Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period Commission file number: ended JUNE 30, 1995 0-18016 ------------- ----------- ALLIED CAPITAL CORPORATION II ------------------------------------------------------ (exact name of Registrant as specified in its charter) MARYLAND 52-1628801 ------------------------- -------------- (State or jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1666 K STREET, N.W. SUITE 901 WASHINGTON, DC 20006 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (202) 331-1112 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ----- -- ------ On August 11, 1995 there were 6,938,191 shares outstanding of the Registrant's common stock, $1 par value. ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Financial Position as of June 30, 1995 and December 31, 1994........................................... 1 Consolidated Statement of Operations - For the Three and Six Months Ended June 30, 1995 and 1994......................... 2 Consolidated Statement of Changes in Net Assets - For the Six Months Ended June 30, 1995 and 1994......................... 3 Consolidated Statement of Cash Flows - For the Six Months Ended June 30, 1995 and 1994.......................................... 4 Notes to Consolidated Financial Statements...................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 6 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 8 Item 2. Changes in Securities.......................................... 8 Item 3. Defaults Upon Senior Securities................................ 8 Item 4. Submission of Matters to a Vote of Security Holders............ 8 Item 5. Other Information.............................................. 8 Item 6. Exhibits and Reports on Form 8-K............................... 9 Signatures.............................................................. 10 PART I - Financial Information Item 1. Financial Statements ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in thousands, except number of shares) June 30, 1995 December 31, 1994 ------------- ----------------- (unaudited) Assets Investments at value: Loans and debt securities....................... $ 85,123 $ 79,423 Equity securities............................... 10,893 6,714 Other investment assets......................... 1,646 1,993 ------- ------- Total investments........................... 97,662 88,130 Cash and cash equivalents......................... 4,458 11,591 U.S. government securities........................ 1,086 748 Other assets...................................... 1,130 1,465 -------- -------- Total assets................................ $104,336 $101,934 -------- -------- -------- -------- Liabilities Dividends and distributions payable............... $ -- $ 2,359 Investment advisory fee payable................... 623 579 Due to affiliates................................. 139 297 Other liabilities................................. 1,016 1,224 -------- -------- Total liabilities.......................... 1,778 4,459 -------- -------- Commitments and Contingencies Shareholders' Equity Common stock, $1 par value; 20,000,000 shares authorized; 6,938,191 shares issued and outstanding at 6/30/95 and 12/31/94.............. 6,938 6,938 Additional paid-in capital........................ 89,860 89,860 Notes receivable from sale of common stock........ (844) (943) Net unrealized appreciation on investments........ 7,303 2,919 Distributions in excess of accumulated earnings... (699) (1,299) -------- -------- Total shareholders' equity................. 102,558 97,475 -------- -------- Total liabilities and shareholders' equity. $104,336 $101,934 -------- -------- -------- -------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 1 ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 1995 1994 1995 1994 -------- ------- ------- ------ Investment income: Interest............................................ $2,585 $2,195 $5,450 $4,238 Other income........................................ 223 -- 290 -- -------- ------- ------- ------ Total investment income........................... 2,808 2,195 5,740 4,238 -------- ------- ------- ------ Expenses: Investment advisory fee............................. 623 529 1,214 1,033 Legal and audit fees................................ 55 15 183 79 Other operating expenses............................ 151 121 232 174 -------- ------- ------- ------ Total expenses.................................... 829 665 1,629 1,286 -------- ------- ------- ------ Net investment income................................. 1,979 1,530 4,111 2,952 Net realized gains on investments..................... 56 540 96 620 -------- ------- ------- ------ Net investment income before net unrealized appreciation on investments.......................... 2,035 2,070 4,207 3,572 Net unrealized appreciation on investments............ 3,613 596 4,384 525 -------- ------- ------- ------ Net increase in net assets resulting from operations.. $5,648 $2,666 $8,591 $4,097 -------- ------- ------- ------ -------- ------- ------- ------ Earnings per share.................................... $ 0.81 $ 0.38 $ 1.24 $ 0.59 -------- ------- ------- ------ -------- ------- ------- ------ Weighted average number of shares and share equivalents outstanding.............................. 6,963 6,938 6,952 6,938 -------- ------- ------- ------ -------- ------- ------- ------ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 2 ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (in thousands, except per share amounts) (unaudited) For the Six Months Ended June 30, --------------------------------- 1995 1994 ----------- ---------- Increase in net assets resulting from operations: Net investment income.................................. $ 4,111 $ 2,952 Net realized gains on investments...................... 96 620 Net change in unrealized appreciation on investments... 