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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 SEPTEMBER 30, 1995 814-186
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ALLIED CAPITAL MORTGAGE CORPORATION
------------------------------------------------------
(exact name of Registrant as specified in its charter)
MARYLAND 52-19399003
- - ----------------------- ------------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W.
9TH FLOOR
WASHINGTON, DC 20006
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(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 331-1112
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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 NO X
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On November 20, 1995 there were 70 shares outstanding of the Registrant's
common stock, $0.0001 par value.
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ALLIED CAPITAL MORTGAGE CORPORATION
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Assets and Liabilities as of September 30, 1995 . . . . . . . . . . . . . . . . 1
Statement of Operations - From the date of incorporation (August 10, 1995)
to September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statement of Changes in Net Assets - From the date of incorporation
(August 10, 1995) to September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 9
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,050
------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050
LIABILITIES
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----
----
NET ASSETS
Common stock, $0.0001 par value; 10,000,000 shares authorized;
70 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ----
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050
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Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,050
======
Net Asset Value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.00
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT
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ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF OPERATIONS
(unaudited)
For the period August 10, 1995 (date of
incorporation) to September 30, 1995
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Investment income:
Interest $ --
-------
Total investment income --
-------
Expenses:
Operating expenses --
-------
Total expenses --
-------
Net investment income --
Net realized gains on investments --
-------
Net investment income before net unrealized
appreciation (depreciation) on investments --
Net unrealized appreciation (depreciation) on
investments --
--------
Net increase in net assets resulting from operations $ --
========
Earnings per share $ --
========
Weighted average number of shares outstanding --
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL MORTGAGE CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
(unaudited)
For the Period August 10, 1995
(date of incorporation) to
to September 30, 1995
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Increase in net assets resulting from operations:
Net investment income $ --
Net realized gains on investments --
Net change in unrealized appreciation
(depreciation) on investments --
--------
Net increase in net assets resulting from operations --
Distributions to Shareholders --
Capital Share Transactions 1,035
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Net Increase in Net Assets 1,035
Net assets at beginning of period --
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Net assets at end of period $1,035
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Net asset value per share $15
===
Shares outstanding at end of period 70
==
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL MORTGAGE CORPORATION
NOTES TO THE STATEMENT OF ASSETS AND LIABILITIES
AS OF SEPTEMBER 30, 1995
NOTE 1. ORGANIZATION
Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.
The Company is contemplating offering shares of its common stock directly to
investors in order to adequately capitalize the Company. The proceeds from the
sale of stock will be invested in accordance with the Company's investment
objectives and policies. The Company has recently been organized and currently
has no operations. Once operations begin, its business will consist of
investing in small businesses through the purchase of non-performing loans or
other interests. The Company is part of a group of funds managed by Allied
Capital Advisers, Inc., which specializes in making loans to, and investments
in, small businesses, as well as buying performing and sub-performing loans
from financial institutions and other third parties.
The Company will purchase non-performing loans from financial institutions and
other third parties. It is expected that many of these loans will involve first
mortgages on real estate, as well as first liens of the operating assets of
small businesses. Once a mortgage is purchased, the Company will contact the
small business concern that borrowed the funds secured by the mortgage. The
objective will be to place part of the non-performing mortgage on a performing
basis, and to reduce the remaining part of the loan to an equity ownership in
the business or an equity ownership in the real estate asset underlying the
mortgage.
The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code").
If the Company qualifies as a regulated investment company and distributes to
shareholders annually in a timely manner at least 90% of its "investment
company taxable income," as defined in the Code (i.e. net investment income,
including accrued discount, and net short-term capital gain), it will not be
subject to federal income tax on the portion of its investment company taxable
income and net capital gain (net long-term capital gain in excess of net
short-term capital loss) distributed to shareholders as required under the
Code. In addition, if the Company distributes in a timely manner 98% of its
net capital gain income for each one-year period, and distributes 98% of its
investment company taxable income for each calendar year (as well as any income
not distributed in prior years), it will not be subject to the 4% nondeductible
federal excise tax imposed with respect to certain undistributed income of
regulated investment companies. If the Company qualifies as a regulated
investment company as it intends to do, it generally will endeavor to
distribute to shareholders all of its investment company taxable income and its
net capital gain, if any, for each taxable year so that the Company will not
incur income and excise taxes on its earnings. No assurances can be made as to
whether the company will ultimately qualify as a RIC, or after such
qualification is achieved, the Company will continue to qualify as a RIC.
