Executive Vice President Katherine C. Marien Executive Vice President John M. Scheurer Executive Vice President Joan M. Sweeney Executive Vice President Thomas R. Salley General Counsel & Secretary Tricia B. Daniels Senior Vice President Jon A. DeLuca Senior Vice President, Treasurer & Chief Financial Officer Susan Gallagher Senior Vice President Philip A. McNeill Senior Vice President Carr T. Preston Senior Vice President George Stelljes III Senior Vice President Thomas H. Westbrook Senior Vice President Richard E. Fearon, Jr. Vice President Erik A. Scott Vice President Suzanne V. Sparrow Vice President, Investor Relations Gay S. Truscott Vice President Penni F. Roll Controller & Assistant Treasurer Kelly A. Anderson Corporate Controller & Assistant Treasurer Robert M. Monk Assistant Vice President Donnel K. Pullum Assistant Vice President Arthur S. Cooper Assistant Secretary (1) Executive Committee (2) Audit Committee (3) Compensation Committee 31 33 Investor Information - -------------------------------------------------------------------------------- Allied Capital Corporation CORPORATE HEADQUARTERS c/o Allied Capital Advisers, Inc. 1666 K Street, NW, 9th Floor Washington, DC 20006 Tel: (202) 331-1112 Fax: (202) 659-2053 TRANSFER AGENT & REGISTRAR Information on transferring securities, replacing a lost or stolen certificate, or processing a change of address should be directed to: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, NY 10005 (800) 937-5449 DIVIDEND REINVESTMENT PLAN For the benefit of our stockholders, the Company provides a dividend reinvestment plan. All communication regarding this service should be directed to the Company's transfer agent and registrar who also serves as the plan administrator. STOCK MARKET LISTING Nasdaq National Market Symbol: ALLC CUSIP Number: 019 033 109 ANNUAL MEETING OF STOCKHOLDERS The 1996 Annual Meeting of Stockholders will be held at 10:00 a.m. on Monday, May 6, 1996 at Strathmore Hall Arts Center, 10701 Rockville Pike, North Bethesda, Maryland. All stockholders are welcome to attend. FORM 10-K A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission, will be sent at no charge to any stockholder upon request to the Investor Relations Department at the Company's corporate headquarters. INDEPENDENT ACCOUNTANTS Matthews, Carter and Boyce McLean, VA NUMBER OF STOCKHOLDERS As of December 31, 1995, there were approximately 1,700 stockholders of record. The Company estimates there were 6,700 beneficial stockholders. INVESTMENT ADVISER Allied Capital Advisers,Inc. Washington, DC Shares of the investment adviser are traded on Nasdaq National Market under the symbol ALLA. QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO STOCKHOLDERS The following table sets forth the high and low bid prices of the Company's common stock by calendar quarter during 1995 and 1994 and the distributions per share. The quotations represent interdealer quotations and do not include markups, markdowns or commissions and may not necessarily represent actual transactions.
- -------------------------------------------------------------------------------------------------------------------------------- 1995 1994 DISTRIBUTIONS Distributions HIGH LOW PER SHARE High Low Per Share ------------------------------------ --------------------------------------- First Quarter $ 13.50 $ 11.50 $ 0.20 $ 14.00 $ 12.25 $ 0.20 Second Quarter $ 12.00 $ 11.13 $ 0.20 $ 14.25 $ 13.25 $ 0.20 Third Quarter $ 13.75 $ 11.25 $ 0.22 $ 14.50 $ 13.25 $ 0.20 Fourth Quarter $ 14.25 $ 12.25 $ 0.24 $ 15.50 $ 12.75 $ 0.20 Annual Extra Distribution $ 0.58 $ 0.60 ------- ------- Total Distributions $ 1.44 $ 1.40 - --------------------------------------------------------------------------------------------------------------------------------
32 EX-23 4 CONSENTS OF MATTHEWS, CARTER AND BOYCE. 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS As independent accountants we hereby consent to the incorporation by reference in the registration statement on Form S-8 File No. 33-78394, of our report dated February 2, 1996 incorporated by reference in Allied Capital Corporation's Form 10-K for the year ended December 31, 1995 and to all references to our Firm included in such registration statement. MATTHEWS, CARTER AND BOYCE McLean, Virginia March 22, 1996 2 CONSENT OF INDEPENDENT ACCOUNTANTS As independent accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 2, 1996 included in Allied Capital Corporation's Annual Report to stockholders. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1995 or performed any audit procedures subsequent to the date of our report. MATTHEWS, CARTER AND BOYCE McLean, Virginia March 22, 1996 EX-27 5 FINANCIAL DATA SCHEDULE.
