e10vq
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
|
|
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For The Quarterly Period
Ended September 30, 2005 |
|
Commission File Number:
0-22832 |
ALLIED CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
|
|
|
|
Maryland
(State or Jurisdiction of
Incorporation or Organization) |
|
52-1081052
(IRS Employer
Identification No.) |
1919 Pennsylvania Avenue, N.W.
Washington, DC 20006
(Address of Principal Executive Offices)
Registrants telephone number, including area code:
(202) 331-1112
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 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 o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
YES x NO o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
On November 7, 2005, there were 136,306,052 shares
outstanding of the Registrants common stock, $0.0001 par
value.
ALLIED CAPITAL CORPORATION
FORM 10-Q TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheet as of September 30, 2005
(unaudited) and
December 31, 2004
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1 |
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|
Consolidated Statement of Operations (unaudited) For
the Three and Nine Months Ended September 30, 2005 and 2004
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2 |
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Consolidated Statement of Changes in Net Assets
(unaudited) For the Nine Months Ended
September 30, 2005 and 2004
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3 |
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Consolidated Statement of Cash Flows (unaudited) For
the Nine Months Ended September 30, 2005 and 2004
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4 |
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Consolidated Statement of Investments as of September 30,
2005 (unaudited)
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5 |
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Notes to Consolidated Financial Statements
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14 |
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Report of Independent Registered Public Accounting Firm
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41 |
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Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
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42 |
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Item 3. Quantitative and Qualitative Disclosures About
Market Risk
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78 |
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Item 4. Controls and Procedures
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79 |
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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80 |
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Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
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81 |
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Item 3. Defaults Upon Senior Securities
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81 |
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Item 4. Submission of Matters to a Vote of Security
Holders
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81 |
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Item 5. Other Information
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81 |
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Item 6. Exhibits
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82 |
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Signatures
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85 |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
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September 30, | |
|
December 31, | |
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2005 | |
|
2004 | |
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| |
|
| |
(in thousands, except per share amounts) |
|
(unaudited) | |
|
|
ASSETS |
Portfolio at value:
|
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|
|
|
|
|
|
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Private finance
|
|
|
|
|
|
|
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Companies more than 25% owned (cost: 2005-$1,510,082;
2004-$1,389,342)
|
|
$ |
1,612,914 |
|
|
$ |
1,359,641 |
|
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|
Companies 5% to 25% owned (cost: 2005-$164,007; 2004-$194,750)
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|
|
156,840 |
|
|
|
188,902 |
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|
|
Companies less than 5% owned (cost: 2005-$1,338,370;
2004-$800,828)
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|
|
1,311,231 |
|
|
|
753,543 |
|
|
|
|
|
|
|
|
|
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Total private finance (cost: 2005-$3,012,459; 2004-$2,384,920)
|
|
|
3,080,985 |
|
|
|
2,302,086 |
|
|
Commercial real estate finance (cost: 2005-$148,623;
2004-$722,612)
|
|
|
142,765 |
|
|
|
711,325 |
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|
|
|
|
|
|
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Total portfolio at value (cost: 2005-$3,161,082; 2004-$3,107,532)
|
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|
3,223,750 |
|
|
|
3,013,411 |
|
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|
|
|
|
|
|
Deposits of proceeds from sales of borrowed Treasury securities
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|
|
17,933 |
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|
|
38,226 |
|
Accrued interest and dividends receivable
|
|
|
65,147 |
|
|
|
79,489 |
|
Other assets
|
|
|
81,565 |
|
|
|
72,712 |
|
Cash and cash equivalents
|
|
|
58,081 |
|
|
|
57,160 |
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|
|
|
|
|
|
|
|
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Total assets
|
|
$ |
3,446,476 |
|
|
$ |
3,260,998 |
|
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|
|
|
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|
LIABILITIES AND SHAREHOLDERS EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures (maturing within one year:
2005-$150,000; 2004-$169,000)
|
|
$ |
968,335 |
|
|
$ |
1,064,568 |
|
|
Revolving line of credit
|
|
|
|
|
|
|
112,000 |
|
|
Obligations to replenish borrowed Treasury securities
|
|
|
17,933 |
|
|
|
38,226 |
|
|
Accounts payable and other liabilities
|
|
|
93,222 |
|
|
|
66,426 |
|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
1,079,490 |
|
|
|
1,281,220 |
|
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Commitments and contingencies
|
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Shareholders equity:
|
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|
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Common stock, $0.0001 par value, 200,000 shares authorized;
136,289 and 133,099 shares issued and outstanding at
September 30, 2005, and December 31, 2004, respectively
|
|
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14 |
|
|
|
13 |
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|
Additional paid-in capital
|
|
|
2,171,063 |
|
|
|
2,094,421 |
|
|
Common stock held in deferred compensation trust
|
|
|
(17,781 |
) |
|
|
(13,503 |
) |
|
Notes receivable from sale of common stock
|
|
|
(4,138 |
) |
|
|
(5,470 |
) |
|
Net unrealized appreciation (depreciation) on portfolio
|
|
|
48,259 |
|
|
|
(107,767 |
) |
|
Undistributed (distributions in excess of) earnings
|
|
|
169,569 |
|
|
|
12,084 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,366,986 |
|
|
|
1,979,778 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
3,446,476 |
|
|
$ |
3,260,998 |
|
|
|
|
|
|
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Net asset value per common share
|
|
$ |
17.37 |
|
|
$ |
14.87 |
|
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The accompanying notes are an integral part of these
consolidated financial statements.
1
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
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For the Three Months | |
|
For the Nine Months | |
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|
Ended September 30, | |
|
Ended September 30, | |
|
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| |
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| |
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|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(in thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
Interest and Related Portfolio Income:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
31,137 |
|
|
$ |
27,242 |
|
|
$ |
89,587 |
|
|
$ |
59,112 |
|
|
|
Companies 5% to 25% owned
|
|
|
5,205 |
|
|
|
7,582 |
|
|
|
16,723 |
|
|
|
19,827 |
|
|
|
Companies less than 5% owned
|
|
|
40,011 |
|
|
|
51,004 |
|
|
|
126,318 |
|
|
|
154,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
|
76,353 |
|
|
|
85,828 |
|
|
|
232,628 |
|
|
|
233,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies 5% to 25% owned
|
|
|
691 |
|
|
|
53 |
|
|
|
691 |
|
|
|
765 |
|
|
|
Companies less than 5% owned
|
|
|
1,414 |
|
|
|
140 |
|
|
|
3,944 |
|
|
|
3,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan prepayment premiums
|
|
|
2,105 |
|
|
|
193 |
|
|
|
4,635 |
|
|
|
4,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
9,019 |
|
|
|
7,611 |
|
|
|
21,777 |
|
|
|
20,406 |
|
|
|
Companies 5% to 25% owned
|
|
|
(14 |
) |
|
|
934 |
|
|
|
111 |
|
|
|
1,404 |
|
|
|
Companies less than 5% owned
|
|
|
7,394 |
|
|
|
2,297 |
|
|
|
16,832 |
|
|
|
6,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
16,399 |
|
|
|
10,842 |
|
|
|
38,720 |
|
|
|
28,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
94,857 |
|
|
|
96,863 |
|
|
|
275,983 |
|
|
|
266,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
17,735 |
|
|
|
20,253 |
|
|
|
57,114 |
|
|
|
57,349 |
|
|
Employee
|
|
|
13,969 |
|
|
|
13,896 |
|
|
|
52,302 |
|
|
|
38,171 |
|
|
Administrative
|
|
|
15,130 |
|
|
|
10,169 |
|
|
|
58,932 |
|
|
|
25,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46,834 |
|
|
|
44,318 |
|
|
|
168,348 |
|
|
|
120,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
48,023 |
|
|
|
52,545 |
|
|
|
107,635 |
|
|
|
145,536 |
|
Income tax expense (benefit), including excise tax
|
|
|
1,889 |
|
|
|
(200 |
) |
|
|
7,482 |
|
|
|
(744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
46,134 |
|
|
|
52,745 |
|
|
|
100,153 |
|
|
|
146,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
64,677 |
|
|
|
(12,483 |
) |
|
|
47,192 |
|
|
|
139,016 |
|
|
|
Companies 5% to 25% owned
|
|
|
(6 |
) |
|
|
13,269 |
|
|
|
4,702 |
|
|
|
48,965 |
|
|
|
Companies less than 5% owned
|
|
|
6,043 |
|
|
|
514 |
|
|
|
236,601 |
|
|
|
(12,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains
|
|
|
70,714 |
|
|
|
1,300 |
|
|
|
288,495 |
|
|
|
175,753 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(3,680 |
) |
|
|
31,954 |
|
|
|
156,026 |
|
|
|
(120,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains
|
|
|
67,034 |
|
|
|
33,254 |
|
|
|
444,521 |
|
|
|
55,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
113,168 |
|
|
$ |
85,999 |
|
|
$ |
544,674 |
|
|
$ |
201,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.84 |
|
|
$ |
0.67 |
|
|
$ |
4.06 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.82 |
|
|
$ |
0.66 |
|
|
$ |
3.99 |
|
|
$ |
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
135,322 |
|
|
|
129,304 |
|
|
|
134,110 |
|
|
|
128,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
138,058 |
|
|
|
131,192 |
|
|
|
136,669 |
|
|
|
131,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
(in thousands, except per share amounts) |
|
| |
|
| |
|
|
(unaudited) | |
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
100,153 |
|
|
$ |
146,280 |
|
|
Net realized gains
|
|
|
288,495 |
|
|
|
175,753 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
156,026 |
|
|
|
(120,384 |
) |
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
544,674 |
|
|
|
201,649 |
|
|
|
|
|
|
|
|
Shareholder distributions:
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
(231,163 |
) |
|
|
(220,832 |
) |
|
Preferred stock dividends
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from shareholder
distributions
|
|
|
(231,163 |
) |
|
|
(220,884 |
) |
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for portfolio investments
|
|
|
7,200 |
|
|
|
3,227 |
|
|
Issuance of common stock upon the exercise of stock options
|
|
|
57,805 |
|
|
|
29,673 |
|
|
Issuance of common stock in lieu of cash distributions
|
|
|
7,456 |
|
|
|
4,399 |
|
|
Net decrease in notes receivable from sale of common stock
|
|
|
1,332 |
|
|
|
13,040 |
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(6,034 |
) |
|
|
(10,152 |
) |
|
Distribution of common stock held in deferred compensation trust
|
|
|
1,756 |
|
|
|
183 |
|
|
Other
|
|
|
4,182 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from capital share
transactions
|
|
|
73,697 |
|
|
|
40,398 |
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
387,208 |
|
|
|
21,163 |
|
Net assets at beginning of period
|
|
|
1,979,778 |
|
|
|
1,914,577 |
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$ |
2,366,986 |
|
|
$ |
1,935,740 |
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
17.37 |
|
|
$ |
14.90 |
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
136,289 |
|
|
|
129,898 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
(in thousands) |
|
| |
|
| |
|
|
(unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
544,674 |
|
|
$ |
201,649 |
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
Portfolio investments
|
|
|
(1,320,611 |
) |
|
|
(1,057,136 |
) |
|
|
Principal collections related to investment repayments or sales
|
|
|
1,241,827 |
|
|
|
543,314 |
|
|
|
Change in accrued or reinvested interest and dividends
|
|
|
(1,905 |
) |
|
|
(31,652 |
) |
|
|
Amortization of discounts and fees
|
|
|
(3,339 |
) |
|
|
(4,736 |
) |
|
|
Changes in other assets and liabilities
|
|
|
33,399 |
|
|
|
16,501 |
|
|
|
Depreciation and amortization
|
|
|
1,404 |
|
|
|
1,266 |
|
|
|
Realized gains from the receipt of notes and other securities as
consideration from sale of investments, net of collections
|
|
|
(4,605 |
) |
|
|
(44,515 |
) |
|
|
Realized losses
|
|
|
50,661 |
|
|
|
65,828 |
|
|
|
Net change in unrealized (appreciation) or depreciation
|
|
|
(156,026 |
) |
|
|
120,384 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
385,479 |
|
|
|
(189,097 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Sale of common stock upon the exercise of stock options
|
|
|
57,805 |
|
|
|
29,673 |
|
|
Collections of notes receivable from sale of common stock
|
|
|
1,332 |
|
|
|
13,040 |
|
|
Borrowings under notes payable and debentures
|
|
|
|
|
|
|
15,212 |
|
|
Repayments on notes payable and debentures
|
|
|
(94,700 |
) |
|
|
(129,000 |
) |
|
Net borrowings under (repayments on) revolving line of credit
|
|
|
(112,000 |
) |
|
|
327,250 |
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
(7,000 |
) |
|
Purchase of common stock held in deferred compensation trust
|
|
|
(6,034 |
) |
|
|
(10,152 |
) |
|
Other financing activities
|
|
|
(4,594 |
) |
|
|
(901 |
) |
|
Common stock dividends and distributions paid
|
|
|
(226,367 |
) |
|
|
(216,433 |
) |
|
Preferred stock dividends paid
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(384,558 |
) |
|
|
21,637 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
921 |
|
|
|
(167,460 |
) |
Cash and cash equivalents at beginning of period
|
|
|
57,160 |
|
|
|
214,167 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
58,081 |
|
|
$ |
46,707 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Companies More Than 25% Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Paging,
L.P.(4)
|
|
Loan (6.8%, Due 12/07
1/08)(6) |
|
$ |
4,631 |
|
|
$ |
4,631 |
|
|
$ |
|
|
|
(Telecommunications)
|
|
Equity Interests |
|
|
|
|
|
|
13,274 |
|
|
|
|
|
|
|
Common Stock (4,656 shares) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
Loan (12.0%, Due 9/09) |
|
|
60,000 |
|
|
|
59,773 |
|
|
|
59,773 |
|
|
(Business Services)
|
|
Debt Securities (18.5%, Due 12/09) |
|
|
124,000 |
|
|
|
124,000 |
|
|
|
124,000 |
|
|
|
Common Stock (18,957,011 shares) |
|
|
|
|
|
|
73,932 |
|
|
|
251,659 |
|
|
Alaris Consulting, LLC
|
|
Loan (16.0%, Due 12/05
12/07)(6) |
|
|
25,835 |
|
|
|
25,846 |
|
|
|
2,065 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
5,305 |
|
|
|
|
|
|
|
Guaranty ($1,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc.
|
|
Loan (0.7%, Due 12/04
12/05)(6) |
|
|
4,999 |
|
|
|
4,600 |
|
|
|
4,097 |
|
|
and Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne,
Inc.(7)
|
|
Preferred Stock (12,500 shares) |
|
|
|
|
|
|
6,969 |
|
|
|
4,807 |
|
|
(Business Services)
|
|
Common Stock (27,500 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance,
Inc.(7)
|
|
Preferred Stock (1,568 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (2,750 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC
|
|
Class A Equity Interests |
|
|
58,908 |
|
|
|
58,908 |
|
|
|
58,908 |
|
|
(Financial Services)
|
|
Class B Equity Interests |
|
|
|
|
|
|
117,436 |
|
|
|
151,090 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
109,301 |
|
|
|
146,319 |
|
|
|
Guaranty ($136,173 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit
($35,550 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Capital Corporation
|
|
Loan (7.9%, Due 12/05) |
|
|
52,456 |
|
|
|
52,456 |
|
|
|
52,456 |
|
|
(Financial Services)
|
|
Debt Securities (18.0%, Due 10/08) |
|
|
4,623 |
|
|
|
4,623 |
|
|
|
4,623 |
|
|
|
Common Stock (10 shares) |
|
|
|
|
|
|
2,049 |
|
|
|
7,504 |
|
|
Diversified Group Administrators, Inc.
|
|
Preferred Stock (1,000,000 shares) |
|
|
|
|
|
|
700 |
|
|
|
657 |
|
|
(Business Services)
|
|
Preferred Stock (1,451,380 shares) |
|
|
|
|
|
|
841 |
|
|
|
790 |
|
|
|
|
Common Stock (1,451,380 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Pacific Company
|
|
Loan (17.4%, Due 2/12 8/12) |
|
|
69,825 |
|
|
|
69,544 |
|
|
|
69,544 |
|
|
(Financial Services)
|
|
Preferred Stock (10,964 shares) |
|
|
|
|
|
|
10,276 |
|
|
|
12,491 |
|
|
|
|
Common Stock (14,735 shares) |
|
|
|
|
|
|
14,819 |
|
|
|
43,925 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
|
|
|
|
7,620 |
|
|
|
8,878 |
|
|
(Tower Leasing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
(7)
|
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
companies. |
The accompanying notes are an integral part of these
consolidated financial statements.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Global Communications, LLC
|
|
Loan (14.5%, Due 12/03
12/06)(6) |
|
$ |
6,393 |
|
|
$ |
6,393 |
|
|
$ |
6,393 |
|
|
(Business Services)
|
|
Debt Securities (13.0%, Due
9/02 9/05)(6) |
|
|
18,446 |
|
|
|
18,443 |
|
|
|
18,443 |
|
|
|
Preferred Equity Interest |
|
|
|
|
|
|
14,067 |
|
|
|
13,582 |
|
|
|
Options |
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Loan (10.0%, Due 12/05
12/08)(6) |
|
|
11,392 |
|
|
|
11,425 |
|
|
|
4,622 |
|
|
(Business Services)
|
|
Common Stock (1,000 shares) |
|
|
|
|
|
|
6,542 |
|
|
|
|
|
|
Healthy Pet Corp.
|
|
Loans (14.6%, Due 8/10) |
|
|
42,249 |
|
|
|
42,059 |
|
|
|
42,059 |
|
|
(Consumer Services)
|
|
Common Stock (25,766 shares) |
|
|
|
|
|
|
25,766 |
|
|
|
25,766 |
|
|
HMT, Inc.
|
|
Preferred Stock (554,052 shares) |
|
|
|
|
|
|
2,637 |
|
|
|
2,637 |
|
|
(Energy Services)
|
|
Common Stock (300,000 shares) |
|
|
|
|
|
|
3,000 |
|
|
|
6,498 |
|
|
|
Warrants |
|
|
|
|
|
|
1,155 |
|
|
|
2,502 |
|
|
Impact Innovations Group, LLC
(Business Services)
|
|
Equity Interests in Affiliate |
|
|
|
|
|
|
|
|
|
|
841 |
|
|
Insight Pharmaceuticals Corporation
|
|
Loan (16.0%, Due 9/12) |
|
|
58,159 |
|
|
|
57,914 |
|
|
|
57,914 |
|
|
(Consumer Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
25,000 |
|
|
|
25,433 |
|
|
|
Common Stock (6,200 shares) |
|
|
|
|
|
|
6,325 |
|
|
|
245 |
|
|
Jakel, Inc.
|
|
Loan (15.5%, Due
3/08)(6) |
|
|
5,412 |
|
|
|
5,412 |
|
|
|
|
|
|
(Industrial Products)
|
|
Debt Securities (15.5%, Due
3/08)(6) |
|
|
8,330 |
|
|
|
8,330 |
|
|
|
|
|
|
|
|
Preferred Stock (6,460 shares) |
|
|
|
|
|
|
6,460 |
|
|
|
|
|
|
|
|
Common Stock (158,061 shares) |
|
|
|
|
|
|
9,347 |
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Loan (14.0%, Due
5/09)(6) |
|
|
7,646 |
|
|
|
7,646 |
|
|
|
4,982 |
|
|
(Financial Services)
|
|
Debt Securities (18.0%, Due
5/09)(6) |
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
2,729 |
|
|
|
|
|
|
Litterer
Beteiligungs-GmbH(4)
|
|
Debt Securities (8.0%, Due 3/07) |
|
|
632 |
|
|
|
632 |
|
|
|
632 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
1,756 |
|
|
|
1,958 |
|
|
Maui Body Works, Inc.
|
|
Common Stock (100 shares) |
|
|
|
|
|
|
2,655 |
|
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan (10.0%, Due 4/09) |
|
|
23,500 |
|
|
|
23,500 |
|
|
|
23,500 |
|
|
(Business Services)
|
|
Loan (16.0%, Due 4/09) |
|
|
39,301 |
|
|
|
39,140 |
|
|
|
39,140 |
|
|
|
|
Common Stock (57,068 shares) |
|
|
|
|
|
|
33,723 |
|
|
|
32,013 |
|
|
|
|
Standby Letters of Credit ($1,397) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MVL Group, Inc.
|
|
Loan (12.9%, Due 7/09) |
|
|
41,829 |
|
|
|
41,403 |
|
|
|
41,403 |
|
|
(Business Services)
|
|
Debt Securities (14.4%, Due 7/09) |
|
|
18,380 |
|
|
|
17,929 |
|
|
|
17,929 |
|
|
|
Common Stock (648,661 shares) |
|
|
|
|
|
|
643 |
|
|
|
3,401 |
|
|
Pennsylvania Avenue Investors, L.P.
(5)
|
|
Equity Interests |
|
|
|
|
|
|
2,477 |
|
|
|
2,065 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
The accompanying notes are an integral part of these
consolidated financial statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Powell Plant Farms, Inc.
|
|
Loan (15.0%, Due 12/05) |
|
$ |
31,840 |
|
|
$ |
22,992 |
|
|
$ |
22,992 |
|
|
(Consumer Products)
|
|
Debt Securities (20.0%, Due
6/03)(6) |
|
|
19,291 |
|
|
|
19,224 |
|
|
|
8,242 |
|
|
|
Preferred Stock (1,483 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redox Brands, Inc.
|
|
Preferred Stock (2,726,444 shares) |
|
|
|
|
|
|
7,903 |
|
|
|
8,885 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
584 |
|
|
|
350 |
|
|
Service Champ, Inc.
|
|
Loan (15.5%, Due 4/12) |
|
|
26,869 |
|
|
|
26,729 |
|
|
|
26,729 |
|
|
(Business Services)
|
|
Common Stock (63,888 Shares) |
|
|
|
|
|
|
13,662 |
|
|
|
13,662 |
|
|
Staffing Partners Holding
|
|
Loan (13.5%, Due
10/06)(6) |
|
|
917 |
|
|
|
917 |
|
|
|
917 |
|
|
Company, Inc.
|
|
Debt Securities (13.5%, Due
10/06)(6) |
|
|
5,517 |
|
|
|
5,517 |
|
|
|
5,517 |
|
|
(Business Services)
|
|
Preferred Stock (439,600 shares) |
|
|
|
|
|
|
4,968 |
|
|
|
1,264 |
|
|
|
Common Stock (69,773 shares) |
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
Startec Global Communications
|
|
Loan (10.0%, Due 5/07 5/09) |
|
|
25,226 |
|
|
|
25,226 |
|
|
|
25,226 |
|
|
Corporation
|
|
Common Stock (19,180,000 shares) |
|
|
|
|
|
|
37,255 |
|
|
|
694 |
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Loan (15.3%, Due 3/12) |
|
|
8,436 |
|
|
|
8,436 |
|
|
|
8,436 |
|
|
(Industrial Products)
|
|
Common Stock (3,000,000 shares) |
|
|
|
|
|
|
3,522 |
|
|
|
39,575 |
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
493 |
|
|
Triview Investments,
Inc.(8)
|
|
Loan (15.0%, Due 7/12) |
|
|
31,000 |
|
|
|
30,845 |
|
|
|
30,845 |
|
|
(Broadcasting & Cable/
|
|
Loans (16.8%, Due 7/08
7/12)(6) |
|
|
19,600 |
|
|
|
19,520 |
|
|
|
19,520 |
|
|
Consumer Products)
|
|
Common Stock (182 shares) |
|
|
|
|
|
|
86,693 |
|
|
|
22,023 |
|
|
|
Guaranty ($800) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letter of Credit ($200) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies more than 25% owned |
|
|
|
|
|
$ |
1,510,082 |
|
|
$ |
1,612,914 |
|
|
Companies 5% to 25% Owned |
|
|
|
|
|
Air Evac Lifeteam
|
|
Debt Securities (13.6%, Due 7/10) |
|
$ |
42,197 |
|
|
$ |
42,041 |
|
|
$ |
42,041 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
3,941 |
|
|
|
3,866 |
|
|
Aspen Pet Products, Inc.
|
|
Loan (19.0%, Due 6/08) |
|
|
19,748 |
|
|
|
19,656 |
|
|
|
19,656 |
|
|
(Consumer Products)
|
|
Preferred Stock (2,877 shares) |
|
|
|
|
|
|
2,154 |
|
|
|
1,542 |
|
|
|
Common Stock (1,400 shares) |
|
|
|
|
|
|
140 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Loan (14.5%, Due 8/12) |
|
|
23,489 |
|
|
|
23,390 |
|
|
|
23,390 |
|
|
(Industrial Products)
|
|
Common Stock (5,073 shares) |
|
|
|
|
|
|
5,813 |
|
|
|
3,600 |
|
|
The Debt Exchange Inc.
|
|
Preferred Stock (921,875 shares) |
|
|
|
|
|
|
1,250 |
|
|
|
2,139 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
(8)
|
|
Triview Investments, Inc. (formerly GAC Investments, Inc.) holds
investments in Longview Cable & Data, LLC (Broadcasting
& Cable) with a cost of $59.1 million and value of
$9.0 million and Triax Holdings, LLC (Consumer Products)
with a cost of $78.0 million and a value of
$63.4 million. The guaranty and standby letter of credit
relate to Longview Cable & Data, LLC. |
The accompanying notes are an integral part of these
consolidated financial statements.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
MedBridge Healthcare, LLC
|
|
Loan (4.0%, Due 8/09) |
|
$ |
7,035 |
|
|
$ |
7,035 |
|
|
$ |
7,035 |
|
|
(Healthcare Services)
|
|
Loan (10.0%, Due
8/14)(6) |
|
|
4,412 |
|
|
|
4,412 |
|
|
|
2,268 |
|
|
|
Convertible Debenture (2.0%,
Due
8/14)(6) |
|
|
2,970 |
|
|
|
984 |
|
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Loan (14.5%, Due 6/09) |
|
|
10,522 |
|
|
|
10,492 |
|
|
|
10,492 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,708 |
|
|
|
953 |
|
|
Pres Air Trol LLC
|
|
Debt Securities (12.0%, Due 4/10) |
|
|
6,180 |
|
|
|
5,863 |
|
|
|
5,863 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,356 |
|
|
|
318 |
|
|
Progressive International
|
|
Loan (16.0%, Due 12/09) |
|
|
7,364 |
|
|
|
7,336 |
|
|
|
7,336 |
|
|
Corporation
|
|
Preferred Stock (500 shares) |
|
|
|
|
|
|
500 |
|
|
|
867 |
|
|
(Consumer Products)
|
|
Common Stock (197 shares) |
|
|
|
|
|
|
13 |
|
|
|
42 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Loans (12.1%, Due 11/10) |
|
|
11,906 |
|
|
|
10,834 |
|
|
|
10,834 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,153 |
|
|
|
2,264 |
|
|
Universal Environmental Services, LLC
|
|
Loan (15.5%, Due 2/09) |
|
|
11,150 |
|
|
|
11,108 |
|
|
|
11,108 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
1,828 |
|
|
|
1,226 |
|
|
Total
companies 5% to 25% owned |
|
|
|
|
|
$ |
164,007 |
|
|
$ |
156,840 |
|
|
Companies Less Than 5% Owned |
|
|
|
|
|
Advanced Circuits, Inc.
|
|
Loans (11.3%, Due 9/11 3/12) |
|
$ |
19,000 |
|
|
$ |
18,906 |
|
|
$ |
18,906 |
|
|
(Industrial Products)
|
|
Common Stock (40,000 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Anthony, Inc.
|
|
Loans (12.7%, Due 9/11 9/12) |
|
|
14,633 |
|
|
|
14,571 |
|
|
|
14,571 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benchmark Medical, Inc.
|
|
Debt Securities (14.0%, Due 12/08) |
|
|
13,823 |
|
|
|
13,773 |
|
|
|
13,773 |
|
|
(Healthcare Services)
|
|
Warrants |
|
|
|
|
|
|
18 |
|
|
|
18 |
|
|
BI Incorporated
|
|
Loan (14.0%, due 2/12) |
|
|
16,121 |
|
|
|
16,048 |
|
|
|
16,048 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
|
|
Loan (13.0%, Due
12/10)(6) |
|
|
3,100 |
|
|
|
3,043 |
|
|
|
2,239 |
|
|
(Consumer Products)
|
|
Debt Securities (13.0%, Due
12/10)(6) |
|
|
10,329 |
|
|
|
9,681 |
|
|
|
7,121 |
|
|
|
Preferred Stock (140,214 shares) |
|
|
|
|
|
|
2,893 |
|
|
|
|
|
|
|
Common Stock (1,810 shares) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
910 |
|
|
|
|
|
|
C&K Market, Inc.
|
|
Loan (13.0%, due 12/08) |
|
|
14,582 |
|
|
|
14,521 |
|
|
|
14,521 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Class C Notes (12.9%, Due 12/13) |
|
|
18,800 |
|
|
|
18,979 |
|
|
|
18,979 |
|
|
CDO Fund I,
Ltd.(4)
|
|
Class D Notes (17.0%, Due 12/13) |
|
|
9,400 |
|
|
|
9,489 |
|
|
|
9,489 |
|
|
(Senior Debt CDO Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Preferred Shares (23,600,000 shares) |
|
|
|
|
|
|
24,271 |
|
|
|
24,271 |
|
|
CLO Fund III, Ltd.