4,384 525 -------- -------- Net increase in net assets resulting from operations. 8,591 4,097 Distributions to Shareholders.............................. (3,607) (3,469) Capital Share Transactions................................. 99 33 -------- -------- Net Increase in Net Assets................................. 5,083 661 Net assets at beginning of period.......................... 97,475 96,225 -------- -------- Net assets at end of period................................ $102,558 $ 96,886 -------- -------- -------- -------- Net asset value per share.................................. $ 14.78 $ 13.96 -------- -------- -------- -------- Shares outstanding at end of period........................ 6,938 6,938 -------- -------- -------- -------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 3 ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited) For the Six Months Ended June 30, --------------------------------- 1995 1994 ------ ------- Cash Flows From Operating Activities: Net increase in net assets resulting from operations........... $ 8,591 $ 4,097 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net unrealized appreciation on investments................. (4,384) (525) Net realized gains on investments.......................... (96) (620) Changes in assets and liabilities: Other assets............................................... 335 (208) Investment advisory fee payable............................ 44 58 Due to affiliates.......................................... (158) (714) Other liabilities.......................................... (208) 60 ------- ------- Net cash provided by operating activities.............. 4,124 2,148 ------- ------- Cash Flows From Investing Activities: Net increase in investments................................. (5,051) (9,523) Net (purchase) redemption of U.S. government securities..... (338) 5,828 Payments on notes receivable................................ 99 33 ------- ------- Net cash used in investing activities................... (5,290) (3,662) ------- ------- Cash Flows From Financing Activities: Dividends and distributions paid............................ (5,967) (4,995) ------- ------- Net cash used in financing activities................... (5,967) (4,995) ------- ------- Net decrease in cash and cash equivalents........................ (7,133) (6,509) Cash and cash equivalents, beginning of period................... 11,591 10,947 ------- ------- Cash and cash equivalents, end of period......................... $ 4,458 $ 4,438 ------- ------- ------- ------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 4 ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED) NOTE 1. GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements of Allied Capital Corporation II and subsidiaries (the Company) contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 1995 and the results of operations, changes in net assets, and cash flows for the periods indicated. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1994 Annual Report. The results of operations for the six months ended June 30, 1995 are not necessarily indicative of the operating results to be expected for the full year. Certain reclassifications have been made to the 1994 condensed financial statements in order to conform to the 1995 presentation. NOTE 2. DISTRIBUTIONS The Company's Board of Directors declared a $0.27 per share second quarter dividend that was paid on June 30, 1995 to shareholders of record on June 16, 1995. In addition, the Company's Board of Directors also declared a $0.25 per share first quarter dividend that was paid on March 31, 1995 to shareholders of record on March 17, 1995. NOTE 3. COMMITMENTS AND CONTINGENCIES Commitments. The Company had loan commitments outstanding equal to $3.0 million at June 30, 1995 to invest in various existing and prospective portfolio companies. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Total investments increased by 10.8% from $88.1 million at December 31, 1994 to $97.7 million at June 30, 1995. This increase was primarily due to new investments of $16 million, net of repayments and valuation changes of approximately $6 million. Cash and cash equivalents and U.S. government securities decreased by 55% from $12.3 million at December 31, 1994 to $5.5 million at June 30, 1995 due to the increase in investments, net of repayments, and dividends paid to shareholders. Net assets increased from $97.5 million at December 31, 1994 to $102.6 million at June 30, 1995. This increase is due to the net increase in net assets resulting from operations for the six months ended June 30, 1995 exceeding the first and second quarter dividends declared. At June 30, 1995 outstanding commitments for future financings were $3.0 million. The Company's current cash and short-term investments combined with its available $25 million line of credit is adequate to satisfy these commitments, and other future investment opportunities throughout the year. RESULTS OF OPERATIONS Second Quarter Ended June 30, 1995 Compared with Second Quarter Ended June 30, 1994. Net increase in net assets resulting from operations for the second quarter of 1995 of $5.6 million increased 112% as compared to the 1994 net increase in net assets resulting from operations of $2.7 million. Earnings per share for the quarter increased to $0.81 per share from $0.38 per share in 1994. The largest single factor effecting the increase in net assets resulting from operations for the second quarter ended June 30, 1995 resulted from $3.6 million in unrealized appreciation on investments resulting from the Company's valuation of the portfolio as of June 30, 1995. The Company believes that several small businesses in the portfolio have appreciated significantly, and that this appreciation can be evaluated through recent offering of the small business concern's stock or through current private