NOTE 2. INVESTMENT ADVISORY AGREEMENT
The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc. (the "Adviser"). The Agreement
would remain in effect for two years from its effective date and from year to
year thereafter, subject to annual approval by the Board of Directors or by
vote of the holders of a majority of the outstanding shares of the Company.
The Agreement can be terminated at any time on sixty days notice, without the
payment of penalty, by the Board of Directors or by vote of the holders of a
majority of the Company's outstanding shares and will terminate automatically
in the event of its assignment.
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Under the Agreement, the Adviser will manage the investments of the Company,
subject to the supervision and control of the Company's Board of Directors.
Specifically, the Adviser will identify, evaluate, structure, close and follow
the investments made by the Company. The Company will not make any investments
that have not been recommended by the Adviser. Except as to those investment
decisions that require specific Board approval, the Adviser will have the
authority to effect purchases and sales of assets for the Company's account.
The Company will be required to pay its share of the expenses (including
accounting, legal, printing, clerical, registration, filing and other expenses)
incurred by the Company in connection with its registration of common shares.
The Company will reimburse the Adviser promptly, against the Adviser's voucher,
for any expenses incurred by the Adviser for the Company's account. Without
limitation, such expenses will include all expenses of any offering and sale
by the Company of its shares and all expenses of the Company's operations; the
fees and disbursements of the Company's counsel, accountants, custodian,
transfer agent and registrar; fees and expenses incurred in producing and
effecting filings with federal and state securities administrators; costs of
the Company's periodic reports to and other communications with the Company's
shareholders; costs of promoting the Company's stock; fees and expenses of
members of the Company's Board of Directors who are not directors, officers or
employees of the Adviser or of any entity affiliated with the Adviser, and fees
of directors who are such officers, directors or employees; premiums for the
fidelity bond maintained by the Company; and all transaction costs incident to
the acquisition and disposition of fees and expenses (e.g., credit report,
title search and delivery charges, costs of specialized consultants such as
accountants or industry-specific technical experts, and deal-specific travel
expenses) incurred in monitoring, negotiating and working-out such investments,
as well as responding to any litigation arising therefrom. If the Company for
its corporate purposes uses the services of attorneys or paraprofessionals on
the staff of the Adviser in lieu of outside counsel, the Company will
reimburse the Adviser for such services at hourly rates calculated to cover the
cost of such services, as well as for incidental disbursements. The Company
will reimburse the Adviser promptly, against the Adviser's voucher, for (a) any
origination fee with respect to any loan or investment made by the Company that
was identified or referred to the Company by any third party with which the
Company or the Adviser then has a written agreement or arrangement that
specifies the amount or rate of such fee or (b) any origination fee with
respect to any loan or investment made by the Company that was identified or
referred to the Company by any third party with which the Company or the
Adviser then does not have a written agreement or arrangement. All such
origination fees reimbursed to the Adviser will be reviewed as of the end of
each calendar quarter by the Company's Board of Directors.
The Company will, during the term of the Agreement, pay to the Adviser, an
investment advisory fee equal to (a) 3.5% per year of the average of the
quarter-end values of the Company's consolidated total assets (less the
Company's Interim Investments, as defined below, and cash) for such year (the
"Base Fee"), and (b) 0.125% per quarter of the quarter-end values of the
Company's consolidated Interim Investments and cash.
For this purpose "Interim Investments" are defined as short-term securities
issued or guaranteed by the U.S. government or an agency or instrumentality
thereof, or in repurchase agreements fully collateralized by such securities.