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Senior Debt CLO Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Camden Partners Strategic Fund II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,142 |
|
|
|
2,674 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
The accompanying notes are an integral part of these
consolidated financial statements.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Catterton Partners V,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
$ |
2,871 |
|
|
$ |
2,767 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBS Personnel Holdings, Inc.
|
|
Loan (14.5%, Due 12/09) |
|
$ |
20,486 |
|
|
|
20,405 |
|
|
|
20,405 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Education
Centers, Inc.
|
|
Loan (15.0%, Due 12/10) |
|
|
32,275 |
|
|
|
32,154 |
|
|
|
32,154 |
|
|
(Education Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component Hardware Group, Inc.
|
|
Preferred Stock (18,000 shares) |
|
|
|
|
|
|
2,605 |
|
|
|
2,775 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
500 |
|
|
Cooper Natural Resources, Inc.
|
|
Debt Securities (0%, Due 11/07) |
|
|
1,005 |
|
|
|
1,005 |
|
|
|
1,005 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,316 shares) |
|
|
|
|
|
|
1,424 |
|
|
|
20 |
|
|
|
Warrants |
|
|
|
|
|
|
830 |
|
|
|
|
|
|
Coverall North America, Inc.
|
|
Loans (14.6%, Due 2/11) |
|
|
27,132 |
|
|
|
27,082 |
|
|
|
27,082 |
|
|
(Business Services)
|
|
Preferred Stock (6,500 shares) |
|
|
|
|
|
|
6,500 |
|
|
|
6,758 |
|
|
|
Warrants |
|
|
|
|
|
|
2,950 |
|
|
|
3,500 |
|
|
Drilltec Patents & Technologies
|
|
Loan (10.0%, Due
8/06)(6) |
|
|
10,994 |
|
|
|
10,918 |
|
|
|
|
|
|
Company, Inc.
|
|
Debt Securities (16.5%, Due
8/06)(6) |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
277 |
|
|
(Energy Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eCentury Capital Partners,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,649 |
|
|
|
795 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elexis Beta
GmbH(4)
|
|
Options |
|
|
|
|
|
|
426 |
|
|
|
50 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frozen Specialties, Inc.
|
|
Warrants |
|
|
|
|
|
|
435 |
|
|
|
530 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Ridge Corporation
(Retail)
|
|
Loan (7.0%, Due
5/12)(6) |
|
|
22,500 |
|
|
|
22,500 |
|
|
|
16,935 |
|
|
Geotrace Technologies, Inc.
|
|
Debt Securities (12.0%, Due 6/09) |
|
|
18,400 |
|
|
|
16,561 |
|
|
|
16,561 |
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
2,350 |
|
|
|
2,500 |
|
|
Ginsey Industries, Inc.
|
|
Loans (12.5%, Due 3/06) |
|
|
3,896 |
|
|
|
3,896 |
|
|
|
3,896 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Broadcasting Systems II
|
|
Loan (5.0%, Due 6/09) |
|
|
2,756 |
|
|
|
2,756 |
|
|
|
2,756 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grotech Partners, VI,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,573 |
|
|
|
4,167 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Havco Wood Products LLC
|
|
Loans (10.7%, Due 8/11) |
|
|
39,000 |
|
|
|
37,755 |
|
|
|
37,755 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,048 |
|
|
|
1,048 |
|
|
Haven Eldercare of New England,
LLC(9)
|
|
Loans (9.3%, Due
10/05)(6) |
|
|
46,671 |
|
|
|
46,670 |
|
|
|
47,465 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Haven Healthcare Management,
LLC(9)
|
|
Loan (18.0% Due
8/06)(6) |
|
|
5,541 |
|
|
|
5,541 |
|
|
|
2,000 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthASPex Services Inc.
|
|
Loans (4.0%, Due 7/08) |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
(9)
|
|
Haven Eldercare of New England, LLC and Haven Healthcare
Management, LLC are affiliated companies. |
The accompanying notes are an integral part of these
consolidated financial statements.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
The Hillman Companies,
Inc.(3)
|
|
Loan (13.5%, Due 9/11) |
|
$ |
43,754 |
|
|
$ |
43,561 |
|
|
$ |
43,561 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homax Holdings, Inc.
|
|
Debt Securities (12.0%, Due 8/11) |
|
|
14,000 |
|
|
|
13,006 |
|
|
|
13,006 |
|
|
(Consumer Products)
|
|
Preferred Stock (89 shares) |
|
|
|
|
|
|
89 |
|
|
|
88 |
|
|
|
|
Common Stock (28 shares) |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
Warrants |
|
|
|
|
|
|
1,106 |
|
|
|
1,428 |
|
|
Icon International, Inc.
|
|
Common Stock (25,707 shares) |
|
|
|
|
|
|
76 |
|
|
|
|
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interline Brands, Inc.
(3)
|
|
Common Stock (10,122 shares) |
|
|
|
|
|
|
152 |
|
|
|
210 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Fiber Corporation
|
|
Loans (14.0%, Due 6/12) |
|
|
21,436 |
|
|
|
21,348 |
|
|
|
21,348 |
|
|
(Industrial Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
2,500 |
|
|
|
1,900 |
|
|
Line-X, Inc.
|
|
Loans (9.9% Due 8/11) |
|
|
53,234 |
|
|
|
52,953 |
|
|
|
52,953 |
|
|
(Consumer Products)
|
|
Standby Letter of Credit ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MedAssets, Inc.
|
|
Preferred Stock (227,865 shares) |
|
|
|
|
|
|
2,049 |
|
|
|
2,850 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
136 |
|
|
|
136 |
|
|
Meineke Car Care Centers, Inc.
|
|
Senior Loan (7.4%, Due 6/11) |
|
|
28,000 |
|
|
|
27,858 |
|
|
|
27,858 |
|
|
(Business Services)
|
|
Loans (11.9%, Due 6/12 6/13) |
|
|
72,000 |
|
|
|
71,660 |
|
|
|
71,660 |
|
|
|
|
Common Stock (10,696,308
shares)(10) |
|
|
|
|
|
|
26,985 |
|
|
|
26,985 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
MHF Logistical Solutions, Inc.
|
|
Loan (10.0%, Due 5/11) |
|
|
22,653 |
|
|
|
22,544 |
|
|
|
22,544 |
|
|
(Business Services)
|
|
Preferred Stock (431 shares) |
|
|
|
|
|
|
431 |
|
|
|
431 |
|
|
|
|
Common Stock (1,438 shares) |
|
|
|
|
|
|
144 |
|
|
|
144 |
|
|
Mid-Atlantic Venture Fund IV,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,600 |
|
|
|
3,477 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mogas Energy, LLC
|
|
Debt Securities (9.5%, Due 3/12 4/12) |
|
|
17,005 |
|
|
|
15,587 |
|
|
|
15,587 |
|
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
1,774 |
|
|
|
2,800 |
|
|
N.E.W. Customer Service Companies, Inc.
|
|
Loans (11.0%, Due 7/12) |
|
|
40,000 |
|
|
|
40,018 |
|
|
|
40,018 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nobel Learning Communities,
|
|
Preferred Stock (1,214,356 shares) |
|
|
|
|
|
|
2,764 |
|
|
|
2,564 |
|
|
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
575 |
|
|
|
1,323 |
|
|
(Education)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norwesco, Inc.
|
|
Loan (12.6%, Due 1/12 7/12) |
|
|
84,005 |
|
|
|
83,601 |
|
|
|
83,601 |
|
|
(Industrial Products)
|
|
Common Stock (573,561
shares)(10) |
|
|
|
|
|
|
39,268 |
|
|
|
39,268 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Novak Biddle Venture Partners III,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,519 |
|
|
|
1,678 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oahu Waste Services, Inc.
|
|
Stock Appreciation Rights |
|
|
|
|
|
|
239 |
|
|
|
780 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
|
(2) |
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
|
(3) |
|
|
Public company. |
|
(4) |
|
|
Non-U.S. company or principal place of business outside the
U.S. |
|
(5) |
|
|
Non-registered investment company. |
|
(6) |
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
|
(10) |
|
|
Common stock is non-voting. In addition to non-voting stock
ownership, the Company has an option to acquire a majority of
the voting securities of the portfolio company at fair market
value. |
The accompanying notes are an integral part of these
consolidated financial statements.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Onyx Television
GmbH(4)
|
|
Preferred Units |
|
|
|
|
|
$ |
201 |
|
|
$ |
|
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opinion Research
Corporation(3)
|
|
Warrants |
|
|
|
|
|
|
996 |
|
|
|
450 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Trading Company, Inc.
|
|
Common Stock (13,820 shares) |
|
|
|
|
|
|
|
|
|
|
5,200 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging Advantage Corporation
|
|
Debt Securities (18.5%, Due 7/06) |
|
$ |
17,039 |
|
|
|
16,521 |
|
|
|
16,521 |
|
|
(Business Services)
|
|
Common Stock (232,168 shares) |
|
|
|
|
|
|
2,386 |
|
|
|
1,003 |
|
|
|
Warrants |
|
|
|
|
|
|
963 |
|
|
|
405 |
|
|
Palm Coast Data, LLC
|
|
Senior Loan (7.3%, Due 8/10) |
|
|
16,100 |
|
|
|
16,020 |
|
|
|
16,020 |
|
|
(Business Services)
|
|
Loan (15.5%, Due 8/12 8/15) |
|
|
29,600 |
|
|
|
29,455 |
|
|
|
29,455 |
|
|
|
|
Common Stock (21,743
shares)(10) |
|
|
|
|
|
|
21,743 |
|
|
|
21,743 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performant Financial Corporation
|
|
Common Stock (478,816 shares) |
|
|
|
|
|
|
734 |
|
|
|
2,500 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Mach, Inc.
|
|
Loan (13.8%, Due 6/12) |
|
|
19,191 |
|
|
|
19,106 |
|
|
|
19,106 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,500 |
|
|
|
1,200 |
|
|
RadioVisa Corporation
|
|
Loan (15.5%, Due 12/08) |
|
|
26,785 |
|
|
|
26,682 |
|
|
|
26,682 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Hawk Industries, LLC
|
|
Loan (11.0%, Due 4/11) |
|
|
41,624 |
|
|
|
41,407 |
|
|
|
41,407 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resun Leasing, Inc.
|
|
Loan (15.5%, Due 11/07) |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.B. Restaurant Company
|
|
Debt Securities (15.0%, Due 11/08) |
|
|
20,483 |
|
|
|
20,017 |
|
|
|
20,017 |
|
|
(Retail)
|
|
Preferred Stock (54,125 shares) |
|
|
|
|
|
|
135 |
|
|
|
135 |
|
|
|
Warrants |
|
|
|
|
|
|
619 |
|
|
|
619 |
|
|
SBBUT, LLC
|
|
Equity Interests |
|
|
|
|
|
|
52 |
|
|
|
52 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soff-Cut Holdings, Inc.
|
|
Preferred Stock (300 shares) |
|
|
|
|
|
|
300 |
|
|
|
300 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
|
|
|
SPP Mezzanine Fund,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,470 |
|
|
|
2,373 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradesmen International, Inc.
|
|
Debt Securities (12.0%, Due 12/09) |
|
|
15,000 |
|
|
|
14,290 |
|
|
|
14,290 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
710 |
|
|
|
1,270 |
|
|
United Site Services, Inc.
|
|
Loan (11.9%, Due 8/11) |
|
|
49,712 |
|
|
|
49,492 |
|
|
|
49,492 |
|
|
(Business Services)
|
|
Common Stock (160,588 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Universal Tax Systems, Inc.
|
|
Loan (14.5%, Due 7/11) |
|
|
18,947 |
|
|
|
18,870 |
|
|
|
18,870 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Updata Venture Partners II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,471 |
|
|
|
5,223 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse-Cibernet Investors, LLC
|
|
Equity Interest |
|
|
|
|
|
|
34 |
|
|
|
34 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
|
(2) |
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
|
(3) |
|
|
Public company. |
|
(4) |
|
|
Non-U.S. company or principal place of business outside the
U.S. |
|
(5) |
|
|
Non-registered investment company. |
|
(6) |
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
|
(10) |
|
|
Common stock is non-voting. In addition to non-voting stock
ownership, the Company has an option to acquire a majority of
the voting securities of the portfolio company at fair market
value. |
The accompanying notes are an integral part of these
consolidated financial statements.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
| |
|
|
|
|
(unaudited) | |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal | |
|
Cost | |
|
Value | |
|
|
|
|
| |
|
| |
|
| |
Venturehouse Group,
LLC(5)
|
|
Equity Interest |
|
|
|
|
|
$ |
598 |
|
|
$ |
395 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VICORP Restaurants,
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
33 |
|
|
|
758 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walker Investment Fund II,
LLLP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,330 |
|
|
|
695 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wear Me Apparel Corporation
|
|
Debt Securities (15.0%, Due 12/10) |
|
$ |
45,000 |
|
|
|
43,878 |
|
|
|
43,878 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
1,219 |
|
|
|
1,520 |
|
|
Wilshire Restaurant Group, Inc.
|
|
Debt Securities (20.0%, Due
6/07)(6) |
|
|
19,107 |
|
|
|
18,566 |
|
|
|
18,566 |
|
|
(Retail)
|
|
Warrants |
|
|
|
|
|
|
735 |
|
|
|
660 |
|
|
Wilton Industries, Inc.
|
|
Loan (19.3%, Due 6/08) |
|
|
4,800 |
|
|
|
4,800 |
|
|
|
4,800 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodstream Corporation
|
|
Loans (13.0%, Due 11/12 5/13) |
|
|
52,188 |
|
|
|
52,037 |
|
|
|
52,037 |
|
|
(Consumer Products)
|
|
Common Stock (180 shares) |
|
|
|
|
|
|
673 |
|
|
|
3,231 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,269 |
|
|
Other companies
|
|
Other debt investments |
|
|
651 |
|
|
|
651 |
|
|
|
651 |
|
|
|
Other debt
investments(6) |
|
|
474 |
|
|
|
474 |
|
|
|
349 |
|
|
|
Other equity
investments(3) |
|
|
|
|
|
|
59 |
|
|
|
40 |
|
|
|
Guaranty ($118) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies less than 5% owned |
|
|
|
|
|
$ |
1,338,370 |
|
|
$ |
1,311,231 |
|
|
Total
private finance (118 portfolio companies) |
|
|
|
|
|
$ |
3,012,459 |
|
|
$ |
3,080,985 |
|
|
|
|
|
(1)
|
|
Interest rates represent the weighted average annual stated
interest rate on loans and debt securities, which are presented
by nature of indebtedness for a single issuer. The maturity
dates represent the earliest and the latest maturity dates. |
(2)
|
|
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. |
(3)
|
|
Public company. |
(4)
|
|
Non-U.S. company or principal place of business outside the
U.S. |
(5)
|
|
Non-registered investment company. |
(6)
|
|
Loan or debt security is on non-accrual status and therefore is
considered non-income producing. |
The accompanying notes are an integral part of these
consolidated financial statements.
12
|
|
|
|
|
|
|
|
|
Commercial Real Estate Finance
|
|
|
|
|
|
|
|
|
(in thousands, except number of loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
|
|
|
|
| |
|
|
Interest | |
|
Number of | |
|
(unaudited) | |
|
|
Rate Ranges | |
|
Loans | |
|
Cost | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Commercial Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 6.99% |
|
|
|
5 |
|
|
$ |
47,056 |
|
|
$ |
46,575 |
|
|
|
|
7.00%8.99% |
|
|
|
25 |
|
|
|
50,448 |
|
|
|
49,469 |
|
|
|
|
9.00%10.99% |
|
|
|
4 |
|
|
|
11,094 |
|
|
|
11,036 |
|
|
|
|
11.00%12.99% |
|
|
|
2 |
|
|
|
8,159 |
|
|
|
7,820 |
|
|
|
|
13.00%14.99% |
|
|
|
1 |
|
|
|
2,296 |
|
|
|
2,296 |
|
|
|
15.00% and above |
|
|
2 |
|
|
|
3,970 |
|
|
|
3,970 |
|
|
|
Total commercial mortgage
loans(11)
|
|
|
|
|
|
|
39 |
|
|
$ |
123,023 |
|
|
$ |
121,166 |
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
$ |
14,147 |
|
|
$ |
15,088 |
|
|
Equity
Interests(2)
Companies more than 25% owned
(Guarantees $7,054) |
|
|
|
|
|
$ |
11,453 |
|
|
$ |
6,511 |
|
|
|
Total commercial real estate finance
|
|
|
|
|
|
|
|
|
|
$ |
148,623 |
|
|
$ |
142,765 |
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
|
$ |
3,161,082 |
|
|
$ |
3,223,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest
rates represent the weighted average annual stated interest rate
on loans and debt securities, which are presented by nature of
indebtedness
for a
single issuer. The maturity dates represent the earliest and the
latest maturity dates. |
(2) Common
stock, preferred stock, warrants, options, and equity interests
are generally non-income producing and restricted. |
(3) Public
company. |
(4) Non-U.S. company
or principal place of business outside the U.S. |
(5) Non-registered
investment company. |
(11) Commercial
mortgage loans totaling $20.7 million at value were on
non-accrual status and therefore were considered non-income
producing. |
The accompanying notes are an integral part of these
consolidated financial statements.
13
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at and for the three and nine months ended
September 30, 2005 and 2004 is unaudited)
Note 1. Organization
Allied Capital Corporation, a Maryland corporation, is a
closed-end management investment company that has elected to be
regulated as a business development company (BDC)
under the Investment Company Act of 1940 (1940 Act).
Allied Capital Corporation (ACC) has a subsidiary,
Allied Investments L.P. (Allied Investments), which
is licensed under the Small Business Investment Act of 1958 as a
Small Business Investment Company (SBIC). In
addition, ACC has a real estate investment trust subsidiary,
Allied Capital REIT, Inc. (Allied REIT), and several
subsidiaries which are single member limited liability companies
established primarily to hold real estate properties. ACC also
has a subsidiary, A.C. Corporation (AC Corp), that
provides diligence and structuring services on private finance
and commercial real estate finance transactions, as well as
structuring, transaction, management, consulting and other
services to the Company and its portfolio companies.
Allied Capital Corporation and its subsidiaries, collectively,
are referred to as the Company.
In accordance with specific rules prescribed for investment
companies, subsidiaries hold investments on behalf of the
Company or provide substantial services to the Company.
Portfolio investments are held for purposes of deriving
investment income and future capital gains. The Company
consolidates the results of its subsidiaries for financial
reporting purposes. The financial results of the Companys
portfolio investments are not consolidated in the Companys
financial statements.
The investment objective of the Company is to achieve current
income and capital gains. In order to achieve this objective,
the Company has primarily invested in companies in a variety of
industries.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of
ACC and its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to the 2004 balances to conform
with the 2005 financial statement presentation.
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete
consolidated financial statements. In the opinion of management,
the unaudited consolidated financial results of the Company
included herein contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the
financial position of the Company as of September 30, 2005,
the results of operations for the three and nine months ended
September 30, 2005 and 2004, and changes in net assets and
cash flows for the nine months ended September 30, 2005 and
2004. The results of operations for the three and nine months
ended September 30, 2005, are not necessarily indicative of
the operating results to be expected for the full year.
14
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
The private finance portfolio and the interest and related
portfolio income and net realized gains (losses) on the private
finance portfolio are presented in three categories: companies
more than 25% owned, which represent portfolio companies where
the Company directly or indirectly owns more than 25% of the
outstanding voting securities of such portfolio company and,
therefore, are deemed controlled by the Company under the 1940
Act; companies owned 5% to 25%, which represent portfolio
companies where the Company directly or indirectly owns 5% to
25% of the outstanding voting securities of such portfolio
company or where the Company holds one or more seats on the
portfolio companys board of directors and, therefore, are
deemed to be an affiliated person under the 1940 Act; and
companies less than 5% owned which represent portfolio companies
where the Company directly or indirectly owns less than 5% of
the outstanding voting securities of such portfolio company and
where the Company has no other affiliations with such portfolio
company. The interest and related portfolio income and net
realized gains (losses) from the commercial real estate finance
portfolio and other sources are included in the companies less
than 5% owned category on the consolidated statement of
operations.
In the ordinary course of business, the Company enters into
transactions with portfolio companies that may be considered
related party transactions.
|
|
|
Valuation Of Portfolio Investments |
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of companies,
non-investment grade commercial mortgage-backed securities
(CMBS), and the bonds and preferred shares of
collateralized debt obligations (CDO). The
Companys investments are generally subject to restrictions
on resale and generally have no established trading market. The
Company values substantially all of its investments at fair
value as determined in good faith by the Board of Directors in
accordance with the Companys valuation policy. The Company
determines fair value to be the amount for which an investment
could be exchanged in an orderly disposition over a reasonable
period of time between willing parties other than in a forced or
liquidation sale. The Companys valuation policy considers
the fact that no ready market exists for substantially all of
the securities in which it invests. The Companys valuation
policy is intended to provide a consistent basis for determining
the fair value of the portfolio. The Company will record
unrealized depreciation on investments when it believes that an
investment has become impaired, including where collection of a
loan or realization of an equity security is doubtful, or when
the enterprise value of the portfolio company does not currently
support the cost of the Companys debt or equity
investments. Enterprise value means the entire value of the
company to a potential buyer, including the sum of the values of
debt and equity securities used to capitalize the enterprise at
a point in time. The Company will record unrealized appreciation
if it believes that the underlying portfolio company has
appreciated in value and/or the Companys equity security
has also appreciated in value. The value of investments in
publicly traded securities is determined using quoted market
prices discounted for restrictions on resale, if any.
|
|
|
Loans and Debt Securities |
For loans and debt securities, fair value generally approximates
cost unless the borrowers enterprise value, overall
financial condition or other factors lead to a determination of
fair value at a different amount.
15
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity), the Company
allocates its cost basis in its investment between its debt
securities and its nominal cost equity at the time of
origination. At that time, the original issue discount basis of
the nominal cost equity is recorded by increasing the cost basis
in the equity and decreasing the cost basis in the related debt
securities.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. For loans and
debt securities with contractual payment-in-kind interest, which
represents contractual interest accrued and added to the loan
balance that generally becomes due at maturity, the Company will
not accrue payment-in-kind interest if the portfolio company
valuation indicates that the payment-in-kind interest is not
collectible. In general, interest is not accrued on loans and
debt securities if the Company has doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. Loans in workout status
that are classified as Grade 4 or 5 assets under the
Companys internal grading system do not accrue interest.
In addition, interest may not accrue on loans or debt securities
to portfolio companies that are more than 50% owned by the
Company depending on such companys capital requirements.
Loan origination fees, original issue discount, and market
discount are capitalized and then amortized into interest income
using the effective interest method. Upon the prepayment of a
loan or debt security, any unamortized loan origination fees are
recorded as interest income and any unamortized original issue
discount or market discount is recorded as a realized gain.
Prepayment premiums are recorded on loans and debt securities
when received.
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest plus the annual
amortization of loan origination fees, original issue discount,
and market discount on accruing loans and debt securities less
the annual amortization of loan origination costs, divided by
(b) total loans and debt securities at value. The weighted
average yield is computed as of the balance sheet date.
The Companys equity securities in portfolio companies for
which there is no liquid public market are valued at fair value
based on the enterprise value of the portfolio company, which is
determined using various factors, including cash flow from
operations of the portfolio company and other pertinent factors,
such as recent offers to purchase a portfolio company, recent
transactions involving the purchase or sale of the portfolio
companys equity securities, liquidation events, or other
events. The determined equity values are generally discounted to
account for restrictions on resale or minority ownership
positions.
The value of the Companys equity securities in public
companies for which market quotations are readily available is
based on the closing public market price on the balance sheet
date. Securities that carry certain restrictions on sale are
typically valued at a discount from the public market value of
the security.
Dividend income on preferred equity securities is recorded as
dividend income on an accrual basis to the extent that such
amounts are expected to be collected and to the extent that the
Company has the option to receive the dividend in cash. Dividend
income on common equity
16
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
securities is recorded on the record date for private companies
or on the ex-dividend date for publicly traded companies.
|
|
|
Commercial Mortgage-Backed Securities (CMBS)
and Collateralized Debt Obligations (CDO) |
On May 3, 2005, the Company completed the sale of its
portfolio of CMBS bonds and CDO bonds and preferred shares. See
Note 3.
Prior to the sale on May 3, 2005, CMBS bonds and CDO bonds
and preferred shares were carried at fair value, which was based
on a discounted cash flow model that utilized prepayment and
loss assumptions based on historical experience and projected
performance, economic factors, the characteristics of the
underlying cash flow, and comparable yields for similar CMBS
bonds and CDO bonds and preferred shares, when available. The
Company recognized unrealized appreciation or depreciation on
its CMBS bonds and CDO bonds and preferred shares as comparable
yields in the market changed and/or based on changes in
estimated cash flows resulting from changes in prepayment or
loss assumptions in the underlying collateral pool. The Company
determined the fair value of its CMBS bonds and CDO bonds and
preferred shares on an individual security-by-security basis.
The Company recognized income from the amortization of original
issue discount using the effective interest method, using the
anticipated yield over the projected life of the investment.
Yields were revised when there were changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield were recognized as an
adjustment to the estimated yield over the remaining life of the
CMBS bonds and CDO bonds and preferred shares from the date the
estimated yield was changed.
|
|
|
Net Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation |
Realized gains or losses are measured by the difference between
the net proceeds from the repayment or sale and the cost basis
of the investment without regard to unrealized appreciation or
depreciation previously recognized, and include investments
charged off during the year, net of recoveries. Net change in
unrealized appreciation or depreciation reflects the change in
portfolio investment values during the reporting period,
including the reversal of previously recorded unrealized
appreciation or depreciation when gains or losses are realized.
Fee income includes fees for guarantees and services rendered by
the Company to portfolio companies and other third parties such
as diligence, structuring, transaction services, management and
consulting services, and other services. Guaranty fees are
generally recognized as income over the related period of the
guaranty. Diligence, structuring, and transaction services fees
are generally recognized as income when services are rendered or
when the related transactions are completed. Management,
consulting and other services fees are generally recognized as
income as the services are rendered.
17
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Guarantees meeting the characteristics described in FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (the
Interpretation) and issued or modified after
December 31, 2002, are recognized at fair value at
inception. However, certain guarantees are excluded from the
initial recognition provisions of the Interpretation.
Debt financing costs are based on actual costs incurred in
obtaining debt financing and are deferred and amortized as part
of interest expense over the term of the related debt
instrument. Costs associated with the issuance of common stock,
such as underwriting, accounting and legal fees, and printing
costs are recorded as a reduction to the proceeds from the sale
of common stock.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include cash in banks and all highly
liquid investments with original maturities of three months or
less.
|
|
|
Dividends to Shareholders |
Dividends to shareholders are recorded on the record date.
The Company has a stock-based employee compensation plan. The
Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation cost is reflected in net
increase in net assets resulting from operations, as all options
granted under this plan had an exercise price equal to the
market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net
increase in net assets resulting from operations and earnings
per share if the Company had applied the fair value recognition
provisions of FASB
18
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation for the
three and nine months ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(in thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
Net increase in net assets resulting from operations as reported
|
|
$ |
113,168 |
|
|
$ |
85,999 |
|
|
$ |
544,674 |
|
|
$ |
201,649 |
|
Less total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
|
(2,546 |
) |
|
|
(3,226 |
) |
|
|
(9,511 |
) |
|
|
(13,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net increase in net assets resulting from operations
|
|
|
110,622 |
|
|
|
82,773 |
|
|
|
535,163 |
|
|
|
187,827 |
|
Less preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders
|
|
$ |
110,622 |
|
|
$ |
82,773 |
|
|
$ |
535,163 |
|
|
$ |
187,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.84 |
|
|
$ |
0.67 |
|
|
$ |
4.06 |
|
|
$ |
1.57 |
|
|
Pro forma
|
|
$ |
0.82 |
|
|
$ |
0.64 |
|
|
$ |
3.99 |
|
|
$ |
1.46 |
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.82 |
|
|
$ |
0.66 |
|
|
$ |
3.99 |
|
|
$ |
1.53 |
|
|
Pro forma
|
|
$ |
0.80 |
|
|
$ |
0.63 |
|
|
$ |
3.92 |
|
|
$ |
1.43 |
|
Pro forma expenses are based on the underlying value of the
options granted by the Company. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option pricing model and expensed over the vesting period. The
following weighted average assumptions were used to calculate
the fair value of options granted during the three and nine
months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004(1) | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
4.1 |
% |
|
|
|
|
|
|
4.1 |
% |
|
|
2.9 |
% |
Expected life in years
|
|
|
5.0 |
|
|
|
|
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility
|
|
|
35.0 |
% |
|
|
|
|
|
|
35.1 |
% |
|
|
37.0 |
% |
Dividend yield
|
|
|
9.0 |
% |
|
|
|
|
|
|
9.0 |
% |
|
|
8.8 |
% |
Weighted average fair value per option
|
|
$ |
3.96 |
|
|
|
|
|
|
$ |
3.94 |
|
|
$ |
4.19 |
|
|
|
(1) |
There were no stock options granted during the three months
ended September 30, 2004. |
|
|
|
Federal and State Income Taxes and Excise Tax |
The Company intends to comply with the requirements of the
Internal Revenue Code (Code) that are applicable to
regulated investment companies (RIC) and real estate
investment trusts
19
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
(REIT). The Company and its subsidiaries that
qualify as a RIC or a REIT intend to distribute or retain
through a deemed distribution all of their annual taxable income
to shareholders; therefore, the Company has made no provision
for regular corporate income taxes for these entities. AC Corp
is a corporation subject to federal and state income taxes and
records a benefit or expense for income taxes as appropriate.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
subject to a 4% excise tax on such income carried over for
distribution in the following year. To the extent that the
Company determines that its estimated current year annual
taxable income will be in excess of estimated current year
dividend distributions, the Company accrues excise taxes, if
any, on estimated excess taxable income as taxable income is
earned using an annual effective excise tax rate. The annual
effective excise tax rate is determined by dividing the
estimated annual excise tax by the estimated annual taxable
income.
Basic earnings per common share is calculated using the weighted
average number of common shares outstanding for the period
presented. Diluted earnings per common share reflects the
potential dilution that could occur if options to issue common
stock were exercised into common stock. Earnings per share is
computed after subtracting dividends on preferred shares.
|
|
|
Use of Estimates in the Preparation of Financial
Statements |
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
The consolidated financial statements include portfolio
investments at value of $3.2 billion and $3.0 billion
at September 30, 2005, and December 31, 2004,
respectively. At September 30, 2005, and December 31,
2004, 93% and 92%, respectively, of the Companys total
assets represented portfolio investments whose fair values have
been determined by the Board of Directors in good faith in the
absence of readily available market values. Because of the
inherent uncertainty of valuation, the Board of Directors
determined values may differ significantly from the values that
would have been used had a ready market existed for the
investments, and the differences could be material.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued Statement No. 123
(Revised 2004), Share-Based Payment (the
Statement), which requires companies to recognize
the grant-date fair value of stock options and other
equity-based compensation issued to employees in the income
statement. The Statement expresses no preference for a type of
valuation model and was originally effective for most public
companies interim or annual periods beginning after
June 15, 2005. In April 2005, the Securities and Exchange
Commission issued a rule deferring the effective date to
January 1, 2006. The scope of the Statement includes a wide
range of share-based compensation arrangements including share
options,
20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The
Statement replaces FASB Statement No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees.
