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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 MARCH 31, 1996 0-18016
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ALLIED CAPITAL CORPORATION II
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(exact name of Registrant as specified in its charter)
MARYLAND 52-1628801
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(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 X NO
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On May 3, 1996 there were 7,197,836 shares outstanding of the Registrant's
common stock, $1 par value.
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ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Operations - For the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Net Assets - For the Three Months
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Cash Flows - For the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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PART I - Financial Information
Item 1. Financial Statements
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
March 31, 1996 December 31, 1995
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(unaudited)
Assets
Investments at value:
Loans and debt securities (cost: 1996 - $82,660; 1995 - $86,474) . . . . $ 80,551 $ 84,235
Equity securities (cost: 1996 - $5,130; 1995 - $5,538) . . . . . . . . . 14,093 13,548
Other investment assets (cost: 1996 - $1,445; 1995 - $1,514) . . . . . . 1,355 1,424
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Total investments . . . . . . . . . . . . . . . . . . . . . . . . 95,999 99,207
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . 10,364 6,227
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,893 1,735
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Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,256 $107,169
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Liabilities
Investment advisory fee payable . . . . . . . . . . . . . . . . . . . . . . $ 629 $ 639
Dividends and distributions payable . . . . . . . . . . . . . . . . . . . . -- 3,403
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 1,146
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Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,033 5,188
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Commitments and Contingencies
Shareholders' Equity
Common stock, $1 par value; 20,000,000 shares authorized;
7,197,836 and 7,104,005 shares issued and outstanding at
3/31/96 and 12/31/95 . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198 7,104
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 93,767 92,225
Notes receivable from sale of common stock . . . . . . . . . . . . . . . . (2,478) (2,495)
Net unrealized appreciation on investments . . . . . . . . . . . . . . . . 6,764 5,681
Undistributed (distributions in excess of) accumulated earnings . . . . . . 1,972 (534)
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Total shareholders' equity . . . . . . . . . . . . . . . . . . . 107,223 101,981
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Total liabilities and shareholders' equity . . . . . . . . . . . $108,256 $107,169
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
For the Three Months Ended
March 30,
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1996 1995
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Investment income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,033 $ 2,863
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 69
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Total investment income . . . . . . . . . . . . . . . . . . . . . 3,054 2,932
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Expenses:
Investment advisory fee . . . . . . . . . . . . . . . . . . . . . . 629 591
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 127 209
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Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . 756 800
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Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 2,298 2,132
Net realized gains on investments . . . . . . . . . . . . . . . . . . 2,568 40
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Net investment income before net unrealized
appreciation on investments . . . . . . . . . . . . . . . . . . . . 4,866 2,172
Net unrealized appreciation on
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,083 771
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Net increase in net assets resulting from operations . . . . . . . . $ 5,949 $ 2,943
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Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.83 $ 0.42
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Weighted average number of shares and share
equivalents outstanding . . . . . . . . . . . . . . . . . . . . . . 7,143 6,945
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share amounts)
(unaudited)
For the Three Months Ended March 31,
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1996 1995
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Increase in net assets resulting from operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . $ 2,298 $ 2,132
Net realized gains on investments . . . . . . . . . . . . . . . 2,568 40
Net change in unrealized appreciation on investments . . . . . 1,083 771
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Net increase in net assets resulting from operations . . . 5,949 2,943
Distributions to Shareholders . . . . . . . . . . . . . . . . . . . (2,360) (1,735)
Capital Share Transactions . . . . . . . . . . . . . . . . . . . . 1,653 --
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Net Increase in Net Assets . . . . . . . . . . . . . . . . . . . . 5,242 1,208
Net assets at beginning of period . . . . . . . . . . . . . . . . . 101,981 97,475
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Net assets at end of period . . . . . . . . . . . . . . . . . . . . $ 107,223 $ 98,683
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Net asset value per share . . . . . . . . . . . . . . . . . . . . . $ 14.90 $ 14.22
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Shares outstanding at end of period . . . . . . . . . . . . . . . . 7,198 6,938
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months Ended March 31,
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1996 1995
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Cash Flows From Operating Activities:
Net increase in net assets resulting from operations . . . . . . . . $ 5,949 $ 2,943
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized appreciation on investments . . . . . . . . . . . . (1,083) (771)
Net realized gains on investments . . . . . . . . . . . . . . . . (2,568) (40)
Changes in assets and liabilities . . . . . . . . . . . . . . . . . (910) (888)
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Net cash provided by operating activities . . . . . . . . . . . 1,388 1,244
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Cash Flows From Investing Activities:
Net decrease (increase) in investments . . . . . . . . . . . . . 6,851 (3,444)
Net redemption of U.S. government securities . . . . . . . . . . . -- 1
Payments on notes receivable . . . . . . . . . . . . . . . . . . . 17 --
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Net cash provided by (used in) investing activities . . . . . . 6,868 (3,443)
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Cash Flows From Financing Activities:
Dividends and distributions paid . . . . . . . . . . . . . . . . . (4,119) (4,094)
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Net cash used in financing activities . . . . . . . . . . . . . (4,119) (4,094)
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Net increase (decrease) in cash and cash equivalents . . . . . . . . . 4,137 (6,293)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 6,227 11,591
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Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 10,364 $ 5,298
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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 of only normal
recurring accruals) necessary to present fairly the Company's
consolidated financial position as of March 31, 1996 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 consolidated financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's December 31, 1995 Annual Report. The
results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the operating results to be expected for
the full year. Certain reclassifications have been made to the 1995
financial statements in order to conform to the 1996 presentation.