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN FORM 10-K. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 115,615 123,184 0 2,341 22,743 148,268 0 81,300 9,787 91,087 12,198 41,090 6,198 6,153 0 (3,676) 0 0 7,569 57,181 1,556 11,957 613 10,794 3,332 5,526 6,459 15,317 0 2,685 6,429 0 0 0 45,435 7,194 (3,420) 0 1,216 1,035 2,799 6,735 10,794 53,584 7.15 0.54 1.94 0.40 1.04 0 8.26 0 79,903 12.89
EX-28 6 FINANCIAL STATEMENTS AS FILED WITH THE S.B.A. 1 EXHIBIT 28 OMB Approval No. 3245-0063 Expiration Date ANNUAL FINANCIAL REPORT ON SBA FORM 468 (CORPORATE SBICs) - -------------------------------------------------------------------------------- NAME OF LICENSEE: Allied Investment Corporation 03/04-0003 - -------------------------------------------------------------------------------- STREET ADDRESS: 1666 K Street, NW - 9th Floor - -------------------------------------------------------------------------------- CITY, STATE AND ZIP CODE: Washington DC 20006 - -------------------------------------------------------------------------------- COUNTY: - -------------------------------------------------------------------------------- EMPLOYER ID NUMBER: 52-1081051 - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED: 12/31/95 - -------------------------------------------------------------------------------- SUMMARY INFORMATION: A B C --------------- 5 3 1 A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION 2 = $1 MILLION TO LESS THAN $2 MILLION 3 = $2 MILLION TO LESS THAN $5 MILLION 4 = $5 MILLION TO LESS THAN $10 MILLION 5 = $10 MILLION OR MORE B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"): 1 = AT LEAST 50% OWNED BY BANK OR BHC 2 = AT LEAST 10% AND LESS THAN 50% OWNED BY BANK OR BHC OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK OR BHC): 3 = PUBLICLY OWNED 4 = PRIVATELY OWNED OWNED BY NON-FINANCIAL CORPORATION: 5 = PUBLICLY OWNED 6 = PRIVATELY OWNED OWNED BY INDIVIDUALS: 7 = PUBLICLY OWNED 8 = PRIVATELY OWNED OWNED BY PARTNERSHIP 9 = PUBLICLY OWNED 10 = PRIVATELY OWNED C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED 2 = NON-DIVERSIFIED (SIC CODE____) NOTE: Public reporting burden for this collection of information is estimated to average 17 hours per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: Chief, Administrative Information Branch, U.S. Small Business Administration, Washington, DC 20416, and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503. SBA Form 468.1 (1-95) Previous editions obsolete Page 1C 2 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003
UNREALIZED UNREALIZED ASSETS COST DEPRECIATION APPRECIATION VALUE(1) ------ ----------------------------------------------------------- LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4) - --------------------- Portfolio Securities: 1 Loans 7,234,712 234,087 404,702 7,405,327 ------------ ----------- ----------- ------------ 2 Debt Securities 44,051,046 5,566,152 311,853 38,796,747 ------------ ----------- ----------- ------------ 3 Equity Securities 7,410,691 5,202,822 6,449,118 8,656,987 ------------ ----------- ----------- ------------ 4 TOTAL PORTFOLIO SECURITIES 58,696,449 11,003,061 7,165,673 54,859,061 ------------ ----------- ----------- ------------ Assets Acquired in Liquidation of Portfolio Securities: 5 Receivables from Sale of Assets Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 6 Assets Acquired 312,232 145,481 0 166,751 ------------ ----------- ----------- ------------ 7 TOTAL ASSETS ACQUIRED 312,232 145,481 0 166,751 ------------ ----------- ----------- ------------ 8 Operating Concerns Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 9 Notes and Other Securities Received 1,058,352 86,437 0 971,915 ------------ ----------- ----------- ------------ 10 TOTAL LOANS AND INVESTMENTS 60,067,033 11,234,979 7,165,673 55,997,727 ------------ ----------- ----------- ------------ 11 Less Current Maturities 2,130,882 ------------ 12 Loans and Investments Net of Current Maturities 53,866,845 ------------ Investment in 301(d) Licensee (2): 13 Name ___________________________________ 0 ------------ License No. ________________ CURRENT ASSETS -------------- 14 Cash and Cash Equivalents 12,697,158 ----------- 15 Invested Idle Funds 0 12,697,158 ----------- ----------- 16 Interest and Dividends Receivable 757,557 ----------- 17 Notes and Accounts Receivable 206,922 ----------- 18 Receivables from Parent or Other Associates 67,812 ----------- 19 Less: Allowance for Losses (lines 16, 17 & 18) 358,317 673,974 ----------- ----------- 20 Current Maturities of Portfolio Securities 2,130,882 ----------- 21 Current Maturities of Assets Acquired 0 ----------- 22 Current Maturities of Operating Concerns Acquired 0 ----------- 23 Current Maturities of Other Securities 0 2,130,882 ----------- ----------- 24 Other (specify) Cash Collateral account 291,335 -------------------------- ----------- 25 Other (specify) _________________________ 0 15,793,349 ----------- ------------ OTHER ASSETS ------------ 26 a. Furniture and Equipment 0 ----------- b. Less: Accumulated Depreciation 0 0 ------------ ----------- 27 Other (specify) Loan Fees Unamortized 746,864 -------------------------- ----------- 28 Other (specify) Prepaid Expenses & other 18,886 765,750 -------------------------- ----------- ------------ 29 TOTAL ASSETS $70,425,944 ------------
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized Depreciation + Unrealized Appreciation = Value) (2) A note to item 13 should include percent owned, cost basis and changes resulting from equity method of accounting. SBA Form 468.1 (1-95) Previous editions obsolete Page 2C 3 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003 LIABILITIES AND CAPITAL ----------------------- LONG-TERM DEBT (Net of Current Maturities) - ------------------------------------------ 30 Notes and Debentures Payable to or Guaranteed by SBA 42,350,000 ----------- 31 Notes and Debentures Payable to Others 2,833,333 45,183,333 ----------- ------------ CURRENT LIABILITIES - ------------------- 32 Accounts Payable and Accrued Expenses 40,543 ----------- 33 Due to Parent or Other Associates 161,396 ----------- 34 Accrued Interest Payable 886,918 ----------- 35 Accrued Taxes Payable 0 ----------- 36 a. Current Maturities of Line 30 0 ----------- b. Current Maturities of Line 31 0 0 ----------- ----------- 37 Distributions Payable 1,833,519 ----------- 38 Short-term Notes Payable/Lines of Credit 0 ----------- 39 Other(specify) _________________________ 0 ----------- 40 Other(specify) _________________________ 0 2,922,376 ----------- ------------ OTHER LIABILITIES - ----------------- 41 Deferred Credits 486,224 ----------- 42 Other(specify) _________________________ 