negotiations for new financing or sale transactions. Total investment income increased 28% from $2.2 million for the second quarter of 1994 to $2.8 million for the second quarter of 1995. The increase in interest income resulted from an increase in loans and debt securities. Other income consists primarily of legal fees recovered during the second quarter of 1995. Expenses increased 25% from $0.7 million from the second quarter of 1994 to $0.8 million for the second quarter of 1995. The investment advisory fee increased 18% resulting from the increase in investments that the investment advisory fee is based upon. Net realized gains on investments decreased to $56,000 for the second quarter of 1995 from $0.5 million in the second quarter of 1994. Net realized gains are unpredictable as the Company exits transactions when it believes realized gains can be maximized. Six Months Ended June 30, 1995 Compared with Six Months Ended June 30, 1994. Net increase in net assets resulting from operations for the six months ended June 30, 1995 increased to $8.6 million or 110% from $4.1 million in the same period of 1994. Earnings per share for the period increased to $1.24 per share from $0.59 per share in 1994. The increase in net assets resulting from operations for the six months was caused by the same factors discussed in the quarter-to-quarter comparison above. 6 PORTFOLIO CHANGES The following represents portfolio investment balances in the Company as of June 30, 1995 that have changes in appreciation or depreciation by more than 10% as compared to the appreciation or depreciation as of December 31, 1994. Appreciation (Depreciation) ------------------------------------- Investment Company June 30, 1995 December 31, 1994 $ Change Percent Change ------------------ ------------- ----------------- -------- -------------- Allied Waste $ 351,556 $ 0 $351,556 * Devlieg-Bullard (51,764) 0 (51,764) * Dogloo, Inc. 574,372 0 574,372 * Envirco Corp 633,687 124,687 509,000 408% Enviroplan (27,853) 66,529 (94,382) (142%) Garden Ridge 2,735,064 433,125 2,301,939 531% Grant Broadcasting 290,992 0 290,992 * Jackson Products 642,530 183,418 459,112 250% June Broadcasting 990,571 411,970 578,601 140% Markings and Equipment (632,140) (315,000) (317,140) (101%) Mill It Stripping (125,000) 0 (125,000) * Montgomery Tank 165,946 123,906 42,040 34% National Museum 302,432 0 302,432 * Old Mill (31,556) 0 (31,556) * Princeton Care 6,845 0 6,845 * R-Tex Decoratives (25,439) 0 (25,439) * Savage Mill 706,810 869,263 (162,453) (19%) Sunstates Refrigeration (2,525) 0 (2,525) * West Virginia Radio (200,000) (150,000) (50,000) (33%) Williams Brothers 683,599 856,799 (173,200) (20%) <FN> * Percentage not applicable due to zero balance at December 31, 1994. 7 Part II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is not a defendant in any material pending legal proceeding and no such material proceedings are know to be contemplated. Item 2. CHANGES IN SECURITIES No material changes have occurred in the securities of the Registrant. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Allied Capital Corporation II held its annual meeting of shareholders on May 11, 1995 in Chevy Chase, Maryland. The following directors were elected as proposed in the proxy material to serve until the next annual shareholders meeting: FOR WITHHELD --------- -------- David Gladstone 5,822,855 49,843 George C. Williams 5,821,656 51,041 William F. Dunbar 5,822,792 49,905 Lawrence I. Hebert 5,822,855 49,843 John D. Reilly 5,822,855 49,843 Smith T. Wood 5,822,855 49,843 John D. Firestone 5,822,855 49,843 John I. Leahy 5,817,559 55,139 Shareholders also ratified the selection of Matthews Carter & Boyce to serve as independent accountants until the next shareholders meeting. The Company received 5,777,893 shares voting in favor of ratification, 44,192 shares voting against the ratification, and 50,609 shares abstaining from voting. Shareholders also approved a new Investment Advisory Agreement which clarified certain provisions of the existing agreement and ensured compliance with applicable requirements of the Investment Company Act of 1940. The Company received 5,545,905 shares voting in favor of approving the amendment, 98,363 shares voting against approving the amendment, and 89,328 shares abstaining from voting. Item 5. OTHER INFORMATION During 1994, in the course of a review of certain regulatory matters, the Company determined that the board of directors of the Company was composed of a lesser percentage of non-interested directors than required by relevant provisions of the Investment Company Act of 1940 (the ""1940 Act''). Specifically, certain non-officer directors of the Company owned stock of Allied Capital Advisers, Inc. (""Advisers''), and one non-officer director was affiliated with a broker/dealer registered under the Securities Exchange Act of 1934. Actions were taken promptly to bring the Company's board of directors into compliance with the relevant provisions of the 1940 Act. A committee of non-interested directors of the Company and Allied Capital Corporation was formed to review this matter. At its own initiative, Advisers also undertook an audit of compliance with securities laws as they relate to the Company and its subsidiaries. The Company currently does not believe that this situation will have a material adverse effect on the operations of the Company or on its financial position. 8 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits 11 Statement of Computation of Earnings Per Share (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1995. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. ALLIED CAPITAL CORPORATION II ----------------------------- (Registrant) /s/ Jon A. DeLuca ----------------------------- Date: August 14, 1995 Jon A. DeLuca --------------- Senior Vice President and Chief Financial Officer 10