The Company has not yet selected a valuation model to value its
stock based awards or adopted accounting policies regarding the
method of recognizing the fair value of awards over the
requisite service period. As a result, the Company has not yet
determined the effects of the Statement on its financial
position and results of operations. See Note 2
Summary of Significant Accounting Policies Stock
Compensation Plans.
Note 3. Portfolio
At September 30, 2005, and December 31, 2004, the
private finance portfolio consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Cost | |
|
Value | |
|
Yield(1) | |
|
Cost | |
|
Value | |
|
Yield(1) | |
($ in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Loans and debt securities
(2)
|
|
$ |
2,132,770 |
|
|
$ |
2,039,642 |
|
|
|
13.0 |
% |
|
$ |
1,679,855 |
|
|
$ |
1,602,869 |
|
|
|
13.9 |
% |
Equity securities
|
|
|
879,689 |
|
|
|
1,041,343 |
|
|
|
|
|
|
|
705,065 |
|
|
|
699,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,012,459 |
|
|
$ |
3,080,985 |
|
|
|
|
|
|
$ |
2,384,920 |
|
|
$ |
2,302,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest plus the annual
amortization of loan origination fees, original issue discount,
and market discount on accruing loans and debt securities less
the annual amortization of loan origination costs, divided by
(b) total loans and debt securities at value. At
September 30, 2005, and December 31, 2004, the cost
and value of loans and debt securities include the Class A
equity interests in BLX and the guaranteed dividend yield on
these equity interests is included in interest income. The
weighted average yield is computed as of the balance sheet date. |
|
(2) |
The principal balance outstanding on loans and debt securities
was $2.2 billion and $1.7 billion at
September 30, 2005, and December 31, 2004,
respectively. The difference between principal and cost is
represented by unamortized loan origination fees and costs,
original issue discounts, and market discounts totaling
$28.0 million and $29.8 million at September 30,
2005, and December 31, 2004, respectively. |
The Companys private finance investment activity
principally involves providing financing through privately
negotiated long-term debt and equity investments. The
Companys private finance investments are generally issued
by private companies and are generally illiquid and subject to
restrictions on resale.
Private finance debt investments are generally structured as
loans and debt securities that carry a relatively high fixed
rate of interest, which may be combined with equity features,
such as conversion privileges, or warrants or options to
purchase a portion of the portfolio companys equity at a
pre-determined strike price, which is generally a nominal price
for warrants or options in a private company. The annual stated
interest rate is only one factor in pricing the investment
relative to the Companys rights and priority in the
portfolio companys capital structure, and will vary
depending on many factors, including if the Company has received
nominal cost equity or other components of investment return,
such as loan origination fees or market discount. The stated
interest rate may include some component of contractual
payment-in-kind interest, which represents contractual interest
accrued and added to the loan balance that generally becomes due
at maturity. At
21
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
September 30, 2005, and December 31, 2004,
approximately 87% and 94%, respectively, of the Companys
loans and debt securities had fixed interest rates, with the
remaining having variable interest rates. Variable interest
rates are generally set as a spread over LIBOR. Loans and debt
securities generally have a maturity of five to ten years, with
interest-only payments in the early years and payments of both
principal and interest in the later years, although debt
maturities and principal amortization schedules vary.
Equity securities consist primarily of securities issued by
private companies and may be subject to restrictions on their
resale and are generally illiquid. The Company may incur costs
associated with making buyout investments, such as legal,
accounting and other professional fees associated with
diligence, referral and investment banking fees, and other
costs, which will be added to the cost basis of the
Companys equity investment. Equity securities generally do
not produce a current return, but are held with the potential
for investment appreciation and ultimate gain on sale.
The Companys largest investments at value at
September 30, 2005, and December 31, 2004, were in
Advantage Sales & Marketing, Inc.
(Advantage) and Business Loan Express, LLC
(BLX).
In June 2004, the Company completed the purchase of a
majority voting ownership in Advantage, which is subject to
dilution by a management option pool. The Companys
investment totaled $257.7 million at cost and
$435.4 million at value at September 30, 2005, and
$258.7 million at cost and $283.0 million at value at
December 31, 2004. Advantage is a leading sales and
marketing agency providing outsourced sales, merchandising, and
marketing services to the consumer packaged goods industry.
Advantage has offices across the United States and is
headquartered in Irvine, CA.
Total interest and related portfolio income earned from the
Companys investment in Advantage for the three and nine
months ended September 30, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
7.8 |
|
|
$ |
5.9 |
|
|
$ |
23.3 |
|
|
$ |
6.0 |
|
Fees and other income
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
4.9 |
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
9.6 |
|
|
$ |
7.4 |
|
|
$ |
28.2 |
|
|
$ |
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from Advantage for the three and nine months
ended September 30, 2005, included interest income of
$1.1 million and $3.4 million, respectively, that was
paid in kind. Interest income from Advantage for the three and
nine months ended September 30, 2004, included interest
income of $1.1 million for both periods which was paid in
kind. The interest paid in kind was paid to the Company through
the issuance of additional debt.
Net change in unrealized appreciation or depreciation for the
three and nine months ended September 30, 2005, included
$33.6 million and $153.5 million, respectively, of
unrealized appreciation related to the Companys investment
in Advantage. Net change in unrealized appreciation or
depreciation for the three and nine months ended
September 30, 2004, did not include any change in
unrealized appreciation or depreciation related to the
Companys investment in Advantage.
22
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
The Companys investment in BLX totaled $285.6 million
at cost and $356.3 million at value at September 30,
2005, and $280.4 million at cost and $335.2 million at
value at December 31, 2004. BLX is a small business lender
that participates in the U.S. Small Business
Administrations 7(a) Guaranteed Loan Program. At
September 30, 2005, and December 31, 2004, the
Company owned 94.9% of the voting Class C equity interests.
BLX has an equity appreciation rights plan for management which
will dilute the value available to the Class C equity
interest holders. BLX is headquartered in New York, NY.
Total interest and related portfolio income earned from the
Companys investment in BLX for the three and nine months
ended September 30, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Interest income on subordinated debt and Class A equity
interests
|
|
$ |
3.6 |
|
|
$ |
5.9 |
|
|
$ |
10.5 |
|
|
$ |
17.2 |
|
Dividend income on Class B equity interests
|
|
|
4.0 |
|
|
|
3.5 |
|
|
|
9.0 |
|
|
|
8.2 |
|
Fees and other income
|
|
|
2.3 |
|
|
|
2.8 |
|
|
|
7.0 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
9.9 |
|
|
$ |
12.2 |
|
|
$ |
26.5 |
|
|
$ |
35.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income from BLX for the three and nine
months ended September 30, 2005, included interest and
dividend income of $1.7 million and $5.1 million,
respectively, which was paid in kind. Interest and dividend
income from BLX for the three and nine months ended
September 30, 2004, included interest and dividend income
of $6.2 million and $16.1 million, respectively, which
was paid in kind. The interest and dividends paid in kind were
paid to the Company through the issuance of additional debt or
equity interests.
Net change in unrealized appreciation or depreciation included a
net increase in unrealized appreciation on the Companys
investment in BLX of $14.6 million and $15.9 million
for the three and nine months ended September 30, 2005,
respectively, and a net increase in unrealized appreciation of
$3.1 million and a net decrease in unrealized appreciation
of $6.2 million for the three and nine months ended
September 30, 2004, respectively.
At December 31, 2004, the Companys subordinated debt
investment in BLX was $44.6 million at cost and value.
Effective January 1, 2005, this debt plus accrued interest
of $0.2 million was exchanged for Class B equity
interests, which are included in private finance equity
interests. Since the subordinated debt is no longer outstanding,
the amount of taxable income available to flow through to
BLXs equity holders will increase by the amount of
interest that would have otherwise been paid on this debt.
The Company had provided BLX with a $20 million revolving credit
facility for working capital which matured on June 30,
2005. At December 31, 2004, there were no amounts
outstanding under this facility.
As a limited liability company, BLXs taxable income flows
through directly to its members. BLXs annual taxable
income generally differs from its book income for the fiscal
year due to
23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
temporary and permanent differences in the recognition of income
and expenses. The Company holds all of BLXs Class A
and Class B interests, and 94.9% of the Class C
interests. BLXs taxable income is first allocated to the
Class A interests to the extent that dividends are paid in
cash or in kind on such interests, with the remainder being
allocated to the Class B and Class C interests. BLX
declares dividends on its Class B interests based on an
estimate of its annual taxable income allocable to such
interests.
At the time of the corporate reorganization of BLX, Inc. from a
C corporation to a limited liability company in 2003, for
tax purposes BLX had a built-in gain representing
the aggregate fair market value of its assets in excess of the
tax basis of its assets. As a RIC, the Company will be subject
to special built-in gain rules on the assets of BLX. Under these
rules, taxes will be payable by the Company at the time and to
the extent that the built-in gains on BLXs assets at the
date of reorganization are recognized in a taxable disposition
of such assets in the 10-year period following the date of the
reorganization. At such time, the built-in gains realized upon
the disposition of these assets will be included in the
Companys taxable income, net of the corporate level taxes
paid by the Company on the built-in gains. However, if these
assets are disposed of after the 10-year period, there will be
no corporate level taxes on these built-in gains.
While the Company has no obligation to pay the built-in gains
tax until these assets are disposed of in the future, it may be
necessary to record a liability for these taxes in the future
should the Company intend to sell the assets of BLX within the
10-year period. The Company estimates that its future tax
liability resulting from the built-in gains at the date of
BLXs reorganization may total up to $40 million. At
September 30, 2005, and December 31, 2004, the Company
considered the increase in fair value of its investment in BLX
due to BLXs tax attributes as an LLC and has also
considered the reduction in fair value of its investment due to
these estimated built-in gain taxes in determining the fair
value of its investment in BLX.
As the controlling equity owner of BLX, the Company has provided
an unconditional guaranty to the BLX credit facility lenders in
an amount equal to 50% of the total obligations (consisting of
principal, letters of credit issued under the facility, accrued
interest, and other fees) on BLXs three-year
$275.0 million revolving credit facility, which includes a
sub-facility for the issuance of letters of credit for up to a
total of $50.0 million. The facility matures in
January 2007. The amount guaranteed by the Company at
September 30, 2005, was $136.2 million. This guaranty
can be called by the lenders only in the event of a default by
BLX. BLX was in compliance with the terms of its credit facility
at September 30, 2005. At September 30, 2005, the
Company had also provided four standby letters of credit
totaling $35.6 million in connection with four term
securitization transactions completed by BLX. In consideration
for providing the guaranty and the standby letters of credit,
BLX paid the Company fees of $1.6 million for both the
three months ended September 30, 2005 and 2004, and
$4.7 million and $4.4 million for the nine months
ended September 30, 2005 and 2004, respectively.
Other activities (at cost) in portfolio companies more than 25%
owned, excluding changes in unrealized appreciation or
depreciation, during the nine months ended September 30,
2005, included:
|
|
|
|
|
a partial repayment of $8.2 million of the Companys
investment in Avborne, Inc. (Avborne) as a result of
the sale of certain of Avbornes assets during the first
quarter of 2005; |
24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
|
|
|
|
|
fundings of $94.3 million on Callidus Capital
Corporations (Callidus) revolving line of
credit related to its middle market underwriting and syndication
facility, including $52.5 million to fund a senior loan to
Triax Holdings, LLC (see below). Callidus repaid borrowings
under this facility totaling $84.0 million during the nine
months ended September 30, 2005, for a net increase in
borrowings under the facility during the nine months ended
September 30, 2005, of $10.3 million. Outstanding
borrowings under this facility were $52.5 million and $42.2
million at September 30, 2005, and December 31, 2004,
respectively. |
|
|
|
the repayment of the Companys debt and equity investment
of $12.8 million in Fairchild Industrial Products Company; |
|
|
|
a partial repayment of $14.6 million of the Companys
investment in ForeSite Towers, LLC (ForeSite) as a
result of the sale of a portion of ForeSites assets during
the second quarter of 2005 and an additional investment of
$3.5 million during the third quarter of 2005; |
|
|
|
the contribution to capital of existing debt securities of GAC
Investments, Inc. (GAC)with a cost basis of
$11.0 million, resulting in a decrease in the
Companys debt cost basis and an increase in the
Companys common stock cost basis in GAC during the first
quarter of 2005. In addition, during the third quarter of 2005,
the Company made an investment of $27.6 million in the
common stock of GAC to fund the purchase of Triax Holdings, LLC
(Triax), a new subsidiary of GAC, and also made
subordinated loans of $50.4 million to Triax. Triax used
the proceeds of the financing to acquire Tretinoin, the generic
equivalent of a leading topical prescription acne medication,
and other related assets, as well as to pay certain closing
costs. Subsequent to September 30, 2005, Triax negotiated a
purchase price adjustment of $45 million that reduced
Triaxs purchase price. The proceeds from the
$45 million purchase price adjustment were used to repay a
portion of the senior loan made by Callidus. Following
GACs investment in Triax, GAC changed its name to Triview
Investments, Inc. (Triview); |
|
|
|
an additional loan of $2.0 million to Gordian Group, Inc.; |
|
|
|
the distribution of Diversified Group Administrators, Inc. from
HealthASPex, Inc. (HealthASPex) to its shareholders
(including the Company) and the redemption of the Companys
equity interest in HealthASPex; |
|
|
|
a debt and equity investment of $67.8 million in Healthy
Pet Corp.; |
|
|
|
the repayment of the Companys debt and equity investment
of $15.9 million in Housecall Medical Resources, Inc.; |
|
|
|
the repayment of the Companys debt investment of
$9.3 million in HMT, Inc.; |
|
|
|
the repayment of the Companys $66.1 million senior
loan investment in Insight Pharmaceuticals Corporation
(Insight) as a result of Insights senior debt
refinancing; |
|
|
|
an additional $9.5 million debt and equity investment in
Mercury Air Centers, Inc. to finance an acquisition; |
|
|
|
an additional $27.4 million debt investment in MVL Group, Inc.
to finance an acquisition; |
|
|
|
fundings of $7.7 million on Powell Plant Farms, Inc.s
(Powell) revolving credit facility for working
capital. Powell repaid borrowings under this facility totaling
$7.9 million, for net repayments under the facility during
the nine months ended September 30, 2005, of
$0.2 million; |
25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
|
|
|
|
|
the sale of the assets out of bankruptcy of Norstan Apparel
Shops, Inc. (Norstan), which resulted in a realized
loss during the second quarter of 2005. During the first quarter
of 2005, the Company appointed three members to Norstans
board of directors and had control of the board. Accordingly,
the realized loss was included in the portfolio companies more
than 25% owned category; |
|
|
|
the repayment of the Companys debt investment of
$14.0 million in Redox Brands, Inc.; |
|
|
|
a debt and equity investment of $40.4 million in Service
Champ Inc.; |
|
|
|
an additional investment of $8.8 million in Startec Global
Communications Corporation to finance an acquisition; and |
|
|
|
an additional debt investment of $8.4 million in STS
Operating, Inc. (STS) to support the
recapitalization of STS. In connection with the
recapitalization, STS redeemed the Companys preferred
stock investment. |
The Company paid a fee to Callidus of $0.6 million in the second
quarter of 2005 for the referral of Service Champ Inc.
(Service Champ) and a fee of $1.2 million in
the third quarter of 2005 for the referral of Triax. These fees
have been included in the cost basis of the Companys
equity investment in Service Champ and Triview, respectively.
On March 31, 2004, the Company sold its control investment
in Hillman, which was one of the Companys largest
investments, for a total transaction value of $510 million,
including the repayment of outstanding debt and adding the value
of Hillmans outstanding trust preferred shares. The
Company was repaid its existing $44.6 million in
outstanding debt. Total consideration to the Company from the
sale at closing, including the repayment of debt, was
$244.3 million, which included net cash proceeds of
$196.8 million and the receipt of a new subordinated debt
instrument of $47.5 million. During the second quarter of
2004, the Company sold a $5.0 million participation in its
subordinated debt in Hillman to a third party, which reduced the
Companys investment, and no gain or loss resulted from the
transaction. For the nine months ended September 30, 2004,
the Company realized a gain of $150.2 million on the
transaction including a gain of $1.2 million realized
during the second quarter of 2004, resulting from post-closing
adjustments, which provided additional cash consideration to the
Company in the same amount. For the year ended December 31,
2004, the Company realized a gain of $150.3 million on the
transaction.
26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
At September 30, 2005, and December 31, 2004, loans
and debt securities at value not accruing interest were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
($ in thousands) |
|
| |
|
| |
Loans and debt securities in workout status (classified as
Grade 4 or 5)
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
19,026 |
|
|
$ |
34,374 |
|
|
Companies less than 5% owned
|
|
|
17,337 |
|
|
|
16,550 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
55,771 |
|
|
|
29,368 |
|
|
Companies 5% to 25% owned
|
|
|
2,267 |
|
|
|
678 |
|
|
Companies less than 5% owned
|
|
|
77,615 |
|
|
|
15,864 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
172,016 |
|
|
$ |
96,834 |
|
|
|
|
|
|
|
|
The industry and geographic compositions of the private finance
portfolio at value at September 30, 2005, and
December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Industry
|
|
|
|
|
|
|
|
|
Business services
|
|
|
40 |
% |
|
|
32 |
% |
Financial services
|
|
|
18 |
|
|
|
21 |
|
Consumer products
|
|
|
13 |
|
|
|
20 |
|
Industrial products
|
|
|
11 |
|
|
|
8 |
|
Healthcare services
|
|
|
6 |
|
|
|
8 |
|
Retail
|
|
|
2 |
|
|
|
2 |
|
Energy services
|
|
|
2 |
|
|
|
2 |
|
Broadcasting and cable
|
|
|
1 |
|
|
|
2 |
|
Other
|
|
|
7 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Geographic
Region(1)
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
33 |
% |
|
|
40 |
% |
West
|
|
|
28 |
|
|
|
27 |
|
Midwest
|
|
|
19 |
|
|
|
15 |
|
Southeast
|
|
|
14 |
|
|
|
14 |
|
Northeast
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
(1) |
The geographic region for the private finance portfolio depicts
the location of the headquarters for the Companys
portfolio companies. The portfolio companies may have a number
of other locations. |
27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
|
|
|
Commercial Real Estate Finance |
At September 30, 2005, and December 31, 2004, the
commercial real estate finance portfolio consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Cost | |
|
Value | |
|
Yield(1) | |
|
Cost | |
|
Value | |
|
Yield(1) | |
($ in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
CMBS bonds
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
383,310 |
|
|
$ |
373,805 |
|
|
|
14.6% |
|
CDO bonds and preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,590 |
|
|
|
212,573 |
|
|
|
16.8% |
|
Commercial mortgage loans
|
|
|
123,023 |
|
|
|
121,166 |
|
|
|
6.6% |
|
|
|
99,373 |
|
|
|
95,056 |
|
|
|
6.8% |
|
Real estate owned
|
|
|
14,147 |
|
|
|
15,088 |
|
|
|
|
|
|
|
16,170 |
|
|
|
16,871 |
|
|
|
|
|
Equity interests
|
|
|
11,453 |
|
|
|
6,511 |
|
|
|
|
|
|
|
11,169 |
|
|
|
13,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
148,623 |
|
|
$ |
142,765 |
|
|
|
|
|
|
$ |
722,612 |
|
|
$ |
711,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on the interest-bearing investments
is computed as the (a) annual stated interest plus the
annual amortization of loan origination fees, original issue
discount, and market discount on accruing interest-bearing
investments less the annual amortization of origination costs,
divided by (b) total interest-bearing investments at value.
The weighted average yield is computed as of the balance sheet
date. Interest-bearing investments for the commercial real
estate finance portfolio include all investments except for real
estate owned and equity interests. |
CMBS Bonds and Collateralized Debt Obligation Bonds and
Preferred Shares (CDOs). On May 3,
2005, the Company completed the sale of its portfolio of CMBS
bonds and CDO bonds and preferred shares to affiliates of Caisse
de dépôt et placement du Québec (the Caisse) for
cash proceeds of $976.0 million and realized a net gain of
$227.7 million, after transaction and other costs of
$7.8 million. Transaction costs included investment banking
fees, legal and other professional fees, and other transaction
costs. Upon the closing of the sale, the Company settled all the
hedge positions relating to these assets, which resulted in a
net realized loss of $0.7 million, which has been included
in the net realized gain on the sale. The value of these assets
prior to their sale was determined on an individual
security-by-security basis. The net gain realized upon the sale
of $227.7 million reflects the total value received for the
portfolio as a whole.
Simultaneous with the sale of the Companys CMBS and CDO
portfolio, the Company entered into certain agreements with
affiliates of the Caisse, including a platform assets purchase
agreement, pursuant to which the Company agreed to sell certain
additional commercial real estate-related assets to the Caisse,
subject to certain adjustments and closing conditions, and a
transition services agreement, pursuant to which the Company
agreed to provide certain transition services for a limited
transition period.
The platform assets purchase agreement was completed on
July 13, 2005, and the Company received total cash proceeds
from the sale of the platform assets of approximately $5.3
million. No gain or loss resulted from the transaction. Under
this agreement, the Company agreed not to invest in CMBS and
real estate-related CDOs and refrain from certain other real
estate-related investing or servicing activities for a period of
three years, subject to certain limitations and excluding the
Companys existing portfolio and related activities.
Services provided under the transition services agreement were
completed on July 13, 2005. For the three and nine months
ended September 30, 2005, the Company received a total of
$0.3 million
28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
and $1.4 million, respectively, under the transition
services agreement as reimbursement for employee and
administrative expenses.
Commercial Mortgage Loans and Equity Interests.
The commercial mortgage loan portfolio contains loans
that were originated by the Company or were purchased from
third-party sellers. At September 30, 2005, approximately
76% and 24% of the Companys commercial mortgage loan
portfolio was composed of fixed and adjustable interest rate
loans, respectively. At December 31, 2004, approximately
94% and 6% of the Companys commercial mortgage loan
portfolio was composed of fixed and adjustable interest rate
loans, respectively. As of September 30, 2005, and
December 31, 2004, loans with a value of $20.7 million
and $18.0 million, respectively, were not accruing
interest. Loans greater than 120 days delinquent generally
do not accrue interest.
Equity interests consist primarily of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of investment appreciation and
ultimate realized gain on sale.
The property types and the geographic composition securing the
commercial mortgage loans and equity interests at value at
September 30, 2005, and December 31, 2004, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Property Type
|
|
|
|
|
|
|
|
|
Hospitality
|
|
|
32 |
% |
|
|
49 |
% |
Housing
|
|
|
17 |
|
|
|
5 |
|
Office
|
|
|
15 |
|
|
|
17 |
|
Retail
|
|
|
14 |
|
|
|
21 |
|
Other(1)
|
|
|
22 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other includes the Companys investment in an originator of
commercial mortgage loans. |
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Geographic Region
|
|
|
|
|
|
|
|
|
Midwest
|
|
|
35 |
% |
|
|
30 |
% |
Mid-Atlantic
|
|
|
27 |
|
|
|
20 |
|
West
|
|
|
21 |
|
|
|
16 |
|
Southeast
|
|
|
12 |
|
|
|
26 |
|
Northeast
|
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
29
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt
At September 30, 2005, and December 31, 2004, the
Company had the following debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
Annual | |
|
|
|
Annual | |
|
|
Facility | |
|
Amount | |
|
Interest | |
|
Facility | |
|
Amount | |
|
Interest | |
|
|
Amount | |
|
Drawn | |
|
Cost(1) | |
|
Amount | |
|
Drawn | |
|
Cost(1) | |
($ in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
939,835 |
|
|
$ |
939,835 |
|
|
|
6.5 |
% |
|
$ |
981,368 |
|
|
$ |
981,368 |
|
|
|
6.5 |
% |
|
SBA debentures
|
|
|
28,500 |
|
|
|
28,500 |
|
|
|
7.5 |
% |
|
|
84,800 |
|
|
|
77,500 |
|
|
|
8.2 |
% |
|
OPIC loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,700 |
|
|
|
5,700 |
|
|
|
6.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
968,335 |
|
|
|
968,335 |
|
|
|
6.5 |
% |
|
|
1,071,868 |
|
|
|
1,064,568 |
|
|
|
6.6 |
% |
Revolving line of credit
|
|
|
722,500 |
|
|
|
|
|
|
|
|
(2) |
|
|
552,500 |
|
|
|
112,000 |
|
|
|
6.3 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
1,690,835 |
|
|
$ |
968,335 |
|
|
|
6.8 |
%(2) |
|
$ |
1,624,368 |
|
|
$ |
1,176,568 |
|
|
|
6.6 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average annual interest cost is computed as the (a)
annual stated interest on the debt plus the annual amortization
of commitment fees and other facility fees that are recognized
into interest expense over the contractual life of the
respective borrowings, divided by (b) debt outstanding on the
balance sheet date. |
|
(2) |
There were no amounts drawn on the revolving line of credit at
September 30, 2005. The annual interest cost for total debt
includes the annual cost of commitment fees and other facility
fees on the revolving line of credit regardless of the amount
drawn on the facility as of the balance sheet date. The annual
cost of commitment fees and other facility fees was
$2.6 million at September 30, 2005. The stated
interest rate payable on the revolving line of credit was 4.7%
at December 31, 2004, which excluded the annual cost of
commitment fees and other facility fees of $1.8 million. |
Notes Payable and Debentures
Unsecured Notes Payable. The Company has issued
unsecured long-term notes to private institutional investors.
The notes require semi-annual interest payments until maturity
and have original terms of five or seven years. At
September 30, 2005, the notes had remaining maturities of
one month to six years. The notes may be prepaid in
whole or in part, together with an interest premium, as
stipulated in the note agreement. During the second quarter of
2005, the Company repaid $40.0 million of the unsecured
notes payable.
The Company has issued five-year unsecured long-term notes
denominated in Euros and Sterling for a total U.S. dollar
equivalent of $15.2 million. The notes have fixed interest
rates and have substantially the same terms as the
Companys existing unsecured notes. The Euro notes require
annual interest payments and the Sterling notes require
semi-annual interest payments until maturity. Simultaneous with
issuing the notes, the Company entered into a cross currency
swap with a financial institution which fixed the Companys
interest and principal payments in U.S. dollars for the life of
the debt.
On October 13, 2005, the Company issued $261.0 million
of five-year and $89.0 million of seven-year unsecured
long-term notes, primarily to insurance companies. The five- and
seven-year notes have fixed interest rates of 6.2% and 6.3%,
respectively, and have substantially the same terms as the
Companys existing unsecured long-term notes. The Company
used a portion of the proceeds from the new long-term note
issuance to repay $125.0 million of existing unsecured long-term
notes that matured on October 15, 2005, and had an annual
weighted average interest cost of 8.3%.
SBA Debentures. At September 30, 2005, the
Company had debentures payable to the SBA with original terms of
ten years and at fixed interest rates ranging from 5.9% to 6.4%.
At September 30, 2005, the debentures had remaining
maturities of five to six years. The debentures
30
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
require semi-annual interest-only payments with all principal
due upon maturity. The SBA debentures are subject to prepayment
penalties if paid prior to the fifth anniversary date of the
notes. During the first and third quarters of 2005, the Company
repaid $31.0 million and $18.0 million, respectively, of
the SBA debentures.
The Company had a commitment from the SBA to borrow up to an
additional $7.3 million above the current amount
outstanding that expired on September 30, 2005.
Scheduled Maturities. Scheduled future maturities
of notes payable and debentures at September 30, 2005, were
as follows:
|
|
|
|
|
|
Year |
|
Amount Maturing | |
|
|
| |
|
|
($ in thousands) | |
2005
|
|
$ |
125,000 |
|
2006
|
|
|
175,000 |
|
2007
|
|
|
|
|
2008
|
|
|
153,000 |
|
2009
|
|
|
267,335 |
|
Thereafter
|
|
|
248,000 |
|
|
|
|
|
|
|
Total
|
|
$ |
968,335 |
|
|
|
|
|
At December 31, 2004, the Company had an unsecured
revolving line of credit with a committed amount of
$552.5 million. During the first quarter of 2005, the
Company expanded the committed amount under the unsecured
revolving credit facility to $587.5 million and during the
second quarter of 2005, the Company extended the maturity of the
line of credit to April 2006 under substantially similar terms.
The extension of the facility required payment of an extension
fee of 0.3% on existing commitments and the interest rate on
outstanding borrowings increased by 0.50% during the extension
period. During the extension period, the facility generally bore
interest at a rate, at the Companys option, equal to
(i) the one-month LIBOR plus 2.00%, (ii) the Bank of
America, N.A. cost of funds plus 2.00% or (iii) the higher
of the Bank of America, N.A. prime rate plus 0.50% or the
Federal Funds rate plus 1.00%. During the extension period, the
facility required an annual commitment fee equal to 0.25% of the
committed amount.
On September 30, 2005, the Company entered into a new
unsecured revolving line of credit with a committed amount of
$722.5 million. The revolving line of credit replaces the
Companys previous revolving line of credit and expires on
September 30, 2008. On November 4, 2005, the Company
expanded the committed amount under the revolving line of credit
facility by $50.0 million, which brings the total committed
amount to $772.5 million. The revolving line of credit may
be expanded through new or additional commitments up to
$922.5 million at the Companys option. The revolving
line of credit generally bears interest at a rate equal to
(i) LIBOR (for the period the Company selects) plus 1.30%
or (ii) the higher of the Federal Funds rate plus 0.50% or
the Bank of America N.A. prime rate. The revolving line of
credit requires the payment of an annual commitment fee equal to
0.20% of the committed amount. The revolving line of credit
generally requires payments of
31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
interest at the end of each LIBOR interest period, but no less
frequently than quarterly, on LIBOR based loans and monthly
payments of interest on other loans. All principal is due upon
maturity.
The annual cost of commitment fees and other facility fees was
$2.6 million and $1.8 million at September 30,
2005, and December 31, 2004, respectively.
The average debt outstanding on the revolving line of credit was
$42.7 million and $77.9 million, respectively, for the
nine months ended September 30, 2005 and 2004. The maximum
amount borrowed under this facility and the weighted average
stated interest rate for the nine months ended
September 30, 2005 and 2004, were $263.3 million and
4.4%, respectively, and $353.0 million and 2.2%,
respectively. As of September 30, 2005, the amount
available under the revolving line of credit was
$683.9 million, net of amounts committed for standby
letters of credit of $38.6 million issued under the credit
facility.