0 ----------- 43 Other(specify) _________________________ 0 486,224 ----------- ------------ 44 TOTAL LIABILITIES 48,591,933 ------------ REDEEMABLE SECURITIES (guaranteed or purchased by SBA) - ------------------------------------------------------ 45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 0 ----------- b. Cumulative Undeclared 4% Dividends 0 0 ----------- ----------- 46 TOTAL REDEEMABLE SECURITIES 0 ------------ CAPITAL - ------- 47 Capital stock 56 ------------ 48 Paid-in Surplus 16,198,920 16,198,976 ------------ ----------- 49 Restricted Contributed Capital Surplus 0 ----------- 50 Capital Stock and Surplus 16,198,976 ----------- 51 3% Preferred Stock Purchased by SBA 0 ----------- 52 Unrealized Gain (Loss) on Securities Held -4,069,306 ----------- 53 Non-Cash Gains/Income 1,580,357 ----------- 54 Undistributed Net Realized Earnings: a. Restricted (Equal to Cost of Treasury Stock) 0 ------------ b. Unrestricted 8,123,984 ------------ c. Total (54a plus 54b) 8,123,984 ----------- 55 Undistributed Realized Earnings (53 plus 54c) 9,704,341 ----------- 56 Total 21,834,011 ------------ 57 Less: Cost of Treasury Stock 0 ------------ 58 TOTAL CAPITAL 21,834,011 ------------ 59 TOTAL LIABILITIES, REDEEMABLE SECURITIES AND CAPITAL (lines 44 plus 46 plus 58) $70,425,944 ------------
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C 4 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF OPERATIONS REALIZED FOR 12 MONTHS ENDED 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Investment Corporation License No. 03/04-0003 INVESTMENT INCOME - ----------------- 1 Interest Income 5,739,030 ---------- 2 Dividend Income 37,522 ---------- 3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0 ---------- 4 Income (Loss) from Investment in Section 301(d) Licensee 0 ---------- 5 Fees for Management Services 0 ---------- 6 Processing and Other Fees 20,209 ---------- 7 Interest on Invested Idle Funds 391,594 ---------- 8 Income from Assets Acquired in Liquidation of Loans and Investments (net of 0 Expenses) 0 -------- ---------- 9 Other Income 9,297 ---------- 10 GROSS INVESTMENT INCOME 6,197,652 ----------- EXPENSES - -------- 11 Interest Expense 3,700,160 ---------- 12 Commitment Fees 0 ---------- 13 Other Financial Cost 0 ---------- 14 Officers' Compensation and Benefits 0 ---------- 15 Employee Compensation and Benefits 0 ---------- 16 Investment Advisory and Management Services 0 ---------- 17 Directors' and Stockholders' Meetings 0 ---------- 18 Advertising and Promotion 0 ---------- 19 Appraisal and Investigation 0 ---------- 20 Communication 0 ---------- 21 Travel 19,506 ---------- 22 Cost of Space Occupied 0 ---------- 23 Depreciation and Amortization 0 ---------- 24 Insurance 1,473 ---------- 25 Payroll Taxes 0 ---------- 26 Other Taxes (excluding income taxes) 2,683 ---------- 27 Provision for Losses on Receivables (excluding loans receivable) 224,568 ---------- 28 Legal Fees 150,201 ---------- 29 Audit and Examination Fees 5,785 ---------- 30 Miscellaneous Expenses (attach schedule) 170,167 ---------- 31 TOTAL EXPENSES 4,274,543 ----------- 32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 1,923,109 ----------- 33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 504,500 ----------- 34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 2,427,609 ----------- 35 Income Tax Expense (Benefit) 0 ----------- 36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $2,427,609 ----------- 37 Extraordinary Item ____________________ 0 ----------- 38 Cumulative Effect of Change in Accounting Principle 0 ----------- 39 NET INCOME (LOSS) $2,427,609 -----------
(1)Include CHARGE-OFFS (full or partial) of loans and investments which represent realized losses. DO NOT INCLUDE valuation adjustments classified as unrealized appreciation or depreciation. Provide supporting detail for all realized gains and losses on page 14C of this form. SBA Form 468.1 (1-95) Previous editions obsolete Page 4C 5 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/95 (page 1 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar) OPERATING ACTIVITIES: - --------------------- CASH INFLOWS: 1 Interest Received from Portfolio Concerns 4,887,981 ---------- 2 Dividends Received from Portfolio Concerns 37,522 ---------- 3 Other Returns on Capital Received from Portfolio Concerns 0 ---------- 4 Management Services and Other Fees Received 298,157 ---------- 5 Interest on Invested Idle Funds 347,597 ---------- 6 Cash Received from Assets Acquired in Liquidation 0 ---------- 7 Other Operating Cash Receipts 268,499 ---------- CASH OUTFLOWS: 8 Interest Paid 3,966,519 ---------- 9 Commitment Fees and Other Financial Costs 0 ---------- 10 Investment Advisory and Management Fees 0 ---------- 11 Officers, Directors and Employees Compensation and Benefits 0 ---------- 12 Operating Expenditures (excluding compensation and benefits) 333,473 ---------- 13 Income Taxes Paid 0 ---------- 14 Other Operating Cash Disbursements 0 ---------- 15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,539,764 ----------- INVESTING ACTIVITIES: - --------------------- Cash Inflows: 16 Loan Principal Payments Received from Portfolio Concerns 4,017,622 ---------- 17 Returns of Capital Received from Portfolio Concerns 0 ---------- 18 Net Proceeds from Disposition of Portfolio Securities 11,063,726 ---------- 19 Liquidation of Idle Funds Investments 6,894,274 ---------- 20 Other (Specify) $ rcvd for MEC receivable 187,672 ------------------------- ---------- Cash Outflows: 21 Purchase of Portfolio Securities 600,223 ---------- 22 Loans to Portfolio Concerns 17,332,678 ---------- 23 Idle Funds Investments 5,427,147 ---------- 24 Other (Specify) __________________________ 0 ---------- 25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -1,196,754 ----------- FINANCING ACTIVITIES: - --------------------- Cash Inflows: 26 Proceeds from Issuance of SBA-Guaranteed Debentures 12,000,000 ---------- 27 Proceeds from Sale of 41 Preferred Stock 0 ---------- 28 Proceeds from Non-SBA Borrowing 0 ---------- 29 Proceeds from Sale of Stock 4,300,000 ---------- 30 Other (Specify) __________________________ 0 ---------- Cash Outflows: 31 Principal Payments on SBA-Guaranteed Debentures 5,500,000 ---------- 32 Principal Payments on Non-SBA Borrowing 0 ---------- 33 Redemption of 4% Preferred Stock 0 ---------- 34 Redemption of 3% Preferred Stock 0 ---------- 35 Redemption of Stock (excluding 3% and 4% Preferred) 0 ---------- 36 Dividends Paid 1,468,994 ---------- 37 Other (Specify) __________________________ 0 ----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C 6 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/95 (page 2 of 2) Name of