NOTE 2. DISTRIBUTIONS
The Company's Board of Directors declared a $0.33 per share first
quarter dividend that was paid on March 29, 1996 to shareholders of
record as of March 15, 1996.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Commitments. The Company had loan commitments to invest in various
existing and prospective portfolio companies, standby letters of
credit and third party guarantees outstanding equal to $1.4 million
at March 31, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the First Quarter Ended March 31, 1996 and 1995.
The net increase in net assets resulting from operations for the
quarter ended March 31, 1996 was $5.9 million, an increase of 102%
over the net increase in net assets resulting from operations for the
quarter ended March 31, 1995. Earnings per share was $0.83 for the
quarter ended March 31, 1996 as compared to $0.42 per share for the
quarter ended March 31, 1995.
For the quarter ended March 31, 1996, net investment income increased
7.8% to $2.3 million from $2.1 million for the quarter ended March 31,
1995. Total investment income increased 4.2% in the first quarter of
1996 as compared to the quarter ended March 31, 1995. This increase
is primarily attributable to the Company increasing its investments in
loans and debt securities that earn a current return.
Total expenses decreased 5.5% to $756,000 for the quarter ended March
31, 1996 from $800,000 in the comparable period last year. The
Company's investment advisory fee increased approximately 6.4% to
$629,000 for the quarter ended March 31, 1996 from $591,000 in the
previous comparable period. This increase is the result of the
Company's growth in invested assets and total assets from March 31,
1995. Other operating expenses decreased approximately 39% for the
first quarter of 1996 as compared to the quarter ended March 31, 1995.
Other operating expenses were higher in the first quarter of 1995 due
to non-recurring legal fees related to litigation that was settled in
1995.
Net realized gains on investments were $2.6 million for the quarter
ended March 31, 1996, as the Company successfully liquidated certain
equity investments in the portfolio and received early payoffs of
outstanding loans in its portfolio.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased approximately $1.1 million to $ 108.3 million
as of March 31, 1996 from $107.2 million as of December 31, 1995.
Total investments as of March 31, 1996 decreased $3.2 million from
December 31, 1995 as total repayments and changes in investment
valuations during the first quarter of 1996 offset new investments to
small businesses of $2 million.
Cash and cash equivalents increased to $10.4 million as of March 31,
1996 from $6.2 million at December 31, 1995 due to the proceeds
received from early payoffs and the investment liquidations.
The Company believes that it has adequate capital to continue to
satisfy its operating needs, commitments and other future investment
opportunities that may arise over the year.
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PORTFOLIO CHANGES
For the three months ended March 31, 1996, the Company's portfolio had
net unrealized appreciation of $1,083,000 due primarily to changes in
market prices for public equity investments and sales of certain other
portfolio investments.
The Company's public equity investments which appreciated
(depreciated) in value during the three months ended March 31, 1996
were:
Unrealized
appreciation
(depreciation)
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Allied Waste $819,000
Esquire Communications 98,000
Garden Ridge Corporation 794,000
Labor Ready 462,000
Nobel Education Dynamics 1,375,000
Quality Software Products (240,000)
The sale of three portfolio investments resulted in unrealized
appreciation (depreciation) and the recognition of realized gains
(losses) during the three months ended March 31, 1996 as follows:
Unrealized Realized
Appreciation Gain
(Depreciation) (Loss)
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Garden Ridge Corporation * $(1,190,000) $1,349,000
June Broadcasting (1,530,000) 1,714,000
SunStates Refrigerated Services, Inc. * 579,000 (579,000)
* Sale of certain stock only.
In addition, the Company's investment in Williams Brothers depreciated
in value by $346,000. The remaining net increase in net unrealized
appreciation during the three months ended March 31, 1996 was
$262,000.
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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
None
Item 5. OTHER INFORMATION
None
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 March 31, 1996.
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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 CORPORATION II
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(Registrant)
/s/ Jon A. DeLuca
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Date: May 13, 1996 Jon A. DeLuca
------------ Executive Vice President and
Chief Financial Officer
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