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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, 1997 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
- ----------------------- -----------------------
(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 May 12, 1997 there were 7,604,016 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, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Operations - For the Three Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Net Assets - For the Three Months
Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Cash Flows - For the Three Months Ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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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Part I - Financial Statements
Item 1. Financial Statements
ALLIED CAPITAL CORPORATION II AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
Assets
Investments at value:
Loans and debt securities (cost: 1997 - $79,102; 1996 - $80,859) . . . . . . . $ 73,016 $ 74,505
Equity securities (cost: 1997 - $5,652; 1996 - $5,956) . . . . . . . . . . . . 9,013 11,613
Other investment assets (cost: 1997 - $180; 1996 - $196) . . . . . . . . . . . 132 148
-------- --------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,161 86,266
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,489 18,525
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,027 2,117
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Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,677 $106,908
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Dividends and distributions payable . . . . . . . . . . . . . . . . . . . . . . . $ - $ 3,379
Investment advisory fee payable . . . . . . . . . . . . . . . . . . . . . . . . . 559 576
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,862 115
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,421 4,070
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $1 par value; 20,000,000 shares authorized;
7,604,016 and 7,550,198 shares issued and outstanding at
3/31/97 and 12/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,604 7,550
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,498 99,522
Notes receivable from sale of common stock . . . . . . . . . . . . . . . . . . . (3,762) (5,387)
Net unrealized depreciation on investments . . . . . . . . . . . . . . . . . . . (2,773) (745)
Undistributed accumulated earnings . . . . . . . . . . . . . . . . . . . . . . . 3,689 1,898
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Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 105,256 102,838
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Total liabilities and shareholders' equity . . . . . . . . . . . . . . $108,677 $106,908
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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 31,
-----------------------------
1997 1996
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Investment income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,636 $3,033
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 21
------ -------
Total investment income . . . . . . . . . . . . . . . . . . . . . . . 2,727 3,054
------ -------
Expenses:
Investment advisory fee . . . . . . . . . . . . . . . . . . . . . . . . 559 629
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . 142 127
------ -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 756
------ -------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,026 2,298
Net realized gains on investments . . . . . . . . . . . . . . . . . . . . 3,035 2,568
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Net investment income before net unrealized
appreciation (depreciation) on investments . . . . . . . . . . . . . . 5,061 4,866
Net unrealized appreciation (depreciation) on
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,028) 1,083
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Net increase in net assets resulting from operations . . . . . . . . . . $3,033 $5,949
====== ======
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.83
====== ======
Weighted average number of shares and share
equivalents outstanding . . . . . . . . . . . . . . . . . . . . . . . . 7,674 7,143
====== ======
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,
-----------------------------
1997 1996
----------- -----------
Increase in net assets resulting from operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,026 $ 2,298
Net realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,035 2,568
Net unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . (2,028) 1,083
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Net increase in net assets resulting from operations . . . . . . . . . . . . . . . 3,033 5,949
--------- ---------
Distributions to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,270) (2,360)
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Capital Share Transactions:
Net decrease in notes receivable from sale of common stock. . . . . 1,625 17
Issuance of common stock upon the exercise of stock options. . . . . 100 -
Issuance of common stock in lieu of cash distributions. . . . . . . . . 930 1,636
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Net increase in net assets resulting from capital share
transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,655 1,653
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Net increase in net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,418 5,242
Net assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,838 101,981
--------- ---------
Net assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,256 $ 107,223
========= =========
Net asset value per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.84 $ 14.90
========= =========
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,604 7,198
========= =========
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,
-------------------------------------
1997 1996
--------- ---------
Cash Flows From Operating Activities:
Net increase in net assets resulting from operations . . . . . . . . . . . $ 3,033 $ 5,949