Licensee Allied Investment Corporation License No. 03/04-0003 (Amounts rounded to nearest dollar) 38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,331,006 ----------- 39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,674,016 ----------- 40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,023,142 ----------- 41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $12,697,158 ----------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED - -------------------------------------------------------- BY (USED IN) OPERATING ACTIVITIES: - ---------------------------------- 42 Net Income (Loss) (page 4C, line 39) 2,427,609 ---------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: 43 Depreciation and Amortization 0 ---------- 44 Provision for Losses on Accounts Receivable 224,568 ---------- 45 Provision for Deferred Income Taxes 0 ---------- 46 (Income) Loss from Investments in Partnerships/Flow-through Entities (excluding income received in cash) 0 ---------- 47 Realized (Gains) Losses on Investments -504,500 ---------- 48 Other (Specify) Amort of OID, Cl Pt, Proc -478,817 ------------------------- ---------- Changes in Operating Assets and Liabilities Net of Noncash Items: 49 (Increase) Decrease in Interest and Dividends Receivable -378,448 ---------- 50 (Increase) Decrease in Other Current Assets -116,897 ---------- 51 Increase (Decrease) in Accounts Payable 98,895 ---------- 52 Increase (Decrease) in Accrued Interest Payable 96,057 ---------- 53 Increase (Decrease) in Accrued Taxes Payable 0 ---------- 54 Increase (Decrease) in Dividends Payable 0 ---------- 55 Increase (Decrease) in Other Current Liabilities 171,297 ---------- 56 Other (Specify) ________________________ 0 ---------- 57 Other (Specify) ________________________ 0 ---------- 58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,539,764 ----------
Supplemental disclosure of non-cash financing and investing activities is required. See FASB Statement No. 95, paragraph 32. SBA Form 468.1 (1-95) Previous editions obsolete Page 6C 7 OMB Approval No. 3245-0063 Expiration Date ANNUAL FINANCIAL REPORT ON SBA FORM 468 (CORPORATE SBICs) - -------------------------------------------------------------------------------- NAME OF LICENSEE: Allied Capital Financial Corporation 03/03-5163 - -------------------------------------------------------------------------------- STREET ADDRESS: 1666 K Street, NW 9th Floor - -------------------------------------------------------------------------------- CITY, STATE AND ZIP CODE: Washington DC 20006 - -------------------------------------------------------------------------------- COUNTY: - -------------------------------------------------------------------------------- EMPLOYER ID NUMBER: 52-1278855 - -------------------------------------------------------------------------------- FOR THE FISCAL YEAR ENDED: 12/31/95 - -------------------------------------------------------------------------------- SUMMARY INFORMATION: A B C 5 3 1 A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION 2 = $1 MILLION TO LESS THAN $2 MILLION 3 = $2 MILLION TO LESS THAN $5 MILLION 4 = $5 MILLION TO LESS THAN $10 MILLION 5 = $10 MILLION OR MORE B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"): 1 = AT LEAST 50% OWNED BY BANK OR BHC 2 = AT LEAST 10% AND LESS THAN 50% OWNED BY BANK OR BHC OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK OR BHC): 3 = PUBLICLY OWNED 4 = PRIVATELY OWNED OWNED BY NON-FINANCIAL CORPORATION: 5 = PUBLICLY OWNED 6 = PRIVATELY OWNED OWNED BY INDIVIDUALS: 7 = PUBLICLY OWNED 8 = PRIVATELY OWNED OWNED BY PARTNERSHIP 9 = PUBLICLY OWNED 10 = PRIVATELY OWNED C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED 2 = NON-DIVERSIFIED (SIC CODE ____) NOTE: Public reporting burden for this collection of information is estimated to average 17 hours per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the form. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to: Chief, Administrative Information Branch, U.S. Small Business Administration, Washington, DC 20416, and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503. SBA Form 468.1 (1-95) Previous editions obsolete Page 1C 8 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
UNREALIZED UNREALIZED ASSETS COST DEPRECIATION APPRECIATION VALUE(1) ------ ----------------------------------------------------------- LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4) - --------------------- Portfolio Securities: 1 Loans 20,121,111 823,182 0 19,297,929 ------------ ----------- ----------- ------------ 2 Debt Securities 12,742,416 103,456 0 12,638,960 ------------ ----------- ----------- ------------ 3 Equity Securities 522,628 262,532 2,274,767 2,534,863 ------------ ----------- ----------- ------------ 4 TOTAL PORTFOLIO SECURITIES 33,386,155 1,189,170 2,274,767 34,471,752 ------------ ----------- ----------- ------------ Assets Acquired in Liquidation of Portfolio Securities: 5 Receivables from Sale of Assets Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 6 Assets Acquired 520,904 293,404 0 227,500 ------------ ----------- ----------- ------------ 7 TOTAL ASSETS ACQUIRED 520,904 293,404 0 227,500 ------------ ----------- ----------- ------------ 8 Operating Concerns Acquired 0 0 0 0 ------------ ----------- ----------- ------------ 9 Notes and Other Securities Received 0 0 0 0 ------------ ----------- ----------- ------------ 10 TOTAL LOANS AND INVESTMENTS 33,907,059 1,482,574 2,274,767 34,699,252 ------------ ----------- ----------- ------------ 11 Less Current Maturities 3,844,118 ------------ 12 Loans and Investments Net of Current Maturities 30,855,134 ------------ Investment in 301(d) Licensee (2): 13 Name ________________________________________________ 0 ------------ License No. ____________________ CURRENT ASSETS - -------------- 14 Cash and Cash Equivalents 9,357,901 ----------- 15 Invested Idle Funds 0 9,357,901 ----------- ----------- 16 Interest and Dividends Receivable 647,268 ----------- 17 Notes and Accounts Receivable 474 ----------- 18 Receivables from Parent or Other Associates 25,000 ----------- 19 Less: Allowance for Losses (lines 16, 17 & 18) 193,781 478,961 ----------- ----------- 20 Current Maturities of Portfolio Securities 3,844,118 ----------- 21 Current Maturities of Assets Acquired 0 ----------- 22 Current Maturities of Operating Concerns Acquired 0 ----------- 23 Current Maturities of Other Securities 0 3,844,118 ----------- ----------- 24 Other (specify) _______________________ 0 ----------- 25 Other (specify) _______________________ 0 13,680,980 ----------- ------------ OTHER ASSETS - ------------ 26 a. Furniture and Equipment 0 ----------- b. Less: Accumulated Depreciation 0 0 ----------- ----------- 27 Other (specify) Loan Fees Unamortized 164,381 -------------------------- ----------- 28 Other (specify) Prepaid Expenses & Other 82,625 247,006 -------------------------- ----------- ------------ 29 TOTAL ASSETS $44,783,120 ------------