Upon the completion of an annual audit, at the end of each calendar year, the
Base Fee may be increased or decreased depending on the amount, if any, by
which the investment performance of the Company exceeds or is exceeded by the
percentage change in the Merrill Lynch High-Yield Master II Index (the
"Index"). At the end of each of the Company's fiscal years, the net asset
value per share will be calculated by the Company's auditors. The investment
return of the Company in a particular year will be the sum of: (a) the change
in its net asset value per share during such year; (b) the value of its cash
distributions per share during such year; and (c) the value of capital gains
taxes per share paid or payable, if any, on undistributed realized long-term
capital gains during such year. The investment performance of the Company for
such year will be its investment return expressed as a percentage of its net
asset value per share at the beginning of such year. (For this purpose, the
value of cash distributions per share and capital gains taxes per share paid or
payable on undistributed realized long-term capital gains will be treated as
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reinvested in shares of the investment company at the net asset value per share
in effect at the close of business on the record date for the payment of such
distributions and the date on which provision is made for such taxes,
respectively, after giving effect to such distributions and taxes). To the
extent the investment performance of the Company exceeds the percentage change
in the Index for that year, one-fifth of one percentage point will be added to
the Base Fee for every one percentage point of the difference between the
investment performance of the Company and the percentage change in the Index.
The maximum amount added to the Base Fee will be one percentage point, with the
adjusted Base Fee not to exceed 4.5%. To the extent the investment performance
of the Company is exceeded by the percentage change in the Index for that year,
one-fifth of one percentage point will be subtracted from the Base Fee for
every one percentage point of the difference between the investment performance
of the Company and the percentage change in the Index. The maximum amount
subtracted from the Base Fee will be one percentage point, with the adjusted
Base Fee not to be lower than 2.5% (the "Minimum Base Fee"). For purposes of
calculating the adjustment to the Base Fee, performance percentages will be
rounded off to the nearest whole percentage.
The Company will, during the term of the Agreement, pay to the Adviser,
quarterly, the Minimum Base Fee equal to 0.625% per quarter (2.5% on an
annualized basis) of the quarter-end value of the Company's consolidated total
assets (less the Company's Interim Investments and cash). The Company will
also pay 0.125% per quarter (0.5% on an annualized basis) of the quarter-end
value of the Company's consolidated Interim Investments and cash.
For the purpose of calculating the investment advisory fee, the values of the
Company's assets will be determined as of the end of each calendar quarter by
the Board of Directors. The Company will pay the Minimum Base Fee and the fee
on Interim Investments and cash with respect to a calendar quarter as soon as
practicable after the values of the Company's assets have been determined for
such quarter. The Company will pay the difference between the Minimum Base Fee
and the Base Fee as soon as practicable after the values of the Company's
assets have been determined for the year-end. If the termination of the
Advisers' services hereunder does not coincide with the last day of a calendar
quarter or the year-end, then the Minimum Base Fee determined in accordance
with this paragraph shall be multiplied by the ratio of the number of days in
such quarter during which Adviser rendered services to the total number of days
in such quarter, with corresponding treatment for calculating any adjustments
to the Base Fee.
NOTE 3. NET ASSETS (SHAREHOLDERS' EQUITY)
The Company has 10,000,000 shares of stock authorized with a par value of
$.0001 per share. All shares of common stock have equal rights as to earnings,
assets, dividends and voting privileges. As of September 30, 1995, there were
70 shares of common stock issued and outstanding of which the Chairman and
President of the Company each own 35 shares.
NOTE 4. SUBSEQUENT EVENT
The Company filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995. Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995. No shares of common stock had been sold to investors
pursuant to this registration statement as of September 30, 1995 or as of the
filing of this report on Form 10-Q.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS LIQUIDITY, CAPITAL RESOURCES AND RESULTS OF
OPERATIONS
Allied Capital Mortgage Corporation (the Company) was incorporated in the state
of Maryland on August 10, 1995 and was organized as a closed-end,
non-diversified, management investment company that has elected to be regulated
as a business development company under Section 54 of the Investment Company
Act of 1940.