The Company has various financial and operating covenants
required by the notes payable and debentures and the revolving
line of credit. These covenants require the Company to maintain
certain financial ratios, including debt to equity and interest
coverage, and a minimum net worth. The Companys credit
facilities limit its ability to declare dividends if the Company
defaults under certain provisions. As of September 30,
2005, and December 31, 2004, the Company was in compliance
with these covenants.
Note 5. Guarantees
In the ordinary course of business, the Company has issued
guarantees and has extended standby letters of credit through
financial intermediaries on behalf of certain portfolio
companies. All standby letters of credit have been issued
through Bank of America, N.A. As of September 30, 2005, and
December 31, 2004, the Company had issued guarantees of
debt, rental obligations, lease obligations and severance
obligations aggregating $145.3 million and
$100.2 million, respectively, and had extended standby
letters of credit aggregating $38.6 million and
$44.1 million, respectively. Under these arrangements, the
Company would be required to make payments to third-party
beneficiaries if the portfolio companies were to default on
their related payment obligations. The maximum amount of
potential future payments was $183.9 million and
$144.3 million at September 30, 2005, and
December 31, 2004, respectively. At September 30,
2005, and December 31, 2004, $0.3 million and
$0.8 million, respectively, had been recorded as a
liability for the Companys guarantees and no amounts had
been recorded as a liability for the Companys standby
letters of credit.
32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Guarantees, continued
As of September 30, 2005, the guarantees and standby
letters of credit expired as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
After 2009 | |
(in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Guarantees
|
|
$ |
145.3 |
|
|
$ |
0.1 |
|
|
$ |
1.0 |
|
|
$ |
136.2 |
|
|
$ |
|
|
|
$ |
2.5 |
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
38.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
183.9 |
|
|
$ |
0.1 |
|
|
$ |
1.0 |
|
|
$ |
136.2 |
|
|
$ |
38.6 |
|
|
$ |
2.5 |
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Standby letters of credit are issued under the Companys
revolving line of credit that expires in September 2008.
Therefore, unless a standby letter of credit is set to expire at
an earlier date, it is assumed that the standby letters of
credit will expire contemporaneously with the expiration of the
Companys line of credit in September 2008. |
In the ordinary course of business, the Company enters into
agreements with service providers and other parties that may
contain provisions for the Company to indemnify such parties
under certain circumstances.
At September 30, 2005, the Company had outstanding
commitments to fund investments totaling $395.4 million,
including $352.2 million related to private finance
investments and $43.2 related to commercial real estate
finance investments. In addition, during the fourth quarter of
2004 and the first quarter of 2005, the Company sold certain
commercial mortgage loans that the Company may be required to
repurchase under certain circumstances. These recourse
provisions expire by April 2007. The aggregate outstanding
principal balance of these sold loans was $11.7 million at
September 30, 2005.
Note 6. Shareholders Equity
The Company did not sell any common stock during the nine months
ended September 30, 2005 or 2004. The Company issued
0.3 million shares of common stock with a value of
$7.2 million as consideration for an additional investment
in Mercury Air Centers, Inc. during the nine months ended
September 30, 2005, and 0.1 million shares of common
stock with a value of $3.2 million to acquire Legacy
Partners Group, LLC during the nine months ended
September 30, 2004.
The Company issued 2.6 million shares and 1.5 million
shares of common stock upon the exercise of stock options during
the nine months ended September 30, 2005 and 2004,
respectively.
The Company has a dividend reinvestment plan, whereby the
Company may buy shares of its common stock in the open market or
issue new shares in order to satisfy dividend reinvestment
requests. If the Company issues new shares, the issue price is
equal to the average of the closing sale prices reported for the
Companys common stock for the five consecutive trading
days immediately prior to the dividend payment date. For the
nine months ended September 30, 2005 and 2004, the Company
issued new shares in order to satisfy dividend reinvestment
requests.
33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Shareholders Equity, continued
Dividend reinvestment plan activity for the nine months ended
September 30, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
(in thousands, except per share amounts) |
|
| |
|
| |
Shares issued
|
|
|
268 |
|
|
|
167 |
|
Average price per share
|
|
$ |
27.82 |
|
|
$ |
26.34 |
|
Note 7. Earnings Per Common Share
Earnings per common share for the three and nine months ended
September 30, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
(in thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
Net increase in net assets resulting from operations
|
|
$ |
113,168 |
|
|
$ |
85,999 |
|
|
$ |
544,674 |
|
|
$ |
201,649 |
|
Less preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$ |
113,168 |
|
|
$ |
85,999 |
|
|
$ |
544,674 |
|
|
$ |
201,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
135,322 |
|
|
|
129,304 |
|
|
|
134,110 |
|
|
|
128,812 |
|
Dilutive options outstanding to officers
|
|
|
2,736 |
|
|
|
1,888 |
|
|
|
2,559 |
|
|
|
2,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted
|
|
|
138,058 |
|
|
|
131,192 |
|
|
|
136,669 |
|
|
|
131,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.84 |
|
|
$ |
0.67 |
|
|
$ |
4.06 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.82 |
|
|
$ |
0.66 |
|
|
$ |
3.99 |
|
|
$ |
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Employee Compensation Plans
The Company has a deferred compensation plan. Amounts deferred
by participants under the deferred compensation plan are funded
to a trust, which is administered by trustees. The accounts of
the deferred compensation trust are consolidated with the
Companys accounts. The assets of the trust are classified
as other assets and the liability to the plan participants is
included in other liabilities in the accompanying financial
statements. The deferred compensation plan accounts at
September 30, 2005, and December 31, 2004, totaled
$16.3 million and $16.1 million, respectively.
The Company has an Individual Performance Award
(IPA) plan, which was established as a long-term
incentive compensation program for certain officers. In
conjunction with the program, the Board of Directors has
approved a non-qualified deferred compensation plan
(DCP II), which is
34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
administered through a trust by an independent third-party
trustee. The administrator of the DCP II is the
Compensation Committee of the Companys Board of Directors
(DCP II Administrator).
The IPA, which is generally determined annually at the beginning
of each year, is deposited in the trust in four equal
installments, generally on a quarterly basis, in the form of
cash. The Compensation Committee of the Board of Directors
designed the DCP II to require the trustee to use the cash
to purchase shares of the Companys common stock in the
open market. During the nine months ended September 30,
2005 and 2004, 0.2 million shares and 0.4 million
shares, respectively, were purchased in the DCP II.
All amounts deposited and then credited to a participants
account in the trust, based on the amount of the IPA received by
such participant, are credited solely for purposes of accounting
and computation and remain assets of the Company and subject to
the claims of the Companys general creditors. Amounts
credited to participants under the DCP II are immediately
vested and generally non-forfeitable once deposited by the
Company into the trust. A participants account shall
generally become distributable only after his or her termination
of employment, or in the event of a change of control of the
Company. Upon the participants termination of employment,
one-third of the participants account will be immediately
distributed in accordance with the plan, one-half of the then
current remaining balance will be distributed on the first
anniversary of his or her employment termination date and the
remainder of the account balance will be distributed on the
second anniversary of the employment termination date.
Distributions are subject to the participants adherence to
certain non-solicitation requirements. All DCP II accounts
will be distributed in a single lump sum in the event of a
change of control of the Company. To the extent that a
participant has an employment agreement, such participants
DCP II account will be fully distributed in the event that
such participants employment is terminated for good reason
as defined under that participants employment agreement.
The DCP II Administrator may also determine other
distributable events and the timing of such distributions. Sixty
days following a distributable event, the Company and each
participant may, at the discretion of the Company, and subject
to the Companys trading window during that time, redirect
the participants account to other investment options.
During any period of time in which a participant has an account
in the DCP II, any dividends declared and paid on shares of
the Companys common stock allocated to the
participants account shall be reinvested by the trustee as
soon as practicable in shares of the Companys common stock
purchased in the open market.
The IPA amounts are contributed into the DCP II trust and
invested in the Companys common stock. The accounts of the
DCP II are consolidated with the Companys accounts.
The common stock is classified as common stock held in deferred
compensation trust in the accompanying financial statements and
the deferred compensation obligation, which represents the
amount owed to the employees, is included in other liabilities.
Changes in the value of the Companys common stock held in
the deferred compensation trust are not recognized. However, the
liability is marked to market with a corresponding charge or
credit to employee compensation expense. At September 30,
2005, and December 31, 2004, common stock held in DCP II
was $17.8 million and $13.5 million, respectively, and
the IPA liability was $20.1 million and $13.1 million,
respectively.
The IPA expenses for the three and nine months ended
September 30, 2005 and 2004, were as follows:
35
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Individual performance award (IPA) contributions
|
|
$ |
1.7 |
|
|
$ |
3.2 |
|
|
$ |
5.5 |
|
|
$ |
10.2 |
|
IPA mark to market expense (benefit)
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
1.5 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IPA expense
|
|
$ |
1.3 |
|
|
$ |
3.1 |
|
|
$ |
7.0 |
|
|
$ |
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also has an individual performance bonus
(IPB) plan which was established in 2005. The IPB
for 2005 will be distributed in cash to award recipients in
equal bi-weekly installments as long as the recipient remains
employed by the Company. If a recipient terminates employment
during the year, any remaining cash payments under the IPB would
be forfeited. For the three and nine months ended
September 30, 2005, the IPB expense was $1.8 million
and $5.4 million, respectively. The IPA and IPB expenses
are included in employee expenses.
Note 9. Stock Option Plan
The purpose of the stock option plan (Option Plan)
is to provide officers and non-officer directors of the Company
with additional incentives. Options are exercisable at a price
equal to the fair market value of the shares on the day the
option is granted. Each option states the period or periods of
time within which the option may be exercised by the optionee,
which may not exceed ten years from the date the option is
granted. The options granted generally vest ratably over a
three-to five-year period.
All rights to exercise options terminate 60 days after an
optionee ceases to be (i) a non-officer director,
(ii) both an officer and a director, if such optionee
serves in both capacities, or (iii) an officer (if such
officer is not also a director) of the Company for any cause
other than death or total and permanent disability. In the event
of a change of control of the Company, all outstanding options
will become fully vested and exercisable as of the change of
control.
There are 32.2 million shares authorized under the Option
Plan. At September 30, 2005, and December 31, 2004,
the number of shares available to be granted under the Option
Plan was 2.6 million and 7.9 million, respectively.
During the nine months ended September 30, 2005, options
for 6.8 million shares were granted to employees under the
Option Plan at a weighted average exercise price of $27.37 per
share. During the nine months ended September 30, 2004,
options for 7.9 million shares were granted to employees
under the Option Plan at a weighted average exercise price of
$28.47 per share. During the nine months ended
September 30, 2005 and 2004, 1.5 million shares and
0.9 million shares, respectively, were forfeited under the
Option Plan.
Options were outstanding for 23.0 million shares and
20.4 million shares with a weighted average exercise price
of $24.60 and $23.55 per share at September 30, 2005, and
December 31, 2004, respectively.
Note 10. Dividends and Distributions and Excise Taxes
The Companys Board of Directors declared and the Company
paid a dividend of $0.57 per common share for each of the
first and second quarters of 2005 and 2004, and the third
quarter of
36
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Excise Taxes,
continued
2004. The Companys Board of Directors declared and the
Company paid a dividend of $0.58 per common share for the third
quarter of 2005. These dividends totaled $231.2 million and
$220.8 million for the nine months ended September 30,
2005 and 2004, respectively. The Company declared an extra cash
dividend of $0.02 per share during 2004 and this was paid to
shareholders on January 28, 2005.
The Companys Board of Directors also declared a dividend
of $0.58 per common share for the fourth quarter of 2005.
The Company currently estimates that its 2005 annual taxable
income will be in excess of its dividend distributions from such
taxable income in 2005, and that such estimated excess taxable
income will be carried over for distribution in 2006.
Accordingly, the Company has accrued an excise tax of
$5.3 million on the estimated taxable income earned for the
nine months ended September 30, 2005.
Note 11. Supplemental Disclosure of Cash Flow
Information
For the nine months ended September 30, 2005 and 2004, the
Company paid interest of $44.2 million and
$46.8 million, respectively.
Principal collections related to investment repayments or sales
included the collection of discounts previously amortized into
interest income and added to the cost basis of a loan or debt
security totaling $7.6 million and $4.7 million for
the nine months ended September 30, 2005 and 2004,
respectively.
Non-cash operating activities for the nine months ended
September 30, 2005, included the exchange of existing
subordinated debt securities and accrued interest of BLX with a
cost basis of $44.8 million for additional Class B
equity interests (see Note 3); the exchange of debt
securities and accrued interest of Coverall North America, Inc.
with a cost basis of $24.2 million for new debt securities
and warrants with a total cost basis of $26.8 million; the
exchange of debt securities of Garden Ridge Corporation with a
cost basis of $25.0 million for a new loan with a cost
basis of $22.5 million; and the contribution to capital of
existing debt securities of GAC Investments, Inc.
(GAC) with a cost basis of $11.0 million,
resulting in a decrease in the Companys debt cost basis
and an increase in the Companys common stock cost basis in
GAC (see Note 3). During the third quarter of 2005, GAC
changed its name to Triview Investments, Inc.
Non-cash operating activities for the nine months ended
September 30, 2004, included notes or other securities
received as consideration from the sale of investments of
$53.9 million. The notes received for the nine months ended
September 30, 2004, included a note received for
$47.5 million in conjunction with the sale of the
Companys investment in Hillman (see Note 3). Non-cash
operating activities for the nine months ended
September 30, 2004, also included an exchange of $48.3
million of subordinated debt in certain predecessor companies of
Advantage Sales & Marketing, Inc. for new subordinated debt
in Advantage; an exchange of existing debt securities with a
cost basis of $46.4 million for new debt and common stock in
Startec Global Communications Corporation; an exchange of
existing debt securities with a cost basis of $13.1 million
for new debt of $11.3 million with the remaining cost basis
attributed to equity in Fairchild Industrial Products Company;
the repayment in kind of $10.0 million of existing
subordinated debt in American Healthcare Services, Inc. with
debt in MedBridge Healthcare, LLC; and an exchange of existing
subordinated debt with a cost basis of $7.3 million for equity
interests in an affiliate of Impact Innovations Group, LLC. In
addition, GAC
37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 11. Supplemental Disclosure of Cash Flow
Information, continued
acquired certain assets of Galaxy out of bankruptcy during the
third quarter of 2004. The Company exchanged its
$50.7 million debt investment in Galaxy for debt and equity
in GAC to facilitate the asset acquisition.
For the nine months ended September 30, 2005 and 2004, the
Companys non-cash financing activities included
$7.5 million and $4.4 million, respectively, related
to the issuance of common stock in lieu of cash distributions.
In addition, the non-cash financing activities included the
issuance of $7.2 million of the Companys common stock
as consideration for an additional investment in Mercury Air
Centers, Inc. for the nine months ended September 30, 2005,
and the issuance of $3.2 million of the Companys
common stock as consideration for an investment in Legacy
Partners Group, LLC for the nine months ended September 30,
2004.
Note 12. Hedging Activities
The Company has invested in commercial mortgage loans and CMBS
and CDO bonds that were purchased at prices that are based in
part on comparable Treasury rates. The Company has entered into
transactions with one or more financial institutions to hedge
against movement in Treasury rates on certain of the commercial
mortgage loans and CMBS and CDO bonds. These transactions,
referred to as short sales, involve the Company receiving the
proceeds from the short sales of borrowed Treasury securities,
with the obligation to replenish the borrowed Treasury
securities at a later date based on the then current market
price. Borrowed Treasury securities and the related obligations
to replenish the borrowed Treasury securities at value,
including accrued interest payable on the obligations, as of
September 30, 2005, and December 31, 2004, consisted
of the following:
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
Description of Issue |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
5-year Treasury securities, due December 2009
|
|
$ |
|
|
|
$ |
533 |
|
5-year Treasury securities, due April 2010
|
|
|
17,933 |
|
|
|
|
|
10-year Treasury securities, due February 2013
|
|
|
|
|
|
|
3,908 |
|
10-year Treasury securities, due February 2014
|
|
|
|
|
|
|
4,709 |
|
10-year Treasury securities, due August 2014
|
|
|
|
|
|
|
14,743 |
|
10-year Treasury securities, due November 2014
|
|
|
|
|
|
|
14,333 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,933 |
|
|
$ |
38,226 |
|
|
|
|
|
|
|
|
As of September 30, 2005, and December 31, 2004, the
total obligations to replenish borrowed Treasury securities had
decreased since the related original sale dates due to changes
in the yield on the borrowed Treasury securities, resulting in
unrealized appreciation on the obligations of $0.3 million
for both dates.
The net proceeds related to the sales of the borrowed Treasury
securities were $17.8 million and $38.5 million at
September 30, 2005, and December 31, 2004,
respectively. Under the terms of the transactions, the Company
had provided additional cash collateral of $0.1 million at
September 30, 2005, and had received cash payments of
$0.3 million at December 31, 2004, for the difference
between the net proceeds related to the sales of the borrowed
Treasury securities and the obligations to replenish the
securities.
The Company has deposited the proceeds related to the sales of
the borrowed Treasury securities and the additional cash
collateral with Wachovia Capital Markets, LLC under repurchase
38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Hedging Activities, continued
agreements. The repurchase agreements are collateralized by
U.S. Treasury securities and are settled weekly. As of
September 30, 2005, the repurchase agreements were due on
October 5, 2005, and had a weighted average interest rate
of 3.2%. The weighted average interest rate on the repurchase
agreements as of December 31, 2004, was 1.3%.
Note 13. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the | |
|
|
|
|
Nine Months Ended | |
|
At and for the | |
|
|
September 30, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2005(1) | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Per Common Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$ |
14.87 |
|
|
$ |
14.94 |
|
|
$ |
14.94 |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income(2)
|
|
|
0.73 |
|
|
|
1.11 |
|
|
|
1.52 |
|
|
Net realized
gains(2)(3)
|
|
|
2.11 |
|
|
|
1.34 |
|
|
|
0.88 |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income plus net realized
gains(2)
|
|
|
2.84 |
|
|
|
2.45 |
|
|
|
2.40 |
|
|
Net change in unrealized appreciation or depreciation
(2)(3)
|
|
|
1.15 |
|
|
|
(0.92 |
) |
|
|
(0.52 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
(2)
|
|
|
3.99 |
|
|
|
1.53 |
|
|
|
1.88 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(1.72 |
) |
|
|
(1.71 |
) |
|
|
(2.30 |
) |
Net increase in net assets from capital share
transactions(2)
|
|
|
0.23 |
|
|
|
0.14 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$ |
17.37 |
|
|
$ |
14.90 |
|
|
$ |
14.87 |
|
|
|
|
|
|
|
|
|
|
|
Market value, end of period
|
|
$ |
28.63 |
|
|
$ |
24.39 |
|
|
$ |
25.84 |
|
Total
return(4)
|
|
|
18 |
% |
|
|
(7 |
)% |
|
|
1 |
% |
Ratios and Supplemental Data
($ and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending net assets
|
|
$ |
2,366,986 |
|
|
$ |
1,935,740 |
|
|
$ |
1,979,778 |
|
Common shares outstanding at end of period
|
|
|
136,289 |
|
|
|
129,898 |
|
|
|
133,099 |
|
Diluted weighted average common shares outstanding
|
|
|
136,669 |
|
|
|
131,487 |
|
|
|
132,458 |
|
Employee and administrative expenses/average net assets
|
|
|
5.14 |
% |
|
|
3.31 |
% |
|
|
4.65 |
% |
Total operating expenses/average net assets
|
|
|
7.77 |
% |
|
|
6.32 |
% |
|
|
8.53 |
% |
Net investment income/average net assets
|
|
|
4.63 |
% |
|
|
7.66 |
% |
|
|
10.45 |
% |
Net increase in net assets resulting from operations/ average
net assets
|
|
|
25.15 |
% |
|
|
10.56 |
% |
|
|
12.97 |
% |
Portfolio turnover rate
|
|
|
40.89 |
% |
|
|
20.19 |
% |
|
|
32.97 |
% |
Average debt outstanding
|
|
$ |
1,058,420 |
|
|
$ |
973,528 |
|
|
$ |
985,616 |
|
Average debt per
share(2)
|
|
$ |
7.74 |
|
|
$ |
7.40 |
|
|
$ |
7.44 |
|
|
|
(1) |
The results for the nine months ended September 30, 2005,
are not necessarily indicative of the operating results to be
expected for the full year. |
|
(2) |
Based on diluted weighted average number of common shares
outstanding for the period. |
|
(3) |
Net realized gains and net change in unrealized appreciation or
depreciation can fluctuate significantly from period to period.
As a result, comparisons may not be meaningful. |
|
(4) |
Total return assumes the reinvestment of all dividends paid for
the periods presented. |
39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 14. Litigation
On June 23, 2004, the Company was notified by the SEC that
the SEC is conducting an informal investigation of the Company.
On December 22, 2004, the Company received letters from the
U.S. Attorney for the District of Columbia requesting the
preservation and production of information regarding the Company
and Business Loan Express, LLC in connection with a criminal
investigation. Based on the information available to the Company
at this time, the inquiries appear to primarily pertain to
matters related to portfolio valuation and the Companys
portfolio company, Business Loan Express, LLC. To date, the
Company has produced materials in response to requests from both
the SEC and the U.S. Attorneys office, and certain current
and former employees have provided testimony and have been
interviewed by the staff of the SEC and the U.S. Attorneys
Office. The Company is voluntarily cooperating with these
investigations.
In addition, the Company is party to certain lawsuits in the
normal course of business.
While the outcome of these legal proceedings cannot at this
time be predicted with certainty, the Company does not expect
that the outcome of these proceedings will have a material
effect upon the Companys financial condition or results of
operations.
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Allied Capital Corporation:
We have reviewed the accompanying consolidated balance sheet of
Allied Capital Corporation and subsidiaries, including the
consolidated statement of investments, as of September 30,
2005, the related consolidated statements of operations for the
three- and nine-month periods ended September 30, 2005 and
2004, and the consolidated statements of changes in net assets
and cash flows and the financial highlights (included in Note
13) for the nine-month periods ended September 30, 2005 and
2004. These consolidated financial statements and financial
highlights are the responsibility of the Companys
management.
We conducted our reviews in accordance with standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the consolidated financial
statements and financial highlights referred to above for them
to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Allied Capital Corporation and
subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, changes in net assets and
cash flows (not presented herein), and the financial highlights
(included in Note 13), for the year then ended; and in our
report dated March 14, 2005, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2004, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Washington, D.C.
November 4, 2005
41
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following analysis of our financial condition and results
of operations should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto included
herein and in our annual report on Form 10-K for the year
ended December 31, 2004. In addition, this quarterly report
on Form 10-Q contains certain forward-looking statements. These
statements include the plans and objectives of management for
future operations and financial objectives and can be identified
by the use of forward-looking terminology such as
may, will, expect,
intend, anticipate,
estimate, or continue or the negative
thereof or other variations thereon or comparable terminology.
These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions.
Certain factors that could cause actual results and conditions
to differ materially from those projected in these
forward-looking statements are set forth below in the Risk
Factors section. Other factors that could cause actual results
to differ materially include:
|
|
|
|
|
changes in the economy; |
|
|
|
risks associated with possible disruption in our operations
due to terrorism; |
|
|
|
future changes in laws or regulations and conditions in our
operating areas; and |
|
|
|
other risks and uncertainties as may be detailed from time to
time in our public announcements and SEC filings. |
Financial or other information presented for private finance
portfolio companies has been obtained from the portfolio
companies, and this financial information presented may
represent unaudited, projected or pro forma financial
information, and therefore may not be indicative of actual
results. In addition, the private equity industry uses financial
measures such as EBITDA or EBITDAM (Earnings Before Interest,
Taxes, Depreciation, Amortization and, in some instances,
Management fees) in order to assess a portfolio companys
financial performance and to value a portfolio company. EBITDA
and EBITDAM are not intended to represent cash flow from
operations as defined by U.S. generally accepted accounting
principles and such information should not be considered as an
alternative to net income, cash flow from operations or any
other measure of performance prescribed by U.S. generally
accepted accounting principles.
OVERVIEW
As a business development company, we are in the private equity
business. Specifically, we provide long-term debt and equity
investment capital to companies in a variety of industries. Our
lending and investment activity has generally been focused on
private finance and commercial real estate finance, primarily
the investment in non-investment grade commercial
mortgage-backed securities, which we refer to as CMBS, and
collateralized debt obligation bonds and preferred shares, which
we refer to as CDOs.
On May 3, 2005, we completed the sale of our portfolio of CMBS
and CDO investments. Upon the completion of this transaction,
our lending and investment activity has been focused primarily
on private finance investments. Our private finance activity
principally involves providing financing through privately
negotiated long-term debt and equity investment capital. Our
financing is generally used to fund growth, acquisitions,
buyouts, recapitalizations, note purchases, bridge financings,
and other types of financings. We generally invest in private
companies though, from time to time, we may invest in companies
that are public but lack access to additional public capital or
whose securities may not be marginable.
42
Our portfolio composition at September 30, 2005, and
December 31, 2004, was as follows:
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|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Private finance
|
|
|
96 |
% |
|
|
76 |
% |
Commercial real estate finance
|
|
|
4 |
% |
|
|
24 |
% |
Our earnings depend primarily on the level of interest and
dividend income, fee and other income, and net realized and
unrealized gains or losses on our investment portfolio after
deducting interest expense on borrowed capital and operating
expenses. Interest income results from the stated interest rate
earned on a loan or debt security and the amortization of loan
origination fees and discounts. The level of interest income is
directly related to the balance of the interest-bearing
investment portfolio outstanding during the period multiplied by
the weighted average yield. Our ability to generate interest
income is dependent on economic, regulatory, and competitive
factors that influence new investment activity, the level of
repayments in the portfolio, the amount of loans and debt
securities for which interest is not accruing and our ability to
secure debt and equity capital for our investment activities.
Because we are a regulated investment company for tax purposes,
we intend to distribute substantially all of our annual taxable
income as dividends to our shareholders. See Other
Matters below.
PORTFOLIO AND INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield
on interest-bearing investments at and for the three and nine
months ended September 30, 2005 and 2004, and at and for
the year ended December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the | |
|
At and for the | |
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
At and for the | |
|
|
September 30, | |
|
September 30, | |
|
Year Ended | |
|
|
| |
|
| |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
Portfolio at value
|
|
$ |
3,223.8 |
|
|
$ |
2,980.0 |
|
|
$ |
3,223.8 |
|
|
$ |
2,980.0 |
|
|
$ |
3,013.4 |
|
Investments funded
|
|
$ |
673.4 |
|
|
$ |
311.9 |
|
|
$ |
1,328.2 |
|
|
$ |
1,106.9 |
|
|
$ |
1,524.5 |
|
Change in accrued or reinvested interest and dividends
|
|
$ |
5.5 |
|
|
$ |
5.5 |
|
|
$ |
1.9 |
|
|
$ |
31.7 |
|
|
$ |
52.2 |
|
Principal collections related to investment repayments or sales
|
|
$ |
151.0 |
|
|
$ |
112.4 |
|
|
$ |
1,241.8 |
|
|
$ |
543.3 |
|
|
$ |
909.2 |
|
Yield on interest-bearing investments
(1)
|
|
|
12.6 |
% |
|
|
14.2 |
% |
|
|
12.6 |
% |
|
|
14.2 |
% |
|
|
14.0 |
% |
|
|
(1) |
The weighted average yield on interest-bearing investments is
computed as the (a) annual stated interest plus the annual
amortization of loan origination fees, original issue discount,
and market discount on accruing interest-bearing investments
less the annual amortization of loan origination costs, divided
by (b) total interest-bearing investments at value. The
weighted average yield is computed as of the balance sheet date. |
43
Private Finance
The private finance portfolio at value, investment activity, and
the yield on loans and debt securities at and for the three and
nine months ended September 30, 2005 and 2004, and at and
for the year ended December 31, 2004, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the | |
|
At and for the | |
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
At and for the | |
|
|
September 30, | |
|
September 30, | |
|
Year Ended | |
|
|
| |
|
| |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities
|
|
$ |
2,039.6 |
|
|
$ |
1,401.1 |
|
|
$ |
2,039.6 |
|
|
$ |
1,401.1 |
|
|
$ |
1,602.9 |
|
|
Equity securities
|
|
|
1,041.4 |
|
|
|
629.9 |
|
|
|
1,041.4 |
|
|
|
629.9 |
|
|
|
699.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
$ |
3,081.0 |
|
|
$ |
2,031.0 |
|
|
$ |
3,081.0 |
|
|
$ |
2,031.0 |
|
|
$ |
2,302.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
funded(1)
|
|
$ |
665.7 |
|
|
$ |
244.0 |
|
|
$ |
1,131.9 |
|
|
$ |
806.4 |
|
|
$ |
1,140.8 |
|
Change in accrued or reinvested interest and dividends
|
|
$ |
5.9 |
|
|
$ |
3.9 |
|
|
$ |
20.4 |
|
|
$ |
25.4 |
|
|
$ |
45.6 |
|
Principal collections related to investment repayments or sales
|
|
$ |
146.5 |
|
|
$ |
99.5 |
|
|
$ |
476.5 |
|
|
$ |
494.0 |
|
|
$ |
551.9 |
|
Yield on interest-bearing
investments(2)
|
|
|
13.0 |
% |
|
|
15.2 |
% |
|
|
13.0 |
% |
|
|
15.2 |
% |
|
|
13.9 |
% |
|
|
(1) |
Investments funded for the nine months ended September 30,
2004, included a $47.5 million subordinated debt investment
in The Hillman Companies, Inc. received in conjunction with the
sale of Hillman as discussed below. |
|
(2) |
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest plus the annual
amortization of loan origination fees, original issue discount,
and market discount on accruing loans and debt securities less
the annual amortization of loan origination costs, divided by
(b) total loans and debt securities at value. The weighted
average yield is computed as of the balance sheet date. |
Our investment activity is focused on making long-term
investments in the debt and equity of primarily private middle
market companies. Debt investments may include senior loans,
second lien debt, unitranche debt (a single debt investment that
is a blend of senior and subordinated debt), or subordinated
debt (with or without equity features). The junior debt that we
invest in that is lower in repayment priority than senior debt
is also known as mezzanine debt. Equity investments may include
a minority equity stake in connection with a debt investment or
a substantial equity stake in connection with a buyout
transaction. In a buyout transaction, we generally invest in
senior and/or subordinated debt and equity (preferred and/or
voting or non-voting common) where our equity ownership
represents a significant portion of the equity, but may or may
not represent a controlling interest. In addition, we may fund
most or all of the debt upon the closing of certain buyout
transactions and then the portfolio company may refinance some
or all of the senior debt subsequent to closing, which would
reduce our investment.