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized Depreciation + Unrealized Appreciation = Value) (2) A note to item 13 should include percent owned, cost basis and changes resulting from equity method of accounting. SBA Form 468.1 (1-95) Previous editions obsolete Page 2C 9 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF FINANCIAL POSITION AS OF 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 LIABILITIES AND CAPITAL ------------------------ LONG-TERM DEBT (Net of Current Maturities) - ------------------------------------------ 30 Notes and Debentures Payable to or Guaranteed by SBA 18,950,000 ----------- 31 Notes and Debentures Payable to Others 2,166,667 21,116,667 ----------- ------------ CURRENT LIABILITIES - ------------------- 32 Accounts Payable and Accrued Expenses 3 ----------- 33 Due to Parent or Other Associates 74,905 ----------- 34 Accrued Interest Payable 291,142 ----------- 35 Accrued Taxes Payable 0 ----------- 36 a. Current Maturities of Line 30 0 ----------- b. Current Maturities of Line 31 0 0 ----------- ----------- 37 Distributions Payable 3,617,166 ----------- 38 Short-term Notes Payable/Lines of Credit 0 ----------- 39 Other(specify) _________________________ 0 ----------- 40 Other(specify) _________________________ 0 3,983,216 ----------- ------------ OTHER LIABILITIES - ----------------- 41 Deferred Credits 287,954 ----------- 42 Other(specify) _________________________ 0 ----------- 43 Other(specify) _________________________ 0 287,954 ----------- ------------ 44 TOTAL LIABILITIES 25,387,837 ------------ REDEEMABLE SECURITIES (guaranteed or purchased by SBA) - ------------------------------------------------------ 45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 1,000,000 ----------- b. Cumulative Undeclared 4% Dividends 0 1,000,000 ----------- ----------- 46 TOTAL REDEEMABLE SECURITIES 1,000,000 ------------ CAPITAL - ------- 47 Capital Stock 0 ------------ 48 Paid-in Surplus 9,623,681 9,623,681 ------------ ----------- 49 Restricted Contributed Capital Surplus 0 ----------- 50 Capital Stock and Surplus 9,623,681 ----------- 51 3% Preferred Stock Purchased by SBA 6,000,000 ----------- 52 Unrealized Gain (Loss) on Securities Held 792,193 ----------- 53 Non-Cash Gains/Income 57,804 ----------- 54 Undistributed Net Realized Earnings: a. Restricted (Equal to Cost of Treasury Stock) 0 ------------ b. Unrestricted 1,921,605 ------------ c. Total (54a plus 54b) 1,921,605 ----------- 55 Undistributed Realized Earnings (53 plus 54c) 1,979,409 ----------- 56 Total 18,395,283 ------------ 57 Less: Cost of Treasury Stock 0 ------------ 58 TOTAL CAPITAL 18,395,283 ------------ 59 TOTAL LIABILITIES, REDEEMABLE SECURITIES AND CAPITAL (lines 44 plus 46 plus 58) $44,783,120 ------------
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C 10 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF OPERATIONS REALIZED FOR 12 MONTHS ENDED 12/31/95 (Amounts rounded to nearest dollar) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 INVESTMENT INCOME - ----------------- 1 Interest Income 3,946,407 ----------- 2 Dividend Income 0 ----------- 3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0 ----------- 4 Income (Loss) from Investment in Section 301(d) Licensee 0 ----------- 5 Fees for Management Services 0 ----------- 6 Processing and Other Fees 14,043 ----------- 7 Interest on Invested Idle Funds 519,361 ----------- 8 Income from Assets Acquired in Liquidation of Loans and Investments (net of __________0 Expenses) 0 ----------- 9 Other Income 103,550 ----------- 10 GROSS INVESTMENT INCOME 4,583,361 ----------- EXPENSES -------- 11 Interest Expense 1,627,141 ----------- 12 Commitment Fees 0 ----------- 13 Other Financial Cost 0 ----------- 14 Officers' Compensation and Benefits 0 ----------- 15 Employee Compensation and Benefits 0 ----------- 16 Investment Advisory and Management Services 0 ----------- 17 Directors' and Stockholders' Meetings 0 ----------- 18 Advertising and Promotion 0 ----------- 19 Appraisal and Investigation 0 ----------- 20 Communication 0 ----------- 21 Travel 0 ----------- 22 Cost of Space Occupied 0 ----------- 23 Depreciation and Amortization 0 ----------- 24 Insurance 933 ----------- 25 Payroll Taxes 0 ----------- 26 Other Taxes (excluding income taxes) 2,211 ----------- 27 Provision for Losses on Receivables (excluding loans receivable) 92,626 ----------- 28 Legal Fees 114,304 ----------- 29 Audit and Examination Fees 4,490 ----------- 30 Miscellaneous Expenses (attach schedule) 20,873 ----------- 31 TOTAL EXPENSES 1,862,578 ----------- 32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,720,783 ----------- 33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 802,848 ----------- 34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 3,523,631 ----------- 35 Income Tax Expense (Benefit) 0 ----------- 36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $3,523,631 ----------- 37 Extraordinary Item __________________ 0 ----------- 38 Cumulative Effect of Change in Accounting Principle 0 ----------- 39 NET INCOME (LOSS) $3,523,631 -----------
(1) Include CHARGE-OFFS (full or partial) of loans and investments which represent realized losses. DO NOT INCLUDE valuation adjustments classified as unrealized appreciation or depreciation. Provide supporting detail for all realized gains and losses on page 14C of this form. SBA Form 468.1 (1-95) Previous editions obsolete Page 4C 11 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/95 (page 1 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar) OPERATING ACTIVITIES: - --------------------- CASH INFLOWS: 1 Interest Received from Portfolio Concerns 3,664,779 ----------- 2 Dividends Received from Portfolio Concerns 0 ----------- 3 Other Returns on Capital Received from Portfolio Concerns 0 ----------- 4 Management Services and Other Fees Received 100,800 ----------- 5 Interest on Invested Idle Funds 731,857 ----------- 6 Cash Received from Assets Acquired in Liquidation 0 ----------- 7 Other Operating Cash Receipts 103,550 ----------- CASH OUTFLOWS: 8 Interest Paid 1,711,002 ----------- 9 Commitment Fees and Other Financial Costs 0 ----------- 10 Investment Advisory and Management Fees 0 ----------- 11 Officers, Directors and Employees Compensation and Benefits 0 ----------- 12 Operating Expenditures (excluding compensation and benefits) 165,115 ----------- 13 Income Taxes Paid 0 ----------- 14 Other Operating