The Company is contemplating offering shares of its common stock directly to
investors in order to adequately capitalize the Company. The proceeds from the
sale of stock will be invested in accordance with the Company's investment
objectives and policies. The Company has recently been organized and currently
has no operations. Once operations begin, its business will consist of
investing in small businesses through the purchase of non-performing loans or
other interests. The Company is part of a group of funds managed by Allied
Capital Advisers, Inc., which specializes in making loans to, and investments
in, small businesses, as well as buying performing and sub-performing loans
from financial institutions and other third parties.
The Company will purchase non-performing loans from financial institutions and
other third parties. It is expected that many of these loans will involve first
mortgages on real estate, as well as first liens of the operating assets of
small businesses. Once a mortgage is purchased, the Company will contact the
small business concern that borrowed the funds secured by the mortgage. The
objective will be to place part of the non-performing mortgage on a performing
basis, and to reduce the remaining part of the loan to an equity ownership in
the business or an equity ownership in the real estate asset underlying the
mortgage.
The Company proposes to enter into an Investment Advisory Agreement (the
Agreement) with Allied Capital Advisers, Inc. (the "Adviser") (see footnote 2).
The Agreement would remain in effect for two years from its effective date and
from year to year thereafter, subject to annual approval by the Board of
Directors or by vote of the holders of a majority of the outstanding shares of
the Company. The Agreement can be terminated at any time on sixty days notice,
without the payment of penalty, by the Board of Directors or by vote of the
holders of a majority of the Company's outstanding shares and will terminate
automatically in the event of its assignment. Under the Agreement, the Adviser
will manage the investments of the Company, subject to the supervision and
control of the Company's Board of Directors. Specifically, the Adviser will
identify, evaluate, structure, close and follow the investments made by the
Company. The Company will not make any investments that have not been
recommended by the Adviser. Except as to those investment decisions that
require specific Board approval, the Adviser will have the authority to effect
purchases and sales of assets for the Company's account.
The Company intends to qualify to be treated as a "regulated investment
company" (RIC) under Subchapter M of the Internal Revenue Code (the "Code").
If the Company qualifies as a regulated investment company and distributes to
shareholders annually in a timely manner at least 90% of its "investment
company taxable income," as defined in the Code (i.e. net investment income,
including accrued discount, and net short-term capital gain), it will not be
subject to federal income tax on the portion of its investment company taxable
income and net capital gain (net long-term capital gain in excess of net
short-term capital loss) distributed to shareholders as required under the
Code. In addition, if the Company distributes in a timely manner 98% of its
net capital gain income for each one-year period, and distributes 98% of its
investment company taxable income for each calendar year (as well as any income
not distributed in prior years), it will not be subject to the 4% nondeductible
federal excise tax imposed with respect to certain undistributed income of
regulated investment companies. If the Company qualifies as a regulated
investment company as it intends to do, it generally will endeavor to
distribute to shareholders all of its investment company taxable income and its
net capital gain, if any, for each taxable year so that the Company will not
incur income and excise taxes on its earnings. No assurances can be made as to
whether the company will ultimately qualify as a RIC, or after such
qualification is achieved, the Company will continue to qualify as a RIC.
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The Company has filed with the Securities and Exchange Commission a Form 10
registration statement registering 4,000,000 shares of the Company's common
stock ($0.0001 par value) and 150,000 units, consisting of one share of common
stock and one debt certificate, on August 23, 1995. Amendments were filed on
September 5, 1995 and October 20, 1995 and the registration went effective on
October 23, 1995. No shares of common stock had been sold to investors
pursuant to this registration statement as of September 30, 1995 or as of the
filing of this report on Form 10-Q.
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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a defendant in any legal proceeding.
Item 2. CHANGES IN SECURITIES
No material changes have occurred in the securities of the Registrant.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
August 10, 1995 to September 30, 1995.
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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 MORTGAGE CORPORATION
-----------------------------------
(Registrant)
s/Jon A. DeLuca
-----------------------------------
Date: December 4, 1995 Jon A. DeLuca
---------------- Senior Vice President
Chief Financial Officer
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