We intend to take a balanced approach to private equity
investing that emphasizes a complementary mix of debt
investments and buyout investments. The combination of these two
types of investments provides current interest and related
portfolio income and the potential for future capital gains.
Recently we have seen junior debt financing opportunities in the
market that we believe are unattractive from a risk/return
perspective. We believe many of these transactions employ too
much leverage and are priced too low relative to the risks
inherent in junior debt instruments. To address the current
market place, our strategy is to focus on buyout and
recapitalization transactions where we can manage risk through
the structure and terms of our debt and equity investments and
where we can potentially realize more attractive total returns
from both current interest and fee income and future capital
gains. We may fund most or all of the debt and equity capital
upon the
44
closing of certain buyout transactions, which may include
investments in lower-yielding senior debt. We are also focusing
our debt investing on smaller middle market companies where we
can provide unitranche debt, where our current yield may be
lower than traditional subordinated debt only. We believe that
the unitranche structure, however, provides greater protection
in the capital structures of our portfolio companies.
The yield on the private finance loans and debt securities was
13.0% at September 30, 2005, as compared to 13.9% at
December 31, 2004, and 15.2% at September 30, 2004.
The weighted average yield on the private finance loans and debt
securities may fluctuate from period to period depending on the
yield on new loans and debt securities, the yield on loans and
debt securities repaid, and the amount of lower-yielding senior
debt that has been funded. The yield on the private finance
portfolio has decreased partly due to our strategy to pursue
more buyout and recapitalization transactions, which may include
investing in senior debt, as well as pursue unitranche
investments.
The level of investment activity for investments funded and
principal repayments for private finance investments can vary
substantially from period to period depending on the number and
size of investments that we make or that we exit and many other
factors, including the amount of debt and equity capital
available to middle market companies, the level of merger and
acquisition activity for such companies, the general economic
environment, and the competitive environment for the types of
investments we make. We believe that merger and acquisition
activity in the middle market was strong in 2004 and has
continued into 2005, which has resulted in an increase in
private finance investment opportunities, as well as increased
repayments.
Investments funded for the nine months ended September 30,
2005 and 2004, and for the year ended December 31, 2004,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and | |
|
|
|
|
|
|
Debt | |
|
Equity | |
|
|
|
|
Securities | |
|
Interests | |
|
Total | |
($ in millions) |
|
| |
|
| |
|
| |
For the Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
280.5 |
|
|
$ |
80.0 |
|
|
$ |
360.5 |
|
|
Companies 5% to 25% owned
|
|
|
2.4 |
|
|
|
2.2 |
|
|
|
4.6 |
|
|
Companies less than 5% owned
|
|
|
663.1 |
|
|
|
103.7 |
|
|
|
766.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
946.0 |
|
|
$ |
185.9 |
|
|
$ |
1,131.9 |
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
267.1 |
|
|
$ |
135.4 |
|
|
$ |
402.5 |
|
|
Companies 5% to 25% owned
|
|
|
89.4 |
|
|
|
24.4 |
|
|
|
113.8 |
|
|
Companies less than 5% owned
|
|
|
276.5 |
|
|
|
13.6 |
|
|
|
290.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
633.0 |
|
|
$ |
173.4 |
|
|
$ |
806.4 |
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
445.4 |
|
|
$ |
171.2 |
|
|
$ |
616.6 |
|
|
Companies 5% to 25% owned
|
|
|
112.0 |
|
|
|
14.4 |
|
|
|
126.4 |
|
|
Companies less than 5% owned
|
|
|
351.5 |
|
|
|
46.3 |
|
|
|
397.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
908.9 |
|
|
$ |
231.9 |
|
|
$ |
1,140.8 |
|
|
|
|
|
|
|
|
|
|
|
We generally fund new investments using cash. In addition, we
may acquire securities in exchange for our common equity. Also,
we may acquire new securities through the reinvestment of
previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend
income through the receipt of a debt or equity security
(payment-in-kind income). From time to time we may opt to
reinvest accrued interest receivable in a new debt or equity
security in lieu of receiving such interest in cash.
45
Outstanding Investment Commitments. At
September 30, 2005, we had outstanding investment
commitments to private finance portfolio companies totaling
$352.2 million, including the following:
|
|
|
|
|
We have various commitments to Callidus Capital Corporation
(Callidus) which owns 80% of Callidus Capital Management, LLC,
an asset management company that structures and manages
collateralized debt obligations (CDOs), collateralized loan
obligations (CLOs), and other related investments. Our
commitment to Callidus consisted of the following at
September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount | |
|
|
Committed | |
|
Amount | |
|
Available | |
|
|
Amount | |
|
Drawn | |
|
to be Drawn | |
($ in millions) |
|
| |
|
| |
|
| |
Subordinated debt to support warehouse facilities &
warehousing
activities(1)
|
|
$ |
100.0 |
|
|
$ |
|
|
|
$ |
100.0 |
|
Revolving line of credit for working capital
|
|
|
4.0 |
|
|
|
|
|
|
|
4.0 |
|
Revolving line of credit facility to support underwriting and
syndication
activities(2)
|
|
|
150.0 |
|
|
|
52.5 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
254.0 |
|
|
$ |
52.5 |
|
|
$ |
201.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Callidus has two secured warehouse credit facilities with third
parties for up to $400 million each. These facilities are
used primarily to finance the acquisition of loans pending
securitization through a CDO or CLO. In conjunction with these
warehouse credit facilities, we have agreed to designate our
$100 million subordinated debt commitment for Callidus to
draw upon to provide first loss capital as needed to support the
warehouse facilities. |
|
|
(2) |
Draws under this facility may include amounts used to fund
senior loans originated by Callidus to portfolio companies
included in our portfolio. The amount drawn at
September 30, 2005, was used by Callidus to fund a senior
loan to our portfolio company, Triax Holdings, LLC. |
|
|
|
In addition, we had a commitment to Callidus to purchase
preferred equity in future CDO or CLO transactions of
$76.8 million at September 30, 2005. |
|
|
|
|
|
$13.8 million in the form of equity to eight private
venture capital funds. |
|
|
|
$12.5 million of financing commitments in the form of debt
to S.B. Restaurant Company. |
|
|
|
$7.8 million in the form of debt to Mercury Air Centers,
Inc. |
|
|
|
$7.6 million in the form of equity to Pennsylvania Avenue
Investors, L.P., a limited partnership controlled by us that
invests in private buyout equity funds. |
In addition to outstanding investment commitments to portfolio
companies at September 30, 2005, we may be required to fund
additional amounts under earn-out arrangements primarily related
to buyout transactions in the future if those companies meet
agreed-upon performance targets. We also had commitments to
private finance portfolio companies in the form of standby
letters of credit and guarantees totaling $176.8 million.
See Financial Condition, Liquidity and Capital
Resources.
During the third quarter of 2005, our portfolio company, GAC
Investments, Inc. (GAC) purchased Triax Holdings, LLC (Triax).
We invested $27.6 million in the common stock of GAC to
help fund the purchase of Triax, a new subsidiary of GAC. In
addition, we made subordinated loans totaling $50.6 million
to Triax. Our portfolio company, Callidus, made senior loans of
$52.5 million to Triax. The proceeds of these debt and
equity investments of $130.7 million were used by Triax to
acquire Tretinoin, the generic equivalent of a leading topical
prescription acne medication, and other related assets, as well
as to pay certain closing costs. Subsequent to the purchase of
these assets, Triax negotiated a purchase price adjustment of
$45 million that reduced Triaxs purchase price. The
proceeds from the $45 million purchase price adjustment
were used to repay a portion of the senior loan made by
Callidus. Following GACs investment in Triax, GAC changed
its name to Triview
46
Investments, Inc. (Triview). Triview owns both Triax and
Longview Cable & Data, LLC. Triview believes it may be
able to utilize its existing tax attributes to offset future
taxable income generated by Triax.
Our largest investments at value at September 30, 2005,
were in Advantage Sales & Marketing, Inc. and Business Loan
Express, LLC (BLX). See Results of Operations
for a discussion of the net change in unrealized appreciation or
depreciation related to these investments.
Advantage Sales & Marketing,
Inc. At September 30,
2005, our investment in Advantage Sales & Marketing, Inc.
(Advantage) totaled $257.7 million at cost and
$435.4 million at value, or 12.6% of our total assets,
which includes unrealized appreciation of $177.7 million.
We completed the purchase of a majority ownership in Advantage
in June 2004.
Total interest and related portfolio income earned from our
investment in Advantage for the nine months ended
September 30, 2005 and 2004, was $28.2 million and
$10.4 million, respectively, which includes interest income
of $23.3 million and $6.0 million, respectively, and
fees and other income of $4.9 million and
$4.4 million, respectively. Interest income from Advantage
for the nine months ended September 30, 2005 and 2004,
included interest income of $3.4 million and
$1.1 million, respectively, which was paid in kind. The
interest paid in kind was paid to us through the issuance of
additional debt.
Net change in unrealized appreciation or depreciation included a
net increase in unrealized appreciation on our investment in
Advantage of $153.5 million for the nine months ended
September 30, 2005, and no change for the nine months ended
September 30, 2004.
Advantage is a leading sales and marketing agency providing
outsourced sales, merchandising, and marketing services to the
consumer packaged goods industry. Advantage has offices across
the United States and is headquartered in Irvine, CA.
Business Loan Express,
LLC. At September 30,
2005, our investment in BLX totaled $285.6 million at cost
and $356.3 million at value, or 10.3% of our total assets,
which includes unrealized appreciation of $70.7 million.
BLX was acquired in 2000.
Total interest and related portfolio income earned from our
investment in BLX for the nine months ended September 30,
2005 and 2004, was $26.5 million and $35.1 million,
respectively, which included interest income on the subordinated
debt and Class A equity interests of $10.5 million and
$17.2 million, respectively, dividend income on
Class B interests of $9.0 million and
$8.2 million, respectively, and fees and other income of
$7.0 million and $9.7 million, respectively. Interest
and dividend income from BLX for the nine months ended
September 30, 2005 and 2004, included interest and dividend
income of $5.1 million and $16.1 million,
respectively, that was paid in kind. The interest and dividends
paid in kind were paid to us through the issuance of additional
debt or equity interests. Accrued interest and dividends
receivable at September 30, 2005, included accrued interest
and dividends due from BLX totaling $4.4 million, of which
$4.0 million was paid in cash in the fourth quarter of 2005.
Net change in unrealized appreciation or depreciation included a
net increase in unrealized appreciation on our investment in BLX
of $15.9 million for the nine months ended
September 30, 2005, and a net decrease in unrealized
appreciation of $6.2 million for the nine months ended
September 30, 2004.
BLX is a national, non-bank lender that participates in the
SBAs 7(a) Guaranteed Loan Program and is licensed by
the SBA as a Small Business Lending Company (SBLC). BLX is a
nationwide preferred lender, as designated by the SBA, and
originates, sells, and services small business loans. In
addition, BLX originates conventional small business loans,
small investment real
47
estate loans and loans under the USDA Business and Industry
Guaranteed Loan Program (B&I). BLX has offices across the
United States and is headquartered in New York, New York.
Changes in the laws or regulations that govern SBLCs or the
SBA 7(a) Guaranteed Loan Program or changes in government
funding for this program could have a material adverse impact on
BLX and, as a result, could negatively affect our financial
results.
As a limited liability company, BLXs taxable income flows
through directly to its members. BLXs annual taxable
income generally differs from its book income for the fiscal
year due to temporary and permanent differences in the
recognition of income and expenses. We hold all of BLXs
Class A and Class B interests, and 94.9% of the
Class C interests. BLXs taxable income is first
allocated to the Class A interests to the extent that
dividends are paid in cash or in kind on such interests, with
the remainder being allocated to the Class B and C
interests. BLX declares dividends on its Class B interests
based on an estimate of its annual taxable income allocable to
such interests.
At December 31, 2004, our subordinated debt investment in BLX
was $44.6 million at cost and value. Effective January 1,
2005, this debt plus accrued interest of $0.2 million was
exchanged for Class B equity interests of $44.8 million,
which is included in private finance equity interests. We
believe this exchange strengthened BLXs equity capital
base and simplified its capital structure. Since the
subordinated debt is no longer outstanding, the amount of
taxable income available to flow through to BLXs equity
holders will increase by the amount of interest that would have
otherwise been paid on this debt.
At September 30, 2005, BLX had a three-year
$275.0 million revolving credit facility provided by third
party lenders that matures in January 2007. The facility
provides for a sub-facility for the issuance of letters of
credit for up to a total of $50.0 million. As the controlling
equity owner in BLX, we have provided an unconditional guaranty
to the revolving credit facility lenders in an amount equal to
50% of the total obligations (consisting of principal, letters
of credit issued under the facility, accrued interest, and other
fees) of BLX under the revolving credit facility. At
September 30, 2005, the principal amount outstanding on the
revolving credit facility was $229.9 million and letters of
credit issued under the facility were $41.5 million. The
total obligation guaranteed by us at September 30, 2005,
was $136.2 million. This guaranty can be called by the
lenders only in the event of a default by BLX. BLX was in
compliance with the terms of the revolving credit facility at
September 30, 2005. At September 30, 2005, we had also
provided four standby letters of credit totaling
$35.6 million in connection with four term securitization
transactions completed by BLX.
On March 31, 2004, we sold our control investment in The
Hillman Companies, Inc. (Hillman) for a total transaction value
of $510 million, including the repayment of outstanding debt and
adding the value of Hillmans outstanding trust preferred
shares. We were repaid our existing $44.6 million in
outstanding debt. Total consideration to us from this sale,
including the repayment of debt, was $245.6 million, which
included net cash proceeds of $198.1 million and the
receipt of a new subordinated debt instrument of $47.5 million.
During the second quarter of 2004, we sold a $5.0 million
participation in our subordinated debt in Hillman to a third
party, which reduced our investment, and no gain or loss
resulted from the transaction. For the year ended December 31,
2004, we realized a gain of $150.3 million on the
transaction.
48
Commercial Real Estate Finance
The commercial real estate finance portfolio at value,
investment activity, and the yield on interest-bearing
investments at and for the three and nine months ended
September 30, 2005 and 2004, and at and for the year ended
December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the | |
|
At and for the | |
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
|
|
September 30, | |
|
September 30, | |
|
At and for | |
|
|
| |
|
| |
|
the Year Ended | |
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
Value | |
|
Yield(1) | |
|
Value | |
|
Yield(1) | |
|
Value | |
|
Yield(1) | |
|
Value | |
|
Yield(1) | |
|
Value | |
|
Yield(1) | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds
|
|
$ |
|
|
|
|
|
|
|
$ |
604.5 |
|
|
|
12.4% |
|
|
$ |
|
|
|
|
|
|
|
$ |
604.5 |
|
|
|
12.4% |
|
|
$ |
373.8 |
|
|
|
14.6% |
|
|
CDO bonds and preferred shares
|
|
|
|
|
|
|
|
|
|
|
177.8 |
|
|
|
17.4% |
|
|
|
|
|
|
|
|
|
|
|
177.8 |
|
|
|
17.4% |
|
|
|
212.6 |
|
|
|
16.8% |
|
|
Commercial mortgage loans
|
|
|
121.2 |
|
|
|
6.6% |
|
|
|
143.2 |
|
|
|
8.1% |
|
|
|
121.2 |
|
|
|
6.6% |
|
|
|
143.2 |
|
|
|
8.1% |
|
|
|
95.0 |
|
|
|
6.8% |
|
|
Real estate owned
|
|
|
15.1 |
|
|
|
|
|
|
|
14.6 |
|
|
|
|
|
|
|
15.1 |
|
|
|
|
|
|
|
14.6 |
|
|
|
|
|
|
|
16.9 |
|
|
|
|
|
|
Equity interests
|
|
|
6.5 |
|
|
|
|
|
|
|
8.9 |
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
8.9 |
|
|
|
|
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
$ |
142.8 |
|
|
|
|
|
|
$ |
949.0 |
|
|
|
|
|
|
$ |
142.8 |
|
|
|
|
|
|
$ |
949.0 |
|
|
|
|
|
|
$ |
711.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments funded
|
|
$ |
7.7 |
|
|
|
|
|
|
$ |
67.9 |
|
|
|
|
|
|
$ |
196.3 |
|
|
|
|
|
|
$ |
300.5 |
|
|
|
|
|
|
$ |
383.7 |
|
|
|
|
|
Change in accrued or reinvested interest
|
|
$ |
(0.4 |
) |
|
|
|
|
|
$ |
1.6 |
|
|
|
|
|
|
$ |
(18.5 |
) |
|
|
|
|
|
$ |
6.3 |
|
|
|
|
|
|
$ |
6.6 |
|
|
|
|
|
Principal collections related to investment repayments or sales
|
|
$ |
4.5 |
|
|
|
|
|
|
$ |
12.9 |
|
|
|
|
|
|
$ |
765.3 |
|
|
|
|
|
|
$ |
49.3 |
|
|
|
|
|
|
$ |
357.3 |
|
|
|
|
|
|
|
(1) |
The weighted average yield on the interest-bearing investments
is computed as the (a) annual stated interest plus the
annual amortization of loan origination fees, original issue
discount, and market discount on accruing interest-bearing
investments less the annual amortization of origination costs,
divided by (b) total interest-bearing investments at value.
The weighted average yield is computed as of the balance sheet
date. Interest-bearing investments for the commercial real
estate finance portfolio include all investments except for real
estate owned and equity interests. |
Our commercial real estate investments funded for the nine
months ended September 30, 2005 and 2004, and for the year
ended December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face | |
|
|
|
Amount | |
|
|
Amount | |
|
Discount | |
|
Funded | |
($ in millions) |
|
| |
|
| |
|
| |
For the Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (4 new
issuances)(2)
|
|
$ |
211.5 |
|
|
$ |
(90.5 |
) |
|
$ |
121.0 |
|
Commercial mortgage loans
|
|
|
73.5 |
|
|
|
(0.9 |
) |
|
|
72.6 |
|
Equity interests
|
|
|
2.7 |
|
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
287.7 |
|
|
$ |
(91.4 |
) |
|
$ |
196.3 |
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (11 new
issuances(1))
|
|
$ |
363.9 |
|
|
$ |
(158.6 |
) |
|
$ |
205.3 |
|
CDO bonds and preferred shares (1 issuance)
|
|
|
4.0 |
|
|
|
(0.3 |
) |
|
|
3.7 |
|
Commercial mortgage loans
|
|
|
99.7 |
|
|
|
(8.3 |
) |
|
|
91.4 |
|
Equity interests
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
467.7 |
|
|
$ |
(167.2 |
) |
|
$ |
300.5 |
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (13 new
issuances(1))
|
|
$ |
419.1 |
|
|
$ |
(183.7 |
) |
|
$ |
235.4 |
|
CDO bonds and preferred shares (3 issuances)
|
|
|
40.5 |
|
|
|
(0.1 |
) |
|
|
40.4 |
|
Commercial mortgage loans
|
|
|
112.1 |
|
|
|
(8.2 |
) |
|
|
103.9 |
|
Equity interests
|
|
|
4.0 |
|
|
|
|
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
575.7 |
|
|
$ |
(192.0 |
) |
|
$ |
383.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
CMBS investments also include investments in issuances in which
we have previously purchased CMBS bonds. |
(2) |
The CMBS bonds invested in during the nine months ended
September 30, 2005, were sold on May 3, 2005. |
At September 30, 2005, we had outstanding funding
commitments related to commercial mortgage loans and equity
interests of $43.2 million, including $33.3 million to
Timarron Capital,
49
Inc., and commitments in the form of standby letters of credit
and guarantees related to equity interests of $7.1 million.
Sale of CMBS Bonds and Collateralized Debt Obligation
Bonds and Preferred
Shares. On May 3,
2005, we completed the sale of our portfolio of commercial
mortgage-backed securities (CMBS) and real estate related
collateralized debt obligation (CDO) bonds and preferred
shares to affiliates of Caisse de dépôt et placement
du Québec (the Caisse) for cash proceeds of
$976.0 million and a net realized gain of
$227.7 million, after transaction and other costs of
$7.8 million. Transaction costs included investment banking
fees, legal and other professional fees, and other transaction
costs. The CMBS and CDO assets sold had a cost basis at closing
of $739.8 million, including accrued interest of
$21.7 million. Upon the closing of the sale, we settled all
the hedge positions relating to these assets, which resulted in
a net realized loss of $0.7 million, which has been
included in the net realized gain on the sale.
For tax purposes, we estimate that the net gain from the sale of
the CMBS and CDO portfolio will be approximately
$241 million, after transaction and other costs of
$7.8 million. The difference between the net gain for book
and tax purposes results from temporary differences in the
recognition of income and expenses related to these assets.
Simultaneous with the sale of our CMBS and CDO portfolio, we
entered into a platform assets purchase agreement with CWCapital
Investments LLC, an affiliate of the Caisse (CWCapital),
pursuant to which we agreed to sell certain commercial real
estate related assets, including servicer advances, intellectual
property, software and other platform assets, subject to certain
adjustments. This transaction was completed on July 13,
2005, and we received total cash proceeds of approximately $5.3
million. No gain or loss resulted from the transaction. Under
this agreement, we have agreed not to invest in CMBS and real
estate-related CDOs and refrain from certain other real
estate-related investing or servicing activities for a period of
three years, subject to certain limitations and excluding our
existing portfolio and related activities.
The real estate securities purchase agreement, under which we
sold the CMBS and CDO portfolio, and the platform asset purchase
agreement contain customary representations and warranties, and
require us to indemnify the affiliates of the Caisse that are
parties to the agreements for certain liabilities arising under
the agreements, subject to certain limitations and conditions.
We also entered into a transition services agreement with
CWCapital pursuant to which we provided certain transition
services to CWCapital for a limited transition period to
facilitate the transfer of various servicing and other rights
related to the CMBS and CDO portfolio. During the transition
period, we agreed, among other things, to continue to act as
servicer or special servicer with respect to the CMBS and CDO
portfolio. Services provided under the transition services
agreement, except for certain information technology services,
were completed on July 13, 2005. For the nine months ended
September 30, 2005, we received a total of
$1.4 million under the transition services agreement as
reimbursement for employee and administrative expenses. These
amounts reduced our employee expenses by $1.1 million and
administrative expenses by $0.3 million.
Hedging Activities
We have invested in commercial mortgage loans and CMBS and CDO
bonds, which were purchased at prices that were based in part on
comparable Treasury rates. We have entered into transactions
with one or more financial institutions to hedge against
movement in Treasury rates on certain of the commercial mortgage
loans and CMBS and CDO bonds. These transactions, referred to as
short sales, involve receiving the proceeds from the short sales
of borrowed Treasury securities, with the obligation to
replenish the borrowed Treasury securities at a later date based
on the then
50
current market price, whatever that price may be. Risks in these
contracts arise from movements in the value of the borrowed
Treasury securities due to changes in interest rates and from
the possible inability of counterparties to meet the terms of
their contracts. If the value of the borrowed Treasury
securities increases, we will incur losses on these
transactions. These losses are limited to the increase in value
of the borrowed Treasury securities; conversely, the value of
the hedged commercial real estate assets would likely increase.
If the value of the borrowed Treasury securities decreases, we
will incur gains on these transactions which are limited to the
decline in value of the borrowed Treasury securities;
conversely, the value of the hedged commercial real estate
assets would likely decrease. We do not anticipate
nonperformance by any counterparty in connection with these
transactions.
The total obligations to replenish borrowed Treasury securities,
including accrued interest payable on the obligations, were
$17.9 million and $38.2 million at September 30,
2005, and December 31, 2004, respectively. The net proceeds
related to the sales of the borrowed Treasury securities plus or
minus the additional cash collateral provided or received under
the terms of the transactions were $17.9 million and
$38.2 million at September 30, 2005, and
December 31, 2004, respectively. The hedge at
September 30, 2005, related to commercial mortgage loans
and the hedge at December 31, 2004, related primarily to
CMBS and CDO bonds. The amount of the hedge will vary from
period to period depending upon the amount of commercial real
estate assets that we own and have hedged as of the balance
sheet date.
Accrued Interest and Dividends Receivable
Accrued interest and dividends receivable as of
September 30, 2005, and December 31, 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
Private finance
|
|
$ |
63.9 |
|
|
$ |
59.8 |
|
Commercial real estate finance
|
|
|
|
|
|
|
|
|
|
CMBS and CDO bonds
|
|
|
|
|
|
|
18.9 |
|
|
Commercial mortgage loans and other
|
|
|
1.2 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
65.1 |
|
|
$ |
79.5 |
|
|
|
|
|
|
|
|
Total accrued interest and dividends receivable declined from
December 31, 2004, to September 30, 2005, primarily as
a result of the sale of our portfolio of CMBS and CDO assets on
May 3, 2005. See Commercial Real Estate Finance
above.
Portfolio Asset Quality
Portfolio by Grade. We employ a grading system for
our entire portfolio. Grade 1 is used for those investments
from which a capital gain is expected. Grade 2 is used for
investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no
loss of investment return or principal is expected. Grade 4
is used for investments that are in workout and for which some
loss of current investment return is expected, but no loss of
principal is expected. Grade 5 is used for investments that
are in workout and for which some loss of principal is expected.
51
At September 30, 2005, and December 31, 2004, our
portfolio was graded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2005 | |
|
At December 31, 2004 | |
|
|
| |
|
| |
|
|
Portfolio | |
|
Percentage of | |
|
Portfolio | |
|
Percentage of | |
Grade |
|
at Value | |
|
Total Portfolio | |
|
at Value(1) | |
|
Total Portfolio | |
|
|
| |
|
| |
|
| |
|
| |
($ in millions) |
|
|
|
|
|
|
|
|
1
|
|
$ |
1,151.0 |
|
|
|
35.7 |
% |
|
$ |
952.5 |
|
|
|
31.6 |
% |
2
|
|
|
1,805.3 |
|
|
|
56.0 |
|
|
|
1,850.5 |
|
|
|
61.4 |
|
3
|
|
|
183.2 |
|
|
|
5.7 |
|
|
|
121.2 |
|
|
|
4.0 |
|
4
|
|
|
10.0 |
|
|
|
0.3 |
|
|
|
11.7 |
|
|
|
0.4 |
|
5
|
|
|
74.3 |
|
|
|
2.3 |
|
|
|
77.5 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,223.8 |
|
|
|
100.0 |
% |
|
$ |
3,013.4 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The value of the CMBS and CDO assets sold on May 3, 2005,
was $586.4 million at December 31, 2004, and this
value was included in Grade 2 assets. See Commercial Real
Estate Finance above. |
|
Total Grade 3, 4 and 5 portfolio assets were
$267.5 million and $210.4 million, respectively, or
were 8.3% and 7.0%, respectively, of the total portfolio at
value at September 30, 2005, and December 31, 2004.
Included in Grade 3, 4 and 5 assets at September 30,
2005, and December 31, 2004, were portfolio assets totaling
$31.9 million and $38.3 million, respectively, that
were secured by commercial real estate.
During the nine months ended September 30, 2005, two
portfolio investments were moved from Grade 2 to
Grade 3 for closer monitoring. At September 30, 2005,
the value of these investments was $85.9 million. These
investments had accrued PIK and deferred interest that had
accumulated to the point where the fair value of the investment
as a whole may not support additional interest accrual. When we
have investments with PIK or deferred interest features, we
include the accrued interest in the cost basis of our investment
when we compare that to the portfolio companys enterprise
value to determine the fair value of our investment. If the
enterprise value is not sufficient to cover the cost basis
including this accrued interest, we may cease accruing further
interest. However, we remain contractually entitled to this
interest and may collect it upon the sale or recapitalization of
the portfolio company. For these two investments, we believed it
was appropriate to discontinue the accrual of further interest,
which increased our loans and debt securities on non-accrual
status. In addition, a portion of a portfolio investment
totaling $32.6 million at value at September 30, 2005,
that was closed in the third quarter of 2005, has been
classified as a Grade 3 asset due to the delayed execution
of the portfolio companys business plan.
Grade 4 and 5 assets include loans, debt securities, and
equity securities. We expect that a number of portfolio
companies will be in the Grades 4 or 5 categories from time
to time. Part of the private equity business is working with
troubled portfolio companies to improve their businesses and
protect our investment. The number of portfolio companies and
related investment amount included in Grade 4 and 5 may
fluctuate from period to period. We continue to follow our
historical practice of working with such companies in order to
recover the maximum amount of our investment.
52
Loans and Debt Securities on Non-Accrual Status.
At September 30, 2005, and December 31, 2004,
loans and debt securities at value not accruing interest for the
total investment portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
Loans and debt securities in workout status (classified as
Grade 4 or
5)(1)
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
19.0 |
|
|
$ |
34.4 |
|
|
|
Companies less than 5% owned
|
|
|
17.3 |
|
|
|
16.5 |
|
|
Commercial real estate finance
|
|
|
12.7 |
|
|
|
5.6 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
55.8 |
|
|
|
29.4 |
|
|
|
Companies 5% to 25% owned
|
|
|
2.3 |
|
|
|
0.7 |
|
|
|
Companies less than 5% owned
|
|
|
77.6 |
|
|
|
15.8 |
|
|
Commercial real estate finance
|
|
|
8.0 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
192.7 |
|
|
$ |
114.9 |
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
6.0% |
|
|
|
3.8% |
|
|
|
(1) |
Workout loans and debt securities exclude equity securities that
are included in the total Grade 4 and 5 assets above. |
Loans and Debt Securities Over 90 Days Delinquent.
Loans and debt securities greater than 90 days
delinquent at value at September 30, 2005, and
December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
($ in millions) |
|
|
|
|
Private finance
|
|
$ |
73.9 |
|
|
$ |
73.5 |
|
Commercial real estate finance
|
|
|
|
|
|
|
|
|
|
CMBS bonds
|
|
|
|
|
|
|
49.0 |
|
|
Commercial mortgage loans
|
|
|
13.2 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
87.1 |
|
|
$ |
132.6 |
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
2.7% |
|
|
|
4.4% |
|
In general, interest is not accrued on loans and debt securities
if we have doubt about interest collection or where the
enterprise value of the portfolio company may not support
further accrual. In addition, interest may not accrue on loans
to portfolio companies that are more than 50% owned by us
depending on such companys capital requirements. To the
extent interest payments are received on a loan that is not
accruing interest, we may use such payments to reduce our cost
basis in the investment in lieu of recognizing interest income.