Cash Disbursements 52,917 ----------- 15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,671,952 ----------- INVESTING ACTIVITIES: --------------------- Cash Inflows: 16 Loan Principal Payments Received from Portfolio Concerns 4,317,440 ----------- 17 Returns of Capital Received from Portfolio Concerns 0 ----------- 18 Net Proceeds from Disposition of Portfolio Securities 1,496,897 ----------- 19 Liquidation of Idle Funds Investments 19,848,098 ----------- 20 Other (Specify) __________________________ 0 ----------- Cash Outflows: 21 Purchase of Portfolio Securities 111 ----------- 22 Loans to Portfolio Concerns 10,639,222 ----------- 23 Idle Funds Investments 7,223,983 ----------- 24 Other (Specify) __________________________ 0 ----------- 25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,799,119 ----------- FINANCING ACTIVITIES: - --------------------- Cash Inflows: 26 Proceeds from Issuance of SBA-Guaranteed Debentures 2,000,000 ----------- 27 Proceeds from Sale of 4% Preferred Stock 0 ----------- 28 Proceeds from Non-SBA Borrowing 0 ----------- 29 Proceeds from Sale of Stock 650,000 ----------- 30 Other (Specify) _________________________ 0 ----------- Cash Outflows: 31 Principal Payments on SBA-Guaranteed Debentures 2,000,000 ----------- 32 Principal Payments on Non-SBA Borrowing 0 ----------- 33 Redemption of 4% Preferred Stock 0 ----------- 34 Redemption of 3% Preferred Stock 0 ----------- 35 Redemption of Stock (excluding 3% and 4% Preferred) 0 ----------- 36 Dividends Paid 1,695,258 ----------- 37 Other (Specify) _________________________ 0 -----------
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C 12 OMB Approval No. 3245-0063 Expiration Date STATEMENT OF CASH FLOWS FOR 12 MONTHS ENDED 12/31/95 (page 2 of 2) Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163 (Amounts rounded to nearest dollar) 38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -1,045,258 ----------- 39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,425,813 ----------- 40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -67,912 ----------- 41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $9,357,901 ----------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED - -------------------------------------------------------- BY (USED IN) OPERATING ACTIVITIES: - ---------------------------------- 42 Net Income (Loss) (page 4C, line 39) 3,523,631 Adjustments to Reconcile Net Income (Loss) to Net ----------- Cash Provided by (Used in) Operating Activities: 43 Depreciation and Amortization 0 ----------- 44 Provision for Losses on Accounts Receivable 92,626 ----------- 45 Provision for Deferred Income Taxes 0 ----------- 46 (Income) Loss from Investments in Partnerships/Flow-through Entities (excluding income received in cash) 0 ----------- 47 Realized (Gains) Losses on Investments -802,848 ----------- 48 Other (Specify) Amort of OID,CL Pts& Proc -185,609 Changes in Operating Assets and Liabilities ----------- Net of Noncash Items: 49 (Increase) Decrease in Interest and Dividends Receivable -50,929 ----------- 50 (Increase) Decrease in Other Current Assets -96,890 ----------- 51 Increase (Decrease) in Accounts Payable -30,406 ----------- 52 Increase (Decrease) in Accrued Interest Payable -17,739 ----------- 53 Increase (Decrease) in Accrued Taxes Payable 0 ----------- 54 Increase (Decrease) in Dividends Payable 0 ----------- 55 Increase (Decrease) in Other Current Liabilities 240,115 ----------- 56 Other (Specify) __________________________ 0 ----------- 57 Other (Specify) __________________________ 0 ----------- 58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $2,671,951 -----------
Supplemental disclosure of non-cash financing and investing activities is required. See FASB Statement No. 95, paragraph 32. SBA Form 468.1 (1-95) Previous editions obsolete Page 6C 13 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Allied Investment Corporation (the Company), a wholly owned subsidiary of Allied Capital Corporation (Parent), is a closed-end management investment company under the Investment Company Act of 1940. The Company is licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC). The Company seeks to achieve a high level of current income by providing debt, mezzanine and equity financing for small privately owned growth companies, and through long-term growth on the value of its net assets. Valuation of Investments. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. Interest and Dividend Income. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When collection of interest is in doubt, interest is not accrued or a reserve is established. Original issue discount is amortized into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Realized Gains or Losses and Unrealized Appreciation or Depreciation on Investments. Realized gains or losses are accounted for on the trade date and are measured by the difference between the proceeds of sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the difference between cost and value. Distributions to the Parent. Distributions to the Parent are recorded on the ex-dividend date. Federal Income Taxes. The Company's objective is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company annually distributes all of its taxable income to the Parent; therefore, a federal income tax provision is not required. In addition, no provision for deferred income taxes has been made for the unrealized 14 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 appreciation on investments since the Company intends to continue to annually distribute all of its taxable income. Dividends declared by the Company in December, but paid during January of the following year, are treated as if the dividends were received by the Parent on December 31 of the year declared. Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. NOTE 2. INVESTMENTS The loans and debt securities included in investments are at annual stated interest rates ranging from approximately zero percent to 17 percent, and are generally payable in installments with final maturities from four months to fifteen years from date of issue. The following loans and debt securities had accrued interest that was fully reserved, or were not accruing interest at December 31, 1995:
AGGREGATE AMOUNT OF INTEREST DATE INTEREST RESERVED AT ACCRUAL NET DECEMBER 31, 1995 PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2) ------------------ --------------- ---- ------------------ ACCRUED INTEREST FULLY RESERVED: Enviroplan, Inc. $ 519,137 $ 37,838 Enviroplan, Inc. 1,929,773 122,876 Sunstates 956,552 79,950 Sunstates 15,315 1,914 Centennial Media 400,000 33,158 ------------ ------------- Total $ 3,820,777 $ 275,736
