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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, 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
--- ----- -- -----
On November 8, 1996 there were 7,367,089 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 September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Operations - For the Three and Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Net Assets - For the Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Cash Flows - For the Nine Months Ended
September 30, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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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PART I - Financial Information
Item 1. Financial Statements
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
September 30, 1996 December 31, 1995
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(unaudited)
ASSETS
Investments at value:
Loans and debt securities (cost: 1996 - $87,550; 1995 -
$86,474) . . . . . . . . . . . . . . . . . . . . . . . . $ 83,368 $ 84,235
Equity securities (cost: 1996 - $6,598; 1995 -
$5,538) . . . . . . . . . . . . . . . . . . . . . . . . . 14,420 13,548
Other investment assets (cost: 1996 - $63; 1995 -
$1,514) . . . . . . . . . . . . . . . . . . . . . . . . . 20 1,424
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Total investments . . . . . . . . . . . . . . . . . 97,808 99,207
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 10,262 6,227
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,651 1,735
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Total assets . . . . . . . . . . . . . . . . . . . . $109,721 $107,169
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Investment advisory fee payable . . . . . . . . . . . . . . $ 634 $ 639
Dividends and distributions payable . . . . . . . . . . . . - 3,403
Other liabilities . . . . . . . . . . . . . . . . . . . . . 248 1,146
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Total liabilities . . . . . . . . . . . . . . . . . 882 5,188
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Commitments and Contingencies
Shareholders' Equity:
Common stock, $1 par value; 20,000,000 shares authorized;
7,367,089 and 7,104,005 shares issued and outstanding at
9/30/96 and 12/31/95 . . . . . . . . . . . . . . . . . . 7,367 7,104
Additional paid-in capital . . . . . . . . . . . . . . . . . 96,471 92,225
Notes receivable from sale of common stock . . . . . . . . . (3,170) (2,495)
Net unrealized appreciation on investments . . . . . . . . . 3,597 5,681
Undistributed (distributions in excess of) accumulated
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 4,574 (534)
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Total shareholders' equity . . . . . . . . . . . . 108,839 101,981
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Total liabilities and shareholders' equity . . . . $109,721 $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 For the Nine Months
Ended September 30, Ended September 30,
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1996 1995 1996 1995
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Investment income:
Interest . . . . . . . . . . . . . . . . . $2,765 $2,940 $8,852 $ 8,390
Other income . . . . . . . . . . . . . . . 25 218 71 508
----- ----- ----- -----
Total investment income . . . . . . . . . 2,790 3,158 8,923 8,898
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Expenses:
Investment advisory fee . . . . . . . . . . 634 591 1,862 1,805
Legal and accounting fees . . . . . . . . . 7 96 160 279
Other operating expenses . . . . . . . . . 25 89 249 321
----- ----- ----- -----
Total expenses . . . . . . . . . . . . . 666 776 2,271 2,405
----- ----- ----- -----
Net investment income . . . . . . . . . . . . 2,124 2,382 6,652 6,493
Net realized gain on investments . . . . . . 684 3,097 6,141 3,193
----- ----- ----- -----
Net investment income before net unrealized
appreciation (depreciation) on
investments . . . . . . . . . . . . . . . . 2,808 5,479 12,793 9,686
Net unrealized appreciation (depreciation) on
investments . . . . . . . . . . . . . . . . (260) 732 (2,084) 5,116
----- ----- ----- -----
Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . $2,548 $6,211 $10,709 $14,802
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Earnings per share . . . . . . . . . . . . . $ 0.34 $ 0.89 $ 1.47 $ 2.13
===== ===== ===== =====
Weighted average number of shares and share
equivalents outstanding . . . . . . . . . . 7,386 6,978 7,287 6,959
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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 Nine Months Ended
September 30,
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1996 1995
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Increase in net assets resulting from operations:
Net investment income . . . . . . . . . . . . . . $ 6,652 $ 6,493
Net realized gain on investments . . . . . . . . 6,141 3,193
Net unrealized appreciation (depreciation) on
investments . . . . . . . . . . . . . . . . . . (2,084) 5,116
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Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . 10,709 14,802
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Distributions to shareholders . . . . . . . . . . . . (7,685) (5,621)
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Capital share transactions:
Net (increase) decrease in notes receivable from
sale of common stock . . . . . . . . . . . . . . . (675) 252
Issuance of common shares upon the exercise of stock
options . . . . . . . . . . . . . . . . . . . . . 1,379 99
Issuance of common shares in lieu of cash
distributions . . . . . . . . . . . . . . . . . . 3,130 -
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Net increase in net assets resulting from
capital share transactions . . . . . . . . . . 3,834 351
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Net increase in net assets . . . . . . . . . . . . . 6,858 9,532
Net assets at beginning of period . . . . . . . . . . 101,981 97,475
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Net assets at end of period . . . . . . . . . . . . . $108,839 $107,007
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Net asset value per share . . . . . . . . . . . . . . $ 14.77 $ 15.41