As a result of these and other factors, the amount of the
private finance portfolio that is greater than 90 days
delinquent or on non-accrual status may vary from period to
period. Loans and debt securities on non-accrual status and over
90 days delinquent should not be added together as they are
two separate measures of portfolio asset quality. Loans and debt
securities that are in both categories (i.e., on non-accrual
status and over 90 days delinquent) totaled
$67.5 million and $43.9 million at September 30,
2005, and December 31, 2004, respectively.
53
RESULTS OF OPERATIONS COMPARISON OF THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
The following table summarizes our operating results for the
three and nine months ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
|
|
|
For the Nine | |
|
|
|
|
|
|
Months Ended | |
|
|
|
|
|
Months Ended | |
|
|
|
|
|
|
September 30, | |
|
|
|
|
|
September 30, | |
|
|
|
|
|
|
| |
|
|
|
Percentage | |
|
| |
|
|
|
Percentage | |
|
|
2005 | |
|
2004 | |
|
Change | |
|
Change | |
|
2005 | |
|
2004 | |
|
Change | |
|
Change | |
($ in thousands, except per share amounts) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
|
|
|
|
|
(unaudited) | |
|
|
|
|
Interest and Related Portfolio Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
$ |
76,353 |
|
|
$ |
85,828 |
|
|
$ |
(9,475 |
) |
|
|
(11 |
)% |
|
$ |
232,628 |
|
|
$ |
233,540 |
|
|
$ |
(912 |
) |
|
|
|
% |
|
Loan prepayment premiums
|
|
|
2,105 |
|
|
|
193 |
|
|
|
1,912 |
|
|
|
991 |
% |
|
|
4,635 |
|
|
|
4,210 |
|
|
|
425 |
|
|
|
10 |
% |
|
Fees and other income
|
|
|
16,399 |
|
|
|
10,842 |
|
|
|
5,557 |
|
|
|
51 |
% |
|
|
38,720 |
|
|
|
28,378 |
|
|
|
10,342 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
94,857 |
|
|
|
96,863 |
|
|
|
(2,006 |
) |
|
|
(2 |
)% |
|
|
275,983 |
|
|
|
266,128 |
|
|
|
9,855 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
17,735 |
|
|
|
20,253 |
|
|
|
(2,518 |
) |
|
|
(12 |
)% |
|
|
57,114 |
|
|
|
57,349 |
|
|
|
(235 |
) |
|
|
|
% |
|
Employee
|
|
|
13,969 |
|
|
|
13,896 |
|
|
|
73 |
|
|
|
1 |
% |
|
|
52,302 |
|
|
|
38,171 |
|
|
|
14,131 |
|
|
|
37 |
% |
|
Administrative
|
|
|
15,130 |
|
|
|
10,169 |
|
|
|
4,961 |
|
|
|
49 |
% |
|
|
58,932 |
|
|
|
25,072 |
|
|
|
33,860 |
|
|
|
135 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46,834 |
|
|
|
44,318 |
|
|
|
2,516 |
|
|
|
6 |
% |
|
|
168,348 |
|
|
|
120,592 |
|
|
|
47,756 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
48,023 |
|
|
|
52,545 |
|
|
|
(4,522 |
) |
|
|
(9 |
)% |
|
|
107,635 |
|
|
|
145,536 |
|
|
|
(37,901 |
) |
|
|
(26 |
)% |
Income tax expense (benefit), including excise tax
|
|
|
1,889 |
|
|
|
(200 |
) |
|
|
2,089 |
|
|
|
** |
|
|
|
7,482 |
|
|
|
(744 |
) |
|
|
8,226 |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
46,134 |
|
|
|
52,745 |
|
|
|
(6,611 |
) |
|
|
(13 |
)% |
|
|
100,153 |
|
|
|
146,280 |
|
|
|
(46,127 |
) |
|
|
(32 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
70,714 |
|
|
|
1,300 |
|
|
|
69,414 |
|
|
|
* |
|
|
|
288,495 |
|
|
|
175,753 |
|
|
|
112,742 |
|
|
|
* |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(3,680 |
) |
|
|
31,954 |
|
|
|
(35,634 |
) |
|
|
* |
|
|
|
156,026 |
|
|
|
(120,384 |
) |
|
|
276,410 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains
|
|
|
67,034 |
|
|
|
33,254 |
|
|
|
33,780 |
|
|
|
* |
|
|
|
444,521 |
|
|
|
55,369 |
|
|
|
389,152 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
113,168 |
|
|
$ |
85,999 |
|
|
$ |
27,169 |
|
|
|
32 |
% |
|
$ |
544,674 |
|
|
$ |
201,649 |
|
|
$ |
343,025 |
|
|
|
170 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.82 |
|
|
$ |
0.66 |
|
|
$ |
0.16 |
|
|
|
24 |
% |
|
$ |
3.99 |
|
|
$ |
1.53 |
|
|
$ |
2.46 |
|
|
|
161 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
138,058 |
|
|
|
131,192 |
|
|
|
6,866 |
|
|
|
5 |
% |
|
|
136,669 |
|
|
|
131,487 |
|
|
|
5,182 |
|
|
|
4 |
% |
|
|
* |
Net realized gains (losses) and net change in unrealized
appreciation or depreciation can fluctuate significantly from
period to period. As a result, period to period comparisons may
not be meaningful. |
|
** |
Percentage change is not meaningful. |
Total Interest and Related Portfolio Income. Total
interest and related portfolio income includes interest and
dividend income, loan prepayment premiums, and fees and other
income.
54
Interest and dividend income for the three and nine months ended
September 30, 2005 and 2004, was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
67.4 |
|
|
$ |
52.7 |
|
|
$ |
177.2 |
|
|
$ |
141.7 |
|
|
CMBS and CDO portfolio
|
|
|
|
|
|
|
25.2 |
|
|
|
29.4 |
|
|
|
70.4 |
|
|
Commercial mortgage loans
|
|
|
1.7 |
|
|
|
2.7 |
|
|
|
5.2 |
|
|
|
7.1 |
|
|
Cash and cash equivalents and other
|
|
|
2.0 |
|
|
|
0.8 |
|
|
|
6.1 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
|
71.1 |
|
|
|
81.4 |
|
|
|
217.9 |
|
|
|
221.3 |
|
Dividends
|
|
|
5.3 |
|
|
|
4.4 |
|
|
|
14.7 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
$ |
76.4 |
|
|
$ |
85.8 |
|
|
$ |
232.6 |
|
|
$ |
233.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The level of interest income, which includes interest paid in
cash and in kind, is directly related to the balance of the
interest-bearing investment portfolio outstanding during the
period multiplied by the weighted average yield. The weighted
average yield varies from period to period based on the current
stated interest on interest-bearing investments and the amount
of loans and debt securities for which interest is not accruing.
The interest-bearing investments in the portfolio at value and
the weighted average yield on the interest-bearing investments
in the portfolio at September 30, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
Interest-bearing portfolio at value
|
|
$ |
2,175.9 |
|
|
$ |
2,341.2 |
|
Portfolio yield
|
|
|
12.6 |
% |
|
|
14.2 |
% |
We sold our CMBS and CDO portfolio on May 3, 2005. As a
result of this transaction, our interest income for the three
and nine months ended September 30, 2005, was reduced due
to the loss of interest from the portfolio sold (net of interest
income earned on short-term excess cash investments). The CMBS
and CDO portfolio sold on May 3, 2005, had a cost basis of
$718.1 million and a weighted average yield on the cost
basis of the portfolio of approximately 13.8%. Excess cash
proceeds from the sale that were not used for the repayment of
debt or other general corporate purposes were held in cash and
cash equivalents until the cash was reinvested in the portfolio.
The portfolio yield at September 30, 2005, of 12.6% as
compared to the portfolio yield of 14.2% at September 30,
2004, reflects the sale of the CMBS and CDO portfolio on
May 3, 2005, as well as the mix of debt investments in the
private finance portfolio. See the discussion of the private
finance portfolio yield above under the caption Private
Finance.
Dividend income results from the dividend yield on preferred
equity interests, if any, or the declaration of dividends by a
portfolio company on preferred or common equity interests.
Dividend income will vary from period to period depending upon
the timing and amount of dividends that are declared or paid by
a portfolio company on preferred or common equity interests.
Dividend income included dividends from BLX on the Class B
equity interests held by us of $4.0 million and
$3.5 million for the three months ended September 30,
2005 and 2004, respectively, and $9.0 million and
$8.2 million for the nine months ended September 30,
2005 and 2004, respectively. These dividends for the three and
nine months ended September 30, 2005, were paid in cash and
these dividends for the three and nine months ended
September 30, 2004, were paid through the issuance of
additional Class B equity interests.
55
Loan prepayment premiums were $2.1 million and
$0.2 million for the three months ended September 30,
2005 and 2004, respectively, and $4.6 million and
$4.2 million for the nine months ended September 30,
2005 and 2004, respectively. While the scheduled maturities of
loans and debt securities generally range from five to ten
years, it is not unusual for our borrowers to refinance or pay
off their debts to us ahead of schedule. Therefore, we generally
structure our loans to require a prepayment premium for the
first three to five years of the loan. Accordingly, the amount
of prepayment premiums will vary depending on the level of
repayments and the age of the loans at the time of repayment.
Fees and other income primarily include fees related to
financial structuring, diligence, transaction services,
management and consulting services to portfolio companies,
guarantees, and other services. As a business development
company, we are required to make significant managerial
assistance available to the companies in our investment
portfolio. Managerial assistance includes management and
consulting services including, but not limited to, corporate
finance, information technology, marketing, human resources,
personnel and board member recruiting, corporate governance, and
risk management.
Fees and other income for the three and nine months ended
September 30, 2005 and 2004, included fees relating to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Structuring and diligence
|
|
$ |
10.2 |
|
|
$ |
4.3 |
|
|
$ |
19.1 |
|
|
$ |
11.5 |
|
Transaction and other services provided to portfolio companies
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
1.7 |
|
|
|
2.2 |
|
Management, consulting and other services provided to portfolio
companies and guaranty fees
|
|
|
5.6 |
|
|
|
5.1 |
|
|
|
15.5 |
|
|
|
13.1 |
|
Other income
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
2.4 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
$ |
16.4 |
|
|
$ |
10.8 |
|
|
$ |
38.7 |
|
|
$ |
28.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and other income are generally related to specific
transactions or services and therefore may vary substantially
from period to period depending on the level of investment
activity and types of services provided. Loan origination fees
that represent yield enhancement on a loan are capitalized and
amortized into interest income over the life of the loan.
Fees and other income for the nine months ended
September 30, 2005, included structuring fees from
Norwesco, Inc., Triax Holdings, LLC and Meineke Car Care
Centers, Inc. totaling $7.1 million, of which
$5.1 million were earned in the third quarter of 2005. Fees
and other income for the nine months ended September 30,
2004, included structuring fees from Advantage, Financial
Pacific Company and Mercury Air Centers, Inc. totaling
$6.7 million, of which $2.2 million were earned in the
third quarter of 2004.
Fees and other income related to the CMBS and CDO portfolio were
$1.4 million for the three months ended September 30,
2004, and $4.1 million and $3.3 million for the nine
months ended September 30, 2005 and 2004, respectively.
Advantage and BLX were our largest investments at value at
September 30, 2005 and 2004, and together represented 22.9%
and 17.7%, of our total assets, respectively. Total interest and
related portfolio income earned from Advantage and BLX was
$9.6 million and $9.9 million, respectively, for the
three months ended September 30, 2005, and
$7.4 million and $12.2 million, respectively, for the
three months ended September 30, 2004. Total interest and
related portfolio income earned from Advantage and BLX was
$28.2 million and $26.5 million, respectively, for the
nine months ended September 30, 2005, and
$10.4 million and $35.1 million, respectively, for the
nine months ended
56
September 30, 2004. Total interest and related portfolio
income for the nine months ended September 30, 2004,
included $2.5 million of income earned from Hillman prior
to the sale of our investment on March 31, 2004, as
discussed above.
Operating Expenses. Operating expenses include
interest, employee, and administrative expenses. The
fluctuations in interest expense during the three and nine
months ended September 30, 2005 and 2004, were primarily
attributable to changes in the level of our borrowings under
various notes payable and debentures and our revolving line of
credit. Our borrowing activity and weighted average cost of
debt, including fees and closing costs, at and for the three and
nine months ended September 30, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the | |
|
At and for the | |
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Total outstanding debt
|
|
$ |
968.3 |
|
|
$ |
1,167.7 |
|
|
$ |
968.3 |
|
|
$ |
1,167.7 |
|
Average outstanding debt
|
|
$ |
980.8 |
|
|
$ |
1,075.3 |
|
|
$ |
1,058.4 |
|
|
$ |
973.5 |
|
Weighted average
cost(1)
|
|
|
6.8 |
% |
|
|
6.3 |
% |
|
|
6.8 |
% |
|
|
6.3 |
% |
|
|
(1) |
The weighted average annual interest cost is computed as the (a)
annual stated interest rate on the debt plus the annual
amortization of commitment fees and other facility fees that are
recognized into interest expense over the contractual life of
the respective borrowings, divided by (b) debt outstanding
on the balance sheet date. |
In addition, interest expense includes interest on our
obligations to replenish borrowed Treasury securities related to
our hedging activities of $0.2 million and
$1.9 million for the three months ended September 30,
2005 and 2004, respectively, and $1.3 million and
$4.3 million for the nine months ended September 30,
2005 and 2004, respectively.
Employee expenses for the three and nine months ended
September 30, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Salaries and employee benefits
|
|
$ |
11.0 |
|
|
$ |
10.8 |
|
|
$ |
34.5 |
|
|
$ |
28.7 |
|
Transition compensation, net
|
|
|
(0.1 |
) |
|
|
|
|
|
|
5.4 |
|
|
|
|
|
Individual performance award (IPA)
|
|
|
1.7 |
|
|
|
3.2 |
|
|
|
5.5 |
|
|
|
10.2 |
|
IPA mark to market expense (benefit)
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
1.5 |
|
|
|
(0.7 |
) |
Individual performance bonus (IPB)
|
|
|
1.8 |
|
|
|
|
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee expense
|
|
$ |
14.0 |
|
|
$ |
13.9 |
|
|
$ |
52.3 |
|
|
$ |
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at end of period
|
|
|
127 |
|
|
|
159 |
|
|
|
127 |
|
|
|
159 |
|
The change in salaries and employee benefits reflects the effect
of wage increases, the change in mix of employees given their
area of responsibility and relevant experience level, and the
termination of certain employees in our commercial real estate
group as discussed below.
Transition compensation costs were $5.4 million for the
nine months ended September 30, 2005, including
$3.4 million of costs under retention agreements and
$3.1 million of transition services bonuses awarded to
certain employees in the commercial real estate group as a
result of the sale of the CMBS and CDO portfolio. Transition
compensation costs of $5.4 million for the nine months
ended September 30, 2005, reflect a reduction for salary
reimbursements from CWCapital under the transition services
agreement of $1.1 million. See the caption Commercial
Real Estate Finance above for additional information.
57
Transition compensation costs for the three months ended
September 30, 2005, consisted of $0.4 million of
transition services bonuses, $0.2 million of salary
reimbursements from CWCapital and a reversal of
$0.3 million of costs accrued in the second quarter of 2005
under retention agreements as the condition for payment of this
amount was not satisfied. These result in a net reduction to
transition compensation costs of $0.1 million for the third
quarter of 2005.
Employee expense, excluding transition compensation, related to
the 31 employees in our commercial real estate group who
terminated employment in the third quarter of 2005 as a result
of the sale of our CMBS and CDO portfolio, was $0.4 million
and $1.7 million for the three months ended
September 30, 2005 and 2004, respectively, and
$4.5 million and $5.2 million for the nine months
ended September 30, 2005 and 2004, respectively. While we
estimate payroll savings from this head count reduction, we will
continue to grow our other investment professional resources as
our private equity portfolio grows, which we expect will
partially offset these savings.
The Individual Performance Award (IPA) is a long-term incentive
compensation program for certain officers. The IPA, which is
generally determined annually at the beginning of each year, is
deposited into a deferred compensation trust in four equal
installments, generally on a quarterly basis, in the form of
cash. The accounts of the trust are consolidated with our
accounts. We are required to mark to market the liability of the
trust and this adjustment is recorded to the IPA compensation
expense. Because the IPA is deferred compensation, the cost of
this award is not a current expense for purposes of computing
our taxable income. The expense is deferred for tax purposes
until distributions are made from the trust.
As a result of recent changes in regulation by the Jobs Creation
Act of 2004 associated with deferred compensation arrangements,
as well as an increase in the competitive market for recruiting
talent in the private equity industry, the Compensation
Committee and the Board of Directors have determined for 2005
that a portion of the IPA should be replaced with an individual
performance bonus (IPB). The IPB is distributed in cash to award
recipients in equal bi-weekly installments (beginning in
February 2005) as long as the recipient remains employed by us.
The total IPA contributions and IPB payments are currently
estimated to be $14.0 million for 2005 before any mark to
market adjustment on the IPA. These amounts are subject to
change if there is a change in the composition of the pool of
award recipients during the year. If a recipient terminates
employment during the year, any further cash contribution for
the IPA or remaining cash payments under the IPB would be
forfeited.
Administrative expenses include legal and accounting fees,
valuation assistance fees, insurance premiums, the cost of
leases for our headquarters in Washington, DC, and our
regional offices, stock record expenses, directors fees,
and various other expenses. Administrative expenses for the
three and nine months ended September 30, 2005 and 2004,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Administrative expenses, excluding investigation related costs
|
|
$ |
8.2 |
|
|
$ |
8.2 |
|
|
$ |
26.2 |
|
|
$ |
23.1 |
|
Investigation related costs
|
|
|
6.9 |
|
|
|
2.0 |
|
|
|
32.7 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
$ |
15.1 |
|
|
$ |
10.2 |
|
|
$ |
58.9 |
|
|
$ |
25.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses have increased significantly in 2005
primarily as a result of requests for information in connection
with two government investigations. These expenses remain
difficult to predict as a result of ongoing requests for
documents and information.
58
The remaining increase in administrative expenses for the nine
months ended September 30, 2005, over the nine months ended
September 30, 2004, was primarily due to increased
corporate expenses, including increased expenses related to
portfolio development and workout activities of
$0.9 million, increased expenses related to accounting fees
and valuation assistance fees of $1.1 million, and
increased expenses related to evaluating potential new buyout
investments of $0.9 million. Administrative expenses,
excluding investigation related costs, for the three months
ended September 30, 2005, were flat versus the three months
ended September 30, 2004.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense
(benefit) for the three and nine months ended September 30,
2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Income tax expense (benefit)
|
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
|
$ |
2.2 |
|
|
$ |
(0.7 |
) |
Excise tax expense
|
|
|
1.3 |
|
|
|
|
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit), including excise tax
|
|
$ |
1.9 |
|
|
$ |
(0.2 |
) |
|
$ |
7.5 |
|
|
$ |
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our wholly owned subsidiary, AC Corp, is a corporation
subject to federal and state income taxes and records a benefit
or expense for income taxes as appropriate based on its
operating results in a given period. In addition, we currently
expect that our estimated annual taxable income for 2005 will be
in excess of our estimated dividend distributions to
shareholders in 2005 from such taxable income, and that such
estimated excess taxable income will be distributed in 2006.
Therefore, we expect that we will generally be required to pay a
4% excise tax on the excess of 98% of our taxable income for
2005 over the amount of actual distributions for 2005.
Accordingly, we accrued an excise tax based upon our current
estimate of annual taxable income for 2005.
Realized Gains and Losses. Net realized gains
primarily result from the sale of equity securities associated
with certain private finance investments, the sale of CMBS bonds
and CDO bonds and preferred shares, and the realization of
unamortized discount resulting from the sale and early repayment
of private finance loans and commercial mortgage loans, offset
by losses on investments. Net realized gains for the three and
nine months ended September 30, 2005 and 2004, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Realized gains
|
|
$ |
79.8 |
|
|
$ |
37.6 |
|
|
$ |
339.2 |
|
|
$ |
241.6 |
|
Realized losses
|
|
|
(9.1 |
) |
|
|
(36.3 |
) |
|
|
(50.7 |
) |
|
|
(65.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
$ |
70.7 |
|
|
$ |
1.3 |
|
|
$ |
288.5 |
|
|
$ |
175.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
When we exit an investment and realize a gain or loss, we make
an accounting entry to reverse any unrealized appreciation or
depreciation, respectively, we had previously recorded to
reflect the appreciated or depreciated value of the investment.
For the three and nine months ended
59
September 30, 2005 and 2004, we reversed previously
recorded unrealized appreciation or depreciation when gains or
losses were realized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
($ in millions) |
|
2005 | |
|
2004 | |
|
2005(1) | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Reversal of previously recorded net unrealized appreciation
associated with realized gains
|
|
$ |
(80.5 |
) |
|
$ |
(20.6 |
) |
|
$ |
(107.0 |
) |
|
$ |
(189.0 |
) |
Reversal of previously recorded net unrealized depreciation
associated with realized losses
|
|
|
7.4 |
|
|
|
37.6 |
|
|
|
49.3 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reversal
|
|
$ |
(73.1 |
) |
|
$ |
17.0 |
|
|
$ |
(57.7 |
) |
|
$ |
(121.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes the reversal of net unrealized appreciation of
$6.5 million on the CMBS and CDO assets sold and the
related hedges. The net unrealized appreciation recorded on
these assets prior to their sale was determined on an individual
security-by-security basis. The net gain realized upon the sale
of $227.7 million reflects the total value received for the
portfolio as a whole. |
|
Realized gains for the three months ended September 30,
2005, primarily resulted from transactions involving three
private finance portfolio companies Housecall
Medical Resources, Inc. ($52.0 million), Fairchild
Industrial Products Company ($16.2 million), and Apogen
Technologies, Inc. ($9.0 million) and one transaction
involving a commercial real estate investment
($1.6 million).
Realized gains for the three months ended September 30,
2004, primarily resulted from transactions involving five
private finance portfolio companies Professional
Paint, Inc. ($13.7 million), Impact Innovations Group, LLC
($9.4 million), United Pet Group, Inc. ($3.7 million),
Housecall Medical Resources, Inc. ($2.6 million) and
Matrics, Inc. ($2.1 million) and one transaction involving
a commercial mortgage loan ($1.8 million).
Realized gains for the nine months ended September 30,
2005, primarily resulted from the sale of our CMBS and CDO
assets, as discussed above under the caption Commercial
Real Estate Finance, ($227.7 million, net of a
realized loss of $0.7 million from related hedges),
transactions involving 12 private finance portfolio
companies Housecall Medical Resources, Inc.
($52.0 million), Fairchild Industrial Products Company
($16.2 million), Apogen Technologies Inc.
($9.0 million), Polaris Pool Systems, Inc.
($7.4 million), MasterPlan, Inc. ($3.7 million),
U.S. Security Holdings, Inc. ($3.3 million), Ginsey
Industries, Inc. ($2.8 million), E-Talk Corporation
($1.6 million), Professional Paint, Inc.
($1.0 million), Oriental Trading Company, Inc.
($1.0 million), Woodstream Corporation ($0.9 million),
and DCS Business Services, Inc. ($0.7 million), and two
transactions involving commercial real estate investments
($7.9 million).
Realized gains for the nine months ended September 30,
2004, primarily resulted from transactions involving 11 private
finance portfolio companies The Hillman Companies,
Inc. ($150.2 million), CorrFlex Graphics, LLC
($25.6 million), Professional Paint, Inc.
($13.7 million), Impact Innovations Group, LLC
($9.4 million), The Hartz Mountain Corporation
($8.2 million), Housecall Medical Resources, Inc.
($7.2 million), International Fiber Corporation
($5.2 million), CBA-Mezzanine Capital Finance, LLC
($3.9 million), United Pet Group, Inc. ($3.7 million),
Matrics, Inc. ($2.1 million), and SmartMail, LLC
($2.1 million) and one transaction involving a commercial
mortgage loan ($1.8 million).
60
Realized losses for the three months ended September 30,
2005, primarily resulted from transactions involving two private
finance portfolio companies HealthASPex, Inc.
($3.5 million) and MortgageRamp, Inc. ($3.5 million).
Realized losses for the three months ended September 30,
2004, primarily resulted from transactions involving two private
finance portfolio companies The Color Factory, Inc.
($24.5 million) and Prosperco Finanz Holding AG
($7.5 million), and one transaction involving a commercial
mortgage loan ($1.0 million).
Realized losses for the nine months ended September 30,
2005, primarily resulted from five transactions involving
private finance portfolio companies Norstan Apparel
Shops, Inc. ($18.5 million), E-Talk Corporation
($9.0 million), Garden Ridge Corporation
($7.1 million), HealthASPex, Inc. ($3.5 million), and
MortgageRamp, Inc. ($3.5 million), and three transactions
involving commercial mortgage loans ($4.5 million).
Realized losses for the nine months ended September 30,
2004, primarily resulted from transactions involving six private
finance portfolio companies The Color Factory, Inc.
($24.5 million), Executive Greetings, Inc.
($19.3 million), Prosperco Finanz Holding AG
($7.5 million), Logic Bay Corporation ($5.0 million),
Sure-Tel, Inc. ($2.3 million), and Startec Global
Communications Corporation ($1.1 million), and two
transactions involving commercial mortgage loans
($2.0 million).
Change in Unrealized Appreciation or Depreciation.
We determine the value of each investment in our
portfolio on a quarterly basis, and changes in value result in
unrealized appreciation or depreciation being recognized in our
statement of operations. Value, as defined in
Section 2(a)(41) of the Investment Company Act of 1940, is
(i) the market price for those securities for which a
market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good
faith by the Board of Directors. Since there is typically no
readily available market value for the investments in our
portfolio, we value substantially all of our portfolio
investments at fair value as determined in good faith by the
Board of Directors pursuant to our valuation policy and a
consistently applied valuation process. At September 30,
2005, portfolio investments recorded at fair value were
approximately 93% of our total assets. Because of the inherent
uncertainty of determining the fair value of investments that do
not have a readily available market value, the fair value of our
investments determined in good faith by the Board of Directors
may differ significantly from the values that would have been
used had a ready market existed for the investments, and the
differences could be material.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. Unlike
banks, we are not permitted to provide a general reserve for
anticipated loan losses. Instead, we are required to
specifically value each individual investment on a quarterly
basis. We will record unrealized depreciation on investments
when we believe that an investment has become impaired,
including where collection of a loan or realization of an equity
security is doubtful, or when the enterprise value of the
portfolio company does not currently support the cost of our
debt or equity investment. Enterprise value means the entire
value of the company to a potential buyer, including the sum of
the values of debt and equity securities used to capitalize the
enterprise at a point in time. We will record unrealized
appreciation if we believe that the underlying portfolio company
has appreciated in value and/or our equity security has also
appreciated in value. Changes in fair value are recorded in the
statement of operations as net change in unrealized appreciation
or depreciation.
61
As a business development company, we have invested in illiquid
securities including debt and equity securities of companies.
The structure of each private finance debt and equity security
is specifically negotiated to enable us to protect our
investment and maximize our returns. We include many terms
governing interest rate, repayment terms, prepayment penalties,
financial covenants, operating covenants, ownership parameters,
dilution parameters, liquidation preferences, voting rights, and
put or call rights. Our investments are generally subject to
restrictions on resale and generally have no established trading
market. Because of the type of investments that we make and the
nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes
the examination of, among other things, the underlying
investment performance, financial condition, and market changing
events that impact valuation.
Valuation Methodology. Our process for determining the
fair value of an investment begins with determining the
enterprise value of the portfolio company. The fair value of our
investment is based on the enterprise value at which the
portfolio company could be sold in an orderly disposition over a
reasonable period of time between willing parties other than in
a forced or liquidation sale. The liquidity event whereby we
exit a private finance investment is generally the sale, the
recapitalization or, in some cases, the initial public offering
of the portfolio company.
There is no one methodology to determine enterprise value and,
in fact, for any one portfolio company, enterprise value is best
expressed as a range of fair values, from which we derive a
single estimate of enterprise value. To determine the enterprise
value of a portfolio company, we analyze its historical and
projected financial results. We generally require portfolio
companies to provide annual audited and quarterly unaudited
financial statements, as well as annual projections for the
upcoming fiscal year. Typically in the private equity business,
companies are bought and sold based on multiples of EBITDA, cash
flow, net income, revenues or, in limited instances, book value.
The private equity industry uses financial measures such as
EBITDA or EBITDAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management
fees) in order to assess a portfolio companys financial
performance and to value a portfolio company. EBITDA and EBITDAM
are not intended to represent cash flow from operations as
defined by U.S. generally accepted accounting principles and
such information should not be considered as an alternative to
net income, cash flow from operations, or any other measure of
performance prescribed by U.S. generally accepted accounting
principles. When using EBITDA to determine enterprise value, we
may adjust EBITDA for non-recurring items. Such adjustments are
intended to normalize EBITDA to reflect the portfolio
companys earnings power. Adjustments to EBITDA may include
compensation to previous owners, acquisition, recapitalization,
or restructuring related items or one-time non-recurring income
or expense items.
In determining a multiple to use for valuation purposes, we
generally look to private merger and acquisition statistics,
discounted public trading multiples or industry practices. In
estimating a reasonable multiple, we consider not only the fact
that our portfolio company may be a private company relative to
a peer group of public comparables, but we also consider the
size and scope of our portfolio company and its specific
strengths and weaknesses. In some cases, the best valuation
methodology may be a discounted cash flow analysis based on
future projections. If a portfolio company is distressed, a
liquidation analysis may provide the best indication of
enterprise value.
If there is adequate enterprise value to support the repayment
of our debt, the fair value of our loan or debt security
normally corresponds to cost unless the borrowers
condition or other factors lead to a determination of fair value
at a different amount. The fair value of equity interests in
portfolio companies is determined based on various factors,
including the enterprise value remaining for equity holders
after the repayment of the portfolio companys debt and
other preference capital, and other pertinent factors such as
recent offers to purchase a portfolio company, recent
transactions
62
involving the purchase or sale of the portfolio companys
equity securities, liquidation events, or other events. The
determined equity values are generally discounted when we have a
minority position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors.
As a participant in the private equity business, we invest
primarily in private middle market companies for which there is
generally no publicly available information. Because of the
private nature of these businesses, there is a need to maintain
the confidentiality of the financial and other information that
we have for the private companies in our portfolio. We believe
that maintaining this confidence is important, as disclosure of
such information could disadvantage our portfolio companies and
could put us at a disadvantage in attracting new investments.