15 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
AGGREGATE AMOUNT OF INTEREST DATE INTEREST RESERVED AT ACCRUAL NET DECEMBER 31, 1995 PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2) ------------------ --------------- ---- ------------------ INTEREST NOT ACCRUED: Denver Directory (3) 9/8/89 $ 187,500 $ 70,860 Denver Directory (3) 9/27/90 175,834 96,889 Colorado Directory (3) 1/3/86 323,000 79,053 Centennial Media (3) 2/22/89 10,170 4,663 Centennial Media (3) 8/16/93 175,000 41,417 Centennial Media (3) 6/1/93 252,510 55,160 Colorado Directory (3) 8/28/88 69,000 16,378 Centennial Media (3) 10/11/93 150,000 32,500 Denver Directory (3) 12/21/90 187,500 38,854 Centennial Media (3) 5/6/93 57,000 18,126 Colorado Directories (3) 11/28/88 90,000 46,858 Centennial Media (3) 9/1/94 400,000 80,339 Love Mortgage 12/31/95 107,284 20,546 Love Mortgage 12/31/95 402,414 51,068 Medifit 11/1/94 339,909 204,452 Old Mill 9/22/95 542,533 31,417 Old Mill 9/22/95 114,893 6,552 Sequoia Pizza 2/8/95 85,751 35,107 Total Foam 7/1/93 239,853 95,000
16 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
AGGREGATE AMOUNT OF INTEREST DATE INTEREST RESERVED AT ACCRUAL NET DECEMBER 31, 1995 PORTFOLIO SECURITY DISCONTINUED(1) COST OR NOT ACCRUED (2) ------------------ --------------- ---- ------------------ Total Foam 7/1/93 241,880 95,000 Total Foam 7/1/93 36,000 13,680 Total Foam 7/1/93 174,388 34,395 Total Foam 7/1/93 239,198 95,000 Total Foam 7/1/93 250,000 90,788 Total Foam 7/1/93 250,000 95,000 Total Foam 7/1/93 119,764 45,510 Total Foam 7/1/93 193,095 76,000 ------------ --------------- Total $ 5,414,476 $ 1,570,612 ============ ===============
(1) Date shown only for loans and debt securities not accruing interest. (2) From date interest accrual discontinued. (3) These notes were purchased at various times at a discount to improve the company's lien position in this investment. No payments have been received on these notes since purchased even though the borrowers are still required to make payments under the note agreements. NOTE 3. INVESTMENT ADVISORY SERVICES The Company's investments are managed by Allied Capital Advisers, Inc. ("Advisers"), an independent publicly traded registered investment adviser. Certain officers of the Company are also officers in Advisers. Pursuant to an advisory agreement with the Parent, Advisers manages the day-to-day activities of the Parent and its wholly owned subsidiaries. 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. In exchange, Advisers is reimbursed for its costs incurred in connection with the above through an 17 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 investment advisory fee paid by the Parent. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments and legal and accounting fees. The Company is required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is 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 or management assistance. NOTE 4. DIVIDENDS AND DISTRIBUTIONS The Company's board of directors declared a dividend of $1,833,519 for the year ended December 31, 1995, which was paid January 29, 1996. This represented all of the Company's taxable income. Pursuant to SBA regulations, retained earnings available for distribution at December 31, 1995 were insufficient to pay this dividend, which resulted in an excess distribution of $3,110,995 which was charged against paid-in surplus in January 1996. As a result of this charge against paid-in surplus, the Company's capital was reduced to a level below the minimum capital required by the SBA to meet leverage ratios. The Parent purchased additional stock in the Company at a cost of $1,700,000 to increase leveragable capital to a level above the minimum required on February 8, 1996. NOTE 5. DEBT Senior Notes. The Company has $2,833,333 of senior notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The senior notes are scheduled to mature over a five-year period commencing in 1998 through 2002 with annual principal payments of $566,667. Subordinated Debentures. Subordinated debentures are payable to the Small Business Administration (SBA) and represent amounts due to the SBA as a result of borrowings made pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1995 were as follows: 18 ALLIED INVESTMENT CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
YEAR AMOUNTS INTEREST RATES ---- ------- -------------- 1996 --- --- 1997 5,000,000 7.950% - 10.350% 1998 4,650,000 9.625% - 9.800% 1999 --- --- 2000 7,700,000 8.700% - 9.600% thereafter 25,000,000 6.875% - 9.080% ----------- $ 42,350,000 ============
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding to various prospective and existing portfolio companies totaling $117,614 at December 31, 1995. At December 31, 1995, the Company had standby letters of credit and third party guarantees outstanding totaling $748,656. The conditional commitments under the letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. Repurchase agreements of $291,335 have been used as collateral for the letters of credit. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. NOTE 7. CONCENTRATIONS OF CREDIT RISK The Company places its cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. 19 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. Allied Capital Financial Corporation (the Company), a wholly owned subsidiary of Allied Capital Corporation (Parent), is a closed-end management investment company under the Investment Company Act of 1940. The Company is licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC). The Company seeks to achieve a high level of current income by providing debt, mezzanine and equity financing for small privately owned growth companies, and through long-term growth on the value of its net assets. Valuation of Investments. Investments are carried at value, as determined by the board of directors. Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which may equal or exceed cost. Equity securities which are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. Interest Income. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. When collection of interest is in doubt, interest is not accrued or a reserve is established. Original issue discount is amortized into interest income using the effective interest method. Realized Gains or Losses and Unrealized Appreciation or Depreciation on Investments. Realized gains or losses are accounted for on the trade date and are measured by the difference between the proceeds of sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the year, net of recoveries. Unrealized appreciation or depreciation reflects the difference between cost and value. Distributions to the Parent. Distributions to the Parent are recorded on the ex-dividend date. Federal Income Taxes. The Company's objective is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies. The Company annually distributes all of its taxable income to the Parent; therefore, a federal income tax provision is not required. 