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Shares outstanding at end of period . . . . . . . . . 7,367 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 CASH FLOWS
(in thousands)
(unaudited)
For the Nine Months Ended
September 30,
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1996 1995
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Cash Flows From Operating Activities:
Net increase in net assets resulting from
operations . . . . . . . . . . . . . . . . . $10,709 $14,802
Adjustments to reconcile net increase in net
assets resulting from operations to net cash
provided by operating activities:
Net unrealized (appreciation) depreciation
on investments . . . . . . . . . . . . . 2,084 (5,116)
Net realized gain on investments . . . . . . (6,141) (3,193)
Amortization of loan discounts and fees . . (1,237) (648)
Changes in assets and liabilities:
Other assets . . . . . . . . . . . . . . . . 84 359
Investment advisory fee payable . . . . . . (5) 11
Other liabilities . . . . . . . . . . . . . (898) (434)
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Net cash provided by operating
activities . . . . . . . . . . . . . . 4,596 5,781
Cash Flows From Investing Activities:
Investments in small business concerns . . . (17,383) (21,831)
Collections from loans and debt securities
and other investment assets . . . . . . . 16,175 26,320
Net proceeds from sale of equity
securities . . . . . . . . . . . . . . . . 7,801 2,785
Net purchase of U.S. government
securities . . . . . . . . . . . . . . . . - 748
Collections from notes receivable from sale
of common stock . . . . . . . . . . . . . . 325 352
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Net cash provided by investing
activities . . . . . . . . . . . . . . 6,918 8,374
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Cash Flows From Financing Activities:
Issuance of common shares . . . . . . . . . 479 -
Dividends and distributions paid . . . . . . (7,958) (7,980)
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Net cash used in financing activities . . (7,479) (7,980)
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Net increase in cash and cash equivalents . . . . 4,035 6,175
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . 6,227 11,591
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Cash and cash equivalents, end of period . . . . $10,262 $17,766
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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
SEPTEMBER 30, 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 September 30, 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 nine months ended September 30, 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 third quarter dividend
equivalent to $0.38 per share payable on September 30, 1996 to
shareholders of record as of September 13, 1996. In connection with
this dividend, the Company paid cash of $1,999,000 and distributed new
shares of common stock to participants in the dividend reinvestment
plan with a value of $785,000 for a total dividend of $2,784,000. The
Company's board of directors have declared dividends equivalent to
$1.06 per share for the nine months ended September 30, 1996. In
connection with these dividends, the Company paid cash of $5,513,000
and distributed new shares of common stock to participants in the
dividend reinvestment plan with a value of $2,172,000 for a total
dividend of $7,685,000.
NOTE 3. COMMITMENTS
The Company had loan commitments outstanding equal to $3,376,000 at
September 30, 1996 to invest in various existing and prospective
portfolio companies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the Third Quarter Ended September 30, 1996 and 1995.
The net increase in net assets resulting from operations for the
quarter ended September 30, 1996 was $2.5 million, a decrease of 59%
compared to the net increase in net assets resulting from operations
for the quarter ended September 30, 1995 of $6.2 million. Earnings
were $0.34 per share for the third quarter of 1996 as compared to $0.89
per share for the same quarter in 1995.
Net investment income decreased 11% to $2.1 million for the quarter
ended September 30, 1996 from $2.4 million for the quarter ended
September 30, 1995. Total investment income decreased 12% in the third
quarter of 1996 as compared to the same quarter of 1995. While the
Company's investments in loans and debt securities that earn a current
return at September 30, 1996 increased as compared to September 30,
1995, the third quarter of 1995 included income that did not recur in
the same quarter of 1996. In the quarter ended September 30, 1995,
other investment income included a prepayment penalty on the early
payoff of a debt totaling $270,000, the recovery of litigation costs
from prior periods of $99,000, and income from an equity participation
in one portfolio company of $113,000.
Total expenses decreased 14% to $666,000 for the quarter ended
September 30, 1996 from $776,000 for the comparable period last year.
The Company's investment advisory fee increased 7% to $634,000 for the
quarter ended September 30, 1996 as compared to $591,000 in the
previous comparable period. While total assets of $109.7 million at
September 30, 1996 were 1% higher than $108.7 million at September 30,
1995, cash and cash equivalents at September 30, 1996 were $7.5 million
lower than the prior year. A lower fee is paid on cash and cash
equivalents, as compared to the fee paid on assets invested in small
business concerns. Legal and accounting fees decreased to $7,000 for
the three months ended September 30, 1996 from $96,000 for the three
months ended September 30, 1995. This is due to the decreased legal
cost of various corporate and portfolio company matters in 1996. One
lawsuit which was pending against the Company related to a portfolio
company was settled in early 1995. Other operating expenses decreased
72% for the third quarter of 1996 as compared to the third quarter of
1995.
Net realized gains on investments were $684,000 for the quarter ended
September 30, 1996, as the Company successfully liquidated certain
equity investments in the portfolio and received early payoffs of
outstanding loans in its portfolio. Net realized gains on investments
were $3.1 million for the third quarter of 1995. Net gains are
realized when the Company sells or otherwise liquidates its
investments, and as a result may vary significantly from quarter to
quarter.