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized (appreciation) depreciation on investments . . . . . . . 2,028 (1,083)
Net realized gains on investments . . . . . . . . . . . . . . . . . . . (3,035) (2,568)
Amortization of loan discounts . . . . . . . . . . . . . . . . . . . . . (87) (135)
Changes in assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 (158)
Investment advisory fee . . . . . . . . . . . . . . . . . . . . . . (17) (10)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 2,747 ( 742)
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Net cash provided by operating activities . . . . . . . . . . . 4,759 1,253
------- -------
Cash Flows From Investing Activities:
Investments in small business concerns . . . . . . . . . . . . . . . . (2,803) (2,000)
Payments on loans and debt securities and other investment assets . . . 4,333 5,853
Net proceeds from sale of equity securities . . . . . . . . . . . . . . 3,669 3,133
Payments on notes receivable from sale of common stock. . . . . . . . . 1,725 17
------- -------
Net cash provided by investing activities . . . . . . . . . . . 6,924 7,003
------- -------
Cash Flows From Financing Activities:
Dividends and distributions paid . . . . . . . . . . . . . . . . . . . . (5,719) (4,119)
------- -------
Net cash used in financing activities . . . . . . . . . . . . . (5,719) (4,119)
------- -------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . 5,964 4,137
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 18,525 6,227
------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $24,489 $10,364
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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, 1997
(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, 1997 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, 1996 Annual Report. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the operating
results to be expected for the full year. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
NOTE 2. DIVIDENDS
The Company's Board of Directors declared a $0.43 per share first quarter
dividend that was paid on March 31, 1997 to shareholders of record as of March
14, 1997. In connection with this dividend, the Company paid cash of
$3,270,000. The Company's board of directors also declared an extra
distribution in December 1996 of $0.45 per share, which was paid to
shareholders on January 31, 1997, for a total distribution for 1996 equal to
$1.92 per share.
NOTE 3. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128,"Earnings per Share" (SFAS 128). SFAS 128
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. SFAS 128 modifies the method of calculation of
net income per share and also requires a reconciliation between basic and
diluted per share amounts. Early adoption of the statement prior to the end of
1997 is not allowed.
The following table (in thousands, except per share data) presents the effect
of SFAS 128 on the Company's net income per share as if adopted for current
period disclosure.
Quarter Ended March 31
1997 1996
---- ----
Net income ............................................. $3,033 $5,949
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Basic average shares outstanding........................ 7,583 7,080
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Basic net income per share.............................. $ 0.40 $ 0.84
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Effect of dilutive securities:
Outstanding stock options ......................... 91 63
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Diluted average shares outstanding...................... 7,674 7,143
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Diluted net income per share ........................... $ 0.40 $ 0.83
====== ======
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NOTE 4. 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 $4,821,000 at March 31, 1997.
Litigation. The Company is party to certain lawsuits in connection with its
business. While the outcome of these legal proceedings cannot at this time be
predicted with certainty, management does not expect that these proceedings
will have a material effect upon the financial condition of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere in this
report.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended March 31, 1997 to March 31, 1996
The net increase in net assets resulting from operations for the
quarter ended March 31, 1997 was $3.0 million, or $.40 per share, a
49% decrease from the net increase in net assets resulting from
operations of $5.9 million, or $0.83 per share, for the quarter ended
March 31, 1996. Net investment income combined with net realized gains
increased in the first quarter of 1997 to $5.0 million from $4.8
million for the first quarter of 1996, and although realized earnings
increased, the effect of valuation changes in the portfolio resulted
in a decline in quarterly earnings. During the quarter certain
investments in the portfolio with publicly traded securities
experienced a softening in their public market prices, and as a
result, the company decreased its valuation of these securities. This
combined with depreciation resulting from the realization of gains in
the portfolio caused net unrealized depreciation of $2 million. Net
income per share for the first quarter of 1997 also reflects a 7%
increase in the weighted average shares outstanding as compared to the
prior comparative period.
Net investment income decreased 12% to $2.0 million for the first
quarter of 1997 from $2.3 million for the same period in 1996. Total
investment income decreased 11% in the quarter ended March 31, 1997 as
compared to the quarter ended March 31, 1996. The company continues
to see increased competition for quality investments in the market
place, and is cautiously approaching new investment activity to assure
that the portfolio is receiving adequate compensation for new
investments, and is accepting appropriate levels of risk. At the same
time, favorable market valuations have allowed the Company to exit
from several investments. This activity has resulted in a temporary
decline in total invested assets.
Total expenses decreased 7% to $701,000 for the quarter ended March
31, 1997 from $756,000 in the comparable period last year. The
Company's investment advisory fee decreased 11% to $559,000 for the
quarter ended March 31, 1997 from $629,000 in the previous comparable
period. This decrease is the result of a change in the mix in total
assets of $108.7 million at March 31, 1997. While total assets
remained relatively steady, cash and cash equivalents were $14.1
million higher as of March 31, 1997. A fee of 0.5% per annum is paid
on cash and cash equivalents, as compared to 2.5% per annum on assets
invested in small business concerns. Therefore, a higher percentage of
cash and cash equivalents to total assets at March 31, 1997 results in
a lower advisory fee. Other operating expenses increased $15,000 for
the first quarter of 1997 as compared to the first quarter of 1996
primarily due to timing of recognition of miscellaneous expenses.
Net realized gains on investments were $3.0 million for the quarter
ended March 31, 1997 due to continued investment exit activity. Net
realized gains on investments were $2.6 million for the first quarter
of 1996. Net gains are realized when the Company sells or otherwise
liquidates its investments, and as a result may vary significantly
from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased $1.8 million to $108.7 million as of March 31,
1997 from $106.9 million as of December 31, 1996. Total investments
at March 31, 1997 decreased $4.1 million from December 31, 1996 as
repayments, sales of equity securities and changes in investment
valuations during the first quarter of 1997 were greater than new
investments to small businesses of $2.8 million.
Cash and cash equivalents increased to $24.5 million as of March 31,
1997 from $18.5 million at December 31, 1996 due to principal
repayments on loans and debt securities and proceeds received from
investment dispositions. The Company also has an available credit
facility of $25.0 million.
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Given the balance of cash available at March 31, 1997 and the
available credit facility, 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 1997.
PORTFOLIO CHANGES
For the three months ended March 31, 1997, the Company's portfolio
depreciated $2.0 million due to the sale of certain investments which
resulted in realized gains (losses), changes 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 three months ended March 31, 1997 as
follows:
Unrealized Realized
Appreciation Gain
(Depreciation) (Loss)
-------------- ------
Allied Waste Industries, Inc. $(1,548,000) $2,566,000
ASW Holdings Corporation (276,000) 537,000
Enviroplan 362,000 (405,000)
Montgomery Tank Lines (284,000) 336,000
The Company's public equity investments which appreciated
(depreciated) in value during the three months ended March 31, 1997
were:
Unrealized
Appreciation
(Depreciation)
--------------
Au Bon Pain Co., Inc. 19,000
Brazos Sportswear, Inc. 623,000
DeVlieg-Bullard, Inc. 14,000
Esquire Communications, Ltd. 343,000
Garden Ridge Corporation 61,000
Labor Ready, Inc. (745,000)
Nobel Education Dynamics, Inc. (391,000)
The Peerless Group, Inc. (287,000)
Quality Software Products Holdings, PLC 3,000
Gulf South Medical Supply, Inc. 79,000
The remaining depreciation during the three months ended March 31,
1997 was $1,000.
FACTORS AFFECTING THE COMPANY'S BUSINESS
Illiquidity. Most of the Company's investments consist of securities
acquired directly from the issuers in private transactions. They are
usually subject to restrictions on resale or otherwise illiquid.
There is usually no established trading market for such securities
into which they could be sold. In addition, most of the securities
are not eligible for sale to the public without registration which
would involve delay and expense.
Competition. A large number of entities and individuals compete for
the opportunity to make the kinds of investments made by the Company.
Many of these entities and individuals have greater financial
resources than the combined resources of the Company. As a result of
this competition, the Company may from time to time be precluded from
making otherwise attractive investments on terms considered to be
prudent in light of the risks to be assumed.
Statements included in this report 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.
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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits in connection with its
business. While the outcome of these legal proceedings cannot at this
time be predicted with certainty, management does not expect that
these proceedings will have a material effect upon the financial
condition of the Company.
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, 1997.
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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
-----------------------------
(Registrant)
/s/ Jon A. DeLuca
------------------------------------------
Date: May 12, 1997 Jon A. DeLuca
------------ Executive Vice President, Treasurer and
Chief Financial Officer
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