Therefore, we do not intend to disclose financial or other
information about our portfolio companies, unless required,
because we believe doing so may put them at an economic or
competitive disadvantage, regardless of our level of ownership
or control.
Because of the lack of publicly available information about our
private portfolio companies, we will continue to work with
third-party consultants to obtain assistance in determining fair
value for a portion of the private finance portfolio each
quarter. We work with these consultants to obtain assistance as
additional support in the preparation of our internal valuation
analysis for a portion of the portfolio each quarter. In
addition, we may receive third-party assessments of a particular
private finance portfolio companys value in the ordinary
course of business, most often in the context of a prospective
sale transaction or in the context of a bankruptcy process. The
valuation analysis prepared by management using these
third-party valuation resources, when applicable, is submitted
to our Board of Directors for its determination of fair value of
the portfolio in good faith.
For the quarter ended September 30, 2005, Duff & Phelps
assisted us by reviewing our valuations of 88 portfolio
companies, including BLX. (During the third quarter of 2005,
S&P Corporate Value Consulting merged with Duff &
Phelps, LLC (Duff & Phelps), a financial advisory and
investment banking firm. The merged company operates under the
name of Duff & Phelps.) Additionally, Houlihan Lokey
Howard and Zukin (Houlihan Lokey) assisted us by reviewing our
valuations of Advantage and two other portfolio companies where
we have a control position. For the remainder of 2005, we intend
to continue to obtain valuation assistance from Duff &
Phelps, Houlihan Lokey and possibly other third parties. We
currently anticipate that we will generally obtain assistance
for all companies in the portfolio where we own more than 50% of
the outstanding voting equity securities for the remainder of
2005 and that we will generally obtain assistance for companies
where we own equal to or less than 50% of the outstanding voting
equity securities at least once during the course of the year.
Valuation assistance may or may not be obtained for new
companies that enter the portfolio after June 30 of any calendar
year during that year or for investments with a cost or value
less than $250,000. We estimate that professional fees for
valuation assistance for all of 2005, including the expense
incurred in the first, second and third quarters, will be
approximately $1.5 million.
63
Net Change in Unrealized Appreciation or Depreciation.
For the portfolio, net change in unrealized appreciation or
depreciation for the three and nine months ended
September 30, 2005 and 2004, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005(1) | |
|
2004(1) | |
|
2005(1) | |
|
2004(1) | |
($ in millions) |
|
| |
|
| |
|
| |
|
| |
Net unrealized appreciation or depreciation
|
|
$ |
69.4 |
|
|
$ |
15.0 |
|
|
$ |
213.7 |
|
|
$ |
1.4 |
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
|
(80.5 |
) |
|
|
(20.6 |
) |
|
|
(107.0 |
) |
|
|
(189.0 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
7.4 |
|
|
|
37.6 |
|
|
|
49.3 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation
|
|
$ |
(3.7 |
) |
|
$ |
32.0 |
|
|
$ |
156.0 |
|
|
$ |
(120.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The net change in unrealized appreciation or depreciation can
fluctuate significantly from period to period. As a result,
quarterly comparisons may not be meaningful. |
At September 30, 2005, our two largest investments were in
Advantage and BLX. The following is a summary of the methodology
that we used to determine the fair value of these investments.
Advantage Sales & Marketing, Inc. At
September 30, 2005, we determined the enterprise value of
Advantage by using its projected normalized 2005 EBITDA times a
multiple. The enterprise value of Advantage has increased since
our acquisition of the company in June 2004 primarily as a
result of the integration of the acquired companies and the
growth in the companys earnings. Earnings growth primarily
resulted from the realization of integration related cost
savings. Using the enterprise value at September 30, 2005,
we determined the value of our investments in Advantage to be
$435.4 million, which resulted in unrealized appreciation
on our investment of $177.7 million at September 30,
2005. This is an increase in unrealized appreciation in the
third quarter of 2005 of $33.6 million and an increase in
unrealized appreciation of $153.5 million for the nine
months ended September 30, 2005. There was no change in
unrealized appreciation or depreciation related to our
investment in Advantage during the three or nine months ended
September 30, 2004. Houlihan Lokey and Duff &
Phelps assisted us by reviewing our valuation of our investment
in Advantage at September 30, 2005. Duff & Phelps
also assisted us by reviewing our valuation of our investment in
Advantage at December 31, 2004.
Business Loan Express, LLC. To determine the value
of our investment in BLX at September 30, 2005, we
performed four separate valuation analyses to determine a range
of values: (1) analysis of comparable public company
trading multiples, (2) analysis of BLXs value
assuming an initial public offering, (3) analysis of merger
and acquisition transactions for financial services companies,
and (4) a discounted dividend analysis. We received
valuation assistance from Duff & Phelps for our
investment in BLX at September 30, 2005, and
December 31, 2004.
With respect to the analysis of comparable public company
trading multiples and the analysis of BLXs value assuming
an initial public offering, we compute a median trailing and
forward price earnings multiple to apply to BLXs pro-forma
net income adjusted for certain capital structure changes that
we believe would likely occur should the company be sold. Each
quarter we evaluate which public commercial finance companies
should be included in the comparable group. The comparable group
at September 30, 2005, was made up of CapitalSource, Inc.,
CIT Group, Inc., Financial Federal Corporation, GATX
Corporation, and Marlin Business Services Corporation, which is
consistent with the comparable group at December 31, 2004.
64
Our investment in BLX at September 30, 2005, was valued at
$356.3 million. This fair value was within the range of
values determined by the four valuation analyses. Unrealized
appreciation on our investment was $70.7 million at
September 30, 2005. This is an increase in unrealized
appreciation for the three months ended September 30, 2005,
of $14.6 million and a net increase in unrealized
appreciation for the nine months ended September 30, 2005,
of $15.9 million. Net change in unrealized appreciation or
depreciation included a net increase in unrealized appreciation
on the Companys investment in BLX of $3.1 million and
a net decrease in unrealized appreciation of $6.2 million
for the three and nine months ended September 30, 2004,
respectively.
Per Share Amounts. All per share amounts included
in the Managements Discussion and Analysis of Financial
Condition and Results of Operations section have been computed
using the weighted average common shares used to compute diluted
earnings per share, which were 138.1 million and
131.2 million for the three months ended September 30,
2005 and 2004, respectively, and 136.7 million and 131.5
million for the nine months ended September 30, 2005 and
2004, respectively.
OTHER MATTERS
Regulated Investment Company Status. We have
elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986. As long
as we qualify as a regulated investment company, we are not
taxed on our investment company taxable income or realized net
capital gains, to the extent that such taxable income or gains
are distributed, or deemed to be distributed, to shareholders on
a timely basis.
Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses, and generally excludes
net unrealized appreciation or depreciation, as gains or losses
are not included in taxable income until they are realized. In
addition, gains realized for financial reporting purposes may
differ from gains included in taxable income as a result of our
election to recognize gains using installment sale treatment,
which results in the deferment of gains for tax purposes until
notes received as consideration from the sale of investments are
collected in cash.
Dividends declared and paid by us in a year generally differ
from taxable income for that year as such dividends may include
the distribution of current year taxable income, the
distribution of prior year taxable income carried over into and
distributed in the current year, or returns of capital. We are
generally required to distribute 98% of our taxable income
during the year the income is earned to avoid paying an excise
tax. If this requirement is not met, the Internal Revenue Code
imposes a nondeductible excise tax equal to 4% of the amount by
which 98% of the current years taxable income exceeds the
distribution for the year. The taxable income on which an excise
tax is paid is generally carried over and distributed to
shareholders in the next tax year. Depending on the level of
taxable income earned in a tax year, we may choose to carry over
taxable income in excess of current year distributions into the
next tax year and pay a 4% excise tax on such income, as
required. See Financial Condition, Liquidity and Capital
Resources below.
In order to maintain our status as a regulated investment
company, we must, in general, (1) continue to qualify as a
business development company; (2) derive at least 90% of
our gross income from dividends, interest, gains from the sale
of securities and other specified types of income; (3) meet
asset diversification requirements as defined in the Internal
Revenue Code; and (4) timely distribute to shareholders at
least 90% of our annual investment company taxable income as
defined in the Internal Revenue Code. We intend to take all
steps necessary to continue to qualify as a
65
regulated investment company. However, there can be no assurance
that we will continue to qualify for such treatment in future
years.
Legal Proceedings. On June 23, 2004, we were
notified by the SEC that they are conducting an informal
investigation of us. On December 22, 2004, we received
letters from the U.S. Attorney for the District of Columbia
requesting the preservation and production of information
regarding us and Business Loan Express, LLC in connection with a
criminal investigation. Based on the information available to us
at this time, the inquiries appear to primarily pertain to
matters related to portfolio valuation and our portfolio
company, Business Loan Express, LLC. To date, we have produced
materials in response to requests from both the SEC and the U.S.
Attorneys office, and certain current and former employees
have provided testimony and have been interviewed by the staff
of the SEC and the U.S. Attorneys Office. We are
voluntarily cooperating with these investigations.
In addition to the above matters, we are party to certain
lawsuits in the normal course of business.
While the outcome of these legal proceedings and other matters
cannot at this time be predicted with certainty, we do not
expect that the outcome of these matters will have a material
effect upon our financial condition or results of operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our portfolio has historically generated cash flow from which we
pay dividends to shareholders and fund new investment activity.
Cash generated from the portfolio includes cash flow from net
investment income and net realized gains and principal
collections related to investment repayments or sales. Cash flow
provided by our operating activities before new investment
activity for the nine months ended September 30, 2005 and
2004, was as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by (used in) operating activities
|
|
$ |
385.5 |
|
|
$ |
(189.1 |
) |
Add: portfolio investments funded
|
|
|
1,320.6 |
|
|
|
1,057.1 |
|
|
|
|
|
|
|
|
|
Total cash provided by operating activities before new
investments
|
|
$ |
1,706.1 |
|
|
$ |
868.0 |
|
|
|
|
|
|
|
|
From the cash provided by operating activities before new
investments, we make new portfolio investments, fund our
operating activities, and pay dividends to shareholders. We also
raise new debt and equity capital from time to time in order to
fund our investments and operations.
We invest otherwise uninvested cash in U.S. government- or
agency-issued or guaranteed securities that are backed by the
full faith and credit of the United States, or in high quality,
short-term repurchase agreements fully collateralized by such
securities. We place our cash with financial institutions and,
at times, cash held in checking accounts in financial
institutions may be in excess of the Federal Deposit Insurance
Corporation insured limit.
Dividends to common shareholders for the nine months ended
September 30, 2005 and 2004, were $231.2 million and
$220.8 million, respectively, or $1.72 per common share for
the nine months ended September 30, 2005, and $1.71 per
common share for the nine months ended September 30, 2004.
An extra cash dividend of $0.02 per common share was declared
during 2004 and was paid to shareholders on January 28,
2005.
Dividends are generally determined based upon an estimate of
annual taxable income, which includes our taxable interest,
dividend and fee income, as well as taxable net capital gains.
As discussed above, taxable income generally differs from net
income for financial reporting purposes due
66
to temporary and permanent differences in the recognition of
income and expenses, and generally excludes net unrealized
appreciation or depreciation, as gains or losses are not
included in taxable income until they are realized. Taxable
income includes non-cash income, such as changes in accrued and
reinvested interest and dividends and the amortization of
discounts and fees. Cash collections of income resulting from
contractual payment-in-kind interest or the amortization of
discounts and fees generally occur upon the repayment of the
loans or debt securities that include such items. Non-cash
taxable income is reduced by non-cash expenses, such as realized
losses and depreciation and amortization expense.
Our Board of Directors reviews the dividend rate quarterly, and
may adjust the quarterly dividend throughout the year. Dividends
are declared based upon our estimate of annual taxable income
available for distribution to shareholders. Our goal is to
declare what we believe to be sustainable increases in our
regular quarterly dividends. To the extent that we earn annual
taxable income in excess of dividends paid for the year, we may
carry over the excess taxable income into the next year and such
excess income will be available for distribution in the next
year as permitted under the Internal Revenue Code of 1986.
Excess taxable income carried over and paid out in the next year
may be subject to a 4% excise tax (see Other
Matters Regulated Investment Company Status
above). We believe that carrying over excess taxable income into
future periods may provide increased visibility with respect to
taxable earnings available to pay the regular quarterly dividend.
We currently expect that our estimated annual taxable income for
2005 will be in excess of our estimated dividend distributions
to shareholders in 2005 from such taxable income, and,
therefore, we expect to carry over excess taxable income for
distribution to shareholders in 2006. Accordingly, for the nine
months ended September 30, 2005, we have accrued an excise
tax of $5.3 million. Excise taxes are accrued based upon
estimated excess taxable income as estimated taxable income is
earned, therefore, the excise tax accrued to date in 2005 may be
adjusted as appropriate in the remainder of 2005 to reflect
changes in our estimate of the carry over amount and additional
excise tax may be accrued during the remainder of 2005 as
additional excess taxable income is earned, if any. Our ability
to earn the estimated annual taxable income for 2005 depends on
many factors, including our ability to make new investments at
attractive yields, the level of repayments in the portfolio, the
realization of gains or losses from portfolio exits, and the
level of operating expense incurred to operate our business. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk
Factors.
Because we are a regulated investment company, we distribute our
taxable income and, therefore, from time to time we will raise
new debt or equity capital in order to fund our investments and
operations.
At September 30, 2005, and December 31, 2004, our
total cash and cash equivalents, total assets, total debt
outstanding, total shareholders equity, debt to equity
ratio and asset coverage for senior indebtedness were as follows:
|
|
|
|
|
|
|
|
|
($ in millions) |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total cash and cash equivalents
|
|
$ |
58.1 |
|
|
$ |
57.2 |
|
Total assets
|
|
$ |
3,446.5 |
|
|
$ |
3,261.0 |
|
Total debt outstanding
|
|
$ |
968.3 |
|
|
$ |
1,176.6 |
|
Total shareholders equity
|
|
$ |
2,367.0 |
|
|
$ |
1,979.8 |
|
Debt to equity ratio
|
|
|
0.41 |
|
|
|
0.59 |
|
Asset coverage
ratio(1)
|
|
|
352 |
% |
|
|
280 |
% |
|
|
(1) |
As a business development company, we are generally required to
maintain a minimum ratio of 200% of total assets to total
borrowings. |
67
We currently target a debt to equity ratio ranging between
0.50:1.00 to 0.70:1.00 because we believe that it is prudent to
operate with a larger equity capital base and less leverage. As
of September 30, 2005, we had no outstanding borrowings on
our revolving line of credit. Our debt to equity ratio of
0.41:1.00 at September 30, 2005, was below our target range.
We did not sell new equity during the nine months ended
September 30, 2005 or 2004. For the year ended
December 31, 2004, we sold equity of $73.5 million.
Shareholders equity increased by $66.6 million,
$47.1 million and $51.3 million through the exercise
of employee options, the collection of notes receivable from the
sale of common stock, and the issuance of shares through our
dividend reinvestment plan for the nine months ended
September 30, 2005 and 2004, and the year ended
December 31, 2004, respectively.
We employ an asset-liability management strategy that focuses on
matching the estimated maturities of our loan and investment
portfolio to the estimated maturities of our borrowings. We use
our revolving line of credit facility as a means to bridge to
long-term financing in the form of debt or equity capital, which
may or may not result in temporary differences in the matching
of estimated maturities. Availability on the revolving line of
credit, net of amounts committed for standby letters of credit
issued under the line of credit facility, was
$683.9 million on September 30, 2005. We evaluate our
interest rate exposure on an ongoing basis. Generally, we seek
to fund our primarily fixed-rate investment portfolio with
fixed-rate debt or equity capital. To the extent deemed
necessary, we may hedge variable and short-term interest rate
exposure through interest rate swaps or other techniques.
At September 30, 2005, we had outstanding debt as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
Facility | |
|
Amount | |
|
Interest | |
|
|
Amount | |
|
Outstanding | |
|
Cost(1) | |
($ in millions) |
|
| |
|
| |
|
| |
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
939.8 |
|
|
$ |
939.8 |
|
|
|
6.5 |
% |
|
SBA debentures
|
|
|
28.5 |
|
|
|
28.5 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
968.3 |
|
|
|
968.3 |
|
|
|
6.5 |
% |
Revolving line of credit
|
|
|
722.5 |
|
|
|
|
|
|
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
1,690.8 |
|
|
$ |
968.3 |
|
|
|
6.8 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average annual interest cost is computed as the
(a) annual stated interest on the debt plus the annual
amortization of commitment fees and other facility fees that are
recognized into interest expense over the contractual life of
the respective borrowings, divided by (b) debt outstanding
on the balance sheet date. |
|
(2) |
There were no amounts drawn on the revolving line of credit at
September 30, 2005. The annual interest cost for total debt
includes the annual cost of commitment fees and other facility
fees on the revolving line of credit regardless of the amount
outstanding on the facility as of the balance sheet date. The
annual cost of commitment fees and other facility fees was
$2.6 million at September 30, 2005. |
Unsecured Notes Payable. We have issued long-term
debt to institutional lenders, primarily insurance companies.
The notes have five- or seven-year maturities, with maturity
dates beginning in 2005 and generally have fixed rates of
interest. The notes generally require payment of interest only
semi-annually, and all principal is due upon maturity. During
the second quarter of 2005, we repaid $40.0 million of the
unsecured notes payable.
On October 13, 2005, we issued $261.0 million of
five-year and $89.0 million of seven-year unsecured
long-term notes, primarily to insurance companies. The five-and
seven-year notes have fixed interest rates of 6.2% and 6.3%,
respectively, and have substantially the same terms are our
existing unsecured long-term notes. We used a portion of the
proceeds from the new long-term note issuance to repay
$125.0 million of our existing unsecured long-term notes
that matured on October 15, 2005, and had an annual
weighted average interest cost of 8.3%.
68
On March 25, 2004, we issued five-year unsecured long-term
notes denominated in Euros and Sterling for a total U.S. dollar
equivalent of $15.2 million. The notes have fixed interest
rates and have substantially the same terms as our existing
unsecured long-term notes. Simultaneous with issuing the notes,
we entered into a cross currency swap with a financial
institution which fixed our interest and principal payments in
U.S. dollars for the life of the debt.
Small Business Administration Debentures. Through
our small business investment company subsidiary, we have
debentures payable to the Small Business Administration with
contractual maturities of ten years. The notes require payment
of interest only semi-annually, and all principal is due upon
maturity. During the first and third quarters of 2005, we repaid
$31.0 million and $18.0 million, respectively, of this
outstanding debt. Under the small business investment company
program, we may borrow up to $119.0 million from the Small
Business Administration. We had a commitment from the Small
Business Administration to borrow up to an additional
$7.3 million above the current amount outstanding that
expired on September 30, 2005.
Revolving Line of Credit. On September 30,
2005, we entered into an unsecured revolving line of credit with
a committed amount of $722.5 million. The revolving line of
credit replaces our previous revolving line of credit and
expires on September 30, 2008. On November 4, 2005, we
expanded the committed amount under the revolving line of credit
facility by $50.0 million, which brings the total committed
amount to $772.5 million. The revolving line of credit may
be expanded through new or additional commitments up to
$922.5 million at our option. The revolving line of credit
generally bears interest at a rate equal to (i) LIBOR (for
the period we select) plus 1.30% or (ii) the higher of the
Federal Funds rate plus 0.50% or the Bank of America N.A. prime
rate. The revolving line of credit requires the payment of an
annual commitment fee equal to 0.20% of the committed amount.
The revolving line of credit generally requires payments of
interest at the end of each LIBOR interest period, but no less
frequently than quarterly, on LIBOR based loans and monthly
payments of interest on other loans. All principal is due upon
maturity.
There were no outstanding borrowings on the unsecured revolving
line of credit at September 30, 2005. The amount available
under the line at September 30, 2005, was
$683.9 million, net of amounts committed for standby
letters of credit of $38.6 million. Net repayments under
the previous revolving line of credit for the nine months ended
September 30, 2005, were $112.0 million.
We have various financial and operating covenants required by
the revolving line of credit and notes payable and debentures.
These covenants require us to maintain certain financial ratios,
including debt to equity and interest coverage, and a minimum
net worth. Our credit facilities limit our ability to declare
dividends if we default under certain provisions. As of
September 30, 2005, we were in compliance with these
covenants.
69
The following table shows our significant contractual
obligations for the repayment of debt and payment of other
contractual obligations as of September 30, 2005.
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|
|
|
Payments Due By Year | |
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| |
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|
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After | |
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2009 | |
($ in millions) |
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| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Notes payable and debentures:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured long-term notes payable
|
|
$ |
939.8 |
|
|
$ |
125.0 |
|
|
$ |
175.0 |
|
|
$ |
|
|
|
$ |
153.0 |
|
|
$ |
267.3 |
|
|
$ |
219.5 |
|
|
SBA debentures
|
|
|
28.5 |
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|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
28.5 |
|
Revolving line of
credit(1)
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Operating leases
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|
|
30.2 |
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|
|
1.2 |
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|
|
4.5 |
|
|
|
4.4 |
|
|
|
4.5 |
|
|
|
4.6 |
|
|
|
11.0 |
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
|
Total contractual obligations
|
|
$ |
998.5 |
|
|
$ |
126.2 |
|
|
$ |
179.5 |
|
|
$ |
4.4 |
|
|
$ |
157.5 |
|
|
$ |
271.9 |
|
|
$ |
259.0 |
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|
|
|
(1) |
At September 30, 2005, $683.9 million remained unused
and available, net of amounts committed for standby letters of
credit of $38.6 million issued under the credit facility. |
The following table shows our contractual commitments that may
have the effect of creating, increasing, or accelerating our
liabilities as of September 30, 2005.
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Amount of Commitment Expiration Per Year | |
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| |
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After | |
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|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2009 | |
($ in millions) |
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| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Guarantees
|
|
$ |
145.3 |
|
|
$ |
0.1 |
|
|
$ |
1.0 |
|
|
$ |
136.2 |
|
|
$ |
|
|
|
$ |
2.5 |
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
38.6 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.6 |
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|
|
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|
|
|
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|
|
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|
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Total commitments
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|
$ |
183.9 |
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|
$ |
0.1 |
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|
$ |
1.0 |
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|
$ |
136.2 |
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|
$ |
38.6 |
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|
$ |
2.5 |
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$ |
5.5 |
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|
(1) |
Standby letters of credit are issued under our revolving line of
credit that expires in September 2008. Therefore, unless a
standby letter of credit is set to expire at an earlier date, we
have assumed that the standby letters of credit will expire
contemporaneously with the expiration of our line of credit in
September 2008. |
In addition, we had outstanding commitments to fund investments
totaling $395.4 million at September 30, 2005. We
intend to fund these commitments and prospective investment
opportunities with existing cash, through cash flow from
operations before new investments, through borrowings under our
line of credit or other long-term debt agreements, or through
the sale or issuance of new equity capital.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are based on the selection
and application of critical accounting policies, which require
management to make significant estimates and assumptions.
Critical accounting policies are those that are both important
to the presentation of our financial condition and results of
operations and require managements most difficult,
complex, or subjective judgments. Our critical accounting
policies are those applicable to the valuation of investments
and certain revenue recognition matters as discussed below.
Valuation of Portfolio Investments. As
a business development company, we invest in illiquid securities
including debt and equity securities of companies. Our
investments are generally subject to restrictions on resale and
generally have no established trading market. We value
substantially all of our investments at fair value as determined
in good faith by the Board of Directors in accordance with our
valuation policy. We determine fair value to be the amount for
which an investment could be exchanged in an orderly disposition
over a reasonable period of time between willing parties other
than in a forced or liquidation sale. Our valuation policy
considers the fact that no ready market exists for substantially
all of the securities in which we invest. Our valuation policy
is intended to
70
provide a consistent basis for determining the fair value of the
portfolio. We will record unrealized depreciation on investments
when we believe that an investment has become impaired,
including where collection of a loan or realization of an equity
security is doubtful, or when the enterprise value of the
portfolio company does not currently support the cost of our
debt or equity investments. Enterprise value means the entire
value of the company to a potential buyer, including the sum of
the values of debt and equity securities used to capitalize the
enterprise at a point in time. We will record unrealized
appreciation if we believe that the underlying portfolio company
has appreciated in value and/ or our equity security has also
appreciated in value. The value of investments in publicly
traded securities is determined using quoted market prices
discounted for restrictions on resale, if any.
Loans and Debt Securities. For loans
and debt securities, fair value generally approximates cost
unless the borrowers enterprise value, overall financial
condition or other factors lead to a determination of fair value
at a different amount.
When we receive nominal cost warrants or free equity securities
(nominal cost equity), we allocate our cost basis in
our investment between debt securities and nominal cost equity
at the time of origination. At that time, the original issue
discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost
basis in the related debt securities.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. For loans and
debt securities with contractual payment-in-kind interest, which
represents contractual interest accrued and added to the loan
balance that generally becomes due at maturity, we will not
accrue payment-in-kind interest if the portfolio company
valuation indicates that the payment-in-kind interest is not
collectible. In general, interest is not accrued on loans and
debt securities if we have doubt about interest collection or
where the enterprise value of the portfolio company may not
support further accrual. Loans in workout status that are
classified as Grade 4 or 5 assets under our internal
grading system do not accrue interest. In addition, interest may
not accrue on loans or debt securities to portfolio companies
that are more than 50% owned by us depending on such
companys capital requirements. Loan origination fees,
original issue discount, and market discount are capitalized and
then amortized into interest income using the effective interest
method. Upon the prepayment of a loan or debt security, any
unamortized loan origination fees are recorded as interest
income and any unamortized original issue discount or market
discount is recorded as a realized gain. Prepayment premiums are
recorded on loans and debt securities when received.
Equity Securities. Our equity
securities in portfolio companies for which there is no liquid
public market are valued at fair value based on the enterprise
value of the portfolio company, which is determined using
various factors, including cash flow from operations of the
portfolio company and other pertinent factors, such as recent
offers to purchase a portfolio company, recent transactions
involving the purchase or sale of the portfolio companys
equity securities, liquidation events, or other events. The
determined equity values are generally discounted to account for
restrictions on resale or minority ownership positions.
The value of our equity securities in public companies for which
market quotations are readily available is based on the closing
public market price on the balance sheet date. Securities that
carry certain restrictions on sale are typically valued at a
discount from the public market value of the security.
Dividend income on preferred equity securities is recorded as
dividend income on an accrual basis to the extent that such
amounts are expected to be collected and to the extent that we
have the option to receive the dividend in cash. Dividend income
on common equity securities is recorded on the record date for
private companies or on the ex-dividend date for publicly traded
companies.
Net Realized Gains or Losses and Net Change in Unrealized
Appreciation or Depreciation. Realized gains or losses
are measured by the difference between the net proceeds from the
repayment
71
or sale and the cost basis of the investment without regard to
unrealized appreciation or depreciation previously recognized,
and include investments charged off during the year, net of
recoveries. Net change in unrealized appreciation or
depreciation reflects the change in portfolio investment values
during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains or losses are realized.
Fee Income. Fee income includes fees for
guarantees and services rendered by us to portfolio companies
and other third parties such as diligence, structuring,
transaction services, management and consulting services, and
other services. Guaranty fees are generally recognized as income
over the related period of the guaranty. Diligence, structuring,
and transaction services fees are generally recognized as income
when services are rendered or when the related transactions are
completed. Management, consulting and other services fees are
generally recognized as income as the services are rendered.
72
RISK FACTORS
Investing in Allied Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective.
Our portfolio of investments is illiquid. We generally
acquire our investments directly from the issuer in privately
negotiated transactions. The majority of the investments in our
portfolio are typically subject to restrictions on resale or
otherwise have no established trading market. We typically exit
our investments when the portfolio company has a liquidity event
such as a sale, recapitalization, or initial public offering of
the company. The illiquidity of our investments may adversely
affect our ability to dispose of debt and equity securities at
times when we may need to or when it may be otherwise
advantageous for us to liquidate such investments. In addition,
if we were forced to immediately liquidate some or all of the
investments in the portfolio, the proceeds of such liquidation
would be significantly less than the current value of such
investments.
Investing in private companies involves a high degree of
risk. Our portfolio primarily consists of long-term loans to
and investments in middle market private companies. Investments
in private businesses involve a high degree of business and
financial risk, which can result in substantial losses for us in
those investments and accordingly should be considered
speculative. There is generally no publicly available
information about the companies in which we invest, and we rely
significantly on the diligence of our employees and agents to
obtain information in connection with our investment decisions.
If we are unable to identify all material information about
these companies, among other factors, we may fail to receive the
expected return on our investment or lose some or all of the
money invested in these companies. In addition, these businesses
may have shorter operating histories, narrower product lines,
smaller market shares and less experienced management than their
competition and may be more vulnerable to customer preferences,
market conditions, loss of key personnel, or economic downturns,
which may adversely affect the return on, or the recovery of,
our investment in such businesses. As an investor, we are
subject to the risk that a portfolio company may make a business
decision that does not serve our interest, which could decrease
the value of our investment.
Substantially all of our portfolio investments are recorded
at fair value as determined in good faith by our Board of
Directors and, as a result, there is uncertainty regarding the
value of our portfolio investments. At September 30,
2005, portfolio investments recorded at fair value were
approximately 93% of our total assets. Pursuant to the
requirements of the 1940 Act, we value substantially all of our
investments at fair value as determined in good faith by our
Board of Directors on a quarterly basis. Since there is
typically no readily available market value for the investments
in our portfolio, our Board of Directors determines in good
faith the fair value of these investments pursuant to a
valuation policy and a consistently applied valuation process.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. Unlike
banks, we are not permitted to provide a general reserve for
anticipated loan losses; we are instead required by the 1940 Act
to specifically value each individual investment on a quarterly
basis and record unrealized depreciation for an investment that
we believe has become impaired, including where collection of a
loan or realization of an equity security is doubtful, or when
the enterprise value of the portfolio company does not currently
support the cost of our debt or equity investment. Enterprise
value means the entire value of the company to a potential
buyer, including the sum of the values of debt and equity
securities used to capitalize the enterprise at a point in time.
We will record unrealized appreciation if we believe that the
underlying portfolio company has
73
appreciated in value and/or our equity security has also
appreciated in value. Without a readily available market value
and because of the inherent uncertainty of valuation, the fair
value of our investments determined in good faith by the Board
of Directors may differ significantly from the values that would
have been used had a ready market existed for the investments,
and the differences could be material. Our net asset value could
be affected if our determination of the fair value of our
investments is materially different than the value that we
ultimately realize.