Net unrealized depreciation on investments for the three months ended
September 30, 1996 was $260,000 as compared to net unrealized
appreciation on investments of $732,000 for the three months ended
September 30, 1995. The Company sold two portfolio investments during
the third quarter that had net unrealized depreciation at June 30, 1996
of $352,000. When the investments were sold, net unrealized
depreciation was reduced by $352,000 and the actual net loss realized
on these investments was included in net realized gain on investments.
The remaining net unrealized depreciation of $612,000 for the third
quarter of 1996 is due to the net decrease in the value of the
Company's investments.
For the Nine Months Ended September 30, 1996 and 1995.
Net increase in net assets resulting from operations was $10.7 million,
or $1.47 per share, for the nine months ended September 30, 1996,
compared to $14.8 million, or $2.13 per share, for the same period in
1995. Net investment income and net realized gains for the nine months
ended September 30, 1996 increased 2% and 92%, respectively, over the
comparable nine month period of the prior year. These increases,
however, were offset by a significant decline in the net unrealized
appreciation in the investment portfolio of 140.7%.
During the nine months ended September 30, 1996, the Company realized
net gains on the sale of investments which had net unrealized
appreciation totaling $3.0 million, or $0.41 per share, that had been
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previously recognized into net income as net unrealized appreciation.
Thus, upon the realization of these gains, the year-to-date 1996 net
increase in net assets resulting from operations reflects an offsetting
decrease in net unrealized appreciation for the same amount. As
investments in the portfolio appreciate or depreciate, the increase or
decrease in value is recognized into net income as the change in net
unrealized appreciation. When gains or losses are realized upon the
disposition of an investment, the effect on net income is computed by
reducing or increasing net income by an amount equal to any net
unrealized appreciation or depreciation on the investment recognized
in prior periods, and increasing or decreasing net income by the
amount of the recognized gain or loss.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased $2.5 million to $109.7 million as of September
30, 1996 from $107.2 million as of December 31, 1995. Total
investments as of September 30, 1996 decreased $1.4 million from
December 31, 1995 as total repayments and changes in investment
valuations during the first nine months of 1996 were greater than new
investments to small businesses of $17.4 million. Cash and cash
equivalents increased to $10.3 million as of September 30, 1996 from
$6.2 million at December 31, 1995 due to principal repayments on loans
and debt securities and proceeds received from investment dispositions.
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 next year.
PORTFOLIO CHANGES
For the nine months ended September 30, 1996, overall the Company's
portfolio depreciated by $2.1 million due to the sale of certain
investments which resulted in realized gains (losses), changes in
investment values from the change in market prices for public equity
investments, and changes in value of certain private investments.
The disposition of certain portfolio investments resulted in unrealized
appreciation (depreciation) and the recognition of realized gains
(losses) during the nine months ended September 30, 1996 as follows:
Unrealized Realized
Appreciation Gain
(Depreciation) (Loss)
-------------- -----------
Garden Ridge Corporation (stock) * $(1,190,000) $1,349,000
Garden Ridge Corporation (warrants) (1,703,000) 3,060,000
June Broadcasting, Inc. (1,530,000) 1,714,000
Labor Ready, Inc. * (181,000) 1,474,000
SunStates Refrigerated Services, Inc. * 579,000 (579,000)
SunStates Refrigerated Services, Inc. ** 1,006,000 (1,029,000)
Other 10,000 152,000
* Sale of certain stock only.
** Sale of certain loans only.
The Company's public equity investments which appreciated (depreciated)
in value during the nine months ended September 30, 1996 were:
Unrealized
Appreciation
(Depreciation)
--------------
Allied Waste Industries, Inc. $1,224,000
Au Bon Pain (118,000)
Garden Ridge Corporation 354,000
Labor Ready, Inc. 944,000
Montgomery Tank Lines 96,000
Nobel Education Dynamics, Inc. 1,259,000
Quality Software Products Holdings, PLC (240,000)
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In addition, the Company's investments in the following private
companies also had unrealized depreciation during the nine months ended
September 30, 1996: Enviroplan, Inc. - $926,000; SunStates Refrigerated
Services, Inc. - $848,000; and Williams Brothers Lumber Company -
$683,000. The remaining investment portfolio had net unrealized
depreciation during the nine months ended September 30, 1996 of
$137,000.
Statements included in this filing concerning the Company's future
prospects are "forward looking statements" under the Federal securities
laws. There can be no assurance that future results will be achieved
and actual results could differ materially from forecasts and
estimates. Important factors that could cause actual results to differ
materially are included but are not limited to those listed in the
Company's quarterly reports as filed on Form 10-Q and annual report as
filed on Form 10-K.
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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 known 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 September 30, 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: November 13, 1996 Jon A. DeLuca
------------------ Executive Vice President and
Chief Financial Officer
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