20 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 In addition, no provision for deferred income taxes has been made for the unrealized appreciation on investments since the Company intends to continue to annually distribute all of its taxable income. Dividends declared by the Company in December, but paid during January of the following year, are treated as if the dividends were received by the Parent on December 31 of the year declared. Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at the acquisition date. NOTE 2. INVESTMENTS The loans and debt securities included in investments are at annual stated interest rates ranging from approximately zero percent to 16 percent, and are generally payable in installments with final maturities from four months to twenty-five years from date of issue. The following loans and debt securities had accrued interest that was fully reserved, or were not accruing interest at December 31, 1995:
AGGREGATE AMOUNT OF INTEREST RESERVED AT DATE INTEREST DECEMBER 31, ACCRUAL 1995 OR NOT PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2) - ---------------------------------------------------------------------------------------------------- ACCRUED INTEREST FULLY RESERVED: CSG Holdings $ 72,917 $ 10,620 CSG Holdings 134,000 19,542 Pact Broadcasting 219,104 9,186 Benfield Services 363,161 19,734 Dye, William 220,700 47,486 ECM Enterprises 35,957 411 Family Investments 137,614 28,318 - ----------------------------------------------------------------------------------------------------
21 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
AGGREGATE AMOUNT OF INTEREST RESERVED AT DATE INTEREST DECEMBER 31, ACCRUAL 1995 OR NOT PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2) - ---------------------------------------------------------------------------------------------------- In the Dough 67,398 842 Jochum, Timothy 29,377 3,120 Oak Park 28,620 3,808 Patriotic Pizza 86,607 15,016 Randhawa Brothers 105,933 10,601 Randhawa Brothers 121,109 17,606 Randhawa Brothers 95,968 7,492 ----------------------------------- Total $ 1,718,465 $ 193,782 =================================== INTEREST NOT ACCRUED: Caltim Pizza 2/8/95 $ 19,621 $ 140 Hot Ones 10/1/95 37,057 13,896 In the Dough 4/11/94 47,768 18,411 North Haledon 8/1/95 18,798 648 Santa Barbara 7/1/90 130,112 111,134 SerpCo, Inc. 7/1/90 188,164 110,511 Benfield Services 7/27/95 363,161 20,950 Dye, William 8/1/95 220,700 11,997 ECM Enterprises 2/8/95 35,957 2,737 Family Investments 2/8/95 137,614 16,876 In the Dough 4/11/94 67,398 17,256 Jochum, Timothy 8/1/95 29,377 1,060 - ----------------------------------------------------------------------------------------------------
22 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
AGGREGATE AMOUNT OF INTEREST RESERVED AT DATE INTEREST DECEMBER 31, ACCRUAL 1995 OR NOT PORTFOLIO SECURITY DISCONTINUED (1) NET COST ACCRUED (2) - ---------------------------------------------------------------------------------------------------- Oak Park 2/8/95 28,620 2,868 Patriotic Pizza 8/1/95 86,607 10,945 Randhawa Brothers 2/8/95 105,933 13,217 Randhawa Brothers 2/8/95 121,109 14,500 Randhawa Brothers 2/8/95 95,968 11,592 Love Mortgage 12/31/95 178,851 22,266 Love Mortgage 12/31/95 47,682 9,562 ------------------------------------- Total $ 1,960,497 $ 410,566 =====================================
(1) Date shown only for loans and debt securities not accruing interest. (2) From date interest accrual discontinued. NOTE 3. INVESTMENT ADVISORY SERVICES The Company's investments are managed by Allied Capital Advisers, Inc. ("Advisers"), an independent publicly traded registered investment adviser. Certain officers of the Company are also officers in Advisers. Pursuant to an advisory agreement with the Parent, Advisers manages the day-to-day activities of the Parent and its wholly owned subsidiaries. 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. In exchange, Advisers is reimbursed for its costs incurred in connection with the above through an investment advisory fee paid by the Parent. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments and legal and accounting fees. The Company is required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are 23 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is 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 or management assistance. NOTE 4. DIVIDENDS AND DISTRIBUTIONS The Company's board of directors declared a common stock dividend of $3,397,165 and a preferred stock dividend of $220,000 for the year ended December 31, 1995, which were paid January 29, 1996. Both dividends combined represented all of the Company's taxable income. Pursuant to SBA regulations, retained earnings available for distribution at December 31, 1995 were sufficient to pay these dividends. NOTE 5. DEBT Senior Notes. The Company has $2,166,667 of senior notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The senior notes are scheduled to mature over a five-year period commencing in 1998 through 2002 with annual principal payments of $433,333. Subordinated Debentures. Subordinated debentures are payable to the Small Business Administration (SBA) and represent amounts due to the SBA as a result of borrowings made pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at December 31, 1995 were as follows: 24 ALLIED CAPITAL FINANCIAL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
YEAR AMOUNTS INTEREST RATES ---- ------- -------------- 1996 --- --- 1997 2,000,000 8.500% 1998 2,000,000 8.875% - 9.000% 1999 --- --- 2000 9,600,000 8.700% - 8.875% thereafter 5,350,000 6.875% - 9.080% ---------- $18,950,000 ==========
Proceeds from the SBA debentures may only be used to finance investments in qualifying small businesses. NOTE 6. PREFERRED STOCK As of December 31, 1995, the Company had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. The Company has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. NOTE 7. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding to various prospective and existing portfolio companies totaling $50,214 at December 31, 1995. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. NOTE 8. CONCENTRATIONS OF CREDIT RISK The Company places its cash in financial institutions and, at times, cash held in checking accounts may be in excess of the FDIC insurance limit. -----END PRIVACY-ENHANCED MESSAGE-----