We adjust quarterly the valuation of our portfolio to reflect
the Board of Directors determination of the fair value of
each investment in our portfolio. Any changes in fair value are
recorded in our statement of operations as net change in
unrealized appreciation or depreciation.
Economic recessions or downturns could impair our portfolio
companies and harm our operating results. Many of the
companies in which we have made or will make investments may be
susceptible to economic slowdowns or recessions. An economic
slowdown may affect the ability of a company to repay our loans
or engage in a liquidity event such as a sale, recapitalization,
or initial public offering. Our nonperforming assets are likely
to increase and the value of our portfolio is likely to decrease
during these periods. These conditions could lead to financial
losses in our portfolio and a decrease in our revenues, net
income, and assets.
Our business of making private equity investments and
positioning them for liquidity events also may be affected by
current and future market conditions. The absence of an active
senior lending environment or a slowdown in middle market merger
and acquisition activity may slow the amount of private equity
investment activity generally. As a result, the pace of our
investment activity may slow. In addition, significant changes
in the capital markets could have an effect on the valuations of
private companies and on the potential for liquidity events
involving such companies. This could affect the timing of exit
events in our portfolio and could negatively affect the amount
of gains or losses upon exit.
Our borrowers may default on their payments, which may have a
negative effect on our financial performance. We primarily
make long-term unsecured, subordinated loans and invest in
equity securities, which may involve a higher degree of
repayment risk. We primarily invest in companies that may have
limited financial resources, may be highly leveraged and may be
unable to obtain financing from traditional sources. Numerous
factors may affect a borrowers ability to repay its loan,
including the failure to meet its business plan, a downturn in
its industry, or negative economic conditions. A portfolio
companys failure to satisfy financial or operating
covenants imposed by us or other lenders could lead to defaults
and, potentially, termination of its loans or foreclosure on its
secured assets, which could trigger cross defaults under other
agreements and jeopardize our portfolio companys ability
to meet its obligations under the loans or debt securities that
we hold. In addition, our portfolio companies may have, or may
be permitted to incur, other debt that ranks senior to or
equally with our securities. This means that payments on such
senior-ranking securities may have to be made before we receive
any payments on our loans or debt securities. Deterioration in a
borrowers financial condition and prospects may be
accompanied by deterioration in any related collateral and may
have a negative effect on our financial results.
Our private finance investments may not produce current
returns or capital gains. Our private finance investments
are typically structured as unsecured debt securities with a
relatively high fixed rate of interest and with equity features
such as conversion rights, warrants, or options, or as buyouts
of companies where we invest in debt and equity securities. As a
result, our private finance investments are generally structured
to generate interest income from the time they are made and may
also produce a realized gain from an accompanying equity
feature. We cannot be sure that our portfolio will generate a
current return or capital gains.
74
Our financial results could be negatively affected if a
significant portfolio investment fails to perform as
expected. Our total investment in companies may be
significant individually or in the aggregate. As a result, if a
significant investment in one or more companies fails to perform
as expected, our financial results could be more negatively
affected and the magnitude of the loss could be more significant
than if we had made smaller investments in more companies. At
September 30, 2005, our largest investments at value were
in Advantage Sales & Marketing, Inc. and Business Loan
Express, LLC and represented 12.6% and 10.3% of our total
assets, respectively, and 10.2% and 9.6% of our total interest
and related portfolio income for the nine months ended
September 30, 2005, respectively.
Our financial results could be negatively affected if
Business Loan Express fails to perform as expected. Business
Loan Express, LLC (BLX) is one of our largest portfolio
investments. Our financial results could be negatively affected
if BLX, as a portfolio company, fails to perform as expected or
if government funding for, or regulations related to the Small
Business Administration 7(a) Guaranteed Loan Program change.
We borrow money, which magnifies the potential for gain or
loss on amounts invested and may increase the risk of investing
in us. Borrowings, also known as leverage, magnify the
potential for gain or loss on amounts invested and, therefore,
increase the risks associated with investing in our securities.
We borrow from and issue senior debt securities to banks,
insurance companies, and other lenders. Lenders of these senior
securities have fixed dollar claims on our consolidated assets
that are superior to the claims of our common shareholders. If
the value of our consolidated assets increases, then leveraging
would cause the net asset value attributable to our common stock
to increase more sharply than it would have had we not
leveraged. Conversely, if the value of our consolidated assets
decreases, leveraging would cause net asset value to decline
more sharply than it otherwise would have had we not leveraged.
Similarly, any increase in our consolidated income in excess of
consolidated interest payable on the borrowed funds would cause
our net income to increase more than it would without the
leverage, while any decrease in our consolidated income would
cause net income to decline more sharply than it would have had
we not borrowed. Such a decline could negatively affect our
ability to make common stock dividend payments. Leverage is
generally considered a speculative investment technique. Our
revolving line of credit, notes payable and debentures contain
financial and operating covenants that could restrict our
business activities, including our ability to declare dividends
if we default under certain provisions.
At September 30, 2005, we had $968.3 million of
outstanding indebtedness bearing a weighted average annual
interest cost of 6.8%. In order for us to cover these annual
interest payments on indebtedness, we must achieve annual
returns on our assets of at least 1.9%.
We may not borrow money unless we maintain asset coverage for
indebtedness of at least 200%, which may affect returns to
shareholders. We must maintain asset coverage for total
borrowings of at least 200%. Our ability to achieve our
investment objective may depend in part on our continued ability
to maintain a leveraged capital structure by borrowing from
banks, insurance companies or other lenders on favorable terms.
There can be no assurance that we will be able to maintain such
leverage. If asset coverage declines to less than 200%, we may
be required to sell a portion of our investments when it is
disadvantageous to do so. As of September 30, 2005, our
asset coverage for senior indebtedness was 352%.
Changes in interest rates may affect our cost of capital and
net investment income. Because we borrow money to make
investments, our net investment income is dependent upon the
difference between the rate at which we borrow funds and the
rate at which we invest these funds. As a result, there can be
no assurance that a significant change in market interest rates
will not have a material adverse effect on our net investment
income. In periods of rising interest rates, our cost of funds
75
would increase, which would reduce our net investment income. We
use a combination of long-term and short-term borrowings and
equity capital to finance our investing activities. We utilize
our revolving line of credit as a means to bridge to long-term
financing. Our long-term fixed-rate investments are financed
primarily with long-term fixed-rate debt and equity. We may use
interest rate risk management techniques in an effort to limit
our exposure to interest rate fluctuations. Such techniques may
include various interest rate hedging activities to the extent
permitted by the 1940 Act. We have analyzed the potential impact
of changes in interest rates on interest income net of interest
expense.
Assuming that the balance sheet as of September 30, 2005,
were to remain constant and no actions were taken to alter the
existing interest rate sensitivity, a hypothetical immediate 1%
change in interest rates would have affected the net income by
less than 1% over a one year horizon. Although management
believes that this measure is indicative of our sensitivity to
interest rate changes, it does not adjust for potential changes
in credit quality, size and composition of the assets on the
balance sheet and other business developments that could affect
net increase in net assets resulting from operations, or net
income. Accordingly, no assurances can be given that actual
results would not differ materially from the potential outcome
simulated by this estimate.
We will continue to need additional capital to grow because
we must distribute our income. We will continue to need
capital to fund growth in our investments. Historically, we have
borrowed from financial institutions and have issued equity
securities to grow our portfolio. A reduction in the
availability of new debt or equity capital could limit our
ability to grow. We must distribute at least 90% of our taxable
ordinary income, which excludes realized net long-term capital
gains, to our shareholders to maintain our regulated investment
company status. As a result, such earnings will not be available
to fund investment originations. In addition, as a business
development company, we are generally required to maintain a
ratio of at least 200% of total assets to total borrowings,
which may restrict our ability to borrow in certain
circumstances. We expect to continue to borrow from financial
institutions and issue additional debt and equity securities. If
we fail to obtain funds from such sources or from other sources
to fund our investments, it could limit our ability to grow,
which could have a material adverse effect on the value of our
common stock.
Loss of regulated investment company tax treatment would
substantially reduce net assets and income available for
dividends. We have operated so as to qualify as a regulated
investment company under Subchapter M of the Code. If we
meet source of income, asset diversification, and distribution
requirements, we will not be subject to corporate level income
taxation on income we timely distribute to our stockholders as
dividends. We would cease to qualify for such tax treatment if
we were unable to comply with these requirements. In addition,
we may have difficulty meeting the requirement to make
distributions to our shareholders because in certain cases we
may recognize income before or without receiving cash
representing such income. If we fail to qualify as a regulated
investment company, we will have to pay corporate-level taxes on
all of our income whether or not we distribute it, which would
substantially reduce the amount of income available for
distribution to our stockholders. Even if we qualify as a
regulated investment company, we generally will be subject to a
corporate-level income tax on the income we do not distribute.
If we do not distribute at least 98% of our annual taxable
income in the year earned, we generally will be required to pay
an excise tax equal to 4% of the amount by which 98% of our
annual taxable income exceeds the distributions for the year.
There is a risk that you may not receive dividends or
distributions. We intend to make distributions on a
quarterly basis to our stockholders. We may not be able to
achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of
these distributions from time to time. In addition, due to the
asset coverage test applicable to us as a business development
company, we may be limited in our ability to make distributions.
Also, our
76
credit facilities limit our ability to declare dividends if we
default under certain provisions. If we do not distribute a
certain percentage of our income annually, we will suffer
adverse tax consequences, including possible loss of our status
as a regulated investment company. In addition, in accordance
with U.S. generally accepted accounting principles and tax
regulations, we include in income certain amounts that we have
not yet received in cash, such as contractual payment-in-kind
interest, which represents contractual interest added to the
loan balance that becomes due at the end of the loan term, or
the accrual of original issue discount. The increases in loan
balances as a result of contractual payment-in-kind arrangements
are included in income in advance of receiving cash payment and
are separately included in the change in accrued or reinvested
interest and dividends in our consolidated statement of cash
flows. Since we may recognize income before or without receiving
cash representing such income, we may have difficulty meeting
the requirement to distribute at least 90% of our investment
company taxable income to maintain our status as a regulated
investment company.
We operate in a competitive market for investment
opportunities. We compete for investments with a large
number of private equity funds and mezzanine funds, other
business development companies, investment banks, other equity
and non-equity based investment funds, and other sources of
financing, including specialty finance companies and traditional
financial services companies such as commercial banks. Some of
our competitors may have greater resources than we do. Increased
competition would make it more difficult for us to purchase or
originate investments at attractive prices. As a result of this
competition, sometimes we may be precluded from making otherwise
attractive investments.
Our business depends on our key personnel. We depend on
the continued services of our executive officers and other key
management personnel. If we were to lose any of these officers
or other management personnel, such a loss could result in
inefficiencies in our operations and lost business
opportunities, which could have a negative effect on our
business.
Changes in the law or regulations that govern us could have a
material impact on us or our operations. We are regulated by
the SEC and the Small Business Administration. In addition,
changes in the laws or regulations that govern business
development companies, regulated investment companies, real
estate investment trusts, and small business investment
companies may significantly affect our business. Any change in
the law or regulations that govern our business could have a
material impact on us or our operations. Laws and regulations
may be changed from time to time, and the interpretations of the
relevant laws and regulations also are subject to change, which
may have a material effect on our operations.
Our ability to invest in private companies may be limited in
certain circumstances. If we are to maintain our status as a
business development company, we must not acquire any assets
other than qualifying assets unless, at the time of
and after giving effect to such acquisition, at least 70% of our
total assets are qualifying assets. If we acquire debt or equity
securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired
assets cannot be treated as qualifying assets. This result is
dictated by the definition of eligible portfolio
company under the 1940 Act, which in part looks to whether
a company has outstanding marginable securities.
Amendments promulgated in 1998 by the Federal Reserve expanded
the definition of a marginable security under the Federal
Reserves margin rules to include any non-equity security.
Thus, any debt securities issued by any entity are marginable
securities under the Federal Reserves current margin
rules. As a result, the staff of the SEC has raised the question
as to whether a private company that has outstanding debt
securities would qualify as an eligible portfolio
company under the 1940 Act.
77
Until the question raised by the staff of the SEC pertaining to
the Federal Reserves 1998 change to its margin rules has
been addressed by legislative, administrative or judicial
action, we intend to treat as qualifying assets only those debt
and equity securities that are issued by a private company that
has no marginable securities outstanding at the time we purchase
such securities or those that otherwise qualify as an
eligible portfolio company under the 1940 Act.
The SEC has issued proposed rules to correct the unintended
consequence of the Federal Reserves 1998 margin rule
amendments of apparently limiting the investment opportunities
of business development companies. In general, the SECs
proposed rules would define an eligible portfolio company as any
company that does not have securities listed on a national
securities exchange or association. We are currently in the
process of reviewing the SECs proposed rules and assessing
its impact, to the extent such proposed rules are subsequently
approved by the SEC, on our investment activities. At this time,
we do not believe that these proposed rules will have a material
adverse effect on our operations.
Results may fluctuate and may not be indicative of future
performance. Our operating results may fluctuate and,
therefore, you should not rely on current or historical period
results to be indicative of our performance in future reporting
periods. Factors that could cause operating results to fluctuate
include, but are not limited to, variations in the investment
origination volume and fee income earned, variation in timing of
prepayments, variations in and the timing of the recognition of
net realized gains or losses and changes in unrealized
appreciation or depreciation, the level of our expenses, the
degree to which we encounter competition in our markets, and
general economic conditions.
Our common stock price may be volatile. The trading price
of our common stock may fluctuate substantially. The price of
the common stock may be higher or lower than the price you pay
for your shares, depending on many factors, some of which are
beyond our control and may not be directly related to our
operating performance. These factors include, but are not
limited to, the following:
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|
|
price and volume fluctuations in the overall stock market from
time to time; |
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significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies; |
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volatility resulting from trading in derivative securities
related to our common stock including puts, calls, long-term
equity anticipation securities, or LEAPs, or short trading
positions; |
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changes in laws or regulatory policies or tax guidelines with
respect to business development companies or regulated
investment companies; |
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actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts; |
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general economic conditions and trends; |
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loss of a major funding source; or |
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departures of key personnel. |
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
There has been no material change in quantitative or qualitative
disclosures about market risk since December 31, 2004.
78
Item 4. Controls and Procedures
(a) As of the end of the period covered by this quarterly
report on Form 10-Q, our chief executive officer and chief
financial officer conducted an evaluation of our disclosure
controls and procedures (as defined in Rules 13a-15 and
15d-15 of the Securities Exchange Act of 1934). Based upon this
evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures
are effective in timely alerting them of any material
information relating to us that is required to be disclosed by
us in the reports it files or submits under the Securities
Exchange Act of 1934.
(b) There have been no changes in our internal control over
financial reporting that occurred during the quarter ended
September 30, 2005, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
79
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings
On June 23, 2004, we were notified by the SEC that they are
conducting an informal investigation of us. On December 22,
2004, we received letters from the U.S. Attorney for the
District of Columbia requesting the preservation and production
of information regarding us and Business Loan Express, LLC in
connection with a criminal investigation. Based on the
information available to us at this time, the inquiries appear
to primarily pertain to matters related to portfolio valuation
and our portfolio company, Business Loan Express, LLC. To date,
we have produced materials in response to requests from both the
SEC and the U.S. Attorneys office, and certain current and
former employees have provided testimony and have been
interviewed by the staff of the SEC and the U.S. Attorneys
Office. We are voluntarily cooperating with these investigations.
On May 28, 2004, Ferolie Corporation, a food broker with
business and contractual relationships with an entity that is
now affiliated with one of our portfolio companies, Advantage
Sales & Marketing Inc., filed suit against us,
Advantage Sales & Marketing and the affiliated entity in the
United States District Court for the District of Columbia
alleging that, among other things, we and Advantage Sales &
Marketing had tortiously interfered with Ferolies contract
with the affiliated entity by causing the affiliated entity
(i) to breach its obligations to Ferolie regarding
Ferolies participation in a reorganization transaction
involving the affiliated entity and (ii) to induce clients
of Ferolie to transfer their business to the affiliated entity.
Ferolie sought actual and punitive damages against us and
Advantage Sales & Marketing and declaratory and
injunctive relief. On July 15, 2004, the United States
District Court for the District of Columbia dismissed the
lawsuit for lack of jurisdiction. On August 18, 2004,
Ferolie filed a Petition to Compel Arbitration in
the United States District Court for the Northern District of
Illinois naming us, Advantage Sales & Marketing and the
affiliated entity as respondents. Ferolie attached to its
petition an Amended Demand for Arbitration and Statement
of Claims that asserts essentially the same claims as were
asserted in the lawsuit that was dismissed by the United States
District Court for the District of Columbia. On October 29,
2004, the United States District Court for the Northern District
of Illinois dismissed Ferolies petition after finding that
Ferolie had failed to adequately allege the existence of subject
matter jurisdiction.
On November 4, 2004, Ferolie refiled its Petition to
Compel Arbitration in the Circuit Court of Cook County,
Illinois. The allegations and relief requested in this
proceeding were identical to the assertions made by Ferolie in
the two previously dismissed proceedings. On February 15,
2005, the Circuit Court of Cook County, Illinois entered an
order denying Ferolies motion for an order compelling us
to arbitrate the claims asserted by Ferolie against us. In the
same order, the Circuit Court of Cook County, Illinois granted
Ferolies motion to compel arbitration of the claims
asserted against Advantage Sales & Marketing and the
affiliated entity. The arbitration is proceeding. We are not a
party to the arbitration.
In addition to the above matters, we are party to certain
lawsuits in the normal course of business.
While the outcome of these legal proceedings and other matters
cannot at this time be predicted with certainty, we do not
expect that the outcome of these matters will have a material
effect upon our financial condition or results of operations.
80
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
During the three months ended September 30, 2005, we issued
a total of 117,069 shares of common stock under our
dividend reinvestment plan pursuant to an exemption from the
registration requirements of the Securities Act of 1933. The
aggregate offering price for the shares of common stock sold
under the dividend reinvestment plan was approximately
$3.3 million.
The following table provides information as of and for the
quarter ended September 30, 2005, regarding shares of our
common stock that were purchased under our Non-Qualified
Deferred Compensation Plan I (DCP I) and Non-Qualified
Deferred Compensation Plan II (DCP II), which are
administered by independent third-party trustees.
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Total Number | |
|
|
|
|
of Shares | |
|
Average Price | |
|
|
Purchased | |
|
Paid Per Share | |
|
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| |
|
| |
DCP
I(1)
|
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|
|
|
|
|
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7/1/2005 to 7/31/2005
|
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|
49 |
|
|
$ |
28.70 |
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|
8/1/2005 to 8/31/2005
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|
|
|
9/1/2005 to 9/30/2005
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DCP
II(2)
|
|
|
|
|
|
|
|
|
|
7/1/2005 to 7/31/2005
|
|
|
11,564 |
|
|
$ |
28.70 |
|
|
8/1/2005 to 8/31/2005
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|
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|
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|
|
|
9/1/2005 to 9/30/2005
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|
57,750 |
|
|
$ |
28.62 |
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|
|
|
|
|
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Total
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|
|
69,363 |
|
|
$ |
28.63 |
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|
|
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(1) |
The DCP I is an unfunded plan, as defined by the Internal
Revenue Code of 1986, that provides for the deferral of
compensation by our directors, employees, and consultants. Our
directors, employees, or consultants are eligible to participate
in the plan at such time and for such period as designated by
the Board of Directors. The DCP I is administered through a
trust by an independent third-party trustee, and we fund this
plan through cash contributions. Directors may choose to defer
directors fees through the DCP I, and may choose to
invest such deferred income in shares of our common stock. To
the extent a director elects to invest in our common stock, the
trustee of the DCP I will be required to use such deferred
directors fees to purchase shares of our common stock in
the market. |
|
(2) |
We have established a long-term incentive compensation program
whereby we will generally determine an individual performance
award for certain officers annually at the beginning of each
year. In conjunction with the program, we instituted the
DCP II, which is an unfunded plan (as defined by the
Internal Revenue Code of 1986) that is administered through a
trust by an independent third-party trustee. The individual
performance awards will be deposited in the trust in four equal
installments, generally on a quarterly basis in the form of cash
and the DCP II requires the trustee to use the cash
exclusively to purchase shares of our common stock in the market. |
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.
81
Item 6. Exhibits
(a) List of Exhibits
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|
Exhibit | |
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|
Number | |
|
Description |
| |
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|
|
3 |
.1 |
|
Restated Articles of Incorporation. (Incorporated by
reference to Exhibit a.1 filed with Allied Capitals
Post-Effective Amendment No. 2 to registration statement on
Form N-2 (File No. 333-67336) filed on March 22,
2002). |
|
3 |
.2 |
|
Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.1. filed with Allied Capitals Form 8-K
on August 18, 2005). |
|
4 |
.1 |
|
Specimen Certificate of Allied Capitals Common Stock, par
value $0.0001 per share. (Incorporated by reference to
Exhibit d. filed with Allied Capitals registration
statement on Form N-2 (File No. 333-51899) filed on
May 6, 1998). |
|
4 |
.2 |
|
Form of debenture between certain subsidiaries of Allied Capital
and the U.S. Small Business Administration. (Incorporated by
reference to Exhibit 4.2 filed by a predecessor entity to
Allied Capital on Form 10-K for the year ended
December 31, 1996). |
|
10 |
.1 |
|
Dividend Reinvestment Plan, as amended. (Incorporated by
reference to Exhibit e. filed with Allied Capitals
registration statement on Form N-2 (File
No. 333-87862) filed on May 8, 2002). |
|
10 |
.2 |
|
Credit Agreement, dated September 30, 2005.
(Incorporated by reference to Exhibit 10.1 filed with
Allied Capitals Form 8-K on October 3, 2005). |
|
10 |
.2(a)* |
|
First Amendment to Credit Agreement, dated November 4, 2005. |
|
10 |
.3 |
|
Note Agreement, dated October 13, 2005. (Incorporated by
reference to Exhibit 10.1 filed with Allied Capitals
Form 8-K on October 14, 2005). |
|
10 |
.5 |
|
Note Agreement, dated as of May 1, 1999. (Incorporated
by reference to Exhibit 10.5 filed with Allied Capital
Form 10-Q for the period ended June 30, 1999). |
|
10 |
.12 |
|
Note Agreement, dated as of October 15, 2000.
(Incorporated by reference to Exhibit 10.4b filed with
Allied Capitals Form 10-Q for the period ended
September 30, 2000). |
|
10 |
.13 |
|
Note Agreement, dated as of October 15, 2001.
(Incorporated by reference to Exhibit f.10 filed with
Allied Capitals Post-Effective Amendment No. 1 to
registration statement on Form N-2 (File
No. 333-67336) filed on November 14, 2001). |
|
10 |
.15 |
|
Control Investor Guaranty Agreement, dated as of March 28,
2001, between Allied Capital and Fleet National Bank and
Business Loan Express, Inc. (Incorporated by reference to
Exhibit f.14 filed with Allied Capitals
Post-Effective Amendment No. 3 to registration statement on
Form N-2 (File No. 333-43534) filed on May 15,
2001). |
|
10 |
.17 |
|
Non-Qualified Deferred Compensation Plan II.
(Incorporated by reference to Exhibit A filed with
Allied Capitals Proxy Statement filed on March 30,
2004). |
|
10 |
.18 |
|
Amended and Restated Deferred Compensation Plan, dated
January 30, 2004. (Incorporated by reference to
Exhibit 10.16 filed with Allied Capitals
Form 10-K for the year ended December 31, 2003). |
|
10 |
.19 |
|
Amended Stock Option Plan. (Incorporated by reference to
Exhibit B of Allied Capitals definitive proxy
statement for Allied Capitals 2004 Annual Meeting of
Stockholders filed on March 30, 2004). |
82
|
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|
Exhibit | |
|
|
Number | |
|
Description |
| |
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|
|
10 |
.20(a) |
|
Allied Capital Corporation 401(k) Plan, dated September 1,
1999. (Incorporated by reference to Exhibit 4.4 filed
with Allied Capitals registration statement on
Form S-8 (File No. 333-88681) filed on October 8,
1999). |
|
10 |
.20(b) |
|
Amendment to Allied Capital Corporation 401(k) Plan, dated
April 15, 2004. (Incorporated by reference to
Exhibit 10.20(b) filed with Allied Capitals
Form 10-Q for the period ended June 30, 2004). |
|
10 |
.20(c)* |
|
Amendment to Allied Capital Corporation 401(k) Plan, dated
November 1, 2005. |
|
10 |
.21 |
|
Employment Agreement, dated January 1, 2004, between Allied
Capital and William L. Walton. (Incorporated by
reference to Exhibit 10.21 filed with Allied Capitals
Form 10-K for the year ended December 31, 2003). |
|
10 |
.22 |
|
Employment Agreement, dated January 1, 2004, between Allied
Capital and Joan M. Sweeney. (Incorporated by reference to
Exhibit 10.22 filed with Allied Capitals
Form 10-K for the year ended December 31, 2003). |
|
10 |
.23 |
|
Recission of Retention Agreement, dated October 27, 2005,
between Allied Capital and John M. Scheurer.
(Incorporated by reference to Exhibit 10.1 filed with
Allied Capitals current report on Form 8-K filed on
November 1, 2005). |
|
10 |
.25 |
|
Form of Custody Agreement with Riggs Bank N.A., which was
assumed by PNC Bank through merger (Incorporated by reference
to Exhibit j.1 filed with Allied Capitals registration
statement on Form N-2 (File No. 333-51899) filed on May 6,
1998). |
|
10 |
.26 |
|
Form of Custody Agreement with LaSalle National Bank.
(Incorporated by reference to Exhibit j.2 filed with Allied
Capitals registration statement on Form N-2 (File No. 333-
51899) filed on May 6, 1998). |
|
10 |
.27 |
|
Custodian Agreement with LaSalle National Bank Association dated
July 9, 2001. (Incorporated by reference to Exhibit j.3 filed
with Allied Capitals registration statement on Form N-2
(File No. 333-67336) filed on August 10, 2001). |
|
10 |
.28 |
|
Code of Ethics. (Incorporated by reference to
Exhibit 10.28 filed with Allied Capitals
Form 10-K for the year ended December 31, 2003.) |
|
10 |
.30 |
|
Agreement and Plan of Merger by and among Allied Capital, Allied
Capital Lock Acquisition Corporation, and Sunsource, Inc dated
June 18, 2001. (Incorporated by reference to Exhibit k.1
filed with Allied Capitals registration statement on Form
N-2 (File No. 333-67336) filed on August 10, 2001). |
|
10 |
.31 |
|
Note Agreement, dated as of May 14, 2003. (Incorporated
by reference to Exhibit 10.31 filed with Allied
Capitals Form 10-Q for the period ended
March 31, 2003). |
|
10 |
.32 |
|
Amendment, dated as of April 30, 2003, to Note Agreement,
dated as of April 30, 1998. (Incorporated by reference
to Exhibit 10.32 filed with Allied Capitals
Form 10-Q for the period ended March 31, 2003). |
|
10 |
.33 |
|
Amendment, dated as of April 30, 2003, to Note Agreement,
dated as of May 1, 1999. (Incorporated by reference to
Exhibit 10.33 filed with Allied Capitals
Form 10-Q for the period ended March 31, 2003). |
|
10 |
.35 |
|
Amendment, dated as of April 30, 2003, to Note Agreement,
dated as of October 15, 2000. (Incorporated by reference
to Exhibit 10.35 filed with Allied Capitals
Form 10-Q for the period ended March 31, 2003). |
|
10 |
.36 |
|
Amendment, dated as of April 30, 2003, to Note Agreement,
dated as of October 15, 2001. (Incorporated by reference
to Exhibit 10.36 filed with Allied Capitals
Form 10-Q for the period ended March 31, 2003). |
83
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description |
| |
|
|
|
10 |
.37 |
|
Form of Indemnification Agreement between Allied Capital and its
directors and certain officers. (Incorporated by reference to
Exhibit 10.37 filed with Allied Capitals
Form 10-K for the year ended December 31, 2003). |
|
10 |
.38 |
|
Note Agreement, dated as of March 25, 2004.
(Incorporated by reference to Exhibit 10.38 filed with
Allied Capitals Form 10-Q for the period ended
March 31, 2004). |
|
10 |
.39 |
|
Note Agreement, dated as of November 15, 2004.
(Incorporated by reference to Exhibit 99.1 filed with
Allied Capitals current report on Form 8-K filed on
November 18, 2004). |
|
10 |
.40 |
|
Real Estate Securities Purchase Agreement. (Incorporated by
reference to Exhibit 2.1 filed with Allied Capitals
Form 8-K filed on May 4, 2005.) |
|
10 |
.41 |
|
Platform Assets Purchase Agreement. (Incorporated by
reference to Exhibit 2.2 filed with Allied Capitals
Form 8-K filed on May 4, 2005.) |
|
10 |
.42 |
|
Transition Services Agreement. (Incorporated by reference to
Exhibit 10.1 filed with Allied Capitals Form 8-K
filed on May 4, 2005.) |
|
15 |
.* |
|
Letter regarding Unaudited Interim Financial Information |
|
31 |
.1* |
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934. |
|
31 |
.2* |
|
Certification of Chief Financial Officer Pursuant
Rule 13a-14 of the Securities Exchange Act of 1934. |
|
32 |
.1* |
|
Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
|
32 |
.2* |
|
Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
* Filed herewith.
84
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 |
|
(Registrant) |
|
|
|
|
Dated: November 8, 2005
|
|
/s/ William L. Walton
---------------------------------------------------
William L. Walton
Chairman and Chief Executive Officer |
|
|
|
/s/ Penni F. Roll
---------------------------------------------------
Penni F. Roll
Chief Financial Officer |
85
EXHIBIT INDEX
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description |
| |
|
|
|
10 |
.2(a)* |
|
First Amendment to Credit Agreement, dated November 4, 2005. |
|
10 |
.20(c)* |
|
Amendment to Allied Capital Corporation 401(k) Plan, dated
November 1, 2005. |
|
15* |
|
|
Letter regarding Unaudited Interim Financial Information |
|
31 |
.1* |
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934. |
|
31 |
.2* |
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934. |
|
32 |
.1* |
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
|
32 |
.2* |
